ECONOMIC AND BUDGET ISSUE BRIEF

The Sustainable Growth Rate Formula for Setting

Medicare’s Physician Payment Rates

Since the Medicare program was created in 1965, several 

methods have been used to determine how much it pays 

physicians for each covered service. Initially, the program 

compensated physicians on the basis of their charges and 

allowed them to bill beneficiaries for the full amount 

above what Medicare paid for each service. In 1975, 

Medicare payments were still linked to what physicians 

charged, but the annual increase in fees could not exceed 

the increase in the Medicare economic index, or MEI.1

Because those changes were not enough to prevent total 

payments from rising more than policymakers desired, 

from 1984 through 1991 the yearly change in fees was 

determined by legislation.

Starting in 1992, the payment system based on physicians’ charges was replaced by a fee schedule. That schedule bases payment for individual services on measures of 

the relative resources used to provide them. The schedule 

was not intended to control spending—it was designed to 

redistribute spending among various physician specialties. 

The fee schedule was updated annually by a combination

CBO SEPTEMBER 6, 2006

Summary

The Supplemental Medical Insurance program 

(Part B of Medicare), which will cost about 

$158 billion in 2006, pays for physicians’ services, 

outpatient hospital services, durable medical equipment, physical therapy, and certain other outpatient services. About 38 percent of those expenditures are payments for services provided by physicians, which are based on a schedule of fees that 

specifies the amount to be paid for each type of service. Most of Medicare’s payment rates are simply 

adjusted each year for inflation—but not those for 

physicians’ services. Those rates are governed by a 

complex formula—the Sustainable Growth Rate 

(SGR) mechanism—that, unless overridden by legislation, will reduce fees by about 4 percent or 

5 percent annually for at least the next several years. 

Legislation has overridden the formula’s results in 

each of the past four years, and the prospect of future, year-after-year rate reductions raises the question of whether the SGR formula is a viable mechanism—and if not, what alternatives might be 

appropriate. This brief describes the SGR mechanism and presents the potential budgetary effects of 

several other approaches. Many of the possible alternatives would be costly. For example, overriding 

the formula with a 1 percent rate increase in 2007 

would raise outlays by $6 billion over the next 10 

years. Replacing the formula with an inflation index 

would cost more than $200 billion over the coming 

decade.

1. The Medicare economic index measures changes in the cost of 

physicians’ time and operating expenses; it is a weighted sum of 

the prices of inputs in those two categories. Most of the components of the index come from the Bureau of Labor Statistics. 

Changes in the cost of physicians’ time are measured using 

changes in nonfarm labor costs. Changes in “all-factor” productivity are also incorporated into the index as a way of accounting for 

improvements in physicians’ productivity. The productivity 

adjustment to the MEI reduces its rate of growth. 
2 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

of the MEI and an adjustment factor that was designed to 

counteract increases in the volume of services being delivered per beneficiary. That factor, known as the volume 

performance standard (VPS), was based on historical 

trends in volume. However, the VPS mechanism led to 

highly variable changes in payment rates, and the Congress replaced it with a new mechanism—the Sustainable 

Growth Rate (SGR)—starting in 1998.2

Experience Under the SGR Mechanism

The SGR mechanism aims to control spending for physicians’ services provided under Part B of Medicare. It does 

so by setting an overall target amount of spending (measured on both an annual and a cumulative basis) for certain types of goods and services provided under Part B; 

included are payments for physicians’ services as well as 

payments that Medicare makes for items—such as laboratory tests, imaging services, and physician-administered 

drugs—that are furnished “incident to” (in connection 

with) physicians’ services. Payment rates are adjusted annually to reflect differences between actual spending and 

the spending target—upward if spending is below the target, downward if spending is above the target.

Policymakers had two main goals when they adopted the 

SGR mechanism: ensuring adequate access to physicians’ 

services and controlling federal spending for those services in a more predictable way than the VPS mechanism 

did. The SGR mechanism has a mixed record with regard 

to those goals.

More than 90 percent of physician and nonphysician 

providers agree to participate in Part B, and surveys generally show that beneficiaries do not experience significant difficulties in getting access to care. However, that 

situation may change if payment rates are significantly reduced, as will occur over the next several years if the SGR 

mechanism operates as currently specified in law.

From 1997 (when the SGR method was first used to 

measure expenditures) through 2005, spending per beneficiary on services paid for under the physician fee schedule grew by 65 percent, or about 6.5 percent per year. In 

contrast, per-beneficiary spending in the rest of Medicare 

(excluding Medicare Advantage, the program’s managed 

care option) grew by about 35 percent over the same 

period.

Aside from growth in Part B enrollment, which has averaged about 1 percent annually since 1997, the growth of 

spending subject to the fee schedule can be attributed 

mainly to increases in the fees themselves and in the volume and intensity of services being provided by physicians.3

 Since 1997, the fees that Medicare pays for each 

service have risen annually by an average of about 2 percent. Although some of the remaining growth has resulted from the addition of covered services, most of the 

rest is attributable to increases in the volume and intensity of services, which have averaged about 4.5 percent 

per year over the 1997–2005 period.

Since 2002, spending as measured by the SGR method 

has consistently been above the targets established by the 

formula. In 2005, expenditures counted under the 

method totaled $94.5 billion, about $14 billion more 

than the $80.4 billion expenditure target for that year. At 

the end of 2005, total spending since the SGR mechanism was put into place stood at about $30 billion above 

the SGR’s cumulative target.4 As a result, the SGR mechanism, under current law, will substantially reduce payment rates for physicians’ services over the next several 

years. Payment rates could decline by a total of 25 percent 

to 35 percent during that period if physicians continued 

to provide services at the current rate.

Projected Spending for Physicians’ 

Services

Because of the impending reductions in payment rates required under current law, Medicare spending for services 

provided by physicians is projected to grow relatively 

slowly for the next several years. The Congressional Budget Office (CBO) estimates that the decline in payment 

rates will be slightly more than offset by increases in enrollment and by growth in the volume and intensity of 

services being delivered. As a result, CBO projects, Medicare spending for physicians’ services will grow in coming 

2. For a more detailed discussion of the history of payment rates, see 

the statement of Douglas Holtz-Eakin, Director, Congressional 

Budget Office, Medicare’s Physician Fee Schedule, before the Subcommittee on Health of the House Committee on Energy and 

Commerce, May 5, 2004.

3. “Intensity” refers to the complexity of services utilized in delivering patient care. For example, use of a computerized axial tomography (CAT) scan rather than an x-ray represents an increase in 

intensity.

4. Those figures include both spending by the Medicare program 

and beneficiaries’ cost-sharing obligations for services. Cost 

sharing, in the form of deductibles and copayments, amounts 

to roughly 20 percent of the total spending counted under the 

targets.
ECONOMIC AND BUDGET ISSUE BRIEF

THE SUSTAINABLE GROWTH RATE FORMULA FOR SETTING MEDICARE’S PHYSICIAN PAYMENT RATES 3

Figure 1.

Sustainable Growth Rate Spending Compared with Expenditure Targets

(Billions of dollars)

Source: Congressional Budget Office.

Note: SGR = sustainable growth rate.

years, but in 2012 it will be only 13 percent higher than 

it was in 2005, reflecting an average annual growth rate of 

less than 2 percent. In contrast, from 1997 through 2005, 

such spending grew by an average of about 7.7 percent 

annually.

Considerable evidence suggests that a reduction in payment rates leads physicians to increase the volume and intensity of the services they perform. Although their participation rates are currently very high, CBO also expects 

that some physicians will probably respond to continuing 

reductions in payment rates by declining to participate in 

the Medicare program.5 Such responses to changes in 

payment rates do not explicitly affect CBO’s projections 

of spending for physicians’ services over the long term because the SGR mechanism will adjust rates to offset 

changes in the volume of physicians’ services furnished to 

Medicare patients. As a result, the reductions in payment 

rates could be larger or smaller than the estimated 25 percent to 35 percent if physicians collectively responded to 

continuing reductions in rates by substantially increasing 

or decreasing the volume and intensity of the services 

they furnish to Medicare beneficiaries.

From 1997 through 2001, cumulative spending governed 

by the SGR mechanism was slightly below the expenditure target set by the formula (see Figure 1). Starting in 

2002, cumulative spending rose above the cumulative target. According to CBO’s projections through 2016, if the 

current SGR mechanism is permitted to operate, the 

amount of spending above the cumulative target will continue to grow for several more years but will then shrink, 

as the annual growth in spending is slowed by the reductions in payment rates produced by the SGR mechanism. 

Toward the end of the period, CBO’s projections show 

cumulative spending coming back in line with the cumu1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

-40

0

40

80

120

160

200

Actual Projected

Annual Spending Counted

Toward SGR Target

Cumulative Spending

Over/Under Targets

Annual SGR Expenditure Target

5. It is uncertain at what point such responses to declining payment 

rates would have a significant, negative effect on Medicare 

patients’ access to physicians’ services. Several organizations, 

including the Government Accountability Office, the Medicare 

Payment Advisory Commission, and the Center for Studying 

Health System Change, are monitoring changes in physicians’ 

willingness to participate in Medicare and to accept new Medicare 

patients.
4 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

lative target.6 The SGR mechanism is designed in such a 

way that if cumulative spending is viewed over a long 

enough period, it will equal the cumulative target.

How the SGR Mechanism Works

The SGR mechanism consists of three components, each 

of which is based on a statutory formula:

B Expenditure targets, which are established by applying 

a growth rate (calculated by formula) to spending during a base period; 

B The growth rate; and

B Annual adjustments to payment rates for physicians’ 

services, which are designed to bring spending in line 

with the expenditure targets over time.

The Expenditure Targets

The SGR mechanism establishes both year-by-year and 

cumulative spending targets (the law refers to the target 

spending levels as “allowed expenditures”). Included in 

the targets is spending for services covered by the physician fee schedule and services provided “incident to” a 

visit to a physician. (That amount includes both spending by the Medicare program and cost-sharing obligations of beneficiaries.) The fee schedule determines how 

much physicians get paid for each of the services they 

provide. Services listed on the schedule accounted for 

about 85 percent of all spending counted toward the 

SGR target in 2005. Payment rates for the “incident-to” 

goods and services, which include laboratory tests and 

physician-administered drugs (such as chemotherapeutic 

formulations), are not determined by the physician fee 

schedule.7

The SGR method uses spending that occurred between 

April 1, 1996, and March 31, 1997, as the base for all future spending counted toward the targets. During that 

base period, the amount of spending counted under the 

method totaled $48.9 billion. Each year, the spending 

target is updated from the base level to reflect the growth 

rate determined by the SGR formula. That formula produced a sustainable growth rate of 3.2 percent for 1998. 

Consequently, the expenditure target for that year was 

$50.5 billion ($48.9 billion multiplied by 1.032).

To produce a cumulative target, the annual targets are 

added together (along with the original base amount). 

The cumulative target in 1998 was $99.4 billion 

($48.9 billion plus $50.5 billion); according to the Centers for Medicare and Medicaid Services (CMS), the cumulative target in 2005 had reached $611.8 billion.

The Growth Rate

The expenditure targets are updated each year by applying a growth rate (the SGR) that is designed to account 

for various factors that contribute to changes in Part B 

spending. That growth rate incorporates the following 

factors:

B First, it includes an adjustment for inflation that takes 

into account changes in the prices of goods and services used by physicians’ practices and in the prices 

that Medicare pays for “incident-to” services. The 

change in the prices of goods and services used by 

physicians’ practices is measured by the Medicare economic index, which incorporates an adjustment for 

changes in productivity, as measured by the change in 

“all-factor” productivity in the economy as a whole. 

(When productivity rises, that adjustment reduces the 

MEI below where it would have been if it had been 

based on price increases alone.) The MEI will be 

2.6 percent for 2007, according to CMS’s preliminary 

estimate.8

6. CBO projects that cumulative spending will fall slightly below the 

cumulative target in 2015 and remain below it for a short time. 

That projected path results from the gradual nature of the adjustments to bring spending in line with the SGR’s expenditure 

targets.

7. Payments for some services, such as laboratory tests, are based on 

their own fee schedules, which are usually updated annually for 

inflation. Payments for physician-administered drugs are based on 

market prices.

8. CMS usually sets the payment rates for each year in November of 

the preceding year. It issues preliminary estimates of the updates 

during the course of the year.

The percentages shown above for the four factors used to determine the SGR for 2007 are such preliminary estimates, as contained in a letter sent by CMS to the Medicare Payment Advisory 

Commission on April 7, 2006. On August 8, 2006, CMS 

announced that it was reducing its estimate of the increase in the 

MEI for 2007 by 0.5 percent, but it did not address the other factors used in the SGR formula. The agency also announced that as 

a result of the change to the MEI, its estimate of the 2007 payment update had changed from -4.6 percent to -5.1 percent.
ECONOMIC AND BUDGET ISSUE BRIEF

THE SUSTAINABLE GROWTH RATE FORMULA FOR SETTING MEDICARE’S PHYSICIAN PAYMENT RATES 5

B Second, the rate incorporates changes in enrollment in 

Medicare’s fee-for-service program, which, CMS estimates, will be a decline of 2.9 percent for 2007.

B Third, the SGR incorporates the estimated 10-year average annual growth rate of real (inflation-adjusted) 

gross domestic product (GDP) per capita—2.2 percent, in CMS’s estimation.

B Fourth, the growth rate takes into account the impact 

of changes in law or regulation that would affect 

spending for services subject to the SGR mechanism 

(such as adding coverage for new benefits), which 

CMS estimates will be -1.0 percent.9

Those four factors are multiplied to yield an overall rate 

of growth that CMS estimates will be 0.7 percent in 

2007:

Change in physicians’ prices (1.026) x change in enrollment (0.971) x change in real GDP per capita (1.022) x 

changes in law or regulation (0.990) = 1.007

In 2006, the expenditure target for services covered by 

the physician fee schedule is $81.7 billion. Increasing the 

2006 target by 0.7 percent results in an expenditure target of $82.3 billion for 2007.

In essence, the SGR method allows spending per beneficiary to grow with inflation, with these additional adjustments:

B A reduction that assigns the benefits of productivity 

improvements to the Medicare program;

B An increase—which could be considered an allowance 

for growth in the volume and intensity of services—

equal to the real change in GDP per capita; and

B An increase or decrease to reflect any changes in the 

coverage offered by the program.

Once a determination of the SGR has been made for a 

given calendar year, it is not necessarily fixed. If actual experience for one or more of the four growth factors differs 

from the estimates in the original calculation, the SGR 

for that year can be changed. In other words, if the SGR 

for 2007 is set under the assumption that fee-for-service 

enrollment will decrease by 2.9 percent and in actuality it 

changes by a different amount, the SGR for that year will 

subsequently be adjusted. In that case, the rates paid in 

2007 would not change, but the cumulative target for 

subsequent years would be adjusted. The SGR—and 

therefore the expenditure targets—for a particular year 

can be retroactively adjusted for up to two years.

Annual Adjustments to Payment Rates

The annual update to payment rates under the physician 

fee schedule involves two components: an inflation adjustment according to the MEI and an “update adjustment factor.” The adjustment factor is based on the relationship between actual spending for services subject to 

the SGR and the formula’s expenditure targets. If actual 

spending under the SGR does not deviate from the expenditure targets, payment rates under the physician fee 

schedule are simply increased by the percentage change in 

the MEI.

If actual spending deviates from the expenditure targets, 

annual updates to payment rates for physicians’ services 

are adjusted. Those adjustments are designed so that over 

a period of several years, cumulative spending will be 

brought back in line with the cumulative expenditure target. The formula for the update adjustment factor takes 

into account both the relationship between spending in a 

given year and that year’s expenditure target and the relationship between cumulative spending and the cumulative expenditure target.

If actual spending is more than the targets, the update adjustment factor will be negative (that is, it will reduce the 

amount of the increase that would otherwise occur to reflect inflation); if actual spending is less than the targets, 

the update adjustment factor will be positive. The law 

sets an upper and lower limit on the update adjustment 

factor—it cannot exceed an increase of 3 percent or a reduction of 7 percent. For 2006, CMS determined that 

cumulative spending was about $30 billion above the expenditure target and that the update adjustment factor 

determined by the formula would have been -21 percent; 

thus, the statutory limit of -7 percent was used. Consequently, in 2006, payment rates for physicians were 

scheduled to decrease by 4.4 percent; the inflation adjustment of 2.8 percent was more than offset by the update 

adjustment factor of -7 percent.10 However, the Deficit 

9. The reduction in the SGR for 2007 arising from changes in law or 

regulation is mainly attributable to provisions enacted in the Deficit Reduction Act (Public Law 109-362)—most notably, reductions in payment rates for imaging services. 10. (1 + 0.028) x (1 - 0.07) = 0.956.
6 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

Reduction Act (P.L. 109-362) overrode the formula for 

2006 and held payment rates at their 2005 level.

Looking forward, CBO estimates that spending for physicians’ services will continue to exceed the cumulative 

target for the next several years. Unless it is modified 

again, the SGR method will reduce payment rates beginning in 2007 and keep updates below inflation through 

at least 2012. (As mentioned earlier, CMS has estimated 

that the reduction in 2007 will be 5.1 percent.)

It is important to note that under the SGR mechanism, 

the adjustment factor applies only to the physician fee 

schedule and not to payment rates for “incident-to” services, which make up about 15 percent of the spending 

counted toward the SGR targets. Consequently, the SGR 

mechanism will adjust payment rates for physicians’ services in future years to offset any difference between the 

rate of growth of spending for “incident-to” services 

and the rate of growth of the expenditure targets. If 

spending for the “incident-to” services grows faster than 

the SGR targets, payment rates for physicians’ services 

will be reduced to compensate for that increase. Before 

2004, when changes were made in the way physicianadministered drugs were paid for, such “incident-to” 

spending experienced several years of double-digit 

growth. The share of SGR-related spending accounted 

for by physician-administered drugs increased from about 

7 percent in 2001 to 9 percent in 2005.

Recent Legislation Affecting the 

SGR Mechanism

Since 2002, the SGR mechanism has called for reductions in payment rates for physicians’ services. In 2002, 

payment rates were cut by 4.8 percent, and CMS determined that rates would be further reduced, by 4.4 percent, in 2003. In the Consolidated Appropriation Resolution of 2003 (P.L. 108-7), the Congress responded to 

that imminent reduction by allowing the Administration 

to boost the cumulative SGR expenditure target, thereby 

producing a 1.6 percent increase in payment rates for 

physicians’ services in 2003.

Spending continued to exceed the target in 2004, and if 

the SGR mechanism had been allowed to operate, the 

formula would have reduced payment rates in that year. 

The Congress and the President acted to prevent such a 

reduction. As part of the Medicare Modernization Act 

(P.L. 108-173), they replaced the scheduled rate reduction with increases of 1.5 percent in both 2004 and 2005. 

The Deficit Reduction Act held 2006 payment rates at 

their 2005 level, overriding an impending reduction of 

4.4 percent.

The budgetary effect of legislative actions to override cuts 

in 2004, 2005, and 2006 was twofold. First, federal 

spending for Medicare Part B benefits grew more than it 

would have otherwise. Second, because the legislation 

specified that increases in the payment rates should not 

be considered a change in law or regulation for purposes 

of determining the expenditure target, the gap between 

cumulative spending and the cumulative target became 

larger than it would have been otherwise. Under the current SGR rules, growth in spending occurring as a result 

of those rate increases will eventually be recouped by future adjustments to payment rates. Consequently, the 

budgetary cost of any future legislative boosts in payment 

rates has been increased.

Budgetary Implications of Changing 

the SGR Mechanism

The Congress has a wide range of options for changing or 

replacing the SGR mechanism. In any such decision, an 

important question is whether payment rates in the future should be reduced to recoup the spending exceeding 

the SGR targets that has already occurred, along with any 

future spending above the targeted amounts. This brief 

presents estimates for three illustrative examples, including one that would eliminate the SGR mechanism and 

replace its targets with annual updates based on inflation 

(see Figure 2).11 Each policy option would increase payments for physicians’ services compared with the payments that would be made under current law, thereby 

also increasing the Part B premiums that beneficiaries pay 

11. For a broader range of alternatives to the SGR mechanism than 

those presented here, see the statement of Donald B. Marron, Acting Director, Congressional Budget Office, Medicare's Physician 

Payment Rates and the Sustainable Growth Rate, before the Subcommittee on Health of the House Committee on Energy and 

Commerce (July 25, 2006), Appendix A.
ECONOMIC AND BUDGET ISSUE BRIEF

THE SUSTAINABLE GROWTH RATE FORMULA FOR SETTING MEDICARE’S PHYSICIAN PAYMENT RATES 7

Figure 2.

Options for Changing Updates to Payment Rates for Physicians’ Services

(Billions of dollars)

Source: Congressional Budget Office.

Notes: Option 1: Increase payment rates by 1 percent in 2007 but do not treat the update as a change in law or regulation.

Option 2: Increase payment rates by 1 percent in 2007 and treat the update as a change in law or regulation.

Option 3: Allow payment rates to increase by the amount of medical inflation.

to the government and the payments that the government makes for beneficiaries enrolled in Medicare Advantage.12 The following budget estimates reflect all three of 

those effects. (Figure 2, however, displays only gross 

changes in spending for physicians’ services.)

Option 1: Increase payment rates by 1 percent in 2007 but 

do not treat the update as a change in law or regulation.

This option would override the update adjustment factor 

for 2007 and increase payment rates under the physician 

fee schedule by 1 percent for that year. If that action was 

not considered a change in law or regulation, the SGR expenditure targets would remain the same, and the difference between cumulative spending and the cumulative 

expenditure targets under the option would be larger 

than that estimated under current law. Thus, the increase 

in spending attributable to the higher payment rate 

would eventually be recouped by the SGR mechanism, 

causing payment rates to be lower in the future than they 

would otherwise have been. Because the maximum adjustment factor of -7 percent is projected to apply for the 

next several years, recouping the costs of this option 

would begin after that period had ended.

Spending for physicians’ services under this option would 

be higher through 2012 and lower in subsequent years 

than the amounts projected under current law. According 

to CBO’s estimates, this option would increase net federal outlays by $13 billion over the 2007–2011 period 

and by $6 billion over the 2007–2016 period. Under 

this option, spending per beneficiary would be about 

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

0

40

60

80

100

120

140

Physician Spending

Under Option 3 Physician Spending

Under Option 2

Physician Spending

Under Option 1

Baseline Physician Spending

12. Any increase in spending for physicians’ services would increase 

the “benchmarks” that Medicare uses to determine how much the 

program pays for beneficiaries in the Medicare Advantage program. At the same time, about one-quarter of the changes in 

spending for physicians’ services and for Medicare Advantage 

would be offset by changes in receipts from beneficiaries’ premiums. However, legislation could specify that Part B premiums 

would not be adjusted to reflect changes in spending resulting 

from changes in payment rates for physicians' services. Such a 

“premium hold-harmless” provision would increase the government’s costs for any of the options by about 30 percent.
8 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

5 percent lower in 2016 than it would be under current 

law.

Option 2: Increase payment rates by 1 percent in 2007 and 

treat the update as a change in law or regulation. This option would override the update adjustment factor during 

2007 and increase payment rates under the physician fee 

schedule by 1 percent for that year. If that action was considered a change in law or regulation, the SGR would be 

adjusted to account for the increased payment rate, and 

the difference between cumulative spending and the cumulative targets would be largely unchanged from the 

difference that would prevail under current law. The rise 

in spending resulting from this option would not be recouped by the SGR mechanism.

Spending for physicians’ services under this alternative 

would be higher in every year than under current law. By 

CBO’s estimates, this option would increase net federal 

outlays by $13 billion over the 2007–2011 period and by 

$31 billion over the 2007–2016 period. Under this option, spending per beneficiary would be about 5 percent 

higher in 2016 than it would be under current law.

Option 3: Allow payment rates to increase by the amount of 

medical inflation. This option would repeal the current 

SGR mechanism and boost payment rates each year by 

the Medicare economic index. Instead of being reduced 

by about 4 percent or 5 percent annually for the next several years, payment rates would rise by between 2 percent 

and 3 percent annually. Those updates would not be subject to further adjustments, and increases in spending 

would not be recouped.

Under this option, spending for physicians’ services 

would grow at an average annual rate of about 7.4 percent over the next 10 years, CBO estimates, compared 

with a 4.5 percent increase as projected under current 

law. According to CBO’s estimates, net federal outlays 

would rise by $58 billion over the 2007–2011 period and 

by $218 billion over the 2007–2016 period. Spending 

per beneficiary under this option would be about 30 percent higher in 2016 than it would be under current law.

Medicare Spending in the Future

Setting appropriate fees for physicians’ services entails a 

balancing of two factors: the need to pay providers 

enough to ensure beneficiaries’ access to care and the 

budgetary pressures created by ever-growing health care 

costs and an aging population. Continuing reductions in 

payment rates might, at some point, cause some physicians to decline to serve Medicare patients. But the task of 

setting payment rates for Medicare services must also be 

addressed in the context of challenging long-run budgetary trends. The aging of the baby-boom generation will 

significantly boost Medicare spending. If the nation spent 

the same fraction of GDP on each Medicare beneficiary 

in 2030 that is spent today—a proposition that reflects 

only the increased number of beneficiaries at that point 

(along with their projected mix by age and sex)—Medicare spending in that year would reach 5 percent of GDP, 

CBO projects, compared with its share today of 3 percent. The fiscal implications of the baby boomers’ aging 

are compounded by the fact that health care costs per 

beneficiary have also been growing significantly faster 

than the economy as measured on a per capita basis. 

If those trends continue and current law remains unchanged, Medicare spending could climb to 7 percent 

of GDP—or higher—by 2030.

In this brief, budget estimates and growth rates not 

directly associated with the SGR mechanism are 

presented on a fiscal year basis. All expenditures and 

growth rates directly associated with the SGR 

mechanism are presented on a calendar year basis.

For further information on the SGR mechanism, 

see the statement of Donald B. Marron, Acting 

Director, Congressional Budget Office, Medicare’s 

Physician Payment Rates and the Sustainable Growth 

Rate, before the Subcommittee on Health of the 

House Committee on Energy and Commerce, 

(July 25, 2006). See also the statement of Douglas 

Holtz-Eakin, Director, Congressional Budget 

Office, Medicare’s Physician Fee Schedule, before the 

Subcommittee on Health of the House Committee 

on Energy and Commerce (May 5, 2004).

This brief was prepared by Geoffrey Gerhardt. It 

and other CBO publications are available at the 

agency’s Web site (www.cbo.gov).

Donald B. Marron

Acting Director