Medicare Physician Payments
Spending Targets Encourage Fiscal Discipline, Modifications Could Stabilize Fees Gao ID: GAO-02-441T February 14, 2002Congress implemented a physician fee schedule and a fee update formula to moderate spending growth relative to specified Medicare spending targets. These spending targets increase annually to reflect higher costs for physician services, the growth in the overall economy, and changes in the number of Medicare beneficiaries. Physician fees are adjusted for changes in the costs of providing services and on actual cumulative spending compared to the cumulative targets. Physician fees are updated to reflect higher costs to provide services. These updates are adjusted up or down on actual spending either falling below or exceeding the targets. In November 2001, the Centers for Medicare and Medicaid announced that updating Medicare's fees will decline 5.4 percent from what was paid in 2001, despite an estimated 2.6 percent increase in the cost of physician inputs. This reduction accounts for historical cumulative spending that exceeded the target by $8.9 billion, or 13 percent of estimated 2002 spending. Several factors contributed to the disparity between actual and targeted spending, including the correction of substantial errors in past spending estimates and the revision of targets for prior years. The current update mechanism could be modified to moderate fluctuations in physician fees and to ensure adequate payments, while retaining the fiscal discipline created by having a spending target. Such modifications would need to balance concerns about preserving fiscal discipline on physician spending with the need to maintain adequate payment rates to ensure that beneficiaries have access to physician services. Because the paramount consideration in setting payment rates is ensuring appropriate beneficiary access to services, timely and detailed data on Medicare beneficiary service use are essential to achieving this balance.
GAO-02-441T, Medicare Physician Payments: Spending Targets Encourage Fiscal Discipline, Modifications Could Stabilize Fees
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United States General Accounting Office:
GAO:
Testimony:
Before the Subcommittee on Health, Committee on Energy and Commerce,
House of Representatives.
For Release on Delivery:
Expected at 8:30 a.m.
Thursday, February 14, 2002:
Medicare Physician Payments:
Spending Targets Encourage Fiscal Discipline, Modifications Could
Stabilize Fees:
Statement of William J. Scanlon:
Director, Health Care Issues:
GAO-02-441T:
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today as you discuss modifications to
Medicare's method for updating its payments to physicians, which in
2001 totaled about $41 billion.[Footnote 1] As you know, more than a
decade ago to control rapid increases in Medicare spending for
physician services, the Congress implemented a physician fee schedule
and a fee update formula to moderate spending growth relative to
specified spending targets. These spending targets increase annually
to account for growth in the costs of providing physician services,
the growth in the overall economy, and changes in the number of
Medicare beneficiaries, while physician fees are adjusted for changes
in the costs of providing services and how actual cumulative spending
compares to the cumulative targets. In November 2001, however, the
Centers for Medicare and Medicaid Services (CMS) announced that
updating Medicare's fees for 2002 with this formula will cause the
fees to decline 5.4 percent from what was paid in 2001.[Footnote 2]
The Congress has been concerned that fluctuations in physician
payments and payment reductions may over the long run jeopardize
beneficiary access to physician services. As a result, it asked the
Medicare Payment Advisory Commission (MedPAC), which advises the
Congress on Medicare payment issues, to study the possibility of
eliminating spending targets and modifying the method for updating
physician fees.
As you consider refinements to Medicare's method of updating physician
payments, it is important to remain mindful of the need to ensure
Medicare's sustainability for future generations of beneficiaries. In
view of the coming surge in the Medicare-eligible population through
the aging of the baby boom generation, projected program spending
threatens to absorb ever-increasing shares of the nation's budgetary
and economic resources. Furthermore, the slowdown in Medicare spending
growth we saw in recent years appears to have ended. At the same time,
the fiscal discipline imposed on provider payments continues to be
challenged, and interest in modernizing the Medicare benefit package
to include prescription drug coverage and catastrophic protection has
increased. Together, these developments will impede efforts to achieve
the fiscal restraint that the Comptroller General and others have
warned is essential to the program's sustainability.
In the context of these broader interests, I will discuss (1)
Medicare's use of spending targets as a means of moderating the growth
in physician service expenditures, (2) the factors used in computing
those targets that resulted in the reduced fees for 2002, and (3)
adjustments to determining and applying spending targets that could
moderate swings in physician fees, while ensuring payments are
adequate to maintain physicians' ability to provide high-quality care
to Medicare beneficiaries. My comments are based on previous and
ongoing work on Medicare spending trends and Medicare payment methods,
including the physician fee schedule.
In brief, moderating Medicare's spending growth on physician services
while setting payment rates adequate to ensure beneficiary access to
care is not a straightforward matter. Medicare spending on physician
services grew rapidly through the 1980s, at an average annual rate of
more than 12 percent, even though physician fees were subject to some
limits. The spending growth was driven by increases in the volume of
services provided to each beneficiary and by increases in the
intensity of services provided.[Footnote 3] Recognizing that
expenditure growth of this magnitude was not sustainable, the Congress
attempted to impose fiscal discipline through a physician fee schedule
and a payment update mechanism that incorporates spending targets.
Physician fees are updated to reflect the increased costs of providing
services with the updates adjusted up or down depending on whether
actual spending has fallen below or exceeded the targets. The targets
themselves are adjusted annually to account for changes in the costs
of providing services, the number of Medicare beneficiaries, and the
gross domestic product (GDP). Since the introduction of this fee
system in 1992, annual increases in the volume and intensity of
services provided per beneficiary have moderated significantly. In
2002 the system resulted in Medicare's physician fees being reduced
5.4 percent below the fees paid in 2001, despite an estimated 2.6
percent increase in the cost of physician inputs.[Footnote 4] This
reduction is to account for historical cumulative spending that
exceeded the target by $8.9 billion, or 13 percent of estimated 2002
spending. Several factors contributed to the disparity between actual
and targeted spending, including the correction of substantial errors
in past spending estimates and the revision of targets for prior
years. The current update mechanism could be modified to moderate
fluctuations in physician fees and to ensure adequate payments, while
retaining the fiscal discipline created by having a spending target.
Such modifications would need to balance concerns about preserving
fiscal discipline on physician spending with the need to maintain
adequate payment rates to ensure that beneficiaries have access to
physician services. Because the paramount consideration in setting
payment rates is ensuring appropriate beneficiary access to services,
timely and detailed data on Medicare beneficiary service use are
essential to achieving this balance.
Background:
Total Medicare spending for physician services depends on actual
payment rates, the volume of services provided, and the mix of those
services. Medicare spending goes up when the price paid to physicians
for each service increases, when the number of services provided
rises, or when more intensive, and therefore more expensive, services
replace less intensive ones.
Since 1992, Medicare has paid for physician services using a fee
schedule. The fee for each service is a dollar conversion factor,
adjusted to reflect the resources required for that service relative
to the resources required to provide all other physician services, and
the differences in the costs of providing services across geographic
areas.
Along with the fee schedule, the Congress enacted a system of spending
targets designed to control growth in total spending for physicians'
services. The Sustainable Growth Rate (SGR) system was created in the
Balanced Budget Act of 1997 and revised in the Medicare, Medicaid, and
SCRIP Balanced Budget Refinement Act of 1999 (BBRA).[Footnote 5] It
replaced the first system of spending targets, implemented in 1992,
known as the Volume Performance Standard. The SGR system sets spending
targets for physician services and adjusts payment rates to bring
spending in line with those targets. The SGR target for total spending
is based on spending in an initial, or base, year and the estimated
growth in real per capita GDP each year and three other factors that
affect overall spending on physician services”the changes in the cost
of inputs used to produce physicians' services (as measured by the
Medicare Economic Index (MEI)), the number of Medicare beneficiaries
in the traditional fee-for-service program, and expenditures that
result from changes in laws or regulations.
The spending target for physician payments is applied by incorporating
it into the adjustment to the conversion factor that determines the
payment amount per service. The conversion factor is determined
annually by adjusting the previous year's conversion factor by the
change in the MEI, to account for the cost of inputs for physician
services, and adjusting this product on the basis of the relationship
between the cumulative SGR target and Medicare physician spending. The
conversion factor update is greater than the MEI when physician
spending has been below the targets and is less than the MEI when
physician spending has been higher.
Spending Targets Established to Moderate Rapid Rise in Outlays for
Physician Services:
In response to escalating Medicare expenditures, the Congress made
major changes in Medicare payment policies, beginning first by
enacting the hospital inpatient prospective payment system, which was
implemented in 1983, and then the Medicare physician fee schedule,
implemented in 1992. When enacting the fee schedule, the Congress
recognized that setting fees alone would not sufficiently restrain
physician spending growth. Despite some constraints on physician fees
since the 1970s, spending on physician services had grown dramatically
in the 1980s as a result of increases in the volume and intensity of
services provided. The Congress, therefore, provided that annual
physician fee increases would depend upon whether total Medicare
physician spending exceeded or fell short of cumulative spending
targets. Since the implementation of the fee schedule and spending
targets, the rise in Medicare spending for physician services has
slowed significantly, reflecting lower growth in the volume and
intensity of these services.
Spending on Physician Services Grew Rapidly Before 1992:
Before the physician fee schedule was implemented, Medicare payments
for physicians' services were largely based on historical charges.
Although during the 1970s the Congress introduced some controls on
annual payment rate increases, Medicare spending for physician
services continued to rise. This was also true in the 1980s”between
1980 and 1990, for example, Medicare spending per beneficiary for
physician services grew at an average annual rate of more than 12
percent, tripling from $278 to $890 (see figure 1).
Figure 1: Medicare Spending for Physicians' Services, per Beneficiary,
1975-1990:
Year: 1975;
Medicare spending: $135.45.
Year: 1980;
Medicare spending: $278.30.
Year: 1985;
Medicare spending: $548.36.
Year: 1990;
Medicare spending: $889.57.
Note: Amounts represent Medicare spending, net of beneficiary cost
sharing, for the year ending June 30.
Sources: Board of Trustees, Federal Supplementary Medical Insurance
Trust Fund, 1998 Annual Report of the Board of Trustees of the Federal
Supplementary Medical Insurance Trust Fund (Washington, D.C.: Apr. 28,
1998), pp. 51-2; and HCFA, A Profile of Medicare: Chartbook 1998
(Washington, D.C.: 1998), p. 64.
[End of figure]
Much of the spending growth resulted from increases in the volume of
services provided to each beneficiary and the substitution of more
intensive and expensive services for less intensive and expensive
ones. The Physician Payment Review Commission, which was charged with
advising the Congress on Medicare physician payment issues, observed,
"by the late 1980s...volume and intensity growth had become the
primary cause of higher program spending. In fact, from 1986 until
1992, while physician payment rates grew by less than 2 percent
annually, the volume and intensity of services rose by almost 8
percent per year."[Footnote 6]
The Congressional Budget Office in 1986 stated that "both the price
and the volume of services must be controlled to constrain costs...."
[Footnote 7] Spending targets were needed to limit growth in volume
and intensity of physician services. In 1989 testimony, Health and
Human Services Secretary Louis W. Sullivan said "Medicare physician
spending has increased at compound annual rates of 16 percent over the
past 10 years. And in spite of our best efforts to control volume and
reign in expenditures, Medicare physician spending is currently out of
control...An expenditure target...sets an acceptable level of growth
in the volume and intensity of physician services."[Footnote 8]
Spending Targets Created Incentives to Moderate Growth in Volume and
Intensity of Services:
The Congress introduced spending targets for physician services in
conjunction with the physician fee schedule in 1992 to help constrain
the rise in Medicare spending for physician services. The targets
incorporated limited growth in the volume and intensity of services
and were revised each year based on estimates of changes in the number
of Medicare beneficiaries and physician input prices. If actual
spending exceeded the targeted amounts, future payment rates would be
reduced, relative to what they would have been if actual spending had
equaled the targets, to offset the excess spending. If actual spending
fell short of the targets, future payment rates would be increased.
Since 1992, the growth in the volume and intensity of physicians'
services per Medicare beneficiary has moderated (see figure 2).
Between 1992 and 2000, the average annual increase in Medicare
spending due to changes in volume and intensity of services per
beneficiary was about 2 percent. In contrast, between 1985 and 1991,
immediately before the introduction of spending targets, volume and
intensity of services per beneficiary increased at an average annual
rate of about 8 percent.
Figure 2: Changes in Volume and Intensity of Medicare Physician
Services, per Beneficiary, 1975-2000:
Year: 1975;
Percent change: 4.5%.
Year: 1980;
Percent change: 8.3%.
Year: 1985;
Percent change: 3.7%.
Year: 1986;
Percent change: 7.6%.
Year: 1987;
Percent change: 9.7%.
Year: 1988;
Percent change: 3.9%.
Year: 1989;
Percent change: 6.5%.
Year: 1990;
Percent change: 9.0%.
Year: 1991;
Percent change: 9.4%.
Year: 1992;
Percent change: 0.2%.
Year: 1993;
Percent change: 0.8%.
Year: 1994;
Percent change: 4.1%.
Year: 1995;
Percent change: 3.6%.
Year: 1996;
Percent change: -0.2%.
Year: 1997;
Percent change: 2.8%.
Year: 1998;
Percent change: 2.5%.
Year: 1999;
Percent change: 0.6%.
Year: 2000;
Percent change: 3.0%.
Notes: Data are for beneficiaries in the traditional fee-for-service
program only.
From 1975 through 1995, volume and intensity of services changes are
based on Medicare outlays for all physician services. From 1996
through 2000, volume and intensity of services changes are based on
Medicare outlays for physician services covered by the fee schedule.
Sources: 1998 Annual Report of the Board of Trustees of the Federal
Supplementary Medical Insurance Trust Fund, pp. 51-2; A Profile of
Medicare:Chartbook 1998, p. 64; and 2001 Annual Report of the Board of
Trustees of the Federal Supplementary Medical Insurance Trust Fund,
[hyperlink, http://www.hcfa.gov/pubforms/trismi2001/tabiig2.htm]
accessed Feb. 9, 2002.
Several Factors Associated With 2002 Fee Reductions:
The application of the SGR system in 2002 resulted in a 5.4 percent
reduction in physician payment rates, despite an estimated 2.6 percent
increase in the costs of inputs used to provide physician services.
The reduction occurred because estimated cumulative physician services
spending since 1996 exceeded the target for cumulative spending by
approximately $8.9 billion, or 13 percent of projected 2002 spending.
In part, the payment update reflects adjustments made to the spending
targets for previous years for revisions in GDP estimates and for more
accurate actual spending statistics. Correcting these errors in
previous years' targets and spending totals to reflect more recent
data resulted in larger physician payment increases in those years
than if accurate data had been used, and they contributed to the size
of the reduction in payments in 2002.
The SGR system sets spending targets for physician services and
adjusts payment rates to bring spending in line with those targets.
Conceptually, if spending equals the targeted amount, physician
payment rates are updated to keep pace with the percentage change in
input prices as measured by the MEI. If spending exceeds the target,
the change in payment rates is smaller than the change in input
prices. If spending falls short of the target, payment rates are
allowed to grow faster than the rise in input prices. By adjusting
payment rates when prior-year spending has been too high, the SGR
system moderates the growth in Medicare outlays for physician services.
The SGR adjustments to the input price update are determined by how
much the cumulative physician spending since 1996 differs from the
cumulative spending target since then. Spending and targets must both
be estimated from information available each November when payment
rates are set for the following year. Previously, those estimates were
then used in subsequent years. Based on requirements in the BBRA,
however, HCFA implemented a process for revising the most recent two
years of spending and target estimates. Because the annual targets are
determined by changes in four factors”the number of fee-for-service
beneficiaries, real per capita GDP, input costs, and the effect of
changes in laws or regulations”a revision to any of those factors, or
to estimates of prior spending, can change the spending estimate. The
SGR adjustments to the input price update can then take effect because
of growth in the volume or intensity of services delivered, resulting
in spending deviating from targets, or because of revised estimates
for prior years' targets and spending.
In setting payment rates for 2002, CMS updated its estimates of past
spending and recalculated past targets. The net effect of both
revisions indicated that Medicare outlays were an estimated $8.9
billion too high. The SGR is designed to recover this excess amount by
lowering payment rates in 2002 and future years. CMS' original
estimates of spending since 1998 were too low, in part because the
agency had not included all appropriate claims in making these
estimates. The original spending targets for 2000 and 2001 were too
high, largely because the Bureau of Economic Analysis in the
Department of Commerce revised its GDP and GDP growth estimates for
those years.
To some extent, the reduction in payment rates this year corrects for
inaccuracies in previous estimates that produced physician fees that
were too high in 2000 and 2001. In both years, payment rates increased
by more than the change in input prices because the information
available at the time those rates were established suggested that
physician spending had been held below the targets. In 2000, payment
rates increased 5.4 percent, while input costs increased 2.4 percent;
in 2001, payment rates increased 4.5 percent, while input costs
increased by 2.1 percent. The reason that 2002 payment rates fall 5.4
percent while input prices increase by 2.6 percent is that the revised
estimates revealed that spending exceeded the targets in previous
years. The reduction would have been almost 4 percentage points
greater, but the SGR system limits how much fees can be adjusted for
the differences between actual and target spending.
Avoiding Large Payment Swings in System Based on Spending Targets:
Several measures could moderate the fluctuations in physician payment
rates. Although these modifications to the SGR could mitigate the
possible impact of rate instability or reductions in beneficiary
access to needed services, doing so could also lessen the ability of
spending targets to encourage fiscal discipline. Available data
indicate that access is adequate, but more timely and detailed
information is critical to promptly recognize potential deteriorations
in access.
Moderating Fluctuations in Physician Payment Rates:
The SGR system is designed to limit the fluctuations in payment rates,
but its design could be modified to achieve greater rate stability.
The BBRA specified that adjustment to realign spending with the
targets cannot cause payments to fall by more than 7 percentage points
below, or increase by more than 3 percentage points above, the
percentage change in input prices. In addition, spending deviations
from past targets are not corrected in a single year but are spread
over several years. Greater rate stability could be achieved by
narrowing the range over which rates could change from one year to the
next. Similarly, the corrections for spending deviations could be
spread over longer periods of time.
Modifying how spending targets are set could also reduce year-to-year
fluctuations in rates. Currently, the changes in GDP for a single year
are used to establish the spending target. The difficulty in
accurately estimating GDP has contributed to the problem of
fluctuations in the target. In addition, linking annual changes in the
targets to annual changes in GDP ties the target to the business
cycle. GDP growth rates are higher during periods of prosperity and
lower during downturns”a commonly used definition of a recession is a
decline in real GDP for two successive quarters. But health care needs
of Medicare beneficiaries are not cyclical. Neither significantly
lowering spending targets during a downturn nor unduly increasing them
in a period of prosperity is appropriate. Linking the determination of
spending targets to average levels of GDP over several years would
help eliminate much of the cyclical variation.
Any changes to the SGR must balance the desire for greater rate
stability with the need for fiscal discipline. Spending targets create
a feedback mechanism between physicians' behavior and payment rate
increases. However, spending targets do not create direct incentives
for any individual physician, since it is the collective behavior of
all physicians that determines the payment adjustments that result
from missing the spending targets. The primary value of spending
targets in instilling fiscal discipline is the signal they send that
affordability of the program is an important concern in establishing
Medicare policies. Limiting the size of the payment adjustment for
missed spending targets or to corrections in prior years' targets, and
lengthening the time over which those adjustments are incorporated,
could partially mute the signal targets send and erode some of the
fiscal discipline they encourage. On the other hand, excessive rate
fluctuations can be difficult for providers and may ultimately affect
beneficiaries' access to physician services if rate fluctuations cause
too many providers to decline to participate in the program.
Monitoring Beneficiary Access to Physicians:
Ensuring that the use of spending targets does not compromise
appropriate access to services is a key concern. Spending targets that
are updated principally by the growth in GDP and other factors may not
reflect fully changes in medical care and the markets for these
services. It is therefore important to monitor service use to assess
whether appropriate access for beneficiaries is secured, especially if
fees are reduced. Such monitoring needs to involve recent experience
so that if spending targets need adjustments, those adjustments are
done promptly to ameliorate any problems.
Information on physicians' willingness to see Medicare patients is
dated but overall does not indicate access problems. Data from the
1990s show that virtually all physicians treated Medicare
beneficiaries or if accepting new patients, accepted those covered by
Medicare. According to data from the American Medical Association
(AMA), 96.2 percent of all nonfederal physicians (excluding residents
and pediatricians who do not normally serve Medicare patients) treated
Medicare beneficiaries in 1996, an increase from the 94.2 percent AMA
reported in 1994. A 1999 survey sponsored by MedPAC found that 93
percent of physicians who were accepting any new patients were
accepting new patients covered by Medicare.
Payment rate decisions should not be made in a data vacuum. As health
needs change, technology improves, or health care markets evolve,
spending targets and resulting payment rates may need to be adjusted
periodically, not by a formula designed for annual updates, but by
specifying a new base year target calibrated to ensure appropriate
access. Payment rates that are too low can impair beneficiary access
to physician services, while payment rates that are too high add
unnecessary financial burdens to Medicare. Informed decisions about
appropriate payment rates and rate changes cannot be made unless
policymakers have detailed and recent data on beneficiaries' access to
needed services.
Concluding Observations:
The SGR mechanism uses information about physician spending in
relation to cost increases, changes in the number of beneficiaries,
and growth in the overall economy to impose fiscal discipline on
Medicare outlays for these services. This mechanism provides a signal
when spending threatens to grow out of control and in that sense is
analogous to what the Comptroller General has called for in testimony
on several occasions with regard to the entire Medicare program. The
demographic changes facing the nation require policymakers to look
ahead and assess both current and future Medicare spending in relation
to the entire federal budget and the economy”first to understand the
urgent need for fiscal discipline, then to make choices to ensure the
sustainability and affordability of the program. A mechanism like the
SGR provides a benchmark for assessing the trend in physician spending
and can prompt actions to bring that spending in line with overall
program goals. In assessing the options for updating physician
payments, the program's prospects for long-term sustainability should
be paramount. Meeting that challenge will involve difficult decisions
that will likely affect beneficiaries, providers, and taxpayers.
This concludes my prepared statement. I would be happy to answer any
questions that you or Members of the Subcommittee may have.
GAO Contacts and Staff Acknowledgments:
For more information regarding this testimony, please contact me at
(202) 512-7114 or Laura A. Dummit at (202) 512-7119. James Cosgrove,
Kathryn Linehan, Lynn Nonnemaker, and Hannah Fein also made key
contributions to this statement.
[End of section]
Footnotes:
[1] The $41 billion represents total Medicare payments to physicians,
excluding beneficiary cost sharing. This statement refers to both
calendar and fiscal years. We will use "fiscal year" where
appropriate; other references to years, except where noted, are to
calendar years.
[2] Until June 2001, CMS was known as the Health Care Financing
Administration (HCFA). We will continue to refer to HCFA when
referring to the organizational structure and operations associated
with that name.
[3] The intensity of services is the quantity and quality of resources
used in providing them.
[4] Inputs for physicians' services are, for example, staff salaries
and overhead.
[5] Pub. L. No. 105-33 § 4503, 11 Stat. 251, 433 (to be codified at 42
U.S.C. § 1395w-4(0). Pub. L. No. 106-113, Appendix F, § 211, 113 Stat.
1501, 1501A-345 (to be codified at 42 U.S.C. 1395W4)).
[6] Physician Payment Review Commission, 1995 Annual Report to
Congress (Washington, D.C.: Physician Payment Review Commission, 1995).
[7] Congressional Budget Office, Physician Reimbursement Under
Medicare: Options for Change (Washington, D.C.: Apr. 1986).
[8] Testimony before the Subcommittee on Medicare and Long-term Care,
Committee on Finance, U.S. Senate, 101st Congress, 1st Session (June
16, 1989).
[End of section]
