The Sustainable Growth Rate and Physician Compensation

Health Letter, February 2014

Medicare is the single largest health insurer in the U.S.[1] In 2012, it spent $67 billion (approximately 12 percent of its total budget) reimbursing physicians for providing services to beneficiaries under Medicare Part B, its optional coverage for office visits, surgical procedures, and other diagnostic and therapeutic services performed in the outpatient or inpatient settings.[2] Part B’s fee-for-service model reimburses physicians based on the volume of such services the physician provides.[3]

In December 2013, key committees in both the Senate and House of Representatives approved legislation that, if passed by Congress later this year, would repeal a cornerstone of Medicare’s reimbursement framework for physicians: the sustainable growth rate (SGR).[4] The proposed legislation would prevent any future SGR-mandated cuts to doctors’ reimbursement rates that have long been strongly opposed by the American Medical Association (AMA), the nation’s most powerful physician lobby.

The projected cost of permanently repealing the SGR has been estimated at more than $100 billion over 10 years. While it is not unreasonable that Medicare fees to physicians should – in some cases – account for inflation over time, American physicians are already paid substantially more than their counterparts abroad. And this disparity is mostly due to the inordinately high fees doled out to U.S. specialists, to the detriment of the nation’s dwindling primary care workforce. Therefore, by failing to progressively restructure Medicare’s reimbursement system in favor of primary care doctors, the currently proposed bills to repeal the SGR stand to perpetuate (Senate version) or exacerbate (House version) this income divide within the medical profession. Meanwhile, proposals are being floated that would pay for the preservation of physicians’ incomes with measures that would increase costs for patients, potentially reducing access to care.[5]

About the SGR

In 1997, Congress introduced the SGR to determine the fees paid to physicians under Medicare.[6] The legislation was an attempt to control growth in Medicare spending by ensuring that payments to physicians, as calculated by the SGR formula, would not grow faster than the overall economy.[7]

The SGR ties annual changes in payment rates to the estimated inflation (or deflation) of costs of running a medical practice over the course of a year.[8] It then adds to (as a bonus) or subtracts from (as a penalty) this value, depending on whether physicians – as a profession – spent less or more, respectively, than annual health expenditure targets set by the Centers for Medicare & Medicaid Services (CMS). These annual targets are determined by a complex formula that includes factors such as the growth in the overall economy and the change in the number of Medicare Part B beneficiaries that year.[9] By thus incentivizing physicians, en masse, to avoid overuse of health care services, the SGR was essentially an attempt at reining in not only physicians but also overall health care spending under the public insurance program.

In the first years under the SGR system, physicians consistently met CMS’ expenditure targets and were therefore granted annual increases in payments above the rate of inflation.[10] But this trend reversed around 2002, when physicians’ spending on health care services began to exceed CMS’ annual targets. (That CMS aggregate targets failed to decrease use of health care services was hardly surprising given that under Medicare’s fee-for-service model, individual physicians were still rewarded for providing more, not fewer, services to patients.[11])

Accordingly, CMS cut physician reimbursement by 5 percent in 2002. However, physician lobbies, led by the AMA, sprung into action and pressured Congress to halt any further cuts.[12] Congress obliged and, since 2003, has postponed all annual reductions mandated by the SGR model, instead freezing or occasionally increasing Medicare payments.

Yet because the SGR system was never repealed, the deferred cuts have simply accumulated every year since 2003. A total of 24 percent in payment cuts were scheduled to go into effect by Jan. 1, 2014,[13] before Congress responded with the latest postponement to April 1, along with another 0.5 percent increase.[14]

The AMA has long advocated a repeal of the SGR in favor of what it terms annual “positive updates” to physician fees.[15] And the AMA has clout. In 2013, the organization spent $13 million on lobbying, making it the 8th highest-spending lobby in the country, ahead of power players like Northrup Grumman, Google and the trade groups for the telecommunications and broadcast industries.[16] (For a look at how the AMA underwrites its extensive lobbying activities, see “The American Medical Association and Its Dubious Revenue Streams”, Health Letter, November 2012.)

Yet despite the AMA’s influence, it had never succeeded – until now – in convincing members of Congress to do away with the SGR, because the projected expense of doing so in one fell swoop was seen as prohibitive by allegedly deficit-wary legislators. The Congressional Budget Office has estimated that a permanent repeal in the SGR formula and freezing of physician payments at current rates would cost the federal government $116.5 billion over the next 10 years (compared to a scenario in which SGR-mandated cuts are implemented).[17] An annual increase in compensation of 0.5 percent would add an additional $19.6 billion to the 10-year cost of the plan.[18]

Members of Congress thus previously opted to halt the mandated cuts incrementally (a total of 15 times since 2003 [19]) which keeps them in good standing with the AMA while not tarnishing their illusory image as deficit “hawks.”

This past December, however, the legislation repealing the SGR was approved by key committees in both the House of Representatives and Senate, and a final bill is expected to pass both chambers before the expiration in April of the latest stopgap delay in SGR cuts.[20] The Senate version would freeze physician payments at current levels for 10 years, while the House bill would first grant a 0.5 percent annual increase until 2016 before freezing payments thereafter.[21] Both bills also would take steps to modify the current fee-for-service payment structure,[22] but it is not yet clear how extensive – or binding – any such changes will actually be.

The medical profession: A microcosm of U.S. income inequality

In arguing for a fee increase, the AMA has repeatedly pointed out that by failing to keep pace with inflation, Medicare has essentially slashed physicians’ pay by 17 percent over the past 10 years.[23] What it omits in its narrative is that even with the pay freezes, U.S. physicians are still paid far more than their counterparts in almost any other country. In 2006, U.S. specialists were paid nearly twice the average among other states in the Organization for Economic Co-operation and Development (OECD).[24]

Physicians today are decidedly not among the struggling classes. According to a survey by the health policy website Medscape, physician salaries in 2012 ranged from a minimum of $170,000 (for infectious disease specialists) to a maximum of $405,000 (for orthopedic surgeons).[25] And physicians’ incomes are more than keeping up with economic growth. With the exception of four specialties (oncologists, endocrinologists, radiologists and psychiatrists), every physician group experienced a growth in average income from 2011 that exceeded the national inflation rate.[26]

But as the Medscape survey also illustrates, physicians are not a monolithic block. The three traditionally defined primary care fields (pediatrics, internal medicine and family medicine) earned an average of $178,000 a year, while specialists’ salaries averaged $276,000.[27]

How Medicare chooses to reimburse physicians is a central factor in fueling this disparity, as highlighted in a 2011 study published in the journal Health Affairs.[28] The study compared payments for primary care office visits and hip replacements by orthopedic surgeons in the U.S. versus in five other developed countries. While public insurance programs, such as Medicare, reimbursed American and foreign physicians at “comparable” rates for primary care office visits, orthopedic surgeons were paid “considerably [30 to 150 percent] higher” sums for hip replacements in the U.S. than their counterparts abroad.[29] The study also found that of the six countries analyzed, the U.S. had, by far, the lowest number of primary care office visits and the third-lowest number of hip replacements per capita.[30]

The Health Affairs study’s results highlighted two important phenomena. First, American doctors’ higher salaries are not because they work harder or have higher overhead fees but because they are paid more per service than doctors in any other developed country. In other words, it is the price, not the volume, of health care services that is the chief driver of overall physician payments. (Incidentally, this can be generalized to the health care system as a whole: Americans pay more while receiving less total care than patients in other developed countries.)[31]

The second important phenomenon highlighted by the study is that the disparity in fees (and incomes) between U.S. physicians and those in other developed countries is far greater – in absolute dollar amounts – for specialists than for primary care doctors.[32] This is a crucial factor in the glaring income inequality within the medical profession, which, in addition to a question of fairness, has far-reaching implications for the broader health care system.

In 2013, an estimated 57 million — or 1 in 5 — Americans lived in areas that do not have access to adequate primary health care because of a shortage of providers.[33] In 2010, the U.S. had 35 percent more specialists than primary care doctors[34] and, by 2012, just 1 in 5 graduating internists indicated that they would pursue a primary care career (compared to over one-half in the 1970s).[35]

Ever-increasing debt burdens on graduating medical students threaten to further erode the ranks of primary care practitioners. In 2011, graduating medical students reported an average debt – including premedical undergraduate debt – of $161,300, more than triple the $46,500 (in 2011 dollars) reported in 1978.[36] In 2013, 27.8 percent of graduates reported that medical debt, and 47.8 percent that anticipated income, were “moderate” or “strong” factors in their choice of specialty.[37]

Whither SGR?

It’s not unreasonable that Medicare fees to physicians should – in certain cases – account for inflation over time. It also is important that Medicare not go the way of Medicaid and slash reimbursement to the point that physicians (and hospitals) begin coveting privately insured patients, excluding elderly and often poorer Medicare beneficiaries.

But, it’s also vital to remember that current fees for many services, especially procedures performed by high-paid specialists, are already higher than most other industrialized countries — and physicians are hardly suffering economically. In addition, flat, across-the-board percentage increases in physician pay only exacerbate the inequality between primary care and specialist physicians. Freezing specialist pay while increasing reimbursement to primary care physicians to keep pace with inflation would help close this salary gap while making primary care careers more appealing to medical students and residents. And because specialists’ pay far exceeds that of primary care doctors, this progressive approach could cost Medicare less than a uniform, specialty-wide pay hike.

Whatever its provisions, the final SGR repeal bill will fall far short if it doesn’t fundamentally reform the inflationary fee-for-service model, which only enriches the medical industrial complex while threatening to bankrupt the rest of the country. Supporters of Medicare also must remain vigilant that increases in physician pay not come at the expense of Medicare’s beneficiaries, especially given the current climate in Washington in which cuts in Medicare services now garner bipartisan support.

Ultimately however, until Medicare is finally improved and expanded to every American in a national single-payer system, power, rather than need, will continue to determine how our health care dollars are spent.


[1] CMS Press Toolkit. Accessed February 6, 2014.

[2] MedPac. Physician and other health professionals payment system. Accessed February 6, 2014.

[3] Health Affairs Issue Brief. Medicare Payments to Physicians (updated). Feb. 13, 2013. Accessed February 6, 2014.

[4] Senate Finance Committee. Congressional Leaders Push for Permanent Fix to Broken SGR Formula. Dec. 12, 2013.…. Accessed February 6, 2014.

[5] McClellan M, Patel K, Sanghavi D. Medicare Physician Payment Reform: Will 2014 Be the Fix for SGR? JAMA. 2014 Jan 13. doi: 10.1001/jama.2013.286100. [Epub ahead of print]. Accessed February 6, 2014.

[6] Health Affairs Issue Brief. Medicare Payments to Physicians (updated). Feb. 13, 2013. Accessed February 6, 2014.

[7] Ibid.

[8] Ibid.

[9] CMS. Estimated Sustainable Growth Rate and Conversion Factor, for Medicare Payments to Physicians in 2013. p. 1.…. Accessed February 3, 2014.

[10] Ibid.

[11] Ibid.

[12] AMA History Timeline. 2003.…. Accessed January 27, 2014.

[13] CBO. Medicare’s Payment to Physicians: the Budgetary Impact of Alternative Policies Relative to CBO’s May 2013 Baseline updated for Final Rule. Dec. 6, 2013.…. Accessed February 6, 2014.

[14] Lowes R. Medscape. Senate Passes 3-Month SGR ‘Doc Fix’. Dec. 18, 2013. Accessed January 27, 2014.

[15] See e.g. Preliminary Comparison of Senate Finance/House Ways & Means Committees’ Revised SGR Discussion Draft (December 2013) to AMA Suggestions Made on November 11, 2013. Issue I. SGR Repeal & Annual Updates.…. Accessed January 27, 2014. For more examples of AMA lobbying to eliminate the SGR, dating back to 2011, see: AMA. Advocacy with Congress. “Medicare Physician Payment” tab.…. Accessed January 27, 2014.

[16] Opensecrets. Top Spenders. 2013.

[17] CBO. Medicare’s Payment to Physicians: the Budgetary Impact of Alternative Policies Relative to CBO’s May 2013 Baseline updated for Final Rule. Dec. 6, 2013.…. Accessed February 6, 2014.

[18] Ibid.

[19] NPR. Congress Poised To Permanently Fix Its Medicare Payment Glitch. Dec. 19, 2013.…

[20] Kaiser Health News. Congress Moves Closer To Changing How Medicare Pays Doctors. Dec. 12, 2013.…

[21] AAFP. Three-Month Payment Patch Should Give Congress Time to Repeal SGR. Dec. 18, 2013.

[22] Ibid.

[23] AMA Fact Sheet on SGR. 2013. Accessed February 6, 2014.

[24] Rampell C. How Much Do Doctors in Other Countries Make? New York Times. July 15, 2009.…. Accessed January 27, 2014.

[25] Medscape Physician Compensation Report, 2012. Slide 2. Accessed February 6, 2014.

[26] Medscape Physician Compensation Report, 2012. Slide 3. Cutoff of 1.7% (inflation rate, 2012; obtained from: Accessed February 6, 2014.

[27] Medscape Physician Compensation Report, 2012. Slide 2. Accessed February 6, 2014.

[28] Laugesen MJ, Glied SA. Higher fees paid to US physicians drive higher spending for physician services compared to other countries. Health Aff (Millwood). 2011 Sep;30(9):1647-56. doi: 10.1377/hlthaff.2010.0204.

[29] Ibid.

[30] Ibid.

[31] Anderson GF, Reinhardt UE, Hussey PS, Petrosyan V. It’s the prices, stupid: why the United States is so different from other countries. Health Aff (Millwood). 2003 May-Jun;22(3):89-105.

[32] Laugesen MJ, Glied SA. Higher fees paid to US physicians drive higher spending for physician services compared to other countries. Health Aff (Millwood). 2011 Sep;30(9):1647-56. doi: 10.1377/hlthaff.2010.0204. Also see: Rampell C. How Much Do Doctors in Other Countries Make? New York Times. July 15, 2009.…. Accessed January 27, 2014.

[33] Primary Care Access. A Report from Chairman Bernard Sanders. Jan. 29, 2013. Accessed February 6, 2014.

[34] CDC. Data Brief. Number 105, September 2012. Generalist and Specialty Physicians: Supply and Access, 2009–2010. Accessed February 6, 2014.

[35] Henderson D. Most Internal Medicine Residents Plan Subspecialty Careers. Medscape. Dec. 4, 2012. Accessed February 6, 2014.

[36] AAMC. Analysis in Brief: Trends in Cost and Debt at U.S. Medical Schools Using a New Measure of Medical School Cost of Attendance. Table 2 (Mean education debt, current dollars). Accessed February 6, 2014.

[37] AAMC Medical School Graduation Questionnaire. 2013.