Because of the high price tag of its repeal, the sustainable growth rate (SGR) remains the elephant in the room of deficit reduction. And as everyone knows, it takes great effort to move an elephant out of a room.


On a recent flight from Miami to San Francisco, I met Juan Carlos and Lucretia, a delightful young Argentinian couple en route to a vacation in northern California. After learning that they were planning to go to Napa Valley, I suggested that they consider dining at the French Laundry, a French restaurant located in the picturesque town of Yountville, Calif. I mentioned that the French Laundry is often included in Restaurant Magazine’s list of “The World’s 50 Best Restaurants” and that it has been awarded three stars in the Michelin Guide to San Francisco. 

As I rhapsodized about the various charms of Yountville, the historical significance of the restaurant building that dates from 1900, the beautiful vegetable gardens of the restaurant, and of course the sumptuous nine-course meals, I could sense that all three of us—especially Lucretia, who was smiling broadly—were in one accord, happily envisioning a future state of culinary delight. 

But then Juan Carlos asked, “How much does it cost?” “Oh,” I replied. “It’s a prix fixe menu that I think will set you back about $300 per person, excluding wine and ‘supplements.’” 

At that, the conversation about dining at the French Laundry ended. It was clear from the pinched look on Juan Carlos’ face that the price of an evening at the French Laundry would outweigh the experience. We began to talk about other topics instead.

In like manner, uncomfortable conversations are taking place in Washington, D.C., regarding the repeal of the unpopular, annually overridden SGR provision—and how to pay for its repeal.

There is currently bipartisan and bicameral support for a substantive piece of legislation: permanent repeal of the SGR, a formulaic approach intended to restrain the growth of Medicare spending on physician services. Per the SGR’s arcane algorithm, by which cumulative actual spending is not to exceed cumulative targeted spending (with April 1, 1996, as the starting point for both), the update for the last nine months of 2014 is a reduction to the Medicare physician fee schedule (PFS) of 24.4 percent. 

Lawmakers from the U.S. House Ways and Means, House Energy and Commerce, and Senate finance committees have collaborated to consolidate separate bills that their respective committees passed toward the end of 2013. The fruit of their labors is H.R. 4015, the SGR Repeal and Medicare Provider Payment Modernization Act of 2014, which was introduced by Rep. Michael C. Burgess (R-Texas), a physician, on Jan. 6, 2014.

The Bipartisan Proposal

The 195-page bill repeals the SGR and specifies annual updates to the PFS of 0.5 percent for 2014-2018, 0 percent for 2019-2023, and for 2024 and beyond, 0.5 percent for physicians not in alternative payment models (APMs)—such as accountable care organizations and patient-centered medical homes—and 1.0 percent for physicians in APMs.

In addition, H.R. 4015 grants physicians in APMs annual 5.0 percent bonuses (based on their prior year’s payments) for 2018-2023 if at least 25 percent of the practice’s Medicare revenue comes from APMs in 2018-2019, at least 50 percent in 2020-2021, and at least 75 percent in 2022 and beyond.

The bill also proposes a Merit-Based Incentive Payment System (MIPS) that replaces and consolidates three Medicare quality payment programs: the electronic health record meaningful use incentive program, the Physician Quality Reporting System, and the Physician Feedback Program/Value-Based Payment Modifier. 

The Cost of the Proposed Permanent Repeal

At the end of February, the Congressional Budget Office (CBO) estimated that H.R. 4015 would increase direct spending for the remaining nine months of 2014 through 2024 by $138 billion.a This compares with the CBO’s 10-year cost estimates of $121 billion and $150 billion, respectively, for the House and Senate bills that formed the basis of the consolidated bill, with the inclusion of certain Medicare, Medicaid/Children’s Health Insurance Program, and other “extenders” accounting for the higher cost of the Senate bill. 

As with virtually all the previous legislative attempts to permanently repeal the SGR, often referred to as “doc fixes,” H.R. 4015 does not identify any specific, realistic sources of funding—so-called "pay-fors" that would offset the increased government spending that repeal of the SGR would entail and allow the legislation to be deficit-neutral.

There certainly have been some creative doc-fix funding proposals in the past. In May 2012, Rep. Allyson Schwartz (D-Pa.) introduced to the House the Medicare Physician Payment Innovation Act of 2012 (H.R. 5707), which proposed tapping savings from the reduction in military operations in Iraq and Afghanistan, but that funding source was generally deemed implausible, and the bill died in a House committee. In February 2013, Rep. Schwartz introduced an updated version of the bill, the Medicare Physician Payment Innovation Act of 2013, which did not propose the use of military operations' savings. 

In November 2013, Sen. Jay Rockefeller (D-W.Va.), chairman of the health care subcommittee of the Senate Committee on Finance, urged the Senate to pass the Medicare Drug Savings Act (S. 740/H.R. 1588), which would require drug companies to provide rebates to the federal government on drugs used by people eligible for both Medicare and Medicaid. The CBO estimated that this change would save Medicare $141.2 billion over 10 years, and Sen. Rockefeller proposed using those savings to pay for a permanent doc fix. As expected, the Pharmaceutical Research and Manufacturers of America opposed the legislation, and the bill did not make it out of the Senate finance committee.

In December 2013, House Joint Resolution 59—Continuing Appropriations Resolution, 2014 (PL 113-67) was passed by both houses of Congress and signed into law. It included the Pathway for SGR Reform Act of 2013, which specified a three-month temporary doc fix, providing a 0.5 percent update to the PFS for January through March 2014, staving off the aforementioned 24.4 percent reduction to physician payments. 

That legislation bought Congress time to figure out how to pay for a permanent SGR repeal. Given the administration’s current focus on implementing the Affordable Care Act and Republicans’ continued opposition to the healthcare reform law, it is hard to imagine Congress passing a broad deficit-reduction plan that incorporates numerous new healthcare reform components that would together fund a permanent doc fix.

The Risk to Hospitals

Because $138 billion is certainly not easy to come by, the source or sources of funding will need to be clearly identified. Based on what we have seen with past short-term SGR patches, the most likely funding scenario is some sort of robbing of Peter (e.g., other players in the healthcare system) to pay physician Paul, with hospitals possibly taking on the role of Peter and bearing the brunt of the financial burden.

However, as the American Hospital Association has pointed out, regulatory actions since 2010 have already reduced Medicare and Medicaid reimbursement to hospitals by $113 billion over the next 10 years, and this figure excludes payment reductions mandated by the Affordable Care Act.b

The Time for Action

Democrats and Republicans alike are critical of the SGR, and politicians on both sides of the aisle in Congress envision a better future state in which the SGR has been repealed and replaced with a more stable system for reimbursing physicians, one that rewards improved quality and reduced cost. 

With the expiration of the current SGR patch at the end of March and the undoubtedly more politically divisive environment in the fall leading up to the midterm elections, now is the time for Congress to be resourceful, creative, and courageous in moving the elephant of the SGR out of the room once and for all.  

Ken Perez is vice president of healthcare policy for Omnicell, Inc., Mountain View, Calif., and a member of HFMA’s Northern California Chapter. 


a. Elmendorf, D.W., letter to Fred Upton, Chairman, Committee on Energy and Commerce, U.S. House of Representatives, Feb. 27,2014. 

b. Andamopoulos, H., “AHA: Hospital Medicare, Medicaid Payments Cut by $113B Since 2010,” Becker’s Hospital Review, Jan. 15, 2014.

Publication Date: Tuesday, April 01, 2014

Login Required

If you are an existing member, please log in below. Username and password are required.



Forgot User Name?
Forgot Password?

If you are not an HFMA member and would like to access portions of our content for 30 days, please fill out the following.

First Name:

Last Name:


   Become an HFMA member instead