Reform the Medicare Sustainable Growth Rate for physician payment and require the fix to be offset. 

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The Sustainable Growth Rate (SGR) – known as the “doc fix” – was created in 1997 to control Medicare spending by setting payment targets for physician services and reducing payment updates if spending exceeded the targets.  The SGR formula has required reductions in physician payments every year since 2002, but beginning in 2003 Congress blocked the reductions each year, requiring even larger reductions every subsequent year.  Because of the accumulated shortfall from deferred reductions, the SGR formula would require a 23 percent reduction in 2012 payments, and will increase every year the problem is not fixed. 

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Freezing physician payments from 2012 through 2020, as we assume in our baseline, would cost $267 billion relative to current law. The Commission believes that this amount – or the cost of any “doc fix” – must be fully offset, and recommends enforcing this principle by eliminating its exemption in statutory PAYGO. In the near term, we also recommend replacing the reductions scheduled under the current formula with a freeze through 2013 and a one percent cut in 2014. <Remember, these recommendations were made in 2010.  These dates will be adjusted accordingly.>

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For the medium term, the Commission recommends directing the Centers for Medicare and Medicaid Services (CMS) to develop an improved physician payment formula that encourages care coordination across multiple providers and settings and pays doctors based on quality instead of quantity of services. In order to maintain pressure to establish a new system and limit the costs of physician payments, the proposal would reinstate the SGR formula in 2015 (using 2014 spending as the base year) until CMS develops a revised physician payment system. The Medicare actuary would be required to certify the new payment system would not cost more than would have been allowed under the SGR formula. 

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Evidence:

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United States.  White House.  "The National Commission on Fiscal Responsibility and Reform."  December 2010