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.
For 2013, the SGR called for a 26.5 percent reduction in physician payment rates, which Congress voted to delay until Dec. 31, 2013. However, these last-minute halts only increase the size of future SGR cuts. For example, the Congressional Budget Office estimates that this one-year freeze at 2012 payment levels will cost $25 billion.
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.