Replacing Medicare's Unsustainable Sustainable Growth Rate: A Better Way to Determine Doctors' Pay

Executive Summary

Clashes over U.S. health care policy are legion, with the furor unleashed by the Affordable Care Act merely the most prominent recent example. Yet on the question of reforming how Medicare pays doctors—determined, at present, by the Sustainable Growth Rate (SGR) mechanism—there is rare bipartisan accord on the need for change.

First enacted in 1997, the SGR was intended as a means to tie cost increases in Medicare, already one of the nation’s most costly programs, to trends in the overall economy. In practice, Congress has proved reluctant to implement the SGR’s approach to budget restraint: lower payments to individual doctors, as determined not by the law of supply and demand but by an arbitrary price-fixing formula. Indeed, since 2002 the congressional budget process has annually included the so-called doc fix—arbitrary upward adjustments to Medicare physician reimbursement rates—thereby reversing its own SGR-imposed cost-control mandates.

The result: as Medicare consumes an ever-larger share of U.S. economic output, the SGR system fails to meet its goal of ensuring that Medicare’s spending on physicians grows more slowly than a broad economic index.1 The Sustainable Growth Rate is, in short, anything but sustainable. Despite such shortcomings, efforts to replace the SGR, which, to date, have largely consisted of minor tweaks, fail themselves to attract sufficient support. As Congress approaches its latest deadline for fixing the SGR, on March 31, 2015, policymakers happily need not search far and wide for a better alternative. An existing government program, based in price and quality competition tied to consumer choice,2 has already restrained cost growth3 without centrally led interventions: Medicare Part C, otherwise known as Medicare Advantage (MA). 

This paper proposes a practical alternative to the current system: setting Medicare reimbursement rates through comparison with the closest available approximation of actual market prices for health care, those experienced by patients enrolled in the substantial and growing Medicare Advantage program. In this proposal, MA, which permits those 65 and older to choose from among a group of private insurance plans, would serve as a source of benchmark pricing for so-called Medicare fee-for-service (FFS) patients—the majority of Medicare enrollees whose health care providers are reimbursed, at a predetermined price, for each individual service performed. The plan offered herein combines the potential for predictability—of the sort health care providers much prefer—with the potential for cost controls originally envisioned by the SGR approach.

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