Ken Perez


At a Glance  

  • The sustainable growth rate (SGR) is a formulaic approach intended to restrain the growth of Medicare spending on physician services.
  • Permanently replacing the SGR will cost $300 billion to $400 billion.
  • Ten years of congressional overrides have contributed to higher Medicare spending on physician services.
  • The absence of a replacement for the SGR leaves the federal government with a significant budget deficit exposure.

Your doctor tells you to go on a diet, and you stick to it for five years before dropping out of the program. You eat not whatever you want, but clearly more than you should, for nine straight years. Not surprisingly, now your weight has ballooned, and you are facing some serious health problems that will be difficult to solve. Your current eating habits are unsustainable, but you want to put off going on a diet for yet another year.

This simple story is analogous to the situation the federal government finds itself in as a result of 10 straight years of congressional overrides of the sustainable growth rate (SGR) formula, an arcane and heretofore obscure legislative provision. By temporarily suspending application of the SGR through these legislative overrides, or "doc fixes," Congress has caused actual spending to exceed budget in each of those years. Because the annual fee update must be adjusted not only for the prior year's variance between budgeted and actual spending but also for the cumulative variance since 1996, the ultimate proposed update for 2012 was a reduction in Medicare physician fees of an overwhelming 27.4 percent.

Efforts to Reform or Repeal the SGR

For years, both Democrats and Republicans have called for reform or repeal of the SGR (commonly called a "doc fix"), but none of these efforts has resulted in the passage of legislation providing a permanent solution. Why has a lasting doc fix been so elusive?

The SGR is complicated and affects federal outlays on a long-term basis. It serves to restrain fiscal spending. As part of current law, the SGR is assumed in the multiyear budgetary projections of the Congressional Budget Office (CBO). Therefore, its removal-in the form of a freeze of rates at the current level-would increase the budget deficit by an estimated $300 billion over the next 10 years, in the absence of offsetting spending cuts.

On Feb. 17, 2012, both the House and the Senate passed the Middle Class Tax Relief and Job Creation Act of 2012 (H.R. 3630). This legislative package, which extended the payroll tax holiday through the end of the year and provided additional financial assistance to the unemployed, also included a 10-month doc fix extending current payment rates from March through the end of 2012. This doc fix was bundled with some Medicare "extenders," which included additional Medicare payments for ambulance services, a policy to base supplemental payments for Medicare physicians on geographic factors, and more Medicare funding for certain rural hospitals with 100 or fewer beds. The CBO has estimated the cost of the 10-month doc fix would be $8.1 billion in 2012, with the increase to the deficit for 2012-22 totaling $18 billion.a  

The 10-month doc fix and the Medicare extenders were paid for by:

  • $9.6 billion in cuts to Medicare payments to hospitals and other providers for bad debt and Medicare payments to clinical laboratories
  • More than $4 billion in cuts to Medicaid "disproportionate share" payments to hospitals that serve many poor patients
  • Diversion of $5 billion from the $15 billion preventive care fund in the Affordable Care Act
  • The elimination of $2.5 billion in additional Medicaid funds Louisiana was to receive under the act (what critics called "The Louisiana Purchase")b  

With the 10-month doc fix-which, when combined with an earlier two-month doc fix-amounts to another full-year override of the SGR, a deep payment rate cut for physicians was averted. (The Temporary Payroll Tax Continuation Act passed by the House and the Senate in December 2011 included a two-month doc fix, freezing rates at 2011 levels for January and February 2012.)

But this latest "kicking the can down the road" does not provide a permanent solution, and the unresolved SGR issue will continue to adversely affect the nation's credit rating.

In a Feb. 15, 2012, news brief issued by the American Medical Association (AMA), Peter Carmel, MD, AMA president, stated:

"The House and Senate conference committee agreement averts a 27 percent cut on March 1, but it represents a serious missed opportunity to permanently replace the flawed Medicare physician payment formula and protect access to care for military families and seniors. . . . People outside of Washington question the logic of spending nearly $20 billion to postpone one cut for a higher cut next year, while increasing the cost of a permanent solution by about another $25 billion."

Similarly, in an official comment issued on the same day, Susan Turney, president and CEO of MGMA-ACMPE, formerly the Medical Group Management Association, said, "We are deeply disappointed that Congress has missed a unique opportunity to repeal the SGR once and for all and instead has chosen political expediency over patients." Turney asserted that physicians could face a 35 percent reduction in rates from Medicare in 2013 and the cost of a permanent fix increased to $400 billion.

The Elephant in the Room

Although the $300 billion to $400 billion cost of permanently replacing the SGR obviously gained some visibility during the fall and winter, in the absence of a permanent doc fix, it remains the elephant in the room. Its sheer magnitude swamps the $150 billion to $200 billion in cuts to Medicare that the Super Committee could have proposed.c It also swamps the $126 billion in Medicare cuts projected to take place under the trigger plan. Anders Gilberg, MGMA-ACMPE senior vice president, commented on the specter of the 2 percent across-the-board cut to Medicare, "That's a concern, but sort of pales in comparison to the SGR."d  

Historically, increased spending in one area of Medicare's budget has usually been offset by decreased Medicare outlays in other areas. In the case of the SGR, one would posit that increased physician expenses could be covered by decreased payments to hospitals and other providers of medical care. However, that "robbing Peter to pay Paul" approach may be unrealistic, given that hospitals have already been subject to reduced payments as a result of healthcare reform and documentation and coding improvements adjustments, in addition to hospitals' likely significant share in cuts coming out of the
trigger plan.

Today, the SGR is a better-understood example of the federal government's failure to maintain fiscal discipline. As noted previously, Congress has overridden the SGR every year from 2003 to 2012. But the credit rating agencies frown upon this practice. Indeed, in elaborating on its negative long-term outlook on the United States, Standard & Poor's warned, "We could lower the long-term rating to 'AA' within the next two years if we see less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case."e  

SGR Reform

The original intent of the SGR was noble, but 10 straight years of congressional overrides have contributed to higher Medicare spending on physician services and have left the federal government with a significant budget deficit exposure. A permanent doc fix-whenever it ultimately becomes a reality-will require courage, as it will impose costly years of reckoning. Although still arcane, the SGR is no longer obscure. SGR reform is now integral to the calculus of deficit reduction, and it will be factored into the appraisal of our nation's creditworthiness by the credit rating agencies.


Ken Perez is senior vice president and director of healthcare policy, MedeAnalytics, Inc., Emeryville, Calif., and a member of HFMA's Northern California Chapter (ken.perez@medeanalytics.com).


footnotes

a. Congressional Budget Office and the staff of the Joint Committee on Taxation, "Budgetary Effects of the Conference Agreement for H.R. 3630, the Middle Class Tax Relief and Job Creation Act of 2012, as Posted on the Web Site of the House Committee on Rules on Feb. 16, 2012," Feb. 16, 2012.

b. Carey, M. A., "Tentative 'Doc Fix' Deal Would Cut Health Law's Prevention Fund by $5B," Feb. 15, 2012,

c. Perez, K., "Medicare Zero: A Comprehensive Analysis of the Impact of Health Reform and the Debt Deal on Medicare Funding of Hospitals and Strategies for Financial Survival," August 2011

d. Sigmond, J., and Daly, R., "Preparing a Game Plan: Healthcare Groups' Message to Deficit Panel: Spare Us," Modern Healthcare, Aug. 22, 2011.

e. Swann, N. G., "United States of America Long-Term Rating Lowered to 'AA+' on Political Risks and Rising Debt Burden; Outlook Negative," Standard & Poors, Aug. 5, 2011,

Publication Date: Tuesday, May 01, 2012

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