From 1980-1990, Medicare payments to doctors were based on charges. During that period, spending under the program on physician services inflated rapidly, growing at an annual rate of 13.4 percent. Congress took note and reformed the system in two key ways: (1) rates paid for services would be determined by the resources, or inputs, necessary to perform them; and (2) annual increases for services would be restricted based on the total volume of services delivered.
That was all well and good; in fact it makes a good bit of sense. And it worked. From 1992 to 1997, spending growth was fairly steady at one to two percent per year. But then Congress doubled down. The heralded budget deal struck in 1997 by then-President Clinton and the Republican-controlled Congress included a refinement to the aspect of Medicare physician payment rates linked to volume growth, newly labeled the Sustainable Growth Rate (SGR) formula.
That’s when the fun really began. In very short, the SGR boosted payments when the growth rate of spending on physician services fell short of growth in the gross domestic product (GDP). Likewise, it cut payments when physician spending grew more rapidly than GDP. Prices, the number of Medicare beneficiaries, and changes in law were all accounted for, essentially leaving utilization rate as the only key factor driving the SGR algorithm.
