Recently, the Centers for Medicaid and Medicare Services announced a scheduled cut in Medicare physician fees of 27.4% for 2012. This cut stems from the sustainable growth rate (SGR) formula used by the physician-payment system. Implemented in 1998 to curb the growth in expenditures on physicians' services, the SGR formula is used to determine annual adjustments to payments for those services. The SGR system sets a target for aggregate nationwide expenditures on the basis of growth in the per capita gross domestic product, growth in the number of Medicare Part B enrollees, changes in physicians' fees, and changes in laws or regulations. The actual expenditures on physicians' services are then compared with the target, and prices are adjusted to achieve the cumulative target over time.
Alhassani, Ali, Amitabh Chandra, and Michael E. Chernew. "Perspective: The Sources of the SGR "Hole"." New England Journal of Medicine 366.2 (January 26, 2012): 89-291.