NCPA - National Center for Policy Analysis

A Market-Based SGR Replacement Plan

March 24, 2015

The Sustainable Growth Rate (SGR) is an improvement over the way Medicare used to pay for physician services. However, as Medicare consumes an ever-larger share of U.S. economic output, the SGR system fails to meet its goal of ensuring that Medicare's spending on physicians grows more slowly than a broad economic index.

There are at least three fundamental flaws with the existing SGR system.

  • The SGR focuses on overall spending without addressing the complexity of service. This creates a free-rider problem.
  • SGR's effort to tie Medicare spending to real GDP per capita. The SGR's explicit link to the size of the economy means that in economic downturns, the target — and thus physician reimbursement levels — will actually decline.
  • Physician payment updates have typically been lower than Medicare Economic Index (MEI) increases.

Efforts to replace the SGR have largely consisted of minor tweaks. A practical alternative to the current system is to set Medicare reimbursement rates through comparison with the closest available approximation of actual market prices for health care, those experienced by patients enrolled in the substantial and growing Medicare Advantage (MA) program. In this proposal, MA, which permits those 65 and older to choose from among a group of private insurance plans, would serve as a source of benchmark pricing for so-called Medicare fee-for-service (FFS) patients. Such an approach has at least two advantages.

  • Market-based pricing more closely approximates the actual cost of providing services.
  • MA plans can structure payment and delivery of services in a more holistic manner, whereas FFS's reimbursements are largely siloed, with little thought for how physician spending may increase or reduce costs elsewhere.

Source: Yevgeniy Feyman, Robert A. Book, "Replacing Medicare's Unsustainable Sustainable Growth Rate," Manhattan Institute for Policy Research, March 2015. 


Browse more articles on Health Issues