The Sustainable Growth Rate Formula – What Does It Mean For You?

What is SGR?

The sustainable growth rate (SGR) is a method used to control spending by Medicare on physician services. Based on the previous year’s total and target expenditures, SGR links physician payments to changes in gross domestic product (GDP). The idea behind the sustainable growth rate model is to prevent Medicare spending per beneficiary from growing faster than the US economy.

The current Medicare model uses a fee schedule to determine physician payments. Physicians are paid according to the complexity of the services being provided and economic factors such as GDP. The fee that a physician receives is based on three variables: the relative value for the service, a geographic pricing cost index (GPCI), and a national dollar conversion factor.

How SGR Works

SGR influences the fee schedule in the following manner. Every year, the Centers for Medicare and Medicaid Services (CMS) determines the previous year’s costs, as well as a conversion factor that changes physician payments for the following year. If actual expenditures exceed the target, the corresponding fee schedule update is reduced, triggering a cut in physician payments. If the actual expenditures are less than the target, however, the fee schedule and payments are increased. Changes take place on the first of March every year.

History of SGR

Since 1992, Medicare has reimbursed physicians on a fee-for-service basis. In 1997 Congress was concerned that Medicare spending was increasing too quickly and threatening the program’s sustainability. At the time, growth rates in the volume and complexity of physician services were low, and forecasters expected these slow growth rates to prevail. Consequently, they introduced the SGR formula as part of the Balanced Budget Act of 1997.

At first the SGR formula kept pace with changes to physicians’ costs, generating a few modest pay increases for physicians. Within several years, however, the growth rate reversed and expenditures increased rapidly, resulting in cuts to physician payment rates. In every year since 2002, Congress has responded to the impending cuts with a “doc fix,” or short-term patch that simply delays the cuts.

SGR in 2014

In January 2014, in response to a looming 24 percent pay cut for physicians, Congress announced a plan to propose a long-term solution to the SGR formula by April 1, 2014. However, no final agreement or solution was ever reached. Instead, on April 1, 2014, President Obama signed H.R. 4302, the Protecting Access to Medicare Act of 2014. H.R. 4302 implemented a twelve-month patch averting the 24 percent cut and replacing it with a 0.5 percent update lasting until April 1, 2015. It also stipulated a zero percent update for the first quarter of 2015.


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