The Doc Fix

Ending the Doc Fix Dr. Jeff Harwood has been a practicing family physician for 22 years in New London, Ohio. Nearly 40 percent of his patients are on Medicare, which means the federal government is supposed to reimburse him for health services that treat seniors. Traditionally, Medicare’s payments to providers are lower than private insurance, so the federal government must appropriately reimburse physicians like Harwood to retain them in the Medicare network.


However, the reimbursement has been in constant jeopardy because of a federal formula called the Sustainable Growth Rate (SGR). The SGR was intended to cap doctor pay across the board based on overall economic growth. But Congress has overridden each annual reduction by ignoring the reimbursement cuts — basically punting the problem.


The SGR causes incredible uncertainty for Harwood and thousands of physicians around the country because they do not know when they will absorb the amassed cuts, currently at 25 percent. That kind of sweeping cut would force many private practices to close and seniors would have to look elsewhere for medical care. Therefore, it is imperative that Congress responsibly reform the SGR to control provider pay in Medicare, and to give patients and doctors like Dr. Harwood true health security.


In 1997, President Bill Clinton signed the Balanced Budget Act that established the SGR mechanism as a way to control Medicare spending.


The SGR sets a target amount that the federal government will reimburse providers participating in the program. This target is based on several factors, the most significant of which is the 10-year average of annual percent change in real gross domestic product (GDP) per capita. In other words, Medicare links doctor reimbursement to the general performance of the economy.


However, there is a sharp difference between the rates of economic growth and health care spending, which has consistently outpaced GDP growth. The Congressional Budget Office projects GDP to rise between 2 and 4 percent annually through 2024, while health costs are expected to rise by nearly 6 percent at the same time. The target amounts set by the SGR do not realistically correspond with the real cost of health care, which depresses Medicare physician pay. According to Dr. Ardis Hovin, President of the American Medical Association, payment rates have remained flat since 2001 and practice costs have increased by more than 20 percent due to inflation. The tremendous gap between what Medicare pays and what it costs to care for seniors is eating away at Harwood and others’ bottom lines.


In addition, the SGR groups all physicians into a collective when observing spending patterns instead of reimbursing a doctor for his or her individual outcomes. An unfortunate cycle develops when the physician collective is combined with Medicare’s Fee-for-Service reimbursement model:

  • Fee-for-Service pays doctors specific fees for individual health services, and these fees are updated every year to align with increased medical costs.
  • The model has created an incentive in private practices to maximize the volume of medical treatments provided.
  • While this scheme greatly increases reimbursement levels for physicians, it increases overall Medicare spending.
  • Fee-for-Service promotes the use of unnecessary tests and procedures, which makes it easier to go above the SGR targets.
  • Ultimately, an across the board cut is forced on each physician regardless of individual innovation and best practices.

In 2002, a 5-percent SGR cut to providers took effect and generated fierce protests by the medical community. President Bush and Congress then decided that the SGR was not only politically problematic but unworkable at controlling costs and incentivizing quality health care. Therefore, the first “doc fix” was passed into law to prevent the reimbursement cuts from going through. SGR patches have continued through the present day with an accumulated cost of $153.7 billion.


The SGR mechanism was poorly designed to control Medicare costs because it was too politically difficult to enforce provider reductions, the criteria for cutting payments was not based on actual medical costs or the performance of individual doctors, and it created improper incentives that actually drove up expenses. The looming 25 percent cut combined with Congressional inaction is causing physicians like Jeff Harwood to hold off on improving medical investment, capability, and coordination. A 2012 survey conducted by the Medical Group Management Association found that 58 percent of physicians would stop accepting Medicare patients if action is not taken to stop the impending cuts. All of this hurts the availability and quality of care and works to raise costs for patients.


The Debate
While politicians have neglected the SGR for over a decade, there is cause for optimism that a bipartisan solution can be found. Several committees in the House and the Senate have drafted bills in recent years that would repeal the SGR, replace it with a reimbursement scheme focused on quality, and then fully finance the replacement.


  • Each bill has a different schedule for providing a temporary physician pay update while a new mechanism is implemented.
  • Potential replacements for the SGR include reimbursements based on performance thresholds, grouping different treatments for the same illness into a bundled payment, and better coordinating care among physicians for the same patient.


Identifying how much repeal will cost has been tough, but the environment for reform has improved because the cost dropped considerably since the Congressional Budget Office (CBO) began scoring the measure. In 2012, the CBO estimated the cost of repeal over ten years would be $245 billion, but in May 2013 the estimate fell to $139 billion. In December, CBO ran a new score that found the estimate had reduced further to $116.5 billion. The lower price tag increased confidence among politicians by making spending decisions more manageable during a time of budget belt-tightening.


Bipartisan legislation has been passed to help reform Medicare. But this problem is actually an opportunity to expand Medicare reform. We shouldn’t minimize the potential that the bipartisan consensus to fix the SGR has opened the door to broader changes in federal health entitlements. Modernizing deductibles and co-pays for beneficiaries would be a welcome reform on the revenue side, while reforming the current fee-for-service payment model would be a sensible change in reducing Medicare spending. There are numerous options available to pay for the $116.5 billion repeal, and, further, Congress should not waste the opportunity to couple SGR reform with broader savings.


Millions of Medicare patients rely on physicians like Jeff Harwood to offer affordable treatment at the time when they need it most. The SGR has been a significant impediment to seniors getting the care they need, and has raised costs throughout the Medicare system. Every local doctor’s office deserves to know how Medicare will reimburse them so they can plan and invest in their practices to better treat patients. If Congress cannot find a way to effectively control the SGR, then older Americans are likely to receive inadequate medical care in the future.