Medicare Physician Payment Updates and the
Sustainable Growth Rate (SGR) System

Jim Hahn
Specialist in Health Care Financing
Janemarie Mulvey
Specialist in Health Care Financing
February 15, 2013
Congressional Research Service
7-5700
www.crs.gov
R40907
CRS Report for Congress
Pr
epared for Members and Committees of Congress

Medicare Physician Payment Updates and the Sustainable Growth Rate (SGR) System

Summary
The Sustainable Growth Rate (SGR) is the statutory method for determining the annual updates to
the Medicare physician fee schedule. The SGR system was established because of the concern
that the Medicare fee schedule itself would not adequately constrain overall increases in spending
for physicians’’ services. While the fee schedule limits the amount that Medicare will pay for each
service, there are no limits on the volume or mix of services. Under the SGR formula, if
expenditures over a period are less than the cumulative spending target for the period, the annual
update is increased. However, if spending exceeds the cumulative spending target over a certain
period, future updates are reduced to bring spending back in line with the target.
In the first few years of the SGR system, the actual expenditures did not exceed the targets and
the updates to the physician fee schedule were close to the Medicare economic index (MEI, a
price index of inputs required to produce physician services). Beginning in 2002, the actual
expenditure exceeded allowed targets, and the discrepancy has grown with each year. However,
with the exception of 2002, when a 4.8% decrease was applied, Congress has enacted a series of
laws to override the reductions.
Most observers agree that the SGR system is fundamentally flawed and is creating instability in
the Medicare program for providers and beneficiaries: (1) the SGR system treats all services and
physicians equally in the calculation of the annual payment update, which is applied uniformly
with no distinction across specialties; (2) continued declines in physician payment rates,
especially among primary care specialties, may potentially jeopardize access to services; and (3)
legislative overrides have provided only temporary reprieve from projected reductions in
payments under the SGR calculation, requiring even steeper future reductions in payment rates.
Several alternatives to the current SGR mechanism have been proposed in recent years. For
example, H.R. 3162, the Children’’s Health and Medicare Protection Act of 2007 (CHAMP),
introduced in the 110th Congress, would have created six categories of physicians services, each
with a separate expenditure target, while H.R. 3961, the Medicare Physician Payment Reform Act
of 2009, would have had only two expenditure categories: (1) evaluation, management, and
preventive services, and (2) all other services. On October 14, 2011, the Medicare Payment
Advisory Commission (MedPAC) sent its recommendations to Congress, repealing the SGR
system and replacing it with a 10-year schedule of specified updates for the physician fee
schedule, with primary care practitioners receiving a 0% update over the next 10 years and non-
primary care practitioners facing a 5.9% decline in payment rates the first three years and 0%
thereafter. None of the proposals has won enough support to be passed into law.
On January 2, 2013, the President signed H.R. 8, the American Taxpayer Relief Act of 2012
(ATRA, P.L. 112-240). Section 601 of the act averts the SGR-determined reduction and maintains
the Medicare physician fee schedule payments at their current rates through December 31, 2013.
The conversion factor for 2014 and afterwards will be computed as if the modification to the
conversion factor in this section had never applied.
On February 5, 2013, CBO stated that its estimate of the cost of a 10-year freeze in payments had
fallen to $138 billion over 10 years, more than $100 billion less than its August 2012 estimate,
primarily due to lower spending for physician services in recent years.

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Medicare Physician Payment Updates and the Sustainable Growth Rate (SGR) System

Contents
Introduction ...................................................................................................................................... 1
Background on the Medicare Fee Schedule Updates ...................................................................... 1
Updates and the Sustainable Growth Rate (SGR) System ........................................................ 2
Conversion Factor Calculation .................................................................................................. 2
Medicare Economic Index .................................................................................................. 3
Sustainable Growth Rate (SGR) ......................................................................................... 3
Update Adjustment Factor ................................................................................................... 4
Historical Updates and Legislative Overrides ................................................................................. 4
Issues for Congress: Concerns About SGR ..................................................................................... 8
SGR Does Not Target High Volume Providers or Procedures ................................................... 8
Potential Impact on Beneficiary Access to Services .................................................................. 9
Issues for Congress: Potential Modifications and Alternatives ....................................................... 9
Legislative Proposals Introduced to Repeal or Modify the SGR ............................................ 10
MedPAC Proposal ................................................................................................................... 12
Budgetary Implications of Repealing or Changing the SGR Formula .................................... 14
Physician Payments and Patient Protection and Affordable Care Act (ACA) ......................... 15
Current Status and Recent Activity.......................................................................................... 15

Figures
Figure 1. Two Measures of the Difference Between Cumulative Allowed and
Actual Expenditures for Physician Services Under the SGR System........................................... 5

Tables
Table 1. Summary of Updates and Legislative Activity .................................................................. 6
Table 2. Select Legislative Proposals to Modify the SGR Calculation ......................................... 11

Appendixes
Appendix. Recent SGR Legislative Activity Enacted into Law .................................................... 17

Contacts
Author Contact Information........................................................................................................... 22

Congressional Research Service

Medicare Physician Payment Updates and the Sustainable Growth Rate (SGR) System

Introduction
The Sustainable Growth Rate (SGR) is the statutory method for determining the annual updates to
the Medicare physician fee schedule. The SGR system was established because of the concern
that the Medicare fee schedule itself would not adequately constrain overall increases in spending
for physicians’’ services. While the fee schedule limits the amount that Medicare will pay for each
service, there are no limits on the volume or mix of services.
In the first few years of the SGR system, the actual expenditures did not exceed the targets and
the updates to the physician fee schedule were close to the Medicare economic index (MEI, a
price index of inputs required to produce physician services). For the next two years, in 2000 and
2001, the actual physician fee schedule update was more than twice the MEI for those years.
However, beginning in 2002, the actual expenditure exceeded allowed targets, and the
discrepancy has grown with each year, resulting in a series of ever-larger cuts under the formula.
With the exception of 2002, when a 4.8% decrease was applied, Congress has enacted a series of
laws to override the reductions. However, these actions have required almost yearly attention
from Congress. This report provides a background on the Medicare fee schedule, the SGR
system, and the annual updates and discusses recent proposals to address this issue.
Background on the Medicare Fee Schedule Updates
Medicare payments for Part B services1 provided by physicians and certain non-physician
practitioners are made on the basis of a fee schedule, a list of over 7,000 tasks and services for
which physicians bill Medicare.2 From the inception of the program until 1992 and the
introduction of the resource-based relative value scale (RB-RVS) fee schedule, Medicare paid
physicians based on ““usual, customary, and reasonable”” charges.3
The Omnibus Budget Reconciliation Act (OBRA 89, P.L. 101-239) created the RB-RVS-based
Medicare fee schedule, which went into effect January 1, 1992. Under the RB-RVS fee schedule,
the Center for Medicare & Medicaid Services (CMS) assigns relative value units (RVUs) that
reflect physician work (i.e., time, skill, and intensity it takes to provide the service), practice
expenses, and malpractice costs.4 The adjusted relative values are then multiplied by a conversion

1 For detail on fee-for-service Medicare and other Medicare background information, see CRS Report R40425,
Medicare Primer, coordinated by Patricia A. Davis and Scott R. Talaga.
2 Social Security Act, §1848. [42 U.S.C. 1395w––4]. In some instances, special rules apply to the calculation of
Medicare fees for some services, including anesthesia, radiology, and nuclear medicine.
3 Also called ““customary, prevailing and reasonable charges,”” this method based physician payments on charges
commonly used by physicians in a local community. The payment for a service was the lowest of (1) the physician’’s
billed charge for the service, (2) the physician’’s customary charge for the service, or (3) the prevailing charge for that
service in the community. For further discussion, see Physician Payment Review Commission, ““Annual Report to
Congress, 1997.””
4 The determination of the relative value units affects all payments under the fee schedule. Refinements in existing
values and establishment of values for new services have been included in the annual fee schedule updates. This
refinement and update process is based in part on recommendations made by the American Medical Association’’s
Specialty Society Relative Value Update Committee (RUC), which receives input from approximately 100 specialty
societies. The law requires a review every five years.
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factor to derive the actual payment amount in dollars. Medicare pays providers the lesser of the
actual charge for the service or the allowed amount under the fee schedule.
Expenditure targets have been a factor in the calculation of Medicare physician payment updates
since the current fee schedule was first implemented in 1992. In the first year, one overall
conversion factor was used to calculate the update. Then, two (surgical and non-surgical services)
and eventually three conversion factors were used for different categories of services (surgical,
primary care, and other nonsurgical services). However, under the Medicare Volume Performance
Standard (MVPS) method, targets were set (and typically exceeded) each year; there was no
cumulative goal and no significant consequence to exceeding the expenditure target. The current
SGR method for calculating annual updates was created partly in response to the shortcomings of
the prior method.
Updates and the Sustainable Growth Rate (SGR) System
The Balanced Budget Act of 1997 (BBA97, P.L. 105-33) replaced the MVPS with the SGR, with
the objective of creating a sustainable growth path for Part B expenditures. First, BBA97 added
cumulative spending criteria that resulted in actual consequences for failing to meet expenditure
targets; beginning with April 1, 1996, as the starting point, actual program expenditures are
compared to growth targets to determine annual updates. Second, BBA 97 introduced the rate of
growth in the per capita amount of the gross domestic product (GDP) into the SGR calculation
and also provided for the use of a single conversion factor instead of three.5 By tying the
expenditure targets to the growth in GDP per capita, this system attempted to hold Medicare
physician expenditures to a level that would not consume an ever-increasing share of national
income.
The SGR system was established because of the concern that the Medicare fee schedule itself
would not adequately constrain overall increases in spending for physicians’’ services. While the
fee schedule limits the amount that Medicare will pay for each service, there are no limits on the
volume or mix of services. The SGR system was intended to serve as a restraint on aggregate
spending. While the SGR targets are not limits on expenditures, they represent a ““sustainable””
trajectory for cumulative spending on Medicare physician services from April 1996 forward. The
annual fee schedule update thus reflects the success or failure in meeting the goal. If expenditures
over a period are less than the cumulative spending target for the period, the update is increased.
However, if spending exceeds the cumulative spending target over a certain period, the update for
a future year is reduced, with the goal to bring spending back in line with the target.
Since the conversion factor applies to all services, the update to the conversion factor is the key
component for determining how reimbursements change from year to year.
Conversion Factor Calculation
The Medicare conversion factor is a scaling factor that converts the geographically adjusted
number of RVUs for each service in the Medicare physician payment schedule into a dollar

5 The Balanced Budget Refinement Act of 1999 (BBRA 99, P.L. 106-113) incorporated an adjustment for the prior
year into the update adjustment factor (UAF) update calculation; it also moved from a fiscal year to a calendar year
system.
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payment amount. The annual update to the conversion factor calculation is based on (1) the MEI,
which measures the weighted-average annual price changes in the inputs needed to produce
physician services;6 (2) the SGR; and (3) the update adjustment factor (UAF).
Medicare Economic Index
The Medicare Economic Index is a factor in the annual update to the physician fee schedule. The
MEI measures the weighted-average annual price change for various inputs needed to produce
physicians’’ services. In 2013, the MEI is projected to increase 0.6%.7 In years when the
cumulative actual expenditures equal the target, physician fees are updated by the growth rate in
the MEI.
Sustainable Growth Rate (SGR)
The SGR sets both the cumulative and allowed expenditures under the UAF formula and consists
of the following components:
•• the estimated percentage changes in physicians fees,
•• the estimated percentage changes in the number of fee-for-service beneficiaries,
•• the estimated percentage growth in real GDP per capita (10-year moving
average), and
•• the estimated percentage changes resulting from changes in laws and regulations.
Because the SGR formula is tied to the percentage change in the number of fee-for-service
beneficiaries, in the short run, increases in managed care enrollment relative to fee-for-service
Medicare would result in a slightly lower SGR. In the longer run, as the population ages and the
number of fee-for-service Medicare beneficiaries increases, this should increase the target rate of
allowed expenditures.
Prior to 2003, the SGR formula included as a component the annual rate of growth in the
economy (i.e., the growth in inflation-adjusted GDP per capita). From 1997 through 2000, per
capita GDP grew faster than Part B expenditures, at more than 4% annually; Part B expenditures
were relatively stable from 1996 to 1998 and then started to increase in 1999 and 2000. However,
economic growth slowed at the turn of the century, while Part B expenditures grew at a faster rate
from 2000 on. Thus, the relative health of the economy effectively masked the increases in total
Part B expenditures for the first few years under the SGR system, but as the economy slowed and
expenditures continued to increase, the updates as determined under the SGR system turned
negative in order to bring projected actual expenditures back in line with target expenditures. To
remove some of the volatility in the target from cyclical economic changes, the Medicare

6 For more information on the components used to calculate the MEI and quarterly historical data, see
http://www.cms.hhs.gov/MedicareProgramRatesStats/downloads/mktbskt-economic-index.pdf. The 2013 MEI estimate
is contained in CMS’’ preliminary estimate of the SGR and conversion factor for 2013, available at
https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/SustainableGRatesConFact/Downloads/
sgr2013p.pdf.
7 The calculation of the 2012 MEI is provided in the final 2012 Medicare physician payment rule issued by CMS; see
http://www.ofr.gov/OFRUpload/OFRData/2011-28597_PI.pdf.
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Modernization Act (P.L. 108-173) changed the measure to a 10-year moving average per capita
GDP growth rate.
Beginning in CY2010, there was a technical adjustment to the calculation of the SGR relating to
how physician services are measured. Specifically, physicians have argued that physician-
administered drugs (which are reimbursed under Part B) should be excluded from the calculation
of expenditures subject to the SGR because physicians have no control or influence on the price
of these drugs. To address this issue, CMS changed the measurement of physician services to
exclude physician-administered drugs from the calculation of allowed and actual expenditures
beginning in CY2010 and all subsequent years. For comparison purposes, they also calculated
cumulative allowed and actual physician-expenditures excluding physician-administered drugs
for all prior years as well (see Figure 1).8 The Congressional Budget Office (CBO) projects that
removal of physician-administered drugs from the target should reduce the difference between
actual and targeted spending in the future as spending for physician-administered drugs has
historically grown faster than physician services.9
Update Adjustment Factor
The update adjustment sets the conversion factor at a level so that projected spending for the year
will meet allowed spending by the end of the year. The adjustment factor is the sum of (1) the
prior year adjustment component; and (2) the cumulative adjustment component. Use of both the
prior year adjustment component and the cumulative adjustment component allows any deviation
between cumulative actual expenditures and cumulative allowed expenditures to be corrected
over several years rather than a single year. As provided under Section 1848(d)(3)(D) of the
Social Security Act, the adjustment factor cannot be less than minus 7% or more than plus 3%.
Thus, despite calculations which would have led to larger reductions, the UAF adjustment has
been minus 7% for the last several years. The caps on the adjustment limit the annual reduction or
increase. Thus, the gap between cumulative actual spending and cumulative allowed spending
grows larger each year and is exacerbated whenever Congress overrides the reductions, since the
targets are never modified under current law.
Historical Updates and Legislative Overrides
Under the update formula, if actual expenditures do not exceed target expenditures, the update
generally would be positive and payments would increase for all services under the fee schedule
subject to the single conversion factor. In the first few years of the SGR system, the actual
expenditures did not exceed the targets. Figure 1 shows the difference between the cumulative
actual allowed (i.e., the target) and cumulative actual expenditures for two different measures of
physician services. Prior to 2010, physician services included physician-administered drugs,
which resulted in a larger difference between the cumulative targeted expenditures and the
cumulative actual. In other words, this made the difference (as shown by the dotted line in Figure
1
) more negative. Under this measure, the updates to the physician fee schedule were close to the

8 See CMS Final Rule, Medicare Program; Payment Policies Under the Physician Fee Schedule and Other Revisions
to Part B for CY 2010, Federal Register Notice,
November 25, 2009.
9 Congressional Budget Office, Medicare’’s Payments to Physicians: The Budgetary Impact of Alternative Policies,
June, 16, 2011; http://www.cbo.gov/ftpdocs/122xx/doc12240/SGR_Menu_2011.pdf.
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MEI in the first two years (2.3% in 1998 and 1999, compared with MEI of 2.2% in 1998 and
2.3% in 1999).10 For the next two years, in 2000 and 2001, the actual physician fee schedule
update was more than twice the MEI for those years (5.5% update vs. MEI of 2.4% in 2000, 5.0%
update vs. MEI of 2.1% in 2001). However, beginning in 2002, the actual expenditures exceeded
allowed targets and the discrepancy has grown with each year.
In 2010 and subsequent years, the measurement of physician services was changed to exclude
physician-administered drugs. By excluding physician-administered drugs, the difference
between actual and targeted expenditures (the solid line in Figure 1) is not as large.
Figure 1. Two Measures of the Difference Between Cumulative Allowed and
Actual Expenditures for Physician Services Under the SGR System
(1996-2011)
20
10
0
(10)
(20)
illions (30)
$B
(40)
(50)
(60)
(70)
96
97
98
99
0
1
2
3
4
5
6
7
8
9
0
1
19
19
19
19
200 200 200 200 200 200 200 200 200 200 201 201
Excludes Phys. Admin. Drugs
Includes Phys. Admin. Drugs

Source: CRS figure from CMS data contained in ““Estimated Sustainable Growth Rate and Conversion Factor,
for Medicare Payments to Physicians in 2012.”” Available at http://www.cms.hhs.gov/SustainableGRatesConFact/
Downloads/sgr2012p.pdf.
Notes: This graph shows the difference between cumulative al owed expenditures and actual expenditures for
physician services. The 2010 figures for both al owed and actual expenditures are CMS estimates. Beginning in
2010, SGR calculation for 2010 and subsequent years exclude physician-administered drugs. Thus, the estimates
for SGR that includes physician-administered drugs is not available after 2009.
A consequence of exceeding the target (that included physician-administered drugs) since 2002,
results in a reduction in the physician fee schedule each year. However, as shown in Table 1,

10 See Table 6, Actual Past Medicare Economic Index Increases and Physician Updates for 1992í2009, and Estimated
Values for 2010, in CMS publication, ““Estimated Sustainable Growth Rate and Conversion Factor, for Medicare
Payments to Physicians in 2010.””
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beginning in 2003, Congress has passed legislation that has overridden the cuts each year (see
Table 1). Greater details about these legislative changes can be found in the Appendix.
Despite the change in the measurement of physician services, the consequences of exceeding the
target and subsequent legislative overrides would have led to a projected reduction in the
conversion factor due to the SGR calculation of 26.5% beginning January 2013.11 While the
American Taxpayer Relief Act (ATRA, P.L. 112-240) averted this reduction, Congress will need
to address the situation again before the end of the year, when the override is due to expire and
the expected SGR-determined reduction is likely to be even greater.
Table 1. Summary of Updates and Legislative Activity
(2002-2013)
Year
Formula update
Actual update
Legislation
Notes
2002
í 4.8%
í4.8%


2003
í 4.4%
1.4%
Consolidated
The update was 1.7% but was
Appropriations
effective on Mar. 1, 2003, so
Resolution of 2003
the average update for the year
(CAR, P.L. 108-7)
was 1.4%.
2004
í 4.5%
1.5%
Medicare

Modernization Act
of 2003 (MMA, P.L.
108-173)
2005
í 3.3%
1.5%
MMA

2006
í 4.4%
0.2%
Deficit Reduction
Although the DRA froze the
Act of 2005 (DRA,
conversion factor update,
P.L. 109-171)
refinements to the RVUs
resulted in a 0.2% update for
the year.
2007
í 5.0%
0%
Tax Relief and

Health Care Act of
2006 (TRHCA, P.L.
109-432)
Jan.-June
í 10.1%
0.5%
Medicare, Medicaid,
Physicians who voluntarily
2008
and SCHIP
reported on certain quality
Extension Act of
measures during July 1, 2007-
2007 (MMSEA, P.L.
Dec. 31, 2007, were eligible for
110-173)
a bonus payment of 1.5% in
2008 per TRHCA.
July-Dec.
í 10.6% reduction
0% (0.5% from
Medicare
See above.
2008
from June 2008 level
2007 level)
Improvement for
Patients and
Providers Act of
2008 (MIPPA, P.L.
110-275)

11 Centers for Medicare & Medicaid Services, Press Release, CMS Announces Policy, Payment Rate Changes for the
Physician Fee Schedule in 2012,
November 1, 2011. Also see Federal Register, vol. 76, no. 228, Medicare Program:
Payment Policies Under the Physician Fee Schedule, November 28, 2011.
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Medicare Physician Payment Updates and the Sustainable Growth Rate (SGR) System

Year
Formula update
Actual update
Legislation
Notes
2009

1.1%
MIPPA
Physicians who voluntarily
reported on certain quality
measures during 2008 were
eligible for a bonus payment of
1.5% in 2009 per MMSEA.
Jan. 1-Feb. 28,
í 21.3%
0%
Department of

2010
Defense
Appropriations Act
(P.L. 111-118)
Mar. 1-Mar.

0%
Temporary
Signed into law on Mar. 2,
31, 2010
Extension Act (P.L.
2010.
111-144)
Apr. 1-May

0%
Continuing
Signed into law on Apr. 15,
31, 2010
Extension Act (P.L.
2010.
111-157)
June 1-Nov.

2.2%
Preservation of
Signed into law on June 25,
30, 2010
Access to Care for
2010. (Increase was retroactive
Medicare
to June 1.)
Beneficiaries and
Pension Relief Act
of 2010 (P.L. 111-
192)
Dec. 1-Dec.

0% (2.2% from Physician Payment

31, 2010.
Jan.-May, 2010 and Therapy Relief
level)
Act of 2010 (P.L.
111-286)
2011

0%
Medicare and

Medicaid Extenders
Act (P.L. 111-309)
Jan. 1-Feb. 29,

0%
Temporary Payrol

2012
Tax Cut
Continuation Act of
2011 (P.L. 112-78)
March 1-Dec.

0%
Middle Class Tax

31, 2012
Relief and Job
Creation Act of
2012 (P.L. 112-96)
2013
í 26.5%
0%
American Taxpayer

Relief Act (P.L. 112-
240)
Source: Annual Report of the Boards of Trustees of the Federal Hospital Insurance And Federal Supplementary
Medical Insurance Trust Funds (several years, available at http://www.cms.gov/Research-Statistics-Data-and-
Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/index.html?redirect=/reportstrustfunds/), and CMS,
Sustainable Growth Rate and Conversion Factor for Medicare Payments to Physicians (several years, available at
http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/SustainableGRatesConFact/index.html?
redirect=/SustainableGRatesConFact/).
In addition to overriding the payment reductions, Congress has also included provisions in several
of the laws to increase Medicare physician payments in other ways. For example, Congress has
altered the geographic adjustment factor for physician work, one component used in making
regional adjustments to payments under the physician fee schedule. MMA set a floor on the work
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geographic adjustment index at 1.0 for 2004-2006, thereby slightly increasing the payment
amounts in some areas. This floor has been extended multiple times, most recently by the
American Taxpayer Relief Act (ATRA, P.L. 112-240), which maintains the floor through 2013.
Some of the bills also modified the cap on the conversion factor, which has led to the current
situation where the consequence of not overriding the reduction would lead to cuts in excess of
the 7% cap. TRHCA specified that the override of the reduction that would have been
implemented under the statutory formula was to be treated as if it did not occur. Therefore, the
starting base for the 2008 calculation was 5% below the actual 2007 conversion factor. MMSEA
overrode the reduction for the first six months of 2008 and provided for a 0.5% increase for that
period. However, the legislation again specified that the override of the statutory formula was to
be treated as if it did not occur. MIPPA again specified that the override of the statutory formula
was to be treated as if it did not occur.
Issues for Congress: Concerns About SGR
There is a growing consensus among observers that the SGR system is fundamentally flawed and
is creating instability in the Medicare program for providers and beneficiaries.12 The SGR was
developed to restrain the volume growth of Medicare physician services. However, physician
services provided to Medicare beneficiaries are growing at more than double the rate allowed
under the SGR system.13 Payment reductions as called for under the update formula have required
almost annual interventions by Congress. The following sections discuss briefly some of the key
concerns with the SGR.
SGR Does Not Target High Volume Providers or Procedures
One commonly asserted criticism is that the SGR system treats all services and physicians equally
in the calculation of the annual payment update to the detriment of physicians who are ““unduly””
penalized. The expenditure target is a nationwide aggregate and the annual updates are applied
uniformly; there is no direct link between individual behavior and the subsequent update. Thus,
actions might be individually rational (physicians provide and bill for additional services and
collect greater reimbursement) yet collectively detrimental (the annual update is reduced).14 An
individual physician who controls or reduces volume does not see a resulting increase in
payments.
Others point out that there is no ability to distinguish between appropriate volume increases (for
instance, due to changes in disease conditions that increase demand) and inappropriate volume
increases (for instance, when tests or procedures are provided that are not necessary).

12 MedPAC, Letter to Congress, Moving Forward from the Sustainable Growth Rate (SGR) System, October 14, 2011.
13 U.S. Government Accountability Office (GAO), Medicare Physician Payments: Trends in Utilization, Spending and
Fees Prompt Consideration of Alternative Payment Approaches
, testimony of Bruce Steinwald before House Energy
and Commerce Committee, July 25, 2006.
14 Often referred to as the tragedy of the commons: while it may be individually rational for each herder to let livestock
graze on the common field (to preserve his own), the collective consequence of many such individual decisions is that
the common fields are overgrazed and all herders suffer from the degradation or depletion of the common good.
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Potential Impact on Beneficiary Access to Services
There has been an increased concern that continued declines in physician payment rates,
especially among primary care specialties, may potentially jeopardize access to services.15 The
Medicare Payment Advisory Commission’’s (MedPAC’’s) annual patient survey of Medicare
beneficiaries age 65 and older and privately insured individuals age 50 to 64 found that both of
these groups are more likely to report problems finding a new primary care physician compared
to finding a new specialist. Physician surveys have also found that primary care physicians are
less likely than specialists to accept new patients.16
Issues for Congress: Potential Modifications
and Alternatives

Given the concerns about the SGR, a key issue becomes how to fix or replace the current
formula. Although a number of modifications to the SGR system have been proposed, there is no
consensus around a long-run alternative. In addition, any permanent change would likely be quite
costly because the CBO baseline must assume current law, which estimates that a reduction in the
conversion factor will occur for the next several years. In addition to the impact on federal
outlays, any change in the update formula will also have implications for beneficiaries; because
Part B beneficiary premiums must cover about 25% of Part B program costs, any overall increase
in spending results in a proportional increase in premiums.17 Suggested modifications have
ranged from modifying the current formula to replacing the formula and linking updates to
payment adequacy and/or quality measures.
The Medicare Modernization Act of 2003 (MMA) required that GAO study ““the appropriateness
of the sustainable growth rate formula”” and ““the stability and predictability of such updates and
rate and alternatives.””18 In a 2004 report, the GAO categorized options for alternatives around
two themes: (1) proposals that end the use of spending targets and separate fee updates from
explicit efforts to moderate spending growth; and (2) proposals that retain spending targets but
modify the current SGR system to address perceived shortcomings.19 The first approach
emphasizes stable fee updates, while the second automatically adjusts fee updates if spending
growth deviates from a predetermined target. GAO stated that ““the choice between the two
approaches may hinge on whether primary consideration should be given to stable fee increases
or to the need for fiscal discipline within the Medicare program.””20 The second approach would
end targets as an explicit measure for moderating spending growth. Updates would be based on
cost increases with the possibility of specifically addressing high volume service categories such
as medical imaging.

15 MedPAC, Report to Congress: Medicare Payment Policy, Washington, DC, 2011.
16 2009 Ambulatory Medical Care Survey.
17 For details on Medicare Part B premiums see CRS Report R40082, Medicare: Part B Premiums, by Patricia A.
Davis.
18 P.L. 108-173, §953(a).

19 U.S. Government Accountability Office, Medicare Physician Payments: Concerns about Spending Target System
Prompt Interest in Considering Reforms
, GAO-05-85, October 8, 2004.
20 Ibid.
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Legislative Proposals Introduced to Repeal or Modify the SGR
For illustrative purposes, Table 2 shows two legislative proposals introduced, but never enacted,
in the prior Congresses that would have changed the way SGR is calculated. While both
proposals would replace the current system of a single expenditure target with multiple targets,
the key difference between them is the number of targets. Providing separate targets attempts to
address, among other things, the criticism that the current update calculation penalized (or
rewarded) all physicians identically regardless of the individual’’s or the specialty’’s contribution
towards meeting or exceeding the aggregate expenditure target. Some physicians and health care
professionals are able to increase volume to offset declining reimbursement rates while others are
not. For example, even though imaging services have grown faster than other types of physician
services (including evaluation and management services, tests, major procedures, and other
procedures) the resulting impact on the annual update factor applies to all services across all
specialties.
As shown in Table 2, H.R. 3162, the Children’’s Health and Medicare Protection Act of 2007
(CHAMP), was introduced in the 110th Congress and includes six expenditure targets. Some have
raised concern that too many expenditure targets may not be appropriate since the targets do not
distinguish between the appropriateness of certain services. For example, some of the increase in
imaging services may have allowed for the earlier detection of disease conditions such as cancer,
which may have produced savings for other services and specialties (e.g., nuclear medicine and
oncology services). Thus, the second approach in H.R. 3961, the Medicare Physician Payment
Reform Act of 2009, would only have had two expenditure categories: (1) evaluation,
management, and preventive services; and (2) all other services. This approach would distinguish
between primary care and non-primary care services and would be similar to the MedPAC
proposal discussed below. One rationale for this approach is to improve access to primary care
providers. As noted earlier, the greatest threat to access over the next decade is concentrated in
primary care services.21

21 MedPAC, 2011 Report To Congress: Medicare Payment Policy.
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Table 2. Select Legislative Proposals to Modify the SGR Calculation
Legislative Proposal
Bill Summary
H.R. 3162 (110th Congress)
Section 301 of Title III would have modified the SGR system by:
The Children’’s Health and Medicare
Replacing single conversion factor and target growth rates with six
Protection Act of 2007
newly created service categories:
••
evaluation and management services for primary care and for
preventive services;
••
other evaluation and management services;
••
imaging services and diagnostic tests;
••
major procedures;
••
anesthesia services; and
••
minor procedures and other services.
The proposal included the fol owing exceptions to current SGR
methodology:
••
““physicians’’ services”” would refer to the physicians’’ services
included in the appropriate service category,
••
the estimate of the annual average percentage growth in real
gross domestic product per capita for the applicable period
would have been increased by 0.03, and
••
a national coverage determination would be treated as a
change in regulation and thus incorporated into the
Secretary’’s estimate of the percentage change in expenditures
for all physicians’’ services in the fiscal year (compared with
the previous fiscal year) resulting from changes in law and
regulations.
The provision would have established a floor for updates so that
the conversion factors for each service category would be no less
than 0.5% for 2008 and 2009.
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Legislative Proposal
Bill Summary
H.R. 3961 (111th Congress)
Similar to H.R. 3162, but different in the following manner:
The Medicare Physician Payment Reform First, the bill would create two (rather than six) categories of
Act of 2009
physician services, each with its own separate target growth rate
and conversion factor update.

The two categories of service would be (1) evaluation,
management, and preventive services; and (2) al other services.
Target expenditures for the evaluation, management, and
preventive services category would be al owed to grow at the rate
of growth of per capita GDP plus 2%, while the target
expenditures for the al other category would be al owed to grow
at the rate of growth of per capita GDP plus 1%.
The proposal would establish a new baseline year for calculating
expenditure targets for each category.
Only physician services would be included in the calculation of
actual and target growth expenditures; services provided incident
to the physician visit (such as laboratory services), would not be
included.
During the transition to the calculations required for the new
method of calculating targets and updates, the 2010 update would
be the percentage increase in the Medicare economic index (MEI).
In its final rule for 2010 Medicare physician payments, CMS
specified that the MEI wil be 1.2%.
Source: Compiled by the Congressional Research Service based on information derived from the Legislative
Information System.
Most proposed changes to the SGR would also change the base year in the calculation future
expenditure targets (essentially starting over), which could increase overall physician
expenditures allowed in the baseline. One issue to consider with any proposals that increase total
spending on physician services (by rebasing and changing the expenditure targets) is that the
impact of the proposal would be felt not only by physicians but also by other parts of the
Medicare program, the Department of Defense TRICARE program, and beneficiaries under
Medicare Part B. Not only would physician reimbursements under the Medicare physician fee
schedule increase, but expenditures under the Medicare Advantage (MA) program would increase
because per beneficiary spending for fee-for-service beneficiaries would increase as a result of the
bill, raising the ““benchmarks”” that Medicare uses to determine the capitation payments for
beneficiaries enrolled in Medicare Advantage plans. TRICARE expenditures would rise because
its physician reimbursements are based on Medicare’’s physician fee schedule. Furthermore, since
Medicare Part B beneficiary premiums are required to cover about 25% of total Part B
expenditures, the increases in physician reimbursements as a result of changing the update
calculation would put pressure on future Part B premiums to rise.
MedPAC Proposal
The Deficit Reduction Act of 2005 (DRA) required MedPAC to submit a report to Congress on
mechanisms that could be used to replace the SGR system, including ““such recommendations on
alternative mechanisms to replace the sustainable growth rate system as the Medicare Payment
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Advisory Commission determines appropriate.””22 In its March 2007 report, MedPAC described
two possible paths: one path would eliminate the SGR and emphasize the development and
adoption of approaches for improving incentives for physicians and other providers to furnish
lower cost and higher quality care, while the second path would add a new system of expenditure
targets in addition to these approaches.23 Earlier reports to Congress from MedPAC have included
recommendations for updating payments for physicians’’ services based on the estimated change
in input prices for the coming year less an adjustment for savings attributable to increased
productivity. Specifically, input prices would be measured using the MEI (without regard to the
CMS adjustment for productivity increases). The recommended productivity adjustment would be
used across all provider services.24
Most recently, on October 14, 2011, MedPAC sent to Congress its specific recommendations for
addressing the SGR and Medicare physician payments. Among the objectives of its proposal was
to replace uncertain payment updates under the SGR system with ““a stable, predictable 10-year
path of legislated fee-schedule updates,””25 and to eliminate the almost 30% reduction beginning
January 1, 2012, that would occur under current law. The recommendation acknowledges the
criticisms of the SGR system as well as the concern that beneficiary access to providers willing to
accept Medicare patients may be affected in coming years should the uncertainty about fee
schedule reimbursements continue. Further, MedPAC is concerned about reducing the
discrepancy in payment between primary care services (mostly cognitive, evaluation, and
management activities) and specialty care and procedure-oriented services.
Specifically, MedPAC’’s recommendations to Congress are to (1) freeze the Medicare physician
fee schedule reimbursement rates for primary care services for 10 years; (2) reduce non-primary
care fee schedule reimbursements by 5.9% each year for three years, then freeze the rates at that
level for 7 additional years; and (3) offset over $200 billion of the cost of the override through a
combination of other modifications to the Medicare program.
The primary care services would be determined in a manner similar to the eligibility criteria for
the primary care bonus introduced by the Patient Protection and Affordable Care Act (ACA):26
providers would have to (1) be a physician whose self-declared specialty is in one of the primary
care specialties (family medicine, internal medicine, geriatric medicine, or pediatric medicine) or
be a nurse practitioner, clinical nurse specialist, or physician assistant; and (2) furnish 60% of
their services in the primary care service codes (office visits, home visits, and visits to patients in
nursing facilities, domiciliaries, and rest homes). The freeze on reimbursement rates for primary
care services would apply only to those service codes. Thus, a primary care provider could
provide some services where the reimbursement rates would be frozen as a result of the MedPAC
proposal and other services where the reimbursement rates would be subject to a decrease.
Similarly, two different physicians could bill for the same code, yet one could be paid at the
frozen reimbursement rate while the other would be paid at a reduced rate. MedPAC projects that
even with this combination of freezes and reductions to the fee schedule reimbursements, total
Medicare expenditures per beneficiary for fee schedule services will continue to rise over the next
10 years.

22 P.L. 109-171, §5104(c).
23 MedPAC, Assessing Alternatives to the Sustainable Growth Rate System, March 2007.
24 MedPAC, Report to the Congress, Medicare Payment Policy, March 2008.
25 http://www.medpac.gov/transcripts/SGR%20sept%202011%20handout.pdf.
26 See §5501 of the Patient Protection and Affordable Care Act (P.L. 111-148).
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MedPAC’’s recommendations to Congress included development of additional initiatives to (1)
collect data to improve payment accuracy, (2) identify overpriced services, and (3) encourage and
accelerate the development of alternative payment models (i.e., Accountable Care Organizations,
bundled payments).27
MedPAC also developed a preliminary list of Medicare policy changes to partially offset the cost
of its SGR override proposal.28 These modifications include prior MedPAC recommendations that
have yet to be adopted (about $50 billion) as well as ““proposals informed by outside groups (e.g.,
HHS OIG, CBO options) and MedPAC staff analysis”” (about $180 billion). The cost of these
offsets would be ““shared by physicians, other health professionals, providers in other sectors, and
beneficiaries.””
Budgetary Implications of Repealing or Changing the
SGR Formula

Repealing or fixing the SGR could be costly from a federal budgetary perspective. In July 2012,
CBO issued cost estimates for a variety of approaches for dealing with the physician payment
issue. They estimated that a one-year fix to the SGR allowing physician payments to remain the
same as the prior year would cost about $11.1 billion in FY2013 and $18.5 billion over 10 years
(2013-2022). However, longer-term fixes would be more costly. According to CBO, freezing
payments over a 10-year period would cost approximately $273.3 billion, and increasing
payments by the MEI each year through 2022 would increase federal spending by about $362
billion for the FY2013-FY2022 period.29 Coupling any of these options with a provision to
exclude this change from beneficiary premium calculations (““premium hold-harmless””) would
increase federal spending even further over the same period.
For the MedPAC recommendations, the estimated ““approximately $200 billion”” cost of the
proposed fee schedule changes to override the SGR-mandated 27.4% reduction in reimbursement
rates would be countered by the proposed offsets package. MedPAC notes that there is
uncertainty in the figures it presents because these offsets ““have not been scored by CBO, and
they are not official estimates”” and as such, ““the cost ... could be higher and the savings could be
lower.””30
The Statutory Pay-As-You Go Act of 2010 (Title I of P.L. 111-139) establishes a new budget
enforcement mechanism generally requiring that direct spending and revenue legislation enacted
into law not increase the deficit.31 However, changes to the SGR that result in increased spending
are considered a limited exception to that rule if enacted before January 1, 2012. Furthermore, the
maximum amount of the exception is to be the difference between estimated net outlays if 2009

27 MedPAC, Assessing Alternatives to the Sustainable Growth Rate System, March 2007.
28 The detailed list is available at http://www.medpac.gov/documents/10142011_MedPAC_SGR_letter.pdf.
29 Congressional Budget Office, Medicare’’s Payments to Physicians: The Budgetary Impact of Alternative Policies
Relative to CBO’’s March 2012 Baseline
. July 2012. http://cbo.gov/sites/default/files/cbofiles/attachments/43502-
SGR%20Options2012.pdf.
30 See the transcript of the September 15, 2011, meeting, available at http://www.medpac.gov/transcripts/
09150916MedPAC.pdf.
31 See CRS Report R41157, The Statutory Pay-As-You-Go Act of 2010: Summary and Legislative History, by Bill
Heniff Jr.
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Medicare fee schedule payment rates were to be in effect for the next five years (i.e., a ““freeze””
through December 31, 2014) and what the payments would have been had fees reverted to levels
as dictated under the SGR system. In addition, any future legislation that reforms or replaces the
SGR system would be scored for pay-as-you-go (PAYGO) purposes only if the modification were
to cost more than the cost of the five-year freeze at 2009 levels.
Physician Payments and Patient Protection and Affordable Care
Act (ACA)

If the SGR system is abandoned, a key question becomes what is the best payment system to
replace it that would lead to improvements in quality, efficiency, and care coordination,
particularly for chronic conditions. As noted above, MedPAC recommended exploring the
feasibility of Medicare Accountable Care Organizations (ACO) and bundling of payments.32
The ACA included a number of demonstrations and other efforts aimed at alternative payment
models that have the potential to change fundamental aspects of how physicians organize,
practice, and deliver care in the future.33 Some of these provisions create new structures and
entities, like the CMS Center for Medicare and Medicaid Innovation or the Patient-Centered
Outcomes Research Institute (PCORI), while others seek to develop alternatives to traditional
fee-for-service payment, such as the National Pilot Program on Payment Bundling, the Medicare-
shared savings program (including the ACO, model), or the value-based payment modifier under
the physician fee schedule. The PCORI, combined with the efforts and experiences with the
alternative payment models, could generate new information about how alternative treatments
affect patient outcomes as well as evidence to support how different payment methods might alter
the incentives for providers and the outcomes for patients. The Innovation Center would have the
authority and flexibility to adopt new payment alternatives, so long as certain criteria were met——
for instance, maintaining quality while reducing expenditures, or improving quality without
increasing expenditures. In the long run, these various provisions have the potential to modify
behavior and payments for physicians and related providers.
Current Status and Recent Activity
Several congressional actions have overridden the SGR update in the 112th Congress. On
December 17, 2011, the Senate passed an amended version of H.R. 3630 that included a two-
month override of the SGR payment reduction through February 2012, freezing reimbursement
rates at 2011 levels. Beginning March 2012 and in subsequent years, the calculation of the fee
schedule reimbursement rates would revert to the statutory formula. On December 20, 2011, the
House voted to resolve differences between the two versions of the bill, and the Speaker
appointed conferees for a conference committee.
On December 23, 2011, H.R. 3765, which contained a two-month override to the SGR payment
reduction through February 2012, was introduced and passed by unanimous consent in both the
House and the Senate and was signed into law that day.

32 See CRS Report CRS Report R41474, Accountable Care Organizations and the Medicare Shared Savings Program.
33 The following information is derived from CRS Report R41196, Medicare Provisions in the Patient Protection and
Affordable Care Act (PPACA): Summary and Timeline
, coordinated by Patricia A. Davis.
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On February 16, 2012, House and Senate conferees came to an agreement on a conference report
for the Middle Class Tax Relief and Job Creation Act (P.L. 112-96) that extended the override
through December 31, 2012, and maintained Medicare physician fee schedule payments at the
same level. The provision also requires reports from (1) the Secretary of HHS that examines
bundled or episode-based payments to cover physicians’’ services for one or more prevalent
chronic conditions or major procedures,34 and (2) GAO that examines private sector initiatives
that base or adjust physician payment rates for quality, efficiency, and care delivery improvement,
such as adherence to evidence-based guidelines.35 CBO has scored this provision as increasing
spending by $18 billion over 10 years (2012-2022).36
On January 2, 2013, the President signed H.R. 8, the American Taxpayer Relief Act of 2012
(ATRA, P.L. 112-240). This act was passed by the Senate on January 1, 2013, by a vote of 89-8
and by the House later that day, 257-167. Section 601 of the act averts the SGR-determined
reduction and maintains the Medicare physician fee schedule payments at their current rates
through December 31, 2013. The conversion factor for 2014 and afterwards will be computed as
if the modification to the conversion factor in this section had never applied. Title VI of the act
also extends several expiring provisions in the Medicare and Medicaid program and makes other
changes in federally funded health programs.
On February 5, 2013, CBO released a report stating that its estimate of the cost of overriding the
SGR with a 10-year freeze in payments had fallen by more than $100 billion over 10 years,
compared to its August 2012 estimate. The cost of ““holding payment rates through 2023 at the
levels they are now would raise outlays for Medicare (net of premiums paid by beneficiaries) by
$14 billion in 2014 and about $138 billion (or about 2 percent) between 2014 and 2023.”” CBO
provided the following reasoning for the reduced cost:
The estimated cost of holding payment rates constant is much lower relative to this baseline
than was the case under previous CBO baselines, primarily because of lower spending for
physicians’’ services in recent years. Under the sustainable growth rate, future payment
updates depend on the difference between spending in prior years and spending targets
established in law. Actual spending has been lower than projected——and lower than the
spending targets inherent in the sustainable growth rate——for the past three years. Because
actual spending has been lower than spending targets, CBO now estimates that payment rates
will increase beginning in 2015. Those higher payment rates narrow the difference between
growth under current law and a freeze at current levels, thereby reducing the estimated cost
of restricting the payment rates. 37

34 In its 2013 Medicare Physician Fee Schedule Final Rule, CMS states that it ““will continue to examine options for
bundled or episode-based payments and will include our recommendations and implementation options in our report to
the Congress.”” See ““Medicare Program; Revisions to Payment Policies Under the Physician Fee Schedule, DME Face-
to-Face Encounters, Elimination of the Requirement for Termination of Non- Random Prepayment Complex Medical
Review and Other Revisions to Part B for CY 2013,”” Department of Health and Human Services, 77 Federal Register
68910-68911, November 16, 2012.
35 U.S. Government Accountability Office, Medicare Physician Payment: Private-Sector Initiatives Can Help Inform
CMS Quality and Efficiency Incentive Efforts
, GAO-13-160, December 26, 2012, http://www.gao.gov/assets/660/
651102.pdf.
36 For details, see http://cbo.gov/ftpdocs/127xx/doc12764/hr3630.pdf.
37 CBO, The Budget and Economic Outlook: Fiscal Years 2013 to 2023, February 2013, p. 31.
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Appendix. Recent SGR Legislative Activity Enacted
into Law

Department of Defense Appropriations Act, 2010 (P.L. 111-118)
Summary
On December 16, 2009, the House passed H.R. 3326, the FY2010 Defense Appropriations bill.
One of the provisions in Section 1011 of the bill delayed the application of the update to the
conversion factor until February 28, 2010.38 Another provision in the same section reduced the
amount of monies available in the Medicare Improvement Fund by $1.55 billion.39 The Senate
passed the bill on December 19, 2009,40 and the bill was signed into law41 that day.
Brief Analysis
The bill delayed the payment reductions from taking effect for two months while maintaining fee
schedule reimbursements at 2009 levels.
Increasing the Statutory Limit on the Public Debt (P.L. 111-139)
Summary
Section 7 of Title I of this bill (H.J.Res. 45, the Statutory Pay-As-You-Go Act of 2010), which
was signed into law on February 12, 2010 (P.L. 111-139), provides a limited exception to the
PAYGO rules for addressing the Medicare physician payment situation as a result of the SGR
system (as well as additional exceptions). The maximum amount of the exception is to be the
difference between estimated net outlays if 2009 Medicare fee schedule payment rates were to be
in effect for the next five years (i.e., a ““freeze”” through December 31, 2014) and what the
payments would have been had fees reverted to levels as dictated under the SGR system.
Furthermore, any future legislation that reforms or replaces the SGR system would be scored for
PAYGO purposes only if the modification were to cost more than the cost of the five-year freeze
at 2009 levels. If legislation changing the SGR system were to be enacted that costs less than the
five-year freeze through 2014, any remaining amount in the adjustment could be used to offset
costs after 2014 as a result of the change, but the total adjustment could not exceed the maximum
adjustment amount.

38 For roll call details, see http://clerk.house.gov/cgi-bin/vote.asp?year=2009&rollnumber=985.
39 §188 of MIPPA established the Medicare Improvement Fund (MIF), available to the Secretary to make
improvements under the original fee-for-service program under Parts A and B for Medicare beneficiaries.
40 For roll call details, see http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=111&
session=1&vote=00384.
41 P.L. 111-118.
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Brief Analysis
The provision exempts the equivalent of a five-year freeze of Medicare reimbursement at 2009
levels from PAYGO——an amount CBO estimates to be $88.5 billion.42 Congress would still have
to pass legislation that would override the cuts as directed by the SGR system.
Temporary Extension Act of 2010 (P.L. 111-144)
Summary
On February 25, 2010, the House passed H.R. 4691, the Temporary Extension Act of 2010, by
voice vote. This bill extended a number of expiring programs, including unemployment insurance
benefits, premium assistance for COBRA benefits, and the Medicare therapy caps, in addition to
forestalling the Medicare physician payment cuts. Section 5 modified the Defense Appropriations
Act, 2010, by delaying the payment reduction for another month, through March 31, 2010. The
CBO score for this section is $1.04 billion in additional outlays.43 Although a motion to pass the
bill by unanimous consent failed in the Senate that evening,44 the bill eventually passed the
Senate by a vote of 78-1945 and was signed into law (P.L. 111-144) on March 2, 2010.
Brief Analysis
This bill delayed the payment reductions from taking effect until April 1, 2010, while maintaining
fee schedule reimbursements at 2009 levels through March 31, 2010.
Continuing Extension Act of 2010 (P.L. 111-157)
Summary
On March 17, 2010, by voice vote, the House passed H.R. 4851, as amended (striking all after the
enacting clause and inserting new text). The bill includes extensions for several programs,
including certain unemployment insurance provisions, premium assistance for COBRA benefits,
and the Medicare therapy caps exceptions process in addition to forestalling the SGR payment
reductions for another month, until May 1, 2010. The Senate amended Section 4 of the bill by
lengthening the Medicare physician payment cut extension until May 31, 2010, and both houses
of Congress passed the bill on April 15, 2010. The President signed the bill into law (P.L. 111-
157) that day.

42 http://www.cbo.gov/budget/factsheets/2010b/SGR-menu.pdf.
43 CBO score available at http://www.cq.com/displayfile.do?docid=3299370.
44 See the Congressional Record at http://thomas.loc.gov/cgi-bin/query/B?
r111:@FIELD(FLD003+s)+@FIELD(DDATE+20100225.
45 http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=111&session=2&vote=
00032.
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Brief Analysis
The bill delayed the physician payment reductions from taking effect until June 1, 2010, while
maintaining fee schedule reimbursements at 2009 levels through May 31, 2010.
Preservation of Access to Care for Medicare Beneficiaries and
Pension Relief Act (P.L. 111-192)

Summary
On June 18, 2010, more than two weeks after the May 31, 2010, expiration of the extension under
the Continuing Extension Act of 2010,46 the Senate passed an amended version of H.R. 3962 by
voice vote that averted the SGR-determined payment reduction and increase the conversion factor
by 2.2% retroactive to June 1, 2010, and continuing through November 30, 2010. CBO scored
this provision as adding $6.3 billion to direct spending over the 5- and 10-year budget window,
with all spending occurring in fiscal years 2010 and 2011. The cost is offset (1) by imposing a
three-day prohibition on hospital provision that would bar Medicare contractors from reopening
or adjusting claims by hospitals during the three days preceding a patient’’s inpatient admission,
and (2) from savings resulting from modifications that allow firms to spread out their pension
fund obligations over a longer period, resulting in fewer tax-preferred contributions to pension
plans and creating more taxable income for the firms.
The House passed the Senate-amended bill on June 24, 2010.47 The President signed the bill into
law (P.L. 111-192) the next day.
Brief Analysis
The act increases the Medicare physician fee schedule payments by 2.2% for six months. A
substantial payment reduction (about 23%) would have been required beginning December 1,
2010, and an additional reduction (about 6%) would have been applied beginning January 1,
2011, in the absence of further congressional action.
The Physician Payment and Therapy Relief Act of 2010
(P.L. 111-286)

Summary
On November 18, 2010, by unanimous consent, the Senate passed H.R. 5712,48 which extended
the 2.2% increase established by P.L. 111-192 (discussed above) for an additional month through

46 CMS issued two instructions to its contractors regarding claims affected by the expiration. The first, on May 27,
instructed contractors to hold claims for services dated June 1 and later and paid under the Medicare physician fee
schedule for the first 10 business days of June (i.e., through June 14, 2010). The second, on June 18, 2010, instructed
contractors to begin lifting the hold and to begin processing June 1 and later Medicare physician fee schedule claims
under the law’’s negative update requirement on a first-in/first-out basis.
47 The vote was 417-1, with 14 Members not voting. See http://clerk.house.gov/evs/2010/roll393.xml.
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December 31, 2010. The House passed the amended bill on November 29, 2010, by voice vote,
and the President signed the bill into law (P.L. 111-286) on November 30, 2010.
The cost of the override was offset by reductions to payments to providers for the second and for
additional services when multiple therapy procedures are performed on the same patient on the
same day.49
Brief Analysis
While this extension maintained provider payments at the existing level, additional legislative
action was required to forestall the reduction to payments under the Medicare fee schedule that
would have taken effect beginning January 1, 2011.
Medicare and Medicaid Extenders Act of 2010 (P.L. 111-309)
Summary
The Medicare and Medicaid Extenders Act of 2010 (H.R. 4994) extended many Medicare
provisions that were due to expire on December 31, 2010, and made other changes to the
Medicare and Medicaid program, including a one-year override of the payment reductions
required under the SGR system. This act provided for a 0% update adjustment factor in 2011
compared to the (end-of-year) 2010 payments. These provisions were fully offset.50
Brief Analysis
Following the one-year override, the legislation states that ““the conversion factor ... shall be
computed ... for 2012 and subsequent years as if [the override] had never applied.”” CMS’’s
November 2011 estimate of the 2012 SGR51 is that a 27.4% reduction will be required beginning

(...continued)
48 Originally introduced in the House in July, 2010 as the Veterans’’, Seniors’’, and Children’’s Health Technical
Corrections Act of 2010, the version passed by the Senate struck and substituted everything after the enacting clause. in
addition to the physician payment modification, the bill also modified the discount applied to payments for therapy
services when multiple procedures are performed on a beneficiary on the same day.
49 See Congressional Budget Office, Estimate of the Statutory Pay-As-You-Go Effects for the Physician Payment and
Therapy Relief Act of 2010, November 18, 2010, http://cbo.gov/ftpdocs/119xx/doc11969/
PhysicianPaymentandTherapyReliefAct.pdf.
50 The one-year override was offset by increasing the penalties collected from individuals who improperly receive
health insurance tax credits (under health care reform), replacing the two fixed penalty amounts ($250 for individuals
and $400 for families at or below 400% of the federal poverty level) with a scaled penalty related to income. The CBO
score is available at http://cbo.gov/ftpdocs/120xx/doc12008/hr4994.pdf.
51 The Secretary is required (§1848(d)(1)(E) of the Social Security Act) to make public an estimate of the sustainable
growth rate (SGR) and the conversion factor applicable to Medicare payments for physicians’’ services for the
following year by March 1 of each year.
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Medicare Physician Payment Updates and the Sustainable Growth Rate (SGR) System

January 1, 2012, in the absence of further legislative action.52 In its March 2011 report, MedPAC
recommended a 1% update to the Medicare physician fee schedule for 2012.53
Temporary Payroll Tax Cut Continuation Act of 2011 (P.L. 112-78)
Summary
On December 23, 2011, H.R. 3765, which contained a two-month override through February
2012, was passed by both the House and the Senate by unanimous consent and was signed into
law (P.L. 112-78).
Brief Analysis
Physician fee schedule payments were extended at the 2011 level for January and February 2012.
Middle Class Tax Relief and Job Creation Act of 2012 (P.L. 112-96)
Summary
On February 16, 2012, House and Senate conferees came to an agreement on a conference report
for H.R. 3630 that extended the override through December 31, 2012 (P.L. 112-96), maintaining
physician fee schedule payments at the current level.
Brief Analysis
In the absence of an override, the physician fee schedule payments will be reduced by 27%
beginning January 2013.
American Taxpayer Relief Act of 2012 (P.L. 112-240)
Summary
On January 2, 2013, the President signed H.R. 8, the American Taxpayer Relief Act of 2012
(ATRA, P.L. 112-240). This act was passed by the Senate on January 1, 2013, by a vote of 89-8,54
and by the House later that day, 257-167.55 Title VI of the act extends several expiring provisions
in the Medicare and Medicaid programs and makes other changes in federally funded health
programs. Many of the sections in Title VI of the ATRA extend current law provisions, resulting
in higher Medicare provider payments or extending authorization and/or funding for expiring

52 Centers for Medicare & Medicaid Services, Press Release, CMS Announces Policy, Payment Rate Changes for the
Physician Fee Schedule in 2012,
November 1, 2011.
53 MedPAC, Report to the Congress: Medicare Payment Policy, Washington, DC, March 2011,
http://www.medpac.gov/documents/mar11_entirereport.pdf.
54 http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=112&session=2&vote=00251
55 http://clerk.house.gov/evs/2013/roll659.xml
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Medicare Physician Payment Updates and the Sustainable Growth Rate (SGR) System

programs. In particular, Section 601 in Title VI of ATRA overrides the sustainable growth rate
(SGR) update mechanism of the Medicare physician fee schedule that would have reduced
payments had it taken effect and extends payments at the current level through December 31,
2013.
Brief Analysis
In the absence of an override, the physician fee schedule payments will be subject to an SGR-
determined update factor beginning January 2014 that will likely require a greater reduction than
the 26.5% that would have applied had ATRA not passed.


Author Contact Information

Jim Hahn
Janemarie Mulvey
Specialist in Health Care Financing
Specialist in Health Care Financing
jhahn@crs.loc.gov, 7-4914
jmulvey@crs.loc.gov, 7-6928

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