Congress has set aside the “Sustainable Growth Rate (SGR) model

December 16, 2010

The big news of the week was the agreement between the White House and the GOP to extend the Bush tax cuts for two years and provide other temporary tax relief at a cost of $800 billion. But perhaps under the radar, the biggest news for doctors was an agreement to set aside the sustainable growth rate (SGR) model for 2011 — the fifth time this year the SGR model has been thrown under the bus, this time to avoid a 25 percent pay cut scheduled for January 1, 2011.

The SGR formula was devised in 1997 by Congress to tie the amount Medicare would reimburse doctors for treating its patients to the overall economy. Enacted by the Balanced Budget Act of 1997 to amend Section 1848(f) of the Social Security Act, the SGR replaced the Medicare Volume Performance Standard (MVPS), which was the previous method that Centers for Medicare & Medicaid Services (CMS) used to control costs. An independent body of 17 commissioners, the Medicare Payment Advisory Commission (MedPAC), was established to be its watchdog.

Here’s how it works: each year, CMS sends a report to MedPAC about the previous year’s total expenditures and the target expenditures for Medicare. Its report includes a conversion factor that changes the payments for physician services for the next year in order to match the target SGR. If the expenditures for the previous year exceeded the target expenditures, then the conversion factor decreases payments for the next year. If the expenditures were less than expected, the conversion factor increases the payments to physicians for the next year. On March 1 of each year, the physician fee schedule is updated per the formula. The estimated SGR for 2010 was -8.8 percent, and the conversion factor was -21.3 percent.

The conversion factor is the rub: it is a combination of the Medicare Economic Index (MEI) and the Update Adjustment Factor (UAF). The MEI measures the weighted average price change for direct and indirect costs involved with producing physicians’ services. The UAF compares actual and target expenditures, and is determined by a formula that includes the target and actual expenditures and the SGR. By law, the UAF cannot exceed -7.0 percent. The UAF element of the formula means actual costs for delivering a unit of service are not the major factor in setting Medicare fees for physicians, and thus the gap between practice costs and Medicare reimbursement has widened.

Since 2001, Congress has set aside the SGR formula 15 times in favor of paying physicians more than it suggested, accruing a liability $300 billion. Medicare enrollment is projected to increase from 44 million in 2011 to 50 million in five years. The deficit problem and economic recovery are not likely to be solved completely by then. The “physician fix” needs permanent fixing.


1. The SGR formula is arcane. One other option is a model that rewards outcomes and performance rather than volume, and allow care team results to be a surrogate for individuals. Simply using the MEI as the sole metric to calculate payments would add $459 billion to the deficit (Source: Council of Economic Advisors) and reinforce practice inefficiencies and volume-based incentives that play a major role in spiraling Medicare costs.

2. Equip consumers to know the costs and outcomes of physician performance as individuals, or better, as integrated groups of nurses and physicians. In this Google-Facebook-iPad-BlueTooth era, there are no excuses for a lack of transparency in information, and there are no excuses for consumers to know more about their football teams than their care teams. And thankfully academic medicine is embracing the reality that team-based care, where physicians, nurses, allied health professionals and consumers share responsibilities for decisions and results—is the path to better care and lower costs.

3. Create Marcus Welby 2.0. The 1969-1976 icon of medicine—white coat, white hair, warm eyes—remained the standard for “modern medicine” for two generations. But Robert Young’s character was a product of his generation. The next generation requires more: competence based on demonstrated adherence to evidence-based practice… performance that’s transparent… and technologies that improve diagnostic skillfulness and treatment coordination.

4. Make Medicare a consumer market: engage seniors in meaningful self-care using information technologies, different incentives, and innovative solutions to treatment planning and management. Regrettably, “senior care” is synonymous with paternalistic oversight and dependence on others. Yet this generation has adapted to innovation more than any prior—TV, computers, super-highways, internet, fast food, social media, and more. Perhaps the physician fix should focus on the enrollees themselves.

The physician fix last week is a band-aid. Perhaps we should discuss a fix that’s about patient outcomes, performance, and team-based delivery of health services.

Paul Keckley, Ph.D.