Medicare: What Is Sustainable Growth Rate?

Medicare was enacted into law in 1965 to cover healthcare costs for citizens age 65 and older. Provided by the federal government, the intent was to design it much like private employer insurance plans, according to the National Bipartisan Commission on the Future of Medicare.

Medicare provides hospitalization (Part A), medical services coverage (Part B) and prescription drug coverage (Part D), which was added in 2006, according to the Centers for Medicare and Medicaid Services.

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In 1997, Congress passed the Balanced Budget Act of 1997, which included The Medicare Sustainable Growth Rate (SGR) formula to help regulate the costs of physician services to Medicare participants. The act tied the payments issued by the government to physicians for the services they provided to Medicare patients to volume, according to Health Affairs Blog. The more physicians prescribed services, the more they were paid. Payments were also linked to the nation’s gross domestic product (GDP). Physician pay for Medicare services fluctuated with the GDP. As it grew or shrank, so too did the payments to physicians.

The SGR formula was flawed in that it dealt with physician costs without consideration of the quality of care provided, according to the American College of Physicians. This formula caused such havoc in physician pay that many physicians began to stop treating Medicare patients. To avoid this drastic action, Congress has been voting to avoid physician pay cuts through various actions for the past two decades. It has voted for a fix multiple times to ensure physicians would be paid more than the SGR would normally allow. These actions were necessary to ensure physicians would continue to provide services to Medicare participants.

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In April, 2015, the Medicare Access and CHIP Reauthorization Act (MACRA) was signed into law. The law was motivated by the need to avoid a 21 percent cut to Medicare physician pay rates which would affect provider access, according to Medical Group Management Association. More importantly, it repealed the Medicare SGR formula, which had been a failed initiative almost from its beginning.

MACRA’s goals include the movement of calculating physician payments to a merit-based system. With the passage of MACRA, the SGR was dropped and individual physicians’ rates will be established and updated regularly based on their performance under a Merit-Based Payment Incentive System known as MIPS, Health Affairs Blog said. With the new law, the way physicians are paid will radically change to be tied to the quality of the care provided as opposed to the volume of services provided. The SGR is no longer used in physician pay calculations for Medicare services.

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