In a last-minute fiscal cliff deal, Congress passed legislation that pushes off huge physician pay cuts mandated by the Sustainable Growth Rate (SGR) formula. Congress now has until Jan. 1, 2014, to find an alternative to the SGR, a payment cap that virtually all experts consider deeply flawed.


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Doctors breathed a sigh of relief but also urged Congress to come up with a long-term solution before the next deadline arrives. 

This Band-Aid was just the latest patch in the government’s attempt to create a physician payment system that offers adequate compensation without driving up costs. The struggle to keep Medicare spending on physician services under control dates back to the program’s inception.

“(The SGR) was a well-intentioned policy in the beginning,” said Stuart Guterman, vice president and executive director of the Commission on a High Performance Health System at The Commonwealth Fund.

When Medicare was established in 1965, there was no set fee schedule for physician pay. Medicare paid a physician based on actual charges, as long as the costs were determined to be “reasonable” (i.e., costs were consistent with the claim history of the physician and his or her peers), and the patient paid the balance.

In 1975, the Medicare Economic Index (MEI) was put in place to limit annual increases in physician payments, but between 1984 and 1991, Congress, concerned that physician fees were nonetheless increasing too quickly, set physician payment updates legislatively.

In 1989, Congress passed the Omnibus Budget Reconciliation Act, introducing the physician fee schedule, a new system that fixed the price of individual medical services and standardized payments to Medicare physicians across the country. Out of concerns that fixing the price on individual medical services would create incentives to order more services, the legislation also included the Medicare Volume Performance Standard (MVPS).  The MVPS adjusted the MEI calculations to counteract the increases in the volume of services delivered per beneficiary.

The SGR, part of the Balanced Budget Act of 1997, replaced the MVPS, partly out of fear that the MVPS would lead to long-term severe cuts to physician payments. The SGR, unlike the previous target, tied physician payments to the gross domestic product (GDP).

The SGR worked in the late 1990s and early 2000s, when the economy was growing quickly. During this time, physicians received significant increases in their payment updates. In 2002, the economy slowed and the SGR began turning out negative numbers. Congress let the cuts go into effect the first year (a 4.8 percent cut), but since then, they’ve passed legislation to defer the cuts. The SGR is cumulative, so cuts have grown from year to year.

Congress is now afraid to permanently repeal the SGR because without it, they fear there will be no control whatsoever on the volume and intensity of physician services, Guterman said.

Another reason Congress has balked at repealing the SGR is the price tag – It would cost $245 billion to freeze physician payments for the next 10 years, according to the Congressional Budget Office.

Congress has been freezing or marginally increasing physician payments in lieu of the SGR cuts for a decade, and yet they balk at setting a multiyear payment freeze, opting instead to set payment updates on an annual basis.

For example, in 2012, Congress decided to freeze physician payments for a year, which cost Medicare $25 billion. The funds to pay for the freeze came from Medicare Advantage Plans (Part C), hospitals and dialysis centers.

“Congress has done this on the theory that if you break off a little piece of poison, eat the poison one year at a time, it’s less toxic than if you eat the whole 10 years,” Guterman said.

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