Replacing Medicare’s Unsustainable Sustainable Growth Rate

Bush logoby Yevgeniy Feyman, Fellow, Manhattan Institute
Robert A. Book, Senior Research Director, Health Systems Innovation Network

featured_yfExecutive 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 growth[3] 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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About the Authors

Yevgeniy Feyman is a fellow and deputy director of the Center for Medical Progress. He writes on health care policy, entitlement reform, and the Affordable Care Act. His research has focused on a variety of topics including the physician shortage, the cost of health care reform, and consumer-directed health care. In 2013, Feyman, with colleagues Avik Roy and Paul Howard, released the Obamacare Impact Map, a state-by-state look at the effects of the ACA. The map was cited numerous times on Capitol Hill and Republican strategist Karl Rove called the map an “indispensable tool” in understanding the law’s effects on Americans.

Feyman has written for various publications including National Review Online,, Washington Examiner, Health Affairs, and Politico. He has spoken on radio and TV shows around the country to discuss emerging issues in health care. He is also a contributor to the Forbes health care blog, The Apothecary. Feyman holds a degree in economics and political science from Hunter College.

Dr. Robert A. Book is a health economist, and Senior Research Director at Health Systems Innovation Network, LLC, where he works primarily on economic and statistical modeling of the effects of health care reform, primarily through the lens of the effects of changes in the law on the incentives faced by individuals, employers, providers, and insurers. He has served as Senior Research Fellow in Health Economics at the Heritage Foundation, on the faculty of the Industrial College of the Armed Forces, as a Senior Associate for The Lewin Group, and as a Research Economist at the Center for Naval Analyses.

Dr. Book earned a Ph.D. in economics and an M.B.A. from the University of Chicago, Booth School of Business, an M.A. in computational and applied mathematics from Rice University, and a B.S. in mathematics and history from Duke University.


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