Medicare spending encompasses an unsustainable 16 percent of the federal budget.  Over the last decade (2000-2011), Medicare spending per capita grew at a rate double that of per capita GDP growth.[1] Attempts by Congress and the Department of Health and Human Services to control costs have been largely unsuccessful. One such effort to limit Medicare Part B spending, also known as the Sustainable Growth Rate (SGR), failed as a result of Congress repeatedly passing legislation that nullifies or delays the mandated cuts. Table 1 below shows actions taken on SGR and whether Congress included offsets for negating the cuts in each year. Appendix 1 gives additional year by year detail on the SGR legislation, costs, and offsets.

This paper will give a brief overview of the SGR and discuss the ways in which it has been rendered ineffective by Congress. 

Table 1: SGR Legislative Actions, 2002-2014

Year

SGR Target

Pre- legislation Conversion Factor

Physician Update

Cumulative

Fix

Offset

Cost of 1 Year Delay (Billions)

Cost to Fix (Billions)

2002

8.3 %

-4.8%

-4.8%

 

N/A

N/A

N/A

N/A

2003

7.30%

-4.4%

+1.4%*

 

H.J. Res 2

None

$53.4 (2003-2012)

 

2004

6.60%

-4.5%

+1.8%*

 

Medicare Modernization Act

Yes

$2.8 (2004-2007)

 

2005

4.20%

-3.3%

+1.5%

 

Medicare Modernization Act

Yes

$2.8 (2004-2007)

$48.6

2006

1.50%

-4.4%

+.2%

 

The Deficit Reduction Act of 2005

Yes

$1.5 (2006)

 

2007

3.50%

-5%

0

 

Tax Relief and Healthcare Act

Yes

$5 (2007-2011)

$170.8

2008

4.50%

-5.3%

+.5%

-.10%

Medicare Medicaid and SCHIP Extension Act Jan-June of 2008

Yes

6.4 (2008-2017)

$177

 

 

 

 

 

Medicare Improvements 
for Patients and Providers Act
July-Dec.

Yes

9.4

(2008-2018)

 

2009

6.40%

-11.5%

+1.1%

-11.5 %

The Medicare Improvements for Patients and Providers Act

Yes

 

$220

2010

8.90%

-5.9%

+1.3%*

-.21%

Department of Defense Appropriations Act, Temporary Extension Act, Continuing Extension Act, Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, Physician Payment

and Therapy Relief Act

 

Yes

 

$285

2011

4.70%

-10.2%

+.9%*

-25%

An Act to Extend Certain Expiring Medicare and Medicaid
Provisions

Yes

$14.9 (2011-2012)

$379

2012

4.8%

-3.3%

0

-27.4 %

Temporary Payroll Tax Cut Continuation

Yes

$3.6 (2012-2021)

 

 

 

 

 

 

Act of 2011, Middle Class Tax Relief and Job Creation Act of 2012

Yes

$17.9 (2012-2012)

$290

2013

-1.3%

+1.4%

0

-26.5%

The American Taxpayer Relief Act of 2012

Yes

$25.2 (2013-2022)

 

CY 2014

 

 

-24.4%

 

 

 

 

$138

*weighted average[2]

Medicare Part B covers physician services, outpatient care and prescription drugs administered in an outpatient setting. The Centers for Medicare and Medicaid Services (CMS) sets the prices for all services (which are adjusted for factors like patient severity and geography) and any provider treating a Medicare patient must agree to accept CMS prices.

Part B spending depends on 3 factors: the number of beneficiaries, the volume of medical services, and prices paid by the Centers for Medicare and Medicaid Services (CMS) for physician visits and accompanying services (laboratory testing and the like). The 1998 Balanced Budget Act introduced the Sustainable Growth Rate (SGR) mechanism to set expenditure targets for Part B spending. Because Congress recognized that Medicare’s Fee-For-Service reimbursement system can give the incentive for unnecessary volume of medical services, the SGR was to serve as an opposing incentive, cutting reimbursement amounts if spending grew too much.

The SGR “target” calculation takes into account beneficiary enrollment, past spending, inflation, GDP growth and any pertinent legislative changes. Reimbursement adjustments for the following year are then calculated by comparing actual spending to the SGR target in that year. If spending growth was below the target, payment rates are increased, and if spending exceeds the target, payments are decreased.

In the first few years of implementation, spending growth came in below the target, and reimbursements were increased. The SGR mechanism first called for a reimbursement reduction in 2002 and physician reimbursements decreased by 4.8 percent. The next year, and every year thereafter, cuts were called for via the SGR calculation. Congress, however, enacted legislation that negated the cut, either doing so outright or by delaying it for that year but agreeing to make a larger cut the following year. The larger cut has yet to come, and the SGR reimbursement reduction scheduled for January 1, 2014 now stands at 24.7 percent.

Congress’s “PAYGO” procedural rule, adopted by the House of Representatives in 2006 and the Senate in 2008, demands that any increase in entitlement spending relative to the current law be accompanied by an offsetting tax increase or spending cut.[3] There is agreement that the SGR is not an effective restraint on Medicare spending, but it has yet to be repealed as Congress is constrained by the “PAYGO” rule. Because current law requires cuts (24.4 percent as of 2013), repealing the SGR would equate, on paper, to increasing physician reimbursement by 24.4 percent. Even making a reimbursement reduction less than 24.4 percent would, technically, be an increase in spending and thus need to be paid for via corresponding spending cuts or tax increases. This would increase physician reimbursement costs quite a bit over 10 years. However, the cost, on paper, is less if you only make the artificial increase of 24.4 percent for one year. As a result, Members of Congress put the fix in place for one year, find cuts to pay for that year alone, and put themselves in the same difficult position 12 months later when even greater cuts are called for, and they do it every year. 

Many headlines in 2013 have proclaimed that fixing the SGR is now “on sale.” In 2011, the cost of freezing payments for 10 years was $298 billion.[4] That cost has adjusted downward due to lower health care cost growth rates. The cost of repealing the SGR entirely is harder to estimate and dependent on whether reimbursements are frozen (estimated at $139 billion over ten years in 2013) or increased. Either way the lower score means that fewer corresponding cuts or revenue increases are needed.[5]

Appendix 1

2002:

Pre-legislation Update: -4.8 percent

Actual Update: -4.8 percent

2003:

Pre-legislation Update: -4.4 percent

Actual Update: +1.4 percent (weighted average)

The House Joint Resolution 2 negated the cut, instead, implementing an increase of 1.4 percent at a cost of $53.4 billion over 10 years without any offset. ,[6][7]

2004, 2005:

Pre-legislation Update: -4.5 percent in 2004, -3.3 in 2005

Actual Update: +1.8 percent (weighted average) in 2004 and 1.5 percent in 2005

The Medicare Modernization Act instituted a 1.5 percent increase in each year 2004 and 2005. Although the increase was specified as 1.5 percent, an adjustment to the geographic indexing made the actual update average to 1.8 percent in 2004.[8] This cost $2.8 billion from 2004-2007 and was offset by cuts to reimbursement amounts for outpatient drug, Durable Medical Equipment (DME), Home Health providers, Ambulatory Surgery Centers, and an increase in the Part B premium for high-income seniors.[9]

2006:

Pre-legislation Update: -4.4 percent

Actual Update: +.2 percent

The Deficit Reduction Act of 2005 held 2006 payment rates at their 2005 level, overriding an impending reduction of 4.4 percent at a cost of $1.5 billion in 2006. This was offset by cuts to reimbursement for imaging procedures, Home Health providers, DME suppliers, and changes to Medicare Advantage risk adjustment.[10]

2007:

Pre-legislation Update: -5 percent

Actual Update: 0

The Tax Relief and Healthcare Act (P.L. 109-432) froze rates at the 2006 level which was projected to cost $5 billion from 2007-2010.[11] This, and other increases in Medicare spending in the bill, was partially offset by a change in the rule that allowed the HHS secretary to pay Medicare Advantage plans from a Medicare “stabilization fund.”[12]

2008:

Pre-legislation Update: -5.3 percent (but accumulated to 10 percent)

Actual Update: +.5 percent

The Medicare, Medicaid, and SCHIP Extension Act of 2007 increased physician payments by .5 percent from January through June at a cost of $6.4 billion over 10 years. This was offset by reductions in payment for outpatient prescription drugs and reimbursement reductions for inpatient rehabilitation facilities.[13]

The Medicare Improvements for Patients and Providers Act of 2008 negated a 10 percent cut scheduled to go into effect in July, and increased rates 18 months, through the end of 2009. This bill increased Medicare spending by $11 billion in 2008, but reduced it in future years for a total 10 year cost of $9.4 billion. This and other Medicare spending increases were offset via Medicare Advantage cuts, the introduction of electronic prescribing, and fees for those who don’t adopt it.[14]

2009:

Pre-legislation Update: -11.5 percent

Actual Update: +1.1 percent

The July 2008 Medicare Improvements for Patients and Providers Act of 2008 negated the cut in 2009 and replaced it with a 1.1 percent increase in that year (offsets are described above). A bill introduced in July that froze payment rates was scored as costing $245 billion over 10 years.[15]

2010:

Pre-legislation Update: -5.3 percent, (accumulated to 21 percent)

Actual Update: +1.3 percent (weighted average)

The Department of Defense Appropriations Act, the Temporary Extension Act, and Continuing Extension Act froze physician reimbursement rates at the 2009 level. 

Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 and the Physician Payment and Therapy Relief Act increased physician reimbursement by 2.2 percent June through December. These were offset with by allowing CMS and the IRS to coordinate data efforts regarding providers with tax debt, prohibiting hospitals from adjusting claims that occurred prior to a patient’s inpatient admission, and reductions to bundled therapy payments.

2011:

Pre-legislation Update: 10.2 percent (accumulated to -25 percent)

Actual Update: .9 percent (weighted average)

An Act to Extend Certain Expiring Medicare and Medicaid Provisions froze payment rates for 2011 at the December 2010 level.[16] Costs of 9.6 billion in 2011 and 5.4 billion in 2012 (total 14.9 billion) were offset with ACA changes including requiring overpayment of premium subsidies to be paid back, which would save 16 billion over 10 years.[17]

2012:

Pre-legislation Update: -3.3 percent (accumulated to -27.4 percent)

Actual Update: 0

The Temporary Payroll Tax Cut Continuation Act of 2011 delayed the 27 percent cut until February, at a cost of 3.6 billion over 10 years.[18] This was offset by an increase in fees paid to Government Sponsored Enterprises from lenders for assuming credit risk on the secondary mortgage market.[19] The Middle Class Tax Relief and Job Creation Act of 2012 (H.R. 3630) delayed the SGR cuts for 10 more months at a cost of $17.9 billion. This was offset by reducing Medicare bad debt reimbursement ($6.9 billion), resetting clinical lab payment rates ($2.7 billion), rebasing Medicaid Disproportionate Share Hospital allotments ($4.1 billion), eliminating Medicaid payments to Louisiana ($2.5 billion), and reducing the health reform law's prevention fund ($5 billion).[20]

2013:

Pre-legislation Update: +1.4 Percent (accumulated to -26.5 percent)

Actual Update: 0

The American Taxpayer Relief Act of 2012 delayed the cuts of 26.5 percent and froze rates.[21] This was offset by Medicare Advantage Cuts, Cuts to Hospital Diagnosis Related Groups, Dialysis, Imaging, Diabetic Supplies, Rebasing Disproportionate Share Hospital payments[22]

2014:

The cut will have accumulated to 24.4 percent.[23]