Broken system of Medicare, SGR and the Sequestration

Would it make sense if you’re told that not only you are not getting a raise this year but your pay will be cut by n% because the US economy didn’t do well this year? In a nutshell this is actually how Medicare cuts (known as SGR) works.

Sustainable Growth Rate

The SGR formula was originally designed to help physicians by increasing their payments based on the overall growth of the economy. It worked well until we hit the 2001 recession and Medicare received a payment cut. Treating physician payments like a stock tied to oil prices on Wall Street is what started to kill Medicare.

The SGR Cuts

During the year 2002 doctors’ Medicare payments were cut by 5.4%. However, since 2002 Congress has stepped in every year to stop the cuts by postponing them towards the next year. The cuts were adding up all these years and now have been accumulated to a whopping 26.5%. The cost of providing care has been steadily rising as well.

A point to note here is that Congress has always stepped in at the 11th hour to stop the cuts BUT has never bothered to revisit the SGR formula which calls for these cuts in the first place.

The Result

If Congress does not bypass the SGR cuts this year, the physicians will see a 26.5% cut from their payments. Keep in mind that while physicians will see this cut their practice overhead will still be the same or more; so the end result will come in form of:

  • High number of job losses
  • Increased number of physician retirements
  • Increased number of physicians opting out of the Medicare program
  • Physicians will decrease the number of their Medicare patients
  • People will have Medicare insurance but will not be able to easily find the doctors to treat them
  • Medicare supplement plans will suffer due to the decreased enrollment

But wait! There is more!

Just so that the SGR was not enough, to sweeten the deal there are also some other cuts and penalties in the form of sequestration and requirements to implement electronic health records.


Sequestration is based on the Budget Control Act of 2011 and its primary purpose is to reduce the deficit. Unless alternate deficit reduction package is passed, the sequestration will affect Medicare by calling for a 2% cut to the payments. This 2% is a separate cut from the ones coming through SGR. Under the sequestration cut the Medicare Part A, B, C and Part D will suffer equally and all of this will translate into another form of strain on the job security.

Sequestration cuts will also affect hospitals because they will be forced to pay more attention to conserving capital while postponing the innovation projects and process efficiency plans. The health plans will suffer by facing the prescription drug benefit loss, and in the end patients will face the hardship.

Bottom Line

It is time for the both parties to set aside their differences and look for the real solution instead of putting another band aid on the problem. There is not much time left until we can no longer ignore the elephant in the room.

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