Enacted as part of the Balanced Budget Act of 1997, the formula was expected to limit increases in Medicare physician payments by linking them to the gross domestic product. If spending in a given year exceeds the SGR target for that year, then physician payments are reduced in the following year.

In 2002, the SGR formula produced a 5.4 percent cut in payment rates. Since then, Congress has stepped in several times to prevent impending reductions. Because the SGR underestimates the increase in the volume and complexity of doctors' services, the formula requires cuts in physician payments that become more severe with each passing year. In 2010, the SGR called for a 21.2 percent reduction in physician payment rates, which Congress voted to delay until Nov. 30, 2010.

However, these last-minute halts only increase the size of future SGR cuts. For example, the Congressional Budget Office indicated that the 10-year cost of a freeze that would have held payments at 2005 levels would have been $48.6 billion. In 2009, the cost to freeze payments would have been $285 billion. By 2015, it is estimated that the 10-year cost of a freeze will surpass $500 billion.

Legislation to address the SGR is expected to be considered after the November 2010 elections.

Under Medicare's fee schedule for 2011, the SGR mandates a 29 percent cut in Medicare spending. In December 2010, Congress took action to forestall the cuts, freezing payments at 2010 levels through the end of 2011.

To date, Congress has not changed the underlying SGR formula, which is considered to be flawed because it attempts to limit Medicare spending for physicians' services by restraining payment rates without limiting the growth in the volume and complexity of services.