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Sustainable Growth Rate is Unsustainable for Clinical Labs

Medicare's sustainable growth rate (SGR) payment formula was implemented in 1997 under the Balanced Budget Act as a means to control Medicare spending through yearly updates to the Physician Fee Schedule. When Gross Domestic Product (GDP) growth outpaces Medicare Part B spending, the SGR leads to an increase in physician payments.  When spending is greater than GDP growth, however, physician compensation goes down.

The House Ways and Means Committee wanted some sort of link between Medicare spending and the growth of the overall economy, since healthcare spending was far outpacing overall economic growth.  But the SGR was almost certain to fail, because the formula that helps determine physician pay levels under Medicare had many shortcomings. Since the SGR was based on overall physician spending, there was no incentive for individual doctors to perform well and be more efficient.

With the economy humming in the mid-to-late 1990s, few projected any SGR cuts to take effect right away. Larger-than-otherwise-expected fee increases were given to physicians in 1997 and 1998. When the economy slowed in 2002, SGR implemented a 5.4% reduction in physician payments. Since 2003, even though Medicare spending has been higher than GDP growth, Congress has acted 15 times to either freeze or increase Medicare physician reimbursement, so that physicians would not see a reimbursement cut. These maneuvers came with a price tag of $150 billion.

To offset these freezes the Clinical Lab Fee Schedule by more than 11 percent since 2010. These cuts are putting a financial strain on many clinical laboratories. The Sustainable Growth Rate has become unsustainable for clinical laboratories. 

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