Sustainable Growth Rate formula

Congressional committees release Medicare payment reform proposal

Feb. 7, 2014: Medicare physician payments would increase by 0.5 percent each year for five years under a new bipartisan agreement on Medicare physician payment reform which would repeal the sustainable growth (SGR) rate formula. The SGR Repeal and Medicare Provider Payment Modernization Act of 2014 would also replace the previously proposed valued-based performance program with a similar Merit-Based Incentive Payment System (MIPS), which includes prospective performance thresholds and offers flexibility in the imposition of performance requirements. The proposal also offers a 5 percent added incentive payment for physicians in alternative payment models (APM), $40 million in technical assistance to small practices of 15 or fewer professionals for MIPS transition or APMs, and $15 million annually for quality measure development.

Other provisions include the following:

  • A requirement that any cuts to individual CPT codes of more than 20 percent as determined in future final Medicare physician fee schedules be phased in over a two-year period to “dampen” the impact of those cuts.  The current system requires all cuts to CPT codes go into effect immediately at the start of the calendar year. The bill would replace a 24 percent across-the-board cut in Medicare payments with small, positive updates of 0.5 percent for the next five years.
  • Establishment of a program that promotes use of appropriate use criteria for advanced diagnostic imaging.
  • Provisions similar to the Standards of Care Protection Act, which the AADA supports.
  • Physicians who opt out of Medicare to engage in private contracting with their patients would no longer be required to renew their opt-out status every two years.
  • Expanded list of criteria used to identify potentially misvalued services to include codes that account for a majority of spending under the physician fee schedule; with substantial changes in procedure time; for which there may be a change in the site of service or a significant difference in payment between sites of service; services that may have greater efficiencies when performed together; or, with high practice expenses or high-cost supplies.
  • Requires GAO report in 18 months regarding other Part B services for which use of clinical decision support mechanisms would be appropriate, such as clinical diagnostic laboratory services.
  • The publishing of utilization and payment data on the Physician Compare website.

The proposal includes changes that the AADA supports, but the legislation does not include provisions to offset the more than $120 billion cost of reform. Read more about the proposal and how much payment reform is projected to cost. The AADA has been actively engaged in the efforts to reform the Medicare physician payment system, and will continue to provide updates as more information becomes available. For more information, email Shawn Friesen at

SGR overview

The Patient Protection and Affordable Care Act did not address the sustainable growth rate (SGR) formula that governs the Medicare physician payment rate. Although there were efforts to eliminate the SGR as part of health system reform, there were not enough votes in Congress to repeal it.

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.

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