Short-Term Fixes to the Sustainable Growth Rate Process . 6.0 Discussion


The primary objective of this report has been to evaluate revisions to the current SGR physician payment update methodology with a focus on refinements to attributes of the SGR process and changes in the definition of target spending.  A spreadsheet model of the current SGR process was constructed for comparative study of effects of changes in the current payment update process.  The basic building blocks of these modeling efforts include data from the past, and data that were used to project future spending patterns.  Outputs of the modeling effort include estimated payment updates and associated levels of program spending.

It is important to emphasize that interpretation of results of these modeling efforts is subject to two important caveats.  First, no behavioral responses on the part of any agents affected by the update process, including providers, Medicare beneficiaries, and Congress, have been incorporated into the structure of the spreadsheet model.  Thus, no behavioral responses to increased or decreased updates affect the model’s predicted effects on updates and program spending.  A consequence is that if volume is expected on net to increase in response to large reductions in CFs, spending effects reported above should best be interpreted as lower-bounds.  In the same way, no behavioral responses to changes in CFs by program beneficiaries or Congress has been assumed other than those already built into data from CMS that have been used to construct the SGR process model.  Second, results reflect various assumptions.  Whenever possible, data from CMS have been used and these reflect study by the CMS Office of the Actuary.  Examples include how the number of Medicare beneficiaries is expected to change in the future and trends in per beneficiary utilization in total SGR services.   

In spite of these caveats, use of the model in examining effects of refinements in the SGR process is helpful.  Modeling is a source of information on relative magnitudes of effects stemming from different refinements and combinations of refinements, and helps the user understand what drives the SGR process.  Key findings from this work may be seen from the perspective offered by Table 17, which displays CFs and spending estimates for future years corresponding to two main SGR approaches: ‘cost’, and the current approach.  Under the current SGR approach, negative updates are expected, CFs would be relatively low (absent Congressional intervention assumptions), and spending is relatively low.  The UAF formula will continue to penalize over-spending, a consequence of expected total SGR spending levels in excess of target spending levels. At the opposite end of the continuum, updates would be based strictly on the expected rate of increase in the costs of practice (as measured by the MEI) under the cost approach, with no payment rewards/penalties (in fact, estimates are produced using the current SGR formula and eliminating UAF rewards and penalties).  Average CFs under the cost approach would exceed CFs under baseline by 20 percent between 2007 and 2010, and by 60 percent between 2011 and 2014.  The difference in total program spending between these two extremes is large – over $190 billion, or 26 percent of baseline spending during 2007-2013.

Table 17. Summary and Payment Reform Continuum




CF (Range)



CF (Range)

















Rebased Spending*


































Notes: Baseline results are based on CFs predicted for years 2007-2014.  Cost model CFs were predicted from the SGR model by basing updates only on the MEI and ‘other’ factors used by CMS; i.e., the UAF is not used in calculating the update for the cost model.  Remaining estimates in this table are from Tables 13a and 13b.  CFs and percent changes are arithmetic averages over the period of interest.  The CF range refers to the values at the beginning and end of the period.  Spending is total SGR spending during the period.  *Target spending amounts rebased to 2006 spending.  **Spending estimates are for years 2011-2013.

A number of refinements to the current process were considered in this report, each motivated by the importance of identifying changes that would reduce the need for yearly Congressional intervention in response to formula-driven reductions in Medicare payments.  Fundamental challenges are that spending in the near future, at least, is expected to be in excess of spending targets as currently defined, and that the downward pressure on payment updates is increasing with the accumulation of over-spending over time, given the design of the SGR.  The primary policy goal, of course, is to identify refinements to the update process that would eliminate or reduce the magnitude of payment reductions but without large increases in spending.

Each of the refinements considered in this report could be summarized by adding a row between the cost and current payment update approaches in Table 17.  CFs for these reforms would exceed baseline levels in the near future, but would be less costly than under the cost model.  Reforms that appear to hold the most promise are those involving changes in the definition of target spending, including rebasing the spending target (beginning in 2007), in combination with the elimination of drug and lab spending from SGR.  Under the current SGR approach, the average percent change in CFs between 2007 and 2010 is expected to be -5 percent without Congressional intervention.  With rebasing as defined in this study, the average reduction in CFs during 2007-2010 would be -3.0.  With simultaneous elimination of lab and drug spending from SGR spending and increases in the SGR (as specified in this study, e.g., to reflect increased preferences for spending on health care), payment updates would increase by 2010 without Congressional intervention.  While these approaches would preserve means of recovering at least a portion of over-spending, program spending would increase but by less than if the cost model were adopted.  The price of less Congressional intervention with CFs obtained with rebasing, elimination of drug and lab spending, and revised SGRs would be 4 percent less than under the cost model, and 12 percent more than under the status quo between 2007 and 2010.  So long as spending continues to increase at expected rates, identifying how best to fix the SGR update process requires that policymakers balance benefits of less future Congressional intervention with the costs of increases in program spending.

View full report


"sgr.pdf" (pdf, 309.97Kb)

Note: Documents in PDF format require the Adobe Acrobat Reader®. If you experience problems with PDF documents, please download the latest version of the Reader®