Medicare’s Sustainable Growth Rate Was Not Entirely Bad

(A version of this Health Alert was published by RealClearPolicy.)

Supported by health-care interests, Medicare beneficiaries, and an overwhelming bipartisan consensus in Congress, President Obama has signed a law that will change how Medicare pays doctors — for the worse. Critics note the law will dramatically increase federal control of medicine and add $141 billion in deficits through 2025, a violation of Republican and Democratic pledges made since 2010.

The old system, called the Sustainable Growth Rate, was hardly perfect. In fact, in over a decade of working in health policy, I have never heard one person say anything good about it. Now that it is dead, it is time to give the SGR a fitting eulogy — to bury it, but also, for once, to praise it. Whatever its flaws, the SGR was this nation’s only attempt to connect the cost of an entitlement to our ability to afford it.

The premiums seniors pay for Medicare’s physician benefit cover only one-quarter of the cost of the program. The rest is funded by general revenues. The SGR was an elegantly simple formula to keep that spending under control. There were only four inputs: changes in the estimated costs to operate a physician’s practice, changes in real per capita GDP, changes in the number of Medicare beneficiaries, and changes in laws or regulations that would have an impact on costs.

The genius of the SGR was that if doctors’ productivity improved more than the nation’s overall productivity, they got a raise. But if their productivity increase was slower, they got a pay cut — at least they were supposed to.

SGR worked fine until 2002. Then practice costs started to increase at a significantly higher rate than the SGR permitted, and doctors’ pay was cut almost 5 percent.

Well, that did not last long. Although the gap between overall productivity and physicians’ productivity kept growing, along with the pay cuts indicated by the SGR, Congress enacted 17 short-term patches to make sure pay never decreased. The current patch expired on March 31, and doctors would have taken a pay cut of about one-fifth had Obama not signed the permanent fix.

No politician has ever been recorded inquiring why doctors are not able to increase their productivity at the same rate as anyone else. It might have something to do with the way Medicare determines what each procedure is worth — Medicare’s centrally controlled system would make a Soviet planner blush. On the other hand, it may be that doctors simply cannot increase their productivity at the same rate that other workers can, for the same reasons musicians or writers cannot — modern technology cannot really compress the time needed for their tasks.

Whatever the cause of the productivity gap, the fact remains that the SGR connected doctors’ Medicare pay with a reasonable measure of the nation’s ability to pay them. Bear in mind that entitlement spending is on autopilot — Medicare appropriations are deemed “mandatory,” or at least they will be until our creditors decide they’ve had enough. Without a measurement like the SGR, nobody can be confident how much money the government will need to pay Medicare claims. They will likely continue to significantly exceed the proportion of federal spending budgeted.

The SGR might not have been the right formula; perhaps it should have better accounted for unavoidable limits on physicians’ productivity improvements. Nevertheless, the principle that Medicare’s physician payments should be based on the nation’s ability to pay, rather than on the cries of physicians’ lobbyists, is one we have jettisoned at our fiscal peril.

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