Medicare Physician Payments
Concerns about Spending Target System Prompt Interest in Considering Reforms Gao ID: GAO-05-85 October 8, 2004Concerns were raised about the current system Medicare uses to determine annual changes to physician fees--the sustainable growth rate (SGR) system--when fees were reduced by 5.4 percent in 2002. Subsequent administrative and legislative actions modified or overrode the SGR system, resulting in fee increases for 2003, 2004, and 2005. However, projected fee reductions for 2006-2012 have raised new concerns about the SGR system. Policymakers are considering whether to eliminate spending targets or modify them. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) required that GAO study SGR and potential alternatives to the system. This report examines (1) how the SGR system is designed to control spending for physician services, (2) what concerns have been raised about the SGR system and its components, (3) what affects the stability and predictability of physician fee updates under the SGR system, and (4) what alternatives to the current SGR system exist. GAO reviewed relevant laws and regulations and interviewed officials and organizations representing physicians. On the basis of this information, GAO identified potential alternatives to the SGR system and requested illustrative simulations of fee updates and spending on physician services from the Centers for Medicare & Medicaid Services (CMS).
To moderate Medicare spending for physician services, the SGR system sets spending targets and adjusts physician fees based on the extent to which actual spending aligns with specified targets. If growth in the number of services provided to each beneficiary--referred to as volume--and in the average complexity and costliness of services--referred to as intensity--is high enough to cause spending to exceed the SGR target, fee updates are set lower than inflation in the cost of operating a medical practice. A wide enough gap between spending and the target results in fee reductions. Physician groups are dissatisfied with SGR as a system to update physician fees. For example, they question the fairness of including rapidly growing spending for physician-administered drugs in the SGR system's definition of physician services expenditures. The groups also contend that the allowance for growth in volume and intensity is too low and lacks the flexibility to allow for factors outside physicians' control. Fee updates under the SGR system have varied widely within an allowed range largely because of annual fluctuations in the growth of the volume and intensity of services that physicians provide to beneficiaries. Certain system design features, such as the use of cumulative spending targets and the need to estimate data, also reduce the stability and predictability of updates. However, MMA's revision of the allowance for growth in volume and intensity of services from an annual change to a 10-year moving average will help to make future updates more stable and predictable. Possible alternatives to the SGR system cluster around the two broad approaches under consideration: (1) end the use of spending targets and separate fee updates from explicit efforts to moderate spending growth or (2) retain spending targets but modify the current SGR system to address perceived shortcomings. CMS projects that either of the two approaches will result in higher aggregate spending, thereby increasing the difficulty of addressing Medicare's long-run financial challenges. The first approach emphasizes stable fee updates, while the second approach automatically adjusts fee updates if spending growth deviates from a predetermined target. While seeking to pay physicians appropriately, it is important to consider how modifications or alterations to the SGR system would affect the long-term sustainability and affordability of the Medicare program. In this context, the choice between the two approaches may hinge on whether primary consideration should be given to stable fee increases or to the need for fiscal discipline within the Medicare program. CMS agreed with the concluding observations in the draft report. Groups representing physicians commented that overall, the draft report offered a good analysis of problems with the SGR system, but did not fully reflect their concerns. We modified the draft as appropriate.
GAO-05-85, Medicare Physician Payments: Concerns about Spending Target System Prompt Interest in Considering Reforms
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
October 2004:
Medicare Physician Payments:
Concerns about Spending Target System Prompt Interest in Considering
Reforms:
GAO-05-85:
GAO Highlights:
Highlights of GAO-05-85, a report to congressional committees:
Why GAO Did This Study:
Concerns were raised about the current system Medicare uses to
determine annual changes to physician fees”the sustainable growth rate
(SGR) system”when fees were reduced by 5.4 percent in 2002. Subsequent
administrative and legislative actions modified or overrode the SGR
system, resulting in fee increases for 2003, 2004, and 2005. However,
projected fee reductions for 2006-2012 have raised new concerns about
the SGR system. Policymakers are considering whether to eliminate
spending targets or modify them.
The Medicare Prescription Drug, Improvement, and Modernization Act of
2003 (MMA) required that GAO study SGR and potential alternatives to
the system. This report examines (1) how the SGR system is designed to
control spending for physician services, (2) what concerns have been
raised about the SGR system and its components, (3) what affects the
stability and predictability of physician fee updates under the SGR
system, and (4) what alternatives to the current SGR system exist. GAO
reviewed relevant laws and regulations and interviewed officials and
organizations representing physicians. On the basis of this
information, GAO identified potential alternatives to the SGR system
and requested illustrative simulations of fee updates and spending on
physician services from the Centers for Medicare & Medicaid Services
(CMS).
What GAO Found:
To moderate Medicare spending for physician services, the SGR system
sets spending targets and adjusts physician fees based on the extent
to which actual spending aligns with specified targets. If growth in
the number of services provided to each beneficiary”referred to as
volume”and in the average complexity and costliness of services”
referred to as intensity”is high enough to cause spending to exceed
the SGR target, fee updates are set lower than inflation in the cost
of operating a medical practice. A wide enough gap between spending
and the target results in fee reductions.
Physician groups are dissatisfied with SGR as a system to update
physician fees. For example, they question the fairness of including
rapidly growing spending for physician-administered drugs in the SGR
system‘s definition of physician services expenditures. The groups also
contend that the allowance for growth in volume and intensity is too
low and lacks the flexibility to allow for factors outside physicians‘
control.
Fee updates under the SGR system have varied widely within an allowed
range largely because of annual fluctuations in the growth of the
volume and intensity of services that physicians provide to
beneficiaries. Certain system design features, such as the use of
cumulative spending targets and the need to estimate data, also reduce
the stability and predictability of updates. However, MMA‘s revision
of the allowance for growth in volume and intensity of services from
an annual change to a 10-year moving average will help to make future
updates more stable and predictable.
Possible alternatives to the SGR system cluster around the two broad
approaches under consideration: (1) end the use of spending targets
and separate fee updates from explicit efforts to moderate spending
growth or (2) retain spending targets but modify the current SGR
system to address perceived shortcomings. CMS projects that either of
the two approaches will result in higher aggregate spending, thereby
increasing the difficulty of addressing Medicare‘s long-run financial
challenges. The first approach emphasizes stable fee updates, while
the second approach automatically adjusts fee updates if spending
growth deviates from a predetermined target. While seeking to pay
physicians appropriately, it is important to consider how modifications
or alterations to the SGR system would affect the long-term
sustainability and affordability of the Medicare program. In this
context, the choice between the two approaches may hinge on whether
primary consideration should be given to stable fee increases or to
the need for fiscal discipline within the Medicare program.
CMS agreed with the concluding observations in the draft report.
Groups representing physicians commented that overall, the draft
report offered a good analysis of problems with the SGR system, but
did not fully reflect their concerns. We modified the draft as
appropriate.
www.gao.gov/cgi-bin/getrpt?GAO-05-85.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact A. Bruce Steinwald at
(202) 512-7101.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
SGR System Designed to Adjust Fee Updates to Bring Actual Spending for
Physician Services in Line with Spending Targets:
Various Concerns Raised about SGR System and Its Components:
Variable Growth in Provision of Physician Services and Certain SGR
System Design Elements Reduce Stability and Predictability of Physician
Fee Updates:
Alternatives for Updating Physician Fees Would Eliminate Spending
Targets or Revise Current SGR System:
Concluding Observations:
Agency and Industry Comments and Our Evaluation:
Appendix I: Calculation of the Performance Adjustment Factor:
Appendix II: Corrections to Prior Estimates Caused the SGR System's
Cumulative Targets to Produce Negative Updates:
Appendix III: Comments from the Centers for Medicare & Medicaid
Services:
Tables:
Table 1: CMS's Estimate of the 2005 Sustainable Growth Rate and Its
Determinants, as of March 2004:
Table 2: Estimated 2005 Fee Update, as of March 2004:
Figures:
Figure 1: Average Annual Percentage Change in Medicare Spending for
Physician Services per Beneficiary, 1980-2003:
Figure 2: Growth in Volume and Intensity of Medicare Physician Services
per Beneficiary, 1980-2003:
Figure 3: Projected MEI and Fee Update under Current Law:
Figure 4: Annual Percentage Change in Real GDP Per Capita and 10-Year
Moving Average Change in Real GDP Per Capita, 1992-2003:
Figure 5: Projected MEI and Fee Updates under Current Law and under
Option of Eliminating Spending Targets and Tying Fee Updates to MEI:
Figure 6: Projected Aggregate Spending under Current Law and under
Option of Eliminating Spending Targets and Tying Fee Updates to MEI:
Figure 7: Projected Real Spending for Physician Fee Schedule Services
per FFS Beneficiary under Current Law and under Option of Eliminating
Spending Targets and Tying Fee Updates to MEI:
Figure 8: Projected MEI and Fee Updates under Current Law and under
Option of Not Including Any Part B Drugs in the SGR System Beginning in
2005:
Figure 9: Projected Aggregate Spending under Current Law and under
Option of Not Including Any Part B Drugs in the SGR System Beginning in
2005:
Figure 10: Projected Real Spending for Physician Fee Schedule Services
per FFS Beneficiary under Current Law and under Option of Not Including
Any Part B Drugs in the SGR System Beginning in 2005:
Figure 11: Projected MEI and Fee Updates under Current Law and under
Option of Resetting the Cumulative Spending Target Equal to Cumulative
Actual Spending as of 2006:
Figure 12: Projected Aggregate Spending under Current Law and under
Option of Resetting the Cumulative Spending Target Equal to Cumulative
Actual Spending as of 2006:
Figure 13: Projected Real Spending for Physician Fee Schedule Services
per FFS Beneficiary under Current Law and under Option of Resetting the
Cumulative Spending Target Equal to Cumulative Actual Spending as of
2006:
Figure 14: Projected MEI and Fee Updates under Current Law and under
Option of Eliminating the Cumulative Aspect of Spending Targets:
Figure 15: Projected Aggregate Spending under Current Law and under
Option of Eliminating the Cumulative Aspect of Spending Targets:
Figure 16: Projected Real Spending for Physician Fee Schedule Services
per FFS Beneficiary under Current Law and under Option of Eliminating
the Cumulative Aspect of Spending Targets:
Figure 17: Projected MEI and Fee Updates under Current Law and under
Option of Increasing Volume and Intensity Growth Allowance to GDP Plus
1 Percentage Point:
Figure 18: Projected Aggregate Spending under Current Law and under
Option of Increasing Volume and Intensity Growth Allowance to GDP Plus
1 Percentage Point:
Figure 19: Projected Real Spending for Physician Fee Schedule Services
per FFS Beneficiary under Current Law and under Option of Increasing
Volume and Intensity Growth Allowance to GDP Plus 1 Percentage Point:
Figure 20: Projected MEI and Fee Updates under Current Law and under
Combination of Options of Resetting the Cumulative Spending Target
Equal to Cumulative Actual Spending as of 2006, Not Including Any Part
B Drugs in the SGR System Beginning in 2005, and Using GDP Plus 1
Percentage Point:
Figure 21: Projected Aggregate Spending under Current Law and under
Combination of Options of Resetting the Cumulative Spending Target
Equal to Cumulative Actual Spending as of 2006, Not Including Any Part
B Drugs in the SGR System Beginning in 2005, and Using GDP Plus 1
Percentage Point:
Figure 22: Projected Real Spending for Physician Fee Schedule Services
per FFS Beneficiary under Current Law and under Combination of Options
of Resetting the Cumulative Spending Target Equal to Cumulative Actual
Spending as of 2006, Not Including Any Part B Drugs in the SGR System
Beginning in 2005, and Using GDP Plus 1 Percentage Point:
Figure 23: Projected MEI and Fee Updates under Current Law and under
Combination of Options of Not Including Any Part B Drugs in the SGR
System Beginning in 2005 and Eliminating the Cumulative Aspect of
Spending Targets:
Figure 24: Projected Aggregate Spending under Current Law and under
Combination of Options of Not Including Any Part B Drugs in the SGR
System Beginning in 2005 and Eliminating the Cumulative Aspect of
Spending Targets:
Figure 25: Projected Real Spending for Physician Fee Schedule Services
per FFS Beneficiary under Current Law and under Combination of Options
of Not Including Any Part B Drugs in the SGR System Beginning in 2005
and Eliminating the Cumulative Aspect of Spending Targets:
Figure 26: Formula Used to Determine the Performance Adjustment Factor
in 2005:
Figure 27: Percentage Change in MEI, SGR Fee Schedule Update, and
Medicare Physician Services Spending per Beneficiary, 1998-2005:
Abbreviations:
BBA: Balanced Budget Act of 1997:
BBRA: Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of
1999:
CBO: Congressional Budget Office:
CMS: Centers for Medicare & Medicaid Services:
CPI-U: consumer price index for urban consumers:
ESRD: end-stage renal disease:
FFS: fee-for-service:
GDP: gross domestic product:
HHS: Department of Health and Human Services:
HI: Hospital Insurance:
MedPAC: Medicare Payment Advisory Commission:
MEI: Medicare Economic Index:
MMA: Medicare Prescription Drug, Improvement, and Modernization Act of
2003:
MVPS: Medicare volume performance standard:
OACT: Office of the Actuary:
PAF: performance adjustment factor:
PPRC: Physician Payment Review Commission:
SGR: sustainable growth rate:
SMI: Supplementary Medical Insurance:
United States Government Accountability Office:
Washington, DC 20548:
October 8, 2004:
Congressional Committees:
Physicians and others raised concerns about the current system Medicare
uses to determine annual changes to physician fees when those fees were
reduced by 5.4 percent in 2002. This reduction was triggered, in part,
because spending on physician services had exceeded predetermined
spending targets and Medicare's system for updating fees--the
sustainable growth rate (SGR) system--called for a reduction in fees to
impose fiscal discipline.[Footnote 1] Subsequent administrative and
legislative actions modified or overrode the SGR system, resulting in
fee increases for 2003, 2004, and 2005. Absent additional action,
however, fees are expected to fall by approximately 5 percent each year
beginning in 2006 and continuing through 2012 as the SGR system
attempts to offset previous excess spending and align actual spending
with the system's spending targets. According to physician groups, such
a decline in fees would likely discourage many physicians from treating
Medicare beneficiaries. As a result of these concerns, policymakers are
interested in considering the appropriateness of current spending
targets and the SGR system as a method for determining physician fee
updates. Essentially, they are considering whether to eliminate
spending targets or retain them, while making modifications to the
system.
Although the current focus of concern is largely on the potential for
declining physician fees, the historic challenge for Medicare has been
to find ways to moderate the rapid growth in spending for physician
services under the Medicare Supplementary Medical Insurance (SMI)--or
Part B--program. In the 1980s, attempts to moderate spending by
limiting physician fees without addressing aggregate expenditures for
physician services were unsuccessful because increases in the number of
services physicians provided per beneficiary--known as volume--and the
average complexity and costliness of those services--known as
intensity--continued to drive up spending. As a result, in the Omnibus
Budget Reconciliation Act of 1989,[Footnote 2] the Congress required
the establishment of a national Medicare physician fee schedule and a
system for annually updating fees that included spending targets. The
fee schedule and spending targets first affected physician fees in
1992. The SGR system, Medicare's current system for updating physician
fees, was established in the Balanced Budget Act of 1997 (BBA) and was
implemented in 1998.[Footnote 3] Both the SGR and its predecessor
system provided for cumulative fee updates that generally exceeded
cumulative increases in physicians' cost of providing
services.[Footnote 4] Since the establishment of the national fee
schedule and spending targets, the growth in spending for Medicare
physician services has slowed substantially. Nonetheless, recent
increases in physician expenditures due to volume and intensity growth
are a reminder that the historic challenge of moderating spending
growth has not disappeared.
The Medicare Prescription Drug, Improvement, and Modernization Act of
2003 (MMA) required us to study certain adjustments to physician fees,
including the SGR system and alternatives to the system.[Footnote 5] As
discussed with the committees of jurisdiction, this report examines (1)
how the SGR system is designed to control spending for physician
services, (2) what concerns have been raised about the SGR system and
its components, (3) what affects the stability and predictability of
physician fee updates under the SGR system, and (4) what alternatives
to the current SGR system exist.
In addressing these objectives, we analyzed Medicare expenditure data
from the Medicare Trustees' 1998 and 2004 annual reports.[Footnote 6]
We also reviewed laws and regulations pertaining to the SGR system and
its predecessor spending target system and interviewed officials at the
Centers for Medicare & Medicaid Services (CMS), the agency responsible
for administering Medicare; the Congressional Budget Office (CBO); the
Medicare Payment Advisory Commission (MedPAC);[Footnote 7] and
organizations representing physicians, including the American Medical
Association, the Medical Group Management Association, the Alliance for
Specialty Medicine, and the American College of Physicians. On the
basis of these document reviews and interviews, we identified potential
alternatives to the SGR system. We requested illustrative simulations
of fee updates and total spending under these alternatives from the CMS
Office of the Actuary (OACT).[Footnote 8] Total spending includes
expenditures from all sources--that is, government outlays and
beneficiary spending, including monthly Part B premiums, deductibles,
and coinsurance payments.[Footnote 9] Because the simulation estimates
produced by CMS OACT include total spending from all sources, the
estimated spending changes will differ from CBO's cost estimates for
the same alternatives. CBO, which is responsible for estimating how
legislated changes would affect federal spending, does not include
beneficiary spending when it estimates the cost of SGR alternatives.
CMS OACT and CBO estimates may also differ as the result of differences
in the underlying assumptions used by the two agencies. Our analyses
apply only to spending affected by the SGR system--that is, physician
spending in the traditional fee-for-service (FFS) program. We assessed
the reliability of the Medicare expenditure data and data used for the
simulations under alternatives to the SGR system by interviewing agency
officials knowledgeable about the data and who are responsible for
producing the projections for the SGR system. We determined that the
data were sufficiently reliable for the purposes of our study. We
performed this work from January 2004 through September 2004 in
accordance with generally accepted government auditing standards.
Results in Brief:
To help impose fiscal discipline and moderate Medicare spending for
physician services, the SGR system sets spending targets and adjusts
fees paid to physicians based on the extent to which actual spending
aligns with specified targets. SGR system targets are designed to allow
real spending per beneficiary--that is, spending per beneficiary
adjusted for the estimated underlying cost of providing physician
services--to grow at the same rate that the national economy (as
measured by the rate that real gross domestic product (GDP)) grows over
time on a per capita basis--currently estimated to be about 2.3 percent
annually.[Footnote 10] If Medicare spending for physician services
remains on target, the annual increase in physician fees is set equal
to the estimated change in physicians' cost of providing
services.[Footnote 11] However, if growth in the volume and intensity
of services provided is high enough to cause spending to exceed the SGR
system target, future fee updates are set below the estimated increase
in physicians' average cost for providing services--in other words,
physicians receive fee increases that are lower than the Medicare
Economic Index (MEI). If the gap between spending and the target is
wide enough, the SGR system results in fee reductions. Conversely, if
volume and intensity growth is low enough to cause spending to fall
below the target, the SGR system benefits physicians by producing fee
increases that exceed the change in their cost of providing services.
Under the SGR system's cumulative spending targets, excess spending
that is not offset in one year accumulates in succeeding years until it
is recouped.
Physician groups are dissatisfied with SGR as a system to update
physician fees and have raised various concerns about its components.
In general, they note that expenditures for physician services
constitute Medicare's only spending that is subject to a target system.
Physician groups report that under this system, fee updates--which are
explicitly linked to spending controls--have caused payment rates in
recent years to fall behind physicians' cost of providing services.
Among specific concerns, physician groups question the fairness of
reducing fee updates for physician services to offset rapidly growing
expenditures for certain outpatient drugs that are covered by Medicare
Part B and that are largely physician administered. The groups also
contend that the SGR system's allowance for spending growth due to
volume and intensity increases--the growth rate of real GDP per capita-
-is too low and inflexible. Physician groups contend that as a result,
factors outside physicians' control--such as any future declines in the
FFS population's average health status and introduction of new,
effective medical technology--may cause spending to exceed the SGR
system targets and thus lead to reduced fee updates. Additional
concerns include whether CMS's method used to account for spending
increases due to changes in laws and regulations--which can change
payments or expand the extent and number of Medicare-covered services-
-is sufficiently complete, accurate, and transparent.
For several reasons, fee updates under the SGR system have varied--
within a specified range--and have been difficult to predict
accurately.[Footnote 12] A principal cause of variation within this
range has been annual fluctuations in the growth of the volume and
intensity of services that physicians provide to beneficiaries. Since
the SGR system was implemented in 1998, volume and intensity growth has
ranged from 1.2 percent in 1999 to 6.1 percent in 2002. Two system
design characteristics also reduce the stability and predictability of
updates. First, the SGR system is designed to respond to fluctuating
volume and intensity growth by adjusting fee updates to keep cumulative
spending in line with the targets. Attempting to control cumulative
spending tends to amplify the variation in annual updates. For example,
if spending has exceeded the spending target, the SGR system must
reduce future updates both to slow future spending growth and to recoup
previous excess spending. Second, uncertainty in estimates of data used
in the SGR system makes long-term estimates of fee updates less
predictable and causes updates to vary from year to year as new data
become available and estimates of data used in the SGR system are
revised.
Alternatives to the SGR system we identified cluster around the two
approaches that policymakers are considering. One approach would end
the use of spending targets--separating fee updates from efforts to
moderate spending growth. MedPAC is a proponent of this approach and
since 2001 has recommended tying fee updates to estimated changes in
physicians' cost of providing services. It has further recommended that
Medicare seek to control spending growth by, among other things,
identifying and addressing the utilization of rapidly growing services,
such as diagnostic imaging. The other approach includes alternatives
that would retain spending targets but modify the current SGR system to
address perceived shortcomings. These modifications could include
removing the Part B prescription drug expenditures that are currently
counted in the SGR system; resetting the targets by not requiring the
system to recoup previous excess spending; using annual, rather than
cumulative, targets to dampen the fluctuation in fee updates; and
modifying the allowance for increased spending due to volume and
intensity growth. The advantage of eliminating spending targets would
be greater fee update stability and predictability, whereas the
advantage of retaining spending targets as part of the system for
updating fees is that the system would automatically work to moderate
spending if volume and intensity growth began to increase above
allowable rates. However, either approach compared to current law,
under which fees are projected to be reduced by as much as 5 percent or
more for several years, will be very expensive--ranging from 4 percent
to 23 percent higher cumulative spending over the 10-year period from
2005 to 2014. Given the importance of the long-term sustainability and
affordability of the Medicare program, examining the impact of spending
over a longer period may be appropriate when contemplating
modifications or alternatives to the SGR system.
CMS agreed with our concluding observations and expressed its
commitment to pay physicians appropriately to ensure that Medicare
beneficiaries have access to high-quality health care. Groups
representing physicians commented that overall, a draft of our report
offered a good analysis of problems with the SGR system, but indicated
it did not fully reflect the extent of their concerns. Some of the
issues the groups raised were outside the scope of our report. We
modified the report as appropriate.
Background:
Medicare spending per beneficiary on physician services has varied
substantially--both among geographic areas and in its growth over time.
The geographic variation in spending--unrelated to beneficiary health
status or outcomes--provides evidence that health needs alone do not
determine spending. Consequently, policymakers have deemed it both
reasonable and desirable to question the appropriateness of current and
projected physician services spending and to explicitly consider the
affordability of such spending when setting physician fees. The
implementation of a national fee schedule and spending targets in 1992,
for example, was designed, in part, to address issues of affordability
and program sustainability by slowing spending growth. Moderating this
growth remains part of the larger effort to ensure future Medicare
program sustainability.
Some Spending on Physician Services May Be Unnecessary, as Suggested by
Unwarranted Regional Variation in Use of Physician Services:
In 1989, the Physician Payment Review Commission (PPRC) reported that
from 1979 through 1989 (the decade prior to the establishment of
spending targets), Medicare spending on physician services per
beneficiary more than tripled, rising much more rapidly than general
inflation.[Footnote 13] At that time, PPRC recommended an expenditure
target for controlling aggregate spending on physician services. The
target was to apply initially to all physician services nationally and
later to evolve to separate targets for regions, categories of
physician services, or both.
Then, as now, utilization of physician services varied widely by
geographic area, while the Medicare patient populations in these areas
differed little from one another in their illnesses. Some studies
report that variation in service use indicates that in some parts of
the country compared with others, there was either overuse or underuse
of services. Recent studies of Medicare expenditures show that regional
variation in the use of medical services remains and that the spending
disparities among areas are explained by physicians' discretionary
practices rather than by differences in patient populations' health
status.[Footnote 14]
Physician Service Expenditures Have Grown Less Rapidly after Spending
Targets and Fee Schedule Were Established:
Three periods from 1980 to the present describe Medicare's recent
experience in spending for physician services. Figure 1 shows growth in
Medicare spending per beneficiary for physician services during the
three periods. In the first period, 1980 through 1991, Medicare's
payment rates for physician services were based on historical charges
for these services, and limits were placed on fees and fee updates but
not on aggregate spending. In the 1992 through 1997 period, physician
services were paid under a national fee schedule, and the first
spending target system--called the Medicare volume performance standard
(MVPS)--set an allowable growth rate for aggregate spending that was
used to adjust physician fees. From 1998 on, services continue to be
paid under a fee schedule and the SGR system replaced the MVPS system
and uses a different method to set an acceptable growth rate for
aggregate spending.
Figure 1: Average Annual Percentage Change in Medicare Spending for
Physician Services per Beneficiary, 1980-2003:
[See PDF for image]
Notes: Spending changes for 1980 through 1991 are for the years ending
June 30 and represent average Medicare spending for beneficiaries in
the traditional FFS program, net of beneficiary cost sharing. Spending
for end-stage renal disease (ESRD) patients is not included. Spending
changes for 1992 through 1997 and 1998 through 2003 are for calendar
years and represent changes in total allowed charges--Medicare
spending, including beneficiary cost sharing--for beneficiaries in the
traditional FFS program.
[End of figure]
In the 1980s, Medicare paid physicians on the basis of "reasonable
charge," defined as the lowest of the physician's actual charge, the
customary charge (the amount the physician usually charged for the
service), or the prevailing charge (based on comparable physicians'
customary charges). Under this system, payment inconsistencies existed
among physicians by services, specialties, and locations. The system
also had an inflationary bias, as a rise in customary charges could
increase prevailing charges over time.[Footnote 15] During this decade,
expenditures for physician services grew rapidly: from 1980 through
1991, Medicare spending per beneficiary for physician services grew at
an average annual rate of 11.6 percent. Although the Congress froze
fees or limited fee increases in the 1980s, spending continued to rise
because there were no limits on growth in the volume and intensity of
services physicians provided to beneficiaries.
Recognizing that the expenditure growth of the 1980s was not
sustainable, the Congress reformed the way Medicare paid for physician
services in the traditional FFS program by requiring the establishment
of a national fee schedule for physician services and a system for
controlling aggregate physician service spending, MVPS. The
establishment of a fee schedule in 1992 was an attempt to break the
link between physicians' charges and Medicare payments. The fee
schedule was designed to pay for services based on the relative
resources used by physicians to provide different types of care and to
address the inflationary bias of the charge-based system. The adoption
of a spending target system was an attempt to control spending growth
attributable to increases in the volume and intensity of physician
services.
Under MVPS, a performance standard for a given year was set, indicating
a growth rate for expenditures that should not be exceeded. The extent
to which actual expenditure growth fell above or below the performance
standard helped to determine the update to physician fees 2 years
later. For example, in 1993, CMS compared actual spending in 1992 with
the performance standard for 1992; the difference largely determined
the update to physician fees in 1994.[Footnote 16] The performance
standard was based on changes in four factors: the number of FFS
Medicare beneficiaries, practice cost inflation, the historical growth
in volume and intensity, and laws and regulations that could affect
spending for physician services.[Footnote 17]
From 1992 through 1997--the period that MVPS was used to set fee
updates--annual spending growth for physician services was far lower
than in the preceding decade. The decline in spending growth during
this period was the result, in large part, of slower volume and
intensity growth. For example, from 1985 through 1991, spending per
beneficiary grew at an average annual rate of 10.8 percent; during that
period, volume and intensity of service use per beneficiary rose an
average 7 percent annually. From 1992 through 1997, the growth in
spending per beneficiary fell to 4.4 percent; during that period,
average annual growth in volume and intensity of service use per
beneficiary fell to 1 percent. (See fig. 2.)
Figure 2: Growth in Volume and Intensity of Medicare Physician Services
per Beneficiary, 1980-2003:
[See PDF for image]
Notes: Data are for beneficiaries in the traditional FFS program only.
Data for ESRD patients are not included. From 1980 through 1992, volume
and intensity of services changes are based on Medicare outlays for all
physician services. From 1993 through 2003, volume and intensity of
services changes are based on Medicare outlays for physician services
covered by the fee schedule.
[End of figure]
Concerns about the MVPS spending targets arose in 1995 when physician
fees were expected to fall over time unless there were continual
declines in the volume and intensity of services provided.[Footnote
18],[Footnote 19] In response to the system's perceived shortcomings,
the Congress took action in BBA in 1997 to replace it with the SGR
system.[Footnote 20] In 1998 and 1999, the first 2 years of the SGR
system, volume and intensity growth remained similar to the rate under
MVPS. However, from 2000 through 2003, volume and intensity growth rose
at an average annual rate of about 5 percent.[Footnote 21] Over the
1998-2003 SGR system period,[Footnote 22] the average growth in volume
and intensity of services per Medicare beneficiary was higher than the
average for the 1992-1997 MVPS period--but substantially below that
experienced before spending targets were introduced. Since the
introduction of the SGR system, total spending on physician services is
projected to grow by an average of 8 percent a year from 2000 through
2005.
Controlling Spending for Physician Services Part of Larger Challenge to
Maintain Fiscal Discipline in Medicare:
In 2003, Medicare spending for physician services totaled nearly $48
billion,[Footnote 23] which accounted for about one-sixth of program
spending overall. We and others have argued for the need for additional
fiscal discipline in Medicare.[Footnote 24] Within the next 10 years,
the federal budget will experience significant increases in spending
pressure, due primarily to known demographic trends and rising health
care costs. Expected technological advances--involving new drugs and
diagnostic procedures, among other things--may improve health outcomes
but will likely increase the price tag of a Medicare program that is
already unsustainable in its present form. In light of physician
service expenditures' significant contribution to aggregate spending,
containing their growth plays an important role in helping to address
the program's long-range and fundamental financing problem.
SGR System Designed to Adjust Fee Updates to Bring Actual Spending for
Physician Services in Line with Spending Targets:
The SGR system is designed to impose fiscal discipline and to moderate
spending for physician services by adjusting annual fee updates to
bring spending in line with targets. The SGR system, similar to the
predecessor MVPS system, relies on spending targets because earlier
attempts to achieve fiscal discipline through limits on fee increases
did not control the spending that resulted from volume and intensity
growth. The SGR system uses a formula specified in statute to establish
each year an allowed spending growth rate, a spending target, and a fee
update. Like MVPS, the SGR system includes an allowance for volume and
intensity increases but, unlike MVPS, ties the allowance to a measure
of the growth of the national economy.
Spending Targets for Physician Services Used to Encourage Fiscal
Discipline:
As noted, spending targets were established--first under MVPS and later
under the SGR system--because policymakers contended that the fee
schedule alone would not have adequately constrained expenditure growth
for physician services. The fee schedule limits payment for individual
services but does not moderate spending growth resulting from volume
and intensity increases. Although the SGR system's spending target does
not cap expenditures for physician services, it serves as a budgetary
control by automatically lowering fee updates in response to excess
spending due to volume and intensity growth. In addition, reduced fee
updates serve as a signal to physicians collectively and to the
Congress that spending due to volume and intensity has increased more
than allowed.
An additional reason for spending targets was advanced by PPRC in its
1995 report to the Congress.[Footnote 25] PPRC explained that spending
targets were intended, in part, to create a collective incentive for
physicians. Specifically, the report stated that spending targets
"provid[e] the medical profession with a collective incentive to reduce
inappropriate care by, for instance, developing and disseminating
practice guidelines that promote cost-effective practice styles."
SGR System Sets Allowable Spending Growth and Targets for Physician
Services:
Every year, CMS must estimate the allowed rate of increase in spending
for physician services and use that rate to construct the annual
spending target for the following calendar year.[Footnote 26] The
sustainable growth rate is the product of the estimated percentage
change in (1) input prices for physicians' services; [Footnote
27],[Footnote 28] (2) the average number of Medicare beneficiaries in
traditional FFS; (3) national economic output, as measured by real
(inflation-adjusted) GDP per capita; and (4) expected expenditures for
physician services resulting from changes in laws or regulations. CMS's
current estimate of the sustainable growth rate for 2005 is 4.6
percent, based on the agency's estimates of the four factors. (See
table 1.)
Table 1: CMS's Estimate of the 2005 Sustainable Growth Rate and Its
Determinants, as of March 2004:
Sustainable growth rate determinants: Input prices for physician
services[A];
Estimated percentage change: 2.6%.
Sustainable growth rate determinants: Traditional FFS Medicare
enrollment;
Estimated percentage change: -0.2%.
Sustainable growth rate determinants: Real GDP per capita;
Estimated percentage change: 2.2%.
Sustainable growth rate determinants: Expenditures for physician
services resulting from changes in laws and regulations;
Estimated percentage change: 0.0%.
Estimated 2005 sustainable growth rate;
Estimated percentage change: 4.6%[B].
Source: CMS OACT.
[A] For purposes of the sustainable growth rate, physician services
include services paid for by the fee schedule as well as laboratory
services and certain Medicare-covered Part B outpatient drugs.
[B] The sustainable growth rate is computed as the product of the
percentage change in the four factors. The percentage changes are
expressed in decimal form relative to 1.0. For example, a percentage
change of 2.6 percent is expressed as 1.026. Therefore, the sustainable
growth rate is computed as (1.026) x (0.998) x (1.022) x (1.0) = 1.046,
or 4.6 percent.
[End of table]
To set each year's spending target, the SGR system increases the
previous year's spending target by the sustainable growth rate for the
given year.[Footnote 29] For example, target spending for 2004 was
$77.3 billion. Target spending for 2005 is 4.6 percent higher, or $80.9
billion. Under the SGR system, every annual target depends on the
targets set in all previous years since the base year 1996.[Footnote
30] BBRA required CMS, in calculating each year's SGR system spending
target, to first revise the targets set for the 2 previous years using
the most recent available data for all elements of the target--that is,
revisions to figures for input prices for physician services, FFS
beneficiary enrollment, real GDP per capita, and expenditures due to
relevant new laws and regulations.[Footnote 31],[Footnote 32]
SGR System Adjusts Fee Updates to Align Spending with Target:
Every fall, CMS determines whether the fee update for the following
calendar year must be adjusted to help align spending with
targets.[Footnote 33] To do so, the agency compares actual spending,
measured cumulatively since 1996, to the cumulative value of the annual
targets, measured over the same period. If the two are equal, the fee
update is set to equal the estimated increase in physicians' average
cost of providing services--as measured by MEI. Otherwise, a
performance adjustment factor (PAF) is used to increase or decrease the
update relative to MEI in order to help bring spending back in line
with the targets. (See app. I for the formula used to calculate the
PAF.) The PAF is subject to limits and may not cause the update to be
set at more than 3 percent above MEI or 7 percent below MEI. In part
because of these limits, adjustments to realign actual cumulative
spending with cumulative targets are spread out over more than 1
year.[Footnote 34]
For example, in projecting the update for 2005, CMS estimated that
cumulative spending from 1996 through 2004 ($543.8 billion) exceeded
the cumulative value of the annual targets during the same period
($531.9 billion) by approximately $11.9 billion. The estimated $11.9
billion difference is due to two components of accumulated excess
spending and needs to be offset: first, excessive growth in volume and
intensity in 2003 and 2004, and second, the additional spending
attributable to MMA. MMA replaced a fee reduction for 2004 with a
minimum 1.5 percent increase, but it did not adjust SGR system targets
to account for the additional spending.[Footnote 35] Because of the
large discrepancy between spending and the target, the SGR system calls
for the maximum PAF reduction. In conjunction with an estimated MEI of
2.8 percent, the application of the PAF would produce a fee update of
negative 4.4 percent.[Footnote 36] In addition to MEI and the PAF, fees
are sometimes subject to other adjustments, including those set by law.
For 2005, there is an additional adjustment of 0.8 percent, which
results in an estimated SGR system fee update for 2005 of negative 3.6
percent. (See table 2.) However, this negative update will be
overridden by an MMA-specified minimum update of 1.5 percent for 2005.
The resulting fee update is applied to the fee schedule's "conversion
factor," a dollar amount that translates each service's relative value
into an actual disbursement amount. [Footnote 37],[Footnote 38]
Table 2: Estimated 2005 Fee Update, as of March 2004:
Estimated 2005 fee update under SGR system[A];
Percentage change: -3.6%.
Update based on: * Change in input prices for physician services (MEI)
[B];
Percentage change: 2.8%.
Update based on: * PAF;
Percentage change: -7.0%.
Update based on: * BBRA required adjustment[C];
Percentage change: 0.8%.
2005 fee update as specified in MMA[D];
Percentage change: 1.5%.
Source: CMS OACT.
[A] Update is computed as the product of the change in input prices,
the PAF, and the BBRA-required adjustment; all are expressed in decimal
form. That is, 2005 fee update = [(1+0.028) x (1 - 0.07) x (1+ 0.008)]
-1 = -0.036 or -3.6 percent.
[B] For purposes of the fee update, physician services include only
services paid for under the fee schedule.
[C] This adjustment, required by the Medicare, Medicaid, and SCHIP
Balanced Budget Refinement Act of 1999 (BBRA), maintains the budget
neutrality of a technical change to the conversion factor.
[D] The actual fee update for 2005 is the greater of the calculated
update of -3.6 percent or 1.5 percent as legislated by MMA.
[End of table]
Under SGR's system of cumulative spending targets, excess spending that
is not offset in one year accumulates in succeeding years until it is
recouped. For 2005, MMA increased actual spending but did not adjust
the target for this additional spending. Now the gap between actual
spending and the target will result in an additional deficit that under
the SGR system will have to be recouped through negative updates in
future years.
SGR System Ties Allowed Increases in Volume and Intensity to Growth in
National Economy:
The parameters of the SGR system allow spending due to the volume and
intensity of physician services to increase, but limit that growth to
the same rate that the national economy (GDP) grows in real terms (that
is, adjusted for inflation) over time on a per capita basis. Under the
SGR system, if the volume and intensity of physician service use grows
faster than the national economy, the annual increase in physician fees
will be less than the estimated increase in the cost of providing
services. Conversely, if volume and intensity grows more slowly, the
SGR system permits physicians to benefit from fee increases that exceed
the increased cost of providing services. To reduce the effect of
yearly business cycles on physician fees, MMA required that economic
growth be measured as the 10-year moving average change in real GDP per
capita for each year beginning in 2003.[Footnote 39] This measure is
projected to range from 2.1 percent to 2.5 percent during the 2005
through 2014 period.
When the SGR system was established, GDP growth was seen as a benchmark
that would allow for affordable increases in volume and intensity and
also one that represented a significant improvement over the benchmark
included in the previous MVPS system. In its 1995 annual report to the
Congress, PPRC stated that limiting real expenditure growth to 1 or 2
percentage points above GDP would be a "realistic and affordable
goal."[Footnote 40] Ultimately, BBA specified the growth rate of GDP
alone. This limit was an indicator of what the nation could afford to
spend on volume and intensity increases. Whether this rate is a
sufficient and appropriate allowance for volume and intensity increases
is uncertain. Currently, volume and intensity is projected to grow by
more than 4 percent per year, whereas the allowance for this growth
under the SGR system is about 2.3 percent annually. Such excess volume
and intensity growth is a key contributing factor to negative fee
updates.
Various Concerns Raised about SGR System and Its Components:
Physician groups are dissatisfied with SGR as a system to update
physician fees and have raised various concerns about its key
components. Noting that physicians are uniquely subject to a system of
fee updates that are explicitly linked to spending controls, the groups
contend that the SGR system has caused payment rates in recent years to
fall behind physicians' cost of providing services. The groups'
concerns with specific SGR system components center on the following
issues: the fairness of including Medicare-covered outpatient drugs in
the calculation of physician service expenditures; the appropriateness
of tying allowable volume and intensity increases to the average growth
in real GDP per capita; and the completeness, accuracy, and
transparency of the method used to account for spending increases due
to changes in laws and regulations.
Physicians Dissatisfied That Medicare Spending for Physician Services
Is Subject to Spending Targets:
Physician groups are concerned that physicians are the only Medicare
provider type whose annual payment updates are subject to a spending
target system. Payment rate updates for hospitals and other
institutional providers, they note, are typically based on changes in
the cost of providing services. However, as CBO, MedPAC, and others
have noted, physicians are different from other providers in certain
ways, which helps to provide a rationale for the application of targets
solely to physician expenditures. Specifically, they note that
physicians determine the services they deliver to their patients and
influence the care delivered by other providers. In addition, under
Medicare payment policies, physicians receive a separate payment for
each service they provide. Thus, they can boost income by increasing
the volume or intensity of services they provide. For example, a
physician may follow up a patient's visit by scheduling another visit,
even when such a follow-up visit is discretionary and could be
substituted with a telephone call. In contrast, Medicare typically pays
institutional providers a fixed amount for a bundle of services; under
this arrangement, no inherent incentive exists to provide extra
services, as doing so would not increase payments.
Physicians Question Fairness of Including:
Part B Outpatient Drugs in Calculation of Physician Service
Expenditures:
One of physician groups' chief concerns is that through fee schedule
updates, the SGR system holds physicians accountable for the escalating
growth in Medicare expenditures for the majority of Part B-covered
drugs.[Footnote 41] (Drugs included in the SGR system are largely
physician administered and do not include all Part B-covered drugs.)
The groups contend that the SGR system should not include these drugs
in the calculation of aggregate physician service expenditures or the
spending targets. Although the targets account for increases in the
drugs' prices, the targets do not explicitly account for increases in
their utilization or the substitution of more expensive drugs for less
expensive ones. Physician groups note that the use of the outpatient
drugs currently covered by Medicare is largely nondiscretionary and
that physicians should not be penalized for prescribing these drugs. To
the extent that expenditures for these Medicare-covered outpatient
drugs grow faster than real GDP per capita--which is the SGR system's
allowance for volume and intensity increases--other physician spending
must grow more slowly or aggregate spending will exceed the targets and
fee updates for physician services will be reduced.
In 2002, Medicare covered approximately 450 outpatient prescription
drugs. The drugs that account for most of Medicare's Part B drug
expenditures are physician administered, such as those for cancer
chemotherapy, accounting for 80 percent of total Medicare spending for
Part B drugs in 2001. In 2001, oncologists submitted about 42 percent
of prescription drug claims, while urologists accounted for 17 percent.
Part B prescription drugs are not covered by the physician fee
schedule,[Footnote 42] but the expenditures for most Part B drugs are
included in the SGR system expenditures because, at the time spending
targets were first introduced, the Secretary of Health and Human
Services (HHS) included these drugs as services and supplies "incident
to" physicians' services. Since that time, Medicare spending for all
Part B drugs has grown substantially, from about $700 million in 1992
to an estimated $8.5 billion in 2002. Much of the spending growth has
resulted from increases in utilization and the substitution of newer,
more expensive medications. Because SGR-covered Part B drug
expenditures have grown more rapidly than other physician service
expenditures, drug expenditures as a proportion of allowable spending
under the targets have grown from 8.7 percent in 2002 to an estimated
12.3 percent in 2004. Such rapid growth in drug expenditures increases
the likelihood that actual spending will exceed SGR system targets.
Moreover, because only payments for services included in the physician
fee schedule are offset when physician service spending deviates from
the spending targets, the increase in the share of total expenditures
attributed to prescription drugs magnifies the adjustment that must be
made to the update to bring spending in line with the targets.
Physicians Concerned That Key Spending Drivers Are Not Included in SGR
System's Allowance for Volume and Intensity Growth:
Physician groups have expressed concern that the SGR system's allowance
for volume and intensity growth--the 10-year moving average growth in
real GDP per capita--is both too low and inflexible. They contend that
tying the allowance to GDP results in targets that do not adequately
account for appropriate increases in the demand for physician services
and changes in medical practice, such as the following:
* A sicker beneficiary population. Physician groups reason that
although health status drives demand for services, the GDP growth
allowance would not account for any increases in physician spending
that could be due to greater care demands per beneficiary.
* Technological advances. The groups note that new, expensive medical
technologies can provide meaningful health gains for Medicare
beneficiaries but that these technology costs are likely to grow faster
than GDP.
* Site-of-service shifts. The groups note that patients with complex
conditions formerly treated in hospitals are increasingly treated in
physician offices and that treating such patients, who may require
frequent office visits and costly procedures, is likely to contribute
to volume and intensity growth.
The MVPS system provided an explicit opportunity to address some of
these concerns procedurally. In addition to the allowance for volume
and intensity growth specified in statute, the MVPS system also
provided specific authority for the HHS Secretary to recommend revising
the allowed increase based on factors such as changes in technology and
concerns about access to physician services. Under the MVPS system, the
Secretary never exercised the authority to make recommendations other
than implementing the MVPS default formula, but it still remained an
option.
Transparency Lacking in Process for Estimating Changes in Medicare
Spending for Physician Services due to Laws and Regulations:
The SGR system is designed to account for changes in law and regulation
that could affect aggregate spending for physician services. For
example, for 2005, CMS estimates that increased spending resulting from
MMA's coverage of a preventive physical examination for new
beneficiaries, cardiovascular screening blood tests, and diabetes
screening tests, among other new increases, will be almost fully offset
by new MMA-required payment adjustments for Part B drugs, which will
lower physician service spending. Physician groups we spoke with
contend that the process for developing such estimates may not be
accurate or complete.
Assessing the accuracy and completeness of these estimates is
difficult, as CMS's process for identifying the applicable statutory
and regulatory changes and the methods used to arrive at dollar
estimates are not fully transparent. Either data are lacking to
quantify the effects of changes or consensus is lacking on the
assumptions and interpretations made about the changes and their
effects. Currently, CMS does not use a formal mechanism for soliciting
input from physician groups or other experts before obtaining public
comment when future fees are announced in the Federal
Register.[Footnote 43] Physician groups contend that at least including
physician representatives in the process of assessing changes in laws
and regulations would improve CMS's analysis of effects and would be
more efficient than waiting for the public comment period.
Variable Growth in Provision of Physician Services and Certain SGR
System Design Elements Reduce Stability and Predictability of Physician
Fee Updates:
Fee updates under the SGR system have varied widely within an allowed
range, principally because of annual fluctuations in the growth of the
volume and intensity of services that physicians provide to
beneficiaries. Two of the SGR system's design characteristics--the
cumulative nature of spending targets and the use of estimated data
elements in the spending target--also serve to reduce the stability and
predictability of updates. The MMA provision that revised the allowance
for growth in service volume and intensity from real GDP per capita
growth rates each year to a 10-year moving average will reduce some of
the swings in future SGR system updates.
Fluctuating Volume and Intensity Growth Is a Principal Cause of
Instability of Fee Updates:
Annual fluctuations in the growth of the volume and intensity of
services that physicians provide to beneficiaries have been a principal
cause of the instability of physician fee updates. Since the SGR system
was implemented in 1998, volume and intensity growth has ranged from
1.2 percent in 1999 to 6.1 percent in 2002. (See fig. 2.) It is
uncertain how much physicians' discretion in the provision of their
services contributes to the fluctuation in volume and intensity growth.
Several studies have found that physicians respond to reduced fee
updates by increasing the volume and intensity of services they provide
to help maintain their total Medicare income.[Footnote 44] In
estimating future spending and fee updates, both CMS and CBO assume
that physicians will compensate, through volume and intensity
increases, for a portion of any fee reductions. Consequently, both CMS
and CBO project that for example, a 1 percent fee reduction would cause
aggregate spending to fall by less than 1 percent. In addition, CBO
assumes that physicians will respond to fee increases by reducing
volume and intensity.
Physician groups contend that volume and intensity growth is a
necessary response to increased demand caused by factors outside of
physicians' control as noted earlier, such as the declining health
status of Medicare beneficiaries, Medicare coverage of new benefits,
and changing medical technology and practices that encourage
beneficiaries to schedule more appointments with physicians. As long as
the contributing factors are not fully understood and predictable,
unexpected volume and intensity fluctuations will result in uncertain
fee updates year to year.
SGR System's Cumulative Targets Increase Potential Fluctuation of
Physician Fee Updates:
The cumulative nature of the SGR system's spending targets increases
the potential fluctuation of physician fee updates, as the system
requires that excess spending in any year be recouped in future years.
Conceptually, this means that if actual spending has exceeded the SGR
system targets, fee updates in future years must be lowered
sufficiently to both offset the accumulated excess spending and slow
expected spending for the coming year. Conversely, the system also
requires that if spending were to fall short of the targets, fees would
need to be increased so that future spending would be raised to align
with target spending.
Estimation of the 2005 fee update illustrates how excess spending that
is not addressed affects future fee updates. In 2004 actual
expenditures under the SGR system are estimated to be $83.4 billion,
whereas target expenditures for the same year will be $77.3 billion. As
a result, 2005 fee updates need to offset a $6.1 billion deficit from
excess spending in 2004 (plus accumulated excess spending of $5.8
billion in past years) and to realign the year's expected spending with
target spending.[Footnote 45] Because the SGR system is designed to
offset accumulated excess spending over a period of years, the deficit
for 2004 and preceding years will reduce fee updates for multiple
years.
According to projections made by CMS OACT, maximum fee reductions will
be in effect from 2006 through 2012. Fee updates will be positive in
2014. (See fig. 3.)
Figure 3: Projected MEI and Fee Update under Current Law:
[See PDF for image]
Note: Projections are as of July 2004.
[End of figure]
Uncertainty in Estimates of Underlying SGR System Data Elements
Decreases Stability and Predictability of Physician Fee Updates:
The stability of fee updates under the SGR system depends, in part, on
CMS's ability to accurately estimate current spending and annual
changes in the four factors that determine the sustainable growth rate:
input prices, FFS enrollment, the 10-year moving average of real GDP
per capita, and expenditures due to changes in laws and regulations. If
reality proves different from these estimates, then the estimates are
revised to incorporate more complete data, thereby contributing to the
year to year fluctuation in fee updates. For example, in the fall of
2004, when CMS determines the update for 2005, the agency must estimate
cumulative expenditures through the end of 2004 based on incomplete
data. If actual spending is underestimated, the 2005 update will be set
higher than it would have been set without the estimation error. This
underestimate will be corrected, because in setting a fee update, the
SGR system requires CMS to revise the spending estimates and the
sustainable growth rates for the 2 preceding years. Therefore, when
more complete spending data become available, the agency will revise
its previous cumulative spending estimates through 2004 and reduce
future fee updates relative to what they would have been if spending
had not been underestimated.
Uncertainty in long-term projections of FFS enrollment, in conjunction
with the cumulative nature of the SGR system's targets, makes long-term
estimates of fee updates less predictable. Because the SGR system
offsets accumulated excess spending by reducing the update for the fee
paid for each service, a decline in the number of services results in
less spending being offset. For example, currently, CMS estimates that
over the next 10 years, enrollment in FFS will decline as more
beneficiaries join private plans. CMS projects that the percentage of
Medicare beneficiaries in the FFS program will decline from about 85
percent in 2005 to 67 percent in 2014. With fewer beneficiaries in FFS,
fewer services would be provided. Therefore, the SGR system would call
for more severe update reductions to offset accumulated excess spending
relative to what would have occurred if FFS enrollment had remained
stable. In contrast, CBO projected that FFS enrollment will increase
over the 10-year period at about the same rate as the increase in
overall Medicare enrollment.[Footnote 46] With more beneficiaries in
FFS, and thus more services provided, update reductions would not need
to be as severe to offset accumulated excess spending. Therefore, under
CBO's FFS projection, positive fee updates would be expected to return
sooner than under CMS's FFS projection.
Switching to the 10-Year Moving Average of Real GDP Per Capita Will
Increase Stability and Predictability:
MMA changed the SGR system formula to use a 10-year moving average of
real GDP per capita, which is currently 2.3 percent. As noted in our
2002 testimony, this change will eliminate much of the cyclical
variation in this factor that occurred in previous years under the
formula when the SGR system target was tied to the yearly change in
real GDP per capita.[Footnote 47] (See fig. 4.) Including a more stable
measure of economic growth in the SGR system formula will help increase
the stability of fee updates.
Figure 4: Annual Percentage Change in Real GDP Per Capita and 10-Year
Moving Average Change in Real GDP Per Capita, 1992-2003:
[See PDF for image]
[End of figure]
Alternatives for Updating Physician Fees Would Eliminate Spending
Targets or Revise Current SGR System:
The projected sustained period of declining physician fees and the
potential for beneficiaries' access to physician services to be
disrupted have heightened interest in alternatives for the current SGR
system. In general, potential alternatives we identified cluster around
two approaches. One approach would end the use of spending targets as a
method for updating physician fees and encouraging fiscal discipline.
The other approach would retain spending targets but modify the current
SGR system to address perceived shortcomings. These modifications could
include one or more of the following options: removing the Part B
prescription drug expenditures that are currently counted in the SGR
system; resetting the targets and not requiring the system to recoup
previous excess spending; using annual, rather than cumulative,
targets; raising the allowance for increased spending due to volume and
intensity growth; and permitting some flexibility in setting the volume
and intensity allowance.
The alternatives discussed in this section--intended to be
illustrative--would all increase fees and thus aggregate spending--both
government outlays and beneficiary cost sharing--for physician services
relative to projected spending under current law.[Footnote 48] Most
changes would require new legislation; one exception is the removal of
Part B prescription drugs from the spending targets, which could be
done administratively. We used CMS OACT's projections to provide a
sense of the magnitude of the effect that potential alternatives might
have on physician fee updates, aggregate spending for physician
services, and real spending for physician fee schedule services per
beneficiary (indicating a level of services beneficiaries receive
excluding prescription drugs and other non-fee-schedule services, such
as laboratory tests).[Footnote 49],[Footnote 50] To simplify
comparisons among the discussed alternatives and current law, all of
the projections use the same assumptions regarding volume and intensity
growth for physician services and future FFS enrollment.[Footnote 51]
Eliminate Spending Targets, Base Fee Updates on Physician Cost
Increases:
In its March 2001 report to the Congress, MedPAC recommended
eliminating the SGR system of spending targets and replacing it with an
approach that would base annual fee updates on changes in the cost of
efficiently providing care.[Footnote 52] Under this approach, efforts
to control aggregate spending would be separate from the mechanism used
to update fees. The advantage of eliminating spending targets would be
greater fee update stability. However, CMS OACT estimates that this
approach, compared with the current law projection, would result in
cumulative expenditures that are 22 percent greater over a 10-year
period.
MedPAC reported that its recommendation could be implemented, in part,
by basing the update on forecast changes in MEI. It suggested that
other adjustments to the update might be necessary, for example, to
ensure overall payment adequacy or correct for previous MEI forecast
errors. In subsequent annual reports to the Congress, MedPAC has
continued to recommend a physician fee update based on MEI.[Footnote
53] In its March 2004 report, for example, MedPAC stated that current
Medicare payments for physician services were adequate and recommended
an update of approximately 2.6 percent for 2005 to "help maintain
physician willingness and ability to furnish services to Medicare
beneficiaries."[Footnote 54] MedPAC's recommendation contrasts with
the 1.5 percent minimum update provided for by MMA and the negative 3.6
percent update specified by the SGR system. In 2004 testimony, MedPAC
stated that fee updates for physician services should not be automatic,
but should be informed by changes in beneficiaries' access to services,
the quality of services provided, the appropriateness of cost
increases, and other factors.
Basing the update on MEI would result in positive and relatively stable
fee updates. (See fig. 5.) According to CMS OACT simulations, such an
approach would likely produce fee updates that ranged from 2.1 percent
to 2.4 percent over the period from 2006 through 2014. Because
physician fees would increase each year during the entire period,
rather than decreasing each year until positive updates returned in
2014 as they would under the current SGR system, Medicare spending for
physician services would rise. For the 10-year period from 2005 through
2014, CMS OACT estimates that this approach would result in cumulative
expenditures that are 22 percent greater than projected under current
law.[Footnote 55] (See fig. 6.) CMS OACT projects that under current
law the net present value of total Medicare spending (both federal and
beneficiary) over the next 75 years on all Part B services will be
$16.9 trillion. If physician fee updates are based on the change in
MEI, CMS OACT estimates that the net present value of total Medicare
spending (both federal and beneficiary) over the next 75 years on Part
B services would equal $19.1 trillion. Real spending per beneficiary
would increase from $2,157 in 2005 to $2,802 in 2014, compared with
real spending per beneficiary under current law, which would decrease
to $1,774 in 2014. (See fig. 7.)
Figure 5: Projected MEI and Fee Updates under Current Law and under
Option of Eliminating Spending Targets and Tying Fee Updates to MEI:
[See PDF for image]
Note: Projections are as of July 2004.
[End of figure]
Figure 6: Projected Aggregate Spending under Current Law and under
Option of Eliminating Spending Targets and Tying Fee Updates to MEI:
[See PDF for image]
Notes: Projections are as of July 2004. Aggregate spending includes all
expenditures for physician services--both government outlays and
beneficiary cost sharing.
[End of figure]
Figure 7: Projected Real Spending for Physician Fee Schedule Services
per FFS Beneficiary under Current Law and under Option of Eliminating
Spending Targets and Tying Fee Updates to MEI:
[See PDF for image]
Notes: Projections are as of July 2004. Real spending per beneficiary
for physician fee schedule services includes both government outlays
and beneficiary cost sharing and is adjusted by MEI. Spending for non-
fee-schedule services--laboratory services and certain Medicare-
covered Part B outpatient drugs--is excluded.
[End of figure]
Although MedPAC's recommended update approach would limit annual
increases in the price Medicare pays for each service, the approach
does not contain an explicit mechanism for constraining aggregate
spending resulting from increases in the volume and intensity of
services physician provide. In 2001, when MedPAC first recommended
eliminating the SGR system, it stated that volume and intensity
increases had not been a major concern since 1992. It added, however,
that if volume and intensity growth reemerged as a concern, Medicare
might address the problem by trying to achieve appropriate use of
services through outcomes and effectiveness research, disseminating
practice guidelines and other tools for applying this research, and
developing evidence-based measures to assess the application of the
research findings.
Since MedPAC's 2001 report, volume and intensity growth has increased
considerably. (See fig. 2.) Subsequent MedPAC reports and testimony
have discussed trends in the use of physician services and have
identified particular services--such as diagnostic imaging--that are
growing rapidly, but the reports have not made recommendations for
addressing volume and intensity growth. However, in 2004 testimony,
MedPAC stated that it planned to study the efficacy of private
insurers' strategies for controlling spending for high-growth services
and whether Medicare might be able to emulate them.[Footnote 56]
Retain Spending Targets, Modify Current SGR System:
Another approach for addressing the perceived shortcoming of the
current SGR system would retain spending targets but modify one or more
elements of the system. The key distinction of this approach, in
contrast to basing updates on MEI, is that fiscal controls designed to
moderate spending would continue to be integral to the system used to
update fees. The advantage of retaining spending targets as part of the
system for updating fees is that the system would automatically work to
moderate spending if volume and intensity growth began to increase
above allowable rates. Although many options are possible under this
approach, six are discussed below. All six would produce fee updates
that are higher during the 10-year period from 2005 through 2014 than
those projected under current law but would also result in higher
aggregate spending ranging from 4 percent to 23 percent more, depending
on the modification.
Remove Part B Drugs from the SGR System:
The Secretary of HHS could, under current authority, consider excluding
Part B drugs from the definition of services furnished incident to
physician services for purposes of the SGR system. As discussed
earlier, expenditures for these drugs have been growing rapidly, which,
in turn, has put downward pressure on the fees paid to Medicare
physicians. However, according to CMS OACT simulations, removing Part B
drugs from the SGR system beginning in 2005 would not prevent several
years of fee declines and would not decrease the volatility in the
updates. Fees would decline by about 5 percent per year from 2006
through 2010. (See fig. 8.) There would be a positive update in 2011--
3 years earlier than is projected under current law. From 2012 through
2014, fees would increase by approximately 5 percent per year. CMS OACT
estimates that removing Part B drugs from the SGR system would result
in cumulative spending over the 10-year period from 2005 through 2014
that is 5 percent higher than is projected under current law.[Footnote
57] (See fig. 9.) Real spending per beneficiary would increase from
$2,157 in 2005 to $2,240 in 2014, compared with real spending per
beneficiary under current law, which would decrease to $1,774 in 2014.
(See fig. 10.)
Figure 8: Projected MEI and Fee Updates under Current Law and under
Option of Not Including Any Part B Drugs in the SGR System Beginning in
2005:
[See PDF for image]
Notes: Projections are as of July 2004. Projected updates under the
option will be equal to projected updates under current law through
2010.
[End of figure]
Figure 9: Projected Aggregate Spending under Current Law and under
Option of Not Including Any Part B Drugs in the SGR System Beginning in
2005:
[See PDF for image]
Notes: Projections are as of July 2004. Aggregate spending includes all
expenditures for physician services--both government outlays and
beneficiary cost sharing. The line depicting the projection under
current law includes all spending included in the SGR system. Under the
option of not including any Part B drugs in the SGR system, spending
for Part B drugs will occur even though it is not included in the SGR
formula. To ensure comparability between the two projections, we
included aggregate spending for both remaining SGR-covered services and
Part B drugs in the line depicting the projection under the option.
[End of figure]
Figure 10: Projected Real Spending for Physician Fee Schedule Services
per FFS Beneficiary under Current Law and under Option of Not Including
Any Part B Drugs in the SGR System Beginning in 2005:
[See PDF for image]
Notes: Projections are as of July 2004. Real spending per beneficiary
for physician fee schedule services includes both government outlays
and beneficiary cost sharing and is adjusted by MEI. Spending for non-
fee-schedule services--laboratory services and certain Medicare-
covered Part B outpatient drugs--is excluded.
[End of figure]
Base Future SGR System Targets on Actual Spending from a Recent Year:
In 2002, we testified that physician spending targets and fees may need
to be adjusted periodically as health needs change, technology
improves, or health care markets evolve.[Footnote 58] Such adjustments
could involve specifying a new base year from which to set future
targets. Currently, the SGR system uses spending from 1996, trended
forward by the sustainable growth rate computed for each year, to
determine allowable spending.
MMA avoided a fee decline in 2004, and a projected fee decline for
2005, by stipulating a minimum update of 1.5 percent in each of those 2
years, but the law did not similarly adjust the spending targets to
account for the additional spending that would result from the minimum
update. Consequently, under the SGR system the additional MMA spending
and other accumulated excess spending will have to be recouped through
fee reductions beginning in 2006. If policymakers believe that the
resulting negative fee updates are inappropriately low, one solution is
to use actual spending from a recent year as a basis for setting future
SGR system targets. Using such an approach, policymakers could
essentially forgive the accumulated excess spending attributable to MMA
and other factors. The effect would be to increase future updates and,
as with other alternatives presented here, overall spending.
According to CMS OACT simulations, forgiving the accumulated excess
spending as of 2005--that is, resetting the cumulative spending target
so that it equals cumulative actual spending--would raise fees in 2006.
(See fig. 11.) However, because volume and intensity growth is
projected to exceed the SGR system's allowance for such growth,
negative updates would return beginning in 2008 and continue through
2013. Resulting cumulative spending over the 10-year period from 2005
through 2014 would be 13 percent higher than is projected under current
law. (See fig. 12.) Real spending per beneficiary for physician
services would grow from $2,157 in 2005 to $2,334 in 2014, compared
with real spending per beneficiary under current law, which would
decrease to $1,774 in 2014. (See fig. 13.)
Figure 11: Projected MEI and Fee Updates under Current Law and under
Option of Resetting the Cumulative Spending Target Equal to Cumulative
Actual Spending as of 2006:
[See PDF for image]
Notes: Projections are as of July 2004. Projection under option of
eliminating accumulated excess spending assumes that the physician fee
update would equal MEI in 2006.
[End of figure]
Figure 12: Projected Aggregate Spending under Current Law and under
Option of Resetting the Cumulative Spending Target Equal to Cumulative
Actual Spending as of 2006:
[See PDF for image]
Notes: Projections are as of July 2004. Aggregate spending includes all
expenditures for physician services--both government outlays and
beneficiary cost sharing. Projection under option of eliminating
accumulated excess spending assumes that the physician fee update would
equal MEI in 2006.
[End of figure]
Figure 13: Projected Real Spending for Physician Fee Schedule Services
per FFS Beneficiary under Current Law and under Option of Resetting the
Cumulative Spending Target Equal to Cumulative Actual Spending as of
2006:
[See PDF for image]
Notes: Projections are as of July 2004. Projection under option of
eliminating accumulated excess spending assumes that the physician fee
update would equal MEI in 2006. Real spending per beneficiary for
physician fee schedule services includes both government outlays and
beneficiary cost sharing and is adjusted by MEI. Spending for non-fee-
schedule services--laboratory services and certain Medicare-covered
Part B outpatient drugs--is excluded.
[End of figure]
Eliminate the Cumulative Aspect of Spending Targets:
One option for reducing the fluctuation in fee updates would be to
eliminate the cumulative aspect of the SGR system's spending targets
and return to a system of annual targets, as was used under MVPS. As
previously discussed, the cumulative aspect of the SGR system's
spending targets--although rigorous as a budgetary tool--can produce
updates that swing from the maximum fee reduction to the maximum fee
increase. In contrast, MVPS's annual spending target approach traded
off some fiscal control for increased fee stability. The MVPS update
for a year depended, in part, on whether actual spending 2 years
earlier had exceeded or fallen short of the annual spending target for
that year. For example, the MVPS update for 1996, which was determined
in 1995, was affected by the relationship between actual and target
spending in 1994. In principle, under MVPS excess spending from a
single year, up to a limit specified by its update formula, was
required to be recouped. Excess spending that could not be made up
within those limits would, in essence, be forgiven.[Footnote 59]
According to CMS OACT simulations, eliminating the cumulative aspect of
the SGR system would result in fee updates that vary less than
projected updates under current law. For example, under an MVPS-like
system of annual targets, from 2006 through 2014, the largest negative
update would be negative 0.6 percent instead of negative 5.0 percent
under current law, and the largest positive update would be 0.9 percent
instead of 3.9 percent. (See fig. 14.) Fees would be essentially flat
over the period, instead of swinging from large fee declines to fee
increases as they are expected to do under the SGR system. Relative to
spending projected under current law, under an MVPS-like system total
spending would be greater each year from 2006 through 2014. CMS OACT
estimates that cumulative expenditures over the 10-year period from
2005 through 2014 would be 15 percent higher than under current law.
(See fig. 15.) Real spending per beneficiary would increase from $2,157
in 2005 to $2,442 in 2014, compared with real spending per beneficiary
under current law, which would decrease to $1,774 in 2014. (See fig.
16.)
Figure 14: Projected MEI and Fee Updates under Current Law and under
Option of Eliminating the Cumulative Aspect of Spending Targets:
[See PDF for image]
Note: Projections are as of July 2004.
[End of figure]
Figure 15: Projected Aggregate Spending under Current Law and under
Option of Eliminating the Cumulative Aspect of Spending Targets:
[See PDF for image]
Notes: Projections are as of July 2004. Aggregate spending includes all
expenditures for physician services--both government outlays and
beneficiary cost sharing.
[End of figure]
Figure 16: Projected Real Spending for Physician Fee Schedule Services
per FFS Beneficiary under Current Law and under Option of Eliminating
the Cumulative Aspect of Spending Targets:
[See PDF for image]
Notes: Projections are as of July 2004. Real spending per beneficiary
for physician fee schedule services includes both government outlays
and beneficiary cost sharing and is adjusted by MEI. Spending for non-
fee-schedule services--laboratory services and certain Medicare-
covered Part B outpatient drugs--is excluded.
[End of figure]
Modify Allowance for Volume and Intensity Growth:
If policymakers agree with physician groups that the current SGR
system's allowance for volume and intensity growth does not adequately
account for appropriate spending increases that result from
technological innovation or changes in medical practice, the allowance
could be increased by some factor above the percentage change in real
GDP per capita. As stated earlier, the current SGR system's allowance
for volume and intensity growth is approximately 2.3 percent per year-
-the 10-year moving average in real GDP per capita--while projected
volume and intensity growth is higher--about 3 percent per year for
physician services alone, and about 4 percent per year including Part B
drugs. To offset the increased spending associated with the higher
volume and intensity growth, the SGR system will reduce updates below
the increase in MEI. In its 1997 report to the Congress, PPRC
recommended adopting an allowance equal to real GDP per capita plus 1
or 2 percentage points "to allow for advancements in medical
capabilities."[Footnote 60]
According to CMS OACT simulations, increasing the allowance for volume
and intensity growth to GDP plus 1 percentage point would likely
produce positive fee updates beginning in 2012--2 years earlier than is
projected under current law. (See fig. 17.) Because fee updates would
be on average greater than under current law during the 10-year period
from 2005 through 2014, Medicare spending for physician services would
rise. CMS OACT estimates that cumulative expenditures over the 10-year
period would increase by 4 percent more than under current
law.[Footnote 61] (See fig. 18.) Real spending per beneficiary would
change little from $2,157 in 2005 to $2,158 in 2014, compared with real
spending per beneficiary under current law, which would decrease to
$1,774 in 2014. (See fig. 19.)
Figure 17: Projected MEI and Fee Updates under Current Law and under
Option of Increasing Volume and Intensity Growth Allowance to GDP Plus
1 Percentage Point:
[See PDF for image]
Notes: Projections are as of July 2004. Projected updates under the
option will be equal to projected updates under current law through
2010.
[End of figure]
Figure 18: Projected Aggregate Spending under Current Law and under
Option of Increasing Volume and Intensity Growth Allowance to GDP Plus
1 Percentage Point:
[See PDF for image]
Notes: Projections are as of July 2004. Aggregate spending includes all
expenditures for physician services--both government outlays and
beneficiary cost sharing.
[End of figure]
Figure 19: Projected Real Spending for Physician Fee Schedule Services
per FFS Beneficiary under Current Law and under Option of Increasing
Volume and Intensity Growth Allowance to GDP Plus 1 Percentage Point:
[See PDF for image]
Notes: Projections are as of July 2004. Real spending per beneficiary
for physician fee schedule services includes both government outlays
and beneficiary cost sharing and is adjusted by MEI. Spending for non-
fee-schedule services--laboratory services and certain Medicare-
covered Part B outpatient drugs--is excluded.
[End of figure]
Congress could also modify the SGR system's allowance for volume and
intensity growth by providing flexibility similar to that afforded by
the MVPS system. Although that earlier system of spending targets
specified a default volume and intensity increase, it also allowed the
HHS Secretary to recommend a different increase if changes in medical
technology, beneficiary access to physician services, or other factors
warranted an allowance that was higher or lower than the default
increase.
Combine Options:
Two alternatives illustrate the effects of combining individual
options. For example, together the Congress and CMS could modify the
SGR system by removing Part B drugs, resetting the base, and increasing
allowed volume and intensity growth to GDP plus 1 percentage
point.[Footnote 62] According to CMS OACT simulations, this combination
of options would result in positive updates ranging from 2.2 percent to
2.8 percent for the 2006-2014 period. (See fig. 20.) CMS OACT projects
that the combined options would increase aggregate spending by 23
percent over the 10-year period (see fig. 21.) and that real spending
per beneficiary for physician services would increase from $2,157 to
$2,866, compared with real spending per beneficiary under current law,
which would decrease to $1,774 in 2014. (See fig. 22.)
Figure 20: Projected MEI and Fee Updates under Current Law and under
Combination of Options of Resetting the Cumulative Spending Target
Equal to Cumulative Actual Spending as of 2006, Not Including Any Part
B Drugs in the SGR System Beginning in 2005, and Using GDP Plus 1
Percentage Point:
[See PDF for image]
Notes: Projections are as of July 2004. Projection under combination of
options of resetting the cumulative spending target equal to cumulative
actual spending as of 2005, removing Part B drugs from the SGR system
beginning in 2005, and using GDP plus 1 percentage point assumes that
the physician fee update would equal MEI in 2006.
[End of figure]
Figure 21: Projected Aggregate Spending under Current Law and under
Combination of Options of Resetting the Cumulative Spending Target
Equal to Cumulative Actual Spending as of 2006, Not Including Any Part
B Drugs in the SGR System Beginning in 2005, and Using GDP Plus 1
Percentage Point:
[See PDF for image]
Notes: Projections are as of July 2004. Aggregate spending includes all
expenditures for physician services--both government outlays and
beneficiary cost sharing. Projection under combination of options of
resetting the cumulative spending target equal to cumulative actual
spending as of 2005, not including any Part B drugs in the SGR system
beginning in 2005, and using GDP plus 1 percentage point assumes that
the physician fee update would equal MEI in 2006. The line depicting
the projection under current law includes all spending included in the
SGR system. Under the option of not including any Part B drugs in the
SGR system, spending for Part B drugs will occur even though it is not
included in the SGR formula. To ensure comparability between the two
projections, we included aggregate spending for both remaining SGR-
covered services and Part B drugs in the line depicting the projection
under the option.
[End of figure]
Figure 22: Projected Real Spending for Physician Fee Schedule Services
per FFS Beneficiary under Current Law and under Combination of Options
of Resetting the Cumulative Spending Target Equal to Cumulative Actual
Spending as of 2006, Not Including Any Part B Drugs in the SGR System
Beginning in 2005, and Using GDP Plus 1 Percentage Point:
[See PDF for image]
Notes: Projections are as of July 2004. Projection under combination of
options of resetting the cumulative spending target equal to cumulative
actual spending as of 2005, removing Part B drugs from the SGR system
beginning in 2005, and using GDP plus 1 percentage point assumes that
the physician fee update would equal MEI in 2006. Real spending per
beneficiary for physician fee schedule services includes both
government outlays and beneficiary cost sharing and is adjusted by MEI.
Spending for non-fee-schedule services--laboratory services and
certain Medicare-covered Part B outpatient drugs--is excluded.
[End of figure]
Another example of combined options could involve removing Part B drugs
and implementing an MVPS-like system of annual targets, but not
increasing the volume and intensity allowance. CMS OACT simulations
project that this combination would result in fee updates that range
from 0.8 percent to 1.3 percent over the period from 2006 through 2014.
(See fig. 23.) Over the 10-year period from 2005 through 2014,
cumulative spending for physician services would exceed those projected
under current law by 18 percent. (See fig. 24.) Real spending per
beneficiary for physician services would increase from $2,157 to
$2,615, compared with real spending per beneficiary under current law,
which would decrease to $1,774 in 2014. (See fig. 25.)
Figure 23: Projected MEI and Fee Updates under Current Law and under
Combination of Options of Not Including Any Part B Drugs in the SGR
System Beginning in 2005 and Eliminating the Cumulative Aspect of
Spending Targets:
[See PDF for image]
Note: Projections are as of July 2004.
[End of figure]
Figure 24: Projected Aggregate Spending under Current Law and under
Combination of Options of Not Including Any Part B Drugs in the SGR
System Beginning in 2005 and Eliminating the Cumulative Aspect of
Spending Targets:
[See PDF for image]
Notes: Projections are as of July 2004. Aggregate spending includes all
expenditures for physician services--both government outlays and
beneficiary cost sharing. The line depicting the projection under
current law includes all spending included in the SGR system. Under the
option of not including any Part B drugs in the SGR system, spending
for Part B drugs will occur even though it is not included in the SGR
formula. To ensure comparability between the two projections, we
included aggregate spending for both remaining SGR-covered services and
Part B drugs in the line depicting the projection under the option.
[End of figure]
Figure 25: Projected Real Spending for Physician Fee Schedule Services
per FFS Beneficiary under Current Law and under Combination of Options
of Not Including Any Part B Drugs in the SGR System Beginning in 2005
and Eliminating the Cumulative Aspect of Spending Targets:
[See PDF for image]
Notes: Projections are as of July 2004. Real spending per beneficiary
for physician fee schedule services includes both government outlays
and beneficiary cost sharing and is adjusted by MEI. Spending for non-
fee-schedule services--laboratory services and certain Medicare-
covered Part B outpatient drugs--is excluded.
[End of figure]
Concluding Observations:
Medicare faces the challenge of moderating the growth in spending for
physician services while ensuring that physicians are paid fairly so
that beneficiaries have appropriate access to their services. Under the
current SGR system, fees are projected to fall by about 5 percent per
year for the next several years. Total payments to physicians will
continue to rise because of expected increases in volume and intensity.
However, on a per capita basis, real spending per beneficiary will
decline, raising concerns that a sustained period of falling fees could
discourage some physicians from participating in the Medicare program
and serving beneficiaries. These concerns have prompted policymakers to
consider alternative approaches for updating physician fees.
One approach under consideration for solving the problem of declining
fees is for Medicare to abandon the use of spending targets and
separate the program's attempts to control spending from its method for
adjusting physician fees each year. This is the approach that has been
recommended by MedPAC. Although projected future fee increases would be
positive and relatively stable, eliminating spending targets would
increase spending. The extent to which spending growth would be
moderated would depend upon the efficacy of separate efforts to address
growth in volume and intensity.
Similarly, the other approach of retaining spending targets but
modifying the SGR system to overcome its current perceived
shortcomings, would also increase spending. These alternative
approaches could also be augmented by separate efforts to moderate
spending. Alternatives under this approach seek to preserve the fiscal
discipline of spending targets while providing for reasonable fee
updates. These alternative approaches could also be augmented by other
efforts to moderate spending. To the extent that the growth in spending
is moderated, physicians would benefit from an increase in fees that
would be triggered under a spending target system.
Almost any change to the SGR system is likely to increase Medicare
spending above the amount that is currently projected. Either of the
two broad types of approaches discussed above--replacing the SGR system
and revising the SGR system--could be implemented in a way that would
likely generate positive fee updates. Therefore, the choice between the
two approaches under consideration may hinge on whether primary
importance should be given to stable fee increases or to the need for
fiscal discipline within the Medicare program.
Agency and Industry Comments and Our Evaluation:
Agency Comments:
In written comments on a draft of this report, CMS agreed with our
concluding observations that appropriately updating the physician
payment rates requires a balance between adjusting physician fees in a
stable and predictable manner and encouraging fiscal discipline with
scarce Medicare resources. CMS expressed its commitment to ensuring
that Medicare beneficiaries have access to high-quality health care and
noted that achieving this goal requires paying physicians
appropriately. CMS mentioned several administrative actions it has
taken to improve Medicare's payments to physicians, including specific
adjustments to MEI that have both made the index a more accurate
representation of inflation in physician practice costs and resulted in
higher payments to physicians. In addition, the agency committed to
considering further administrative actions and discussed ongoing
efforts to implement various provisions of MMA that may reduce adverse
incentives in the current payment system, allow the program to pay for
higher quality care, and uncover innovative methods to control spending
growth in the future. We have reprinted CMS's letter in appendix III.
Industry Association Comments:
We obtained oral comments from officials representing the American
Medical Association (AMA), the Medical Group Management Association
(MGMA), the American College of Physicians (ACP), and the Alliance for
Specialty Medicine (ASM). In discussing the draft report with these
groups, their overall reaction was that the report was a good analysis
of the problems with the SGR system; however, they raised a number of
concerns about the draft report. The bulk of their comments focused on
OACT's estimates of aggregate spending on physician services, the SGR
system's use of MEI as a measure of input price inflation for physician
services, and the draft's discussion of physicians' concerns about the
SGR system. The rest of their comments pertained to either issues
related to physician behavior or to topics outside the scope of our
review. A summary of the physician groups' comments and our evaluation
is provided below.
Representatives from all four groups commented on CMS OACT's estimates
illustrating each option's additional aggregate spending over a 10-year
period relative to current law spending over the same period. The
groups were confused by the difference between CMS OACT's estimates and
CBO's budget impact estimates, which were available for some of the
options. CBO's budget scores--that is, cost estimates that show the
impact of legislative changes on the federal budget--include only
federal expenditures and exclude spending from other sources, such as
beneficiary cost sharing. In contrast, CMS OACT's aggregate spending
estimates include both federal outlays and beneficiary cost sharing.
Because any changes to the SGR system that result in increased spending
would not only affect taxpayers but also Medicare beneficiaries
(through increased cost sharing and part B premiums), we believe it is
appropriate to include the estimated increase in aggregate spending.
Nevertheless, because our focus is on the relative costliness of each
option, we revised the draft to highlight the proportional difference
between current law spending and the spending estimated for each
option. In addition, we now include CBO's budget scores for each
option, where available.
All four physician groups also expressed concern that the draft report
did not discuss the use of MEI as a measure of input price inflation
for physician services. The groups contended that MEI does not contain
sufficiently current data on physician practice costs, stating that it
does not account for or keep pace with the cost of items such as
information technology. Examining MEI and other indices included in the
SGR system was outside the scope of our report. Moreover, in responding
to public comments on a federal regulation, CMS stated that the various
expense categories constituting MEI capture all practice expenses and
are based on the most recent available data. [Footnote 63]
The physician groups commented that the projected payment reductions of
5 percent a year from 2006 through 2014 are unrealistically severe and
that the draft report did not sufficiently emphasize the access
problems that beneficiaries would experience in the event of these
cuts. They further noted that the Congress has regularly made
adjustments to the SGR system and would probably act again. We noted in
the draft report that policymakers, physicians, and others are
concerned about the impact that the projected fee reductions would have
on beneficiary access to physician services, noting that the Medicare
Trustees and other parties believe it is unlikely that the projected
fee reductions will take place.
Representatives from both ACP and ASM asserted that we should include a
discussion about the effect of the spending targets on physician
behavior and volume and intensity. They noted that evidence is lacking
that directly correlates the introduction of both spending targets and
the physician fee schedule in 1992 with the corresponding drop in
volume and intensity in that year. They believe this reduction was
likely caused by something other than the spending target, such as
initiatives aimed at correctly coding claims for physician services.
ACP stated that for the Congress to evaluate any alternatives, there
must be a discussion of how the SGR system affects the volume and
intensity of physician services. As noted in the draft report, we do
not claim that spending targets and the fee schedule influenced
individual behavior and reduced the volume and intensity of physician
services in the early 1990s, we noted that PPRC claimed that a spending
target system would provide a collective incentive for physicians to
develop practice guidelines and control unnecessary utilization.
Further, in the draft report we described spending targets as a method
for automatically imposing fiscal discipline, not as a tool to modify
the behavior of individual physicians.
Representatives from ACP further noted that while the draft report
included a discussion of geographic variation in physician service use,
it did not mention that the SGR system is a blunt instrument in that it
applies nationally to all physicians. In a year in which fees are
reduced, physicians in regions that could be characterized as low
spending would receive the same fee reduction as physicians in higher-
spending regions. We agree that the SGR system does not distinguish
between physicians whose discretionary practice patterns result in
higher Medicare spending and those physicians whose practice patterns
do not. As we stated in the draft report, at the time PPRC recommended
expenditure targets, it initially envisioned a national target that
would apply to all physician services and later the evolution of
separate targets that would apply to regions, categories of physician
services, or both.
The physician groups raised additional topics that were beyond the
scope of our study. For example, AMA contended that Medicare's new
preventive benefits and government-sponsored health campaigns create a
government-induced demand among beneficiaries for services that, in
turn, could increase volume and intensity of service use. To date,
studies have not been conducted on whether new benefits and federal
health campaigns have directly affected Medicare beneficiaries' use of
physician services. Our report notes, however, that the SGR system's
allowance for volume and intensity growth, unlike that of the MVPS
system, is inflexible and would not take such factors into account. ACP
noted that increased spending on physician services may be appropriate,
as it may result in other program savings, such as reduced spending for
hospital care. Whether such savings have been or can be achieved would
require research outside this study's scope.
We are sending copies of this report to the Secretary of Health and
Human Services and interested congressional committees. We will also
provide copies to others on request. In addition, this report is
available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have questions about this report, please contact
me at (202) 512-7101 or James Cosgrove at (202) 512-7029. Other
contributors to this report include Jessica Farb, Hannah Fein, and
Jennifer Podulka.
Signed by:
A. Bruce Steinwald:
Director, Health Care--Economic and Payment Issues:
List of Committees:
The Honorable Charles E. Grassley:
Chairman:
The Honorable Max Baucus:
Ranking Minority Member:
Committee on Finance:
United States Senate:
The Honorable Joe L. Barton:
Chairman:
The Honorable John D. Dingell:
Ranking Minority Member:
Committee on Energy and Commerce:
House of Representatives:
The Honorable William M. Thomas:
Chairman:
The Honorable Charles B. Rangel:
Ranking Minority Member:
Committee on Ways and Means:
House of Representatives:
The Honorable Michael Bilirakis:
Chairman:
The Honorable Sherrod Brown:
Ranking Minority Member:
Subcommittee on Health:
Committee on Energy and Commerce:
House of Representatives:
The Honorable Nancy L. Johnson:
Chairman:
The Honorable Pete Stark:
Ranking Minority Member:
Subcommittee on Health:
Committee on Ways and Means:
House of Representatives:
[End of section]
Appendix I: Calculation of the Performance Adjustment Factor:
Each year, CMS follows a statutory formula to compute a performance
adjustment factor (PAF) and determines whether the physician fee update
should be adjusted relative to the percentage change in the Medicare
Economic Index (MEI) and, if so, by how much. (See fig. 26.) The PAF
takes into account the difference between actual and target
expenditures. If spending has equaled the targets, the PAF is equal to
1 and the update will equal the percentage change in MEI. If spending
has been below the targets, the PAF is greater than 1, thus increasing
the update. If spending has been above the targets, the PAF is less
than 1, thus reducing the update. The PAF is a blend of the relative
difference between target and actual spending in the current year,
accounting for 75 percent, and the relative cumulative difference in
expenditures from April 1996 through the current year, accounting for
33 percent. The weights were developed by the Centers for Medicare &
Medicaid Services' (CMS) Office of the Actuary (OACT) and included in
statute to minimize the volatility of both fee updates and the time
required to align actual spending with the targets. Applying these
weights causes the difference between cumulative actual expenditures
and cumulative target expenditures to be adjusted over several years
rather than during a single year. As a result, the fee update is less
volatile than would be the case if the full adjustment were made in 1
year. The PAF is subject to statutory limits and may not cause the fee
update to be set at more than 3 percent above MEI or 7 percent below
MEI. These limits may further increase the time necessary to align
spending with targets.
Figure 26: Formula Used to Determine the Performance Adjustment Factor
in 2005:
[See PDF for image]
[End of figure]
[End of section]
Appendix II: Corrections to Prior Estimates Caused the SGR System's
Cumulative Targets to Produce Negative Updates:
Since the introduction of the fee schedule in 1992 through 2001,
physicians generally experienced real increases in their fee updates--
that is, fee updates increased more than the increase in the cost of
providing physician services, as measured by MEI. Specifically, during
that period, fee updates increased by 39.7 percent, whereas MEI
increased by 25.9 percent. In 2002, however, the sustainable growth
rate (SGR) system reduced fees by 4.8 percent,[Footnote 64] despite an
estimated 2.6 percent increase in the costs of providing physician
services. (See fig. 27.)
Figure 27: Percentage Change in MEI, SGR Fee Schedule Update, and
Medicare Physician Services Spending per Beneficiary, 1998-2005:
[See PDF for image]
Notes: Spending per beneficiary represents Medicare spending for
beneficiaries in the traditional FFS program, net of beneficiary cost
sharing. Spending for end-stage renal disease patients is not included.
The physician fee schedule update figures shown do not reflect
additional required adjustments, such as those for legislated changes
and for budget neutrality.
[A] The 1.7 percent fee update went into effect in March 2003.
[B] The physician fee updates of 1.5 percent for 2004 and 2005 were
specified by the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003.
[End of figure]
In 2002, corrections to prior estimation errors caused the SGR system's
cumulative targets to begin producing negative updates. The SGR system
reduced fees in 2002 because estimated spending for physician services-
-cumulative since 1996--exceeded the target by about $8.9 billion, or
13 percent of projected 2002 spending. In part, the fee reduction
occurred because CMS revised upward its estimates of previous years'
actual spending. Specifically, CMS found that its previous estimates
had omitted a portion of actual spending for 1998, 1999, and 2000. In
addition, in 2002 CMS lowered the 2 previous years' spending targets
based on revised gross domestic product (GDP) data from the Department
of Commerce. Based on the new higher spending estimates and lower
targets, CMS determined that fees had been too high in 2000 and 2001.
In setting the 2002 physician fees, the SGR system reduced fees to
recoup previous excess spending. The update would have been about
negative 9 percent if the SGR system had not limited its decrease to 7
percent below MEI. Because the previous overpayments were not fully
recouped in 2002, and because of volume and intensity increases, by
2003, physicians were facing several more years of fee reductions to
bring cumulative Medicare spending on physician services in line with
cumulative targets.
Despite its recognition of errors, CMS had determined that its
authority to revise previous spending targets was limited. In 2002, CMS
noted that the 1998 and 1999 spending targets had been based on
estimated growth rates for beneficiary FFS enrollment and real GDP per
capita; actual experience had shown these growth rates to be too low.
If the estimates could have been revised, the targets for those and
subsequent years would have been increased. However, at the time that
CMS acknowledged these errors, the agency concluded that it was not
allowed to revise these estimates.[Footnote 65] Without such revisions,
the cumulative spending targets remained lower than if errors had not
been made.
In late 2002, the estimate of the sustainable growth rate called for a
negative 4.4 percent fee update in 2003. With the passage of the
Consolidated Appropriations Resolution of 2003,[Footnote 66] CMS
determined that it was authorized to correct the 1998 and 1999 spending
targets. Because SGR system targets are cumulative measures, these
corrections resulted in an average 1.4 percent increase in physician
fees for services for 2003.[Footnote 67]
The Medicare Prescription Drug, Improvement, and Modernization Act of
2003 (MMA) averted additional fee reductions projected for 2004 and
2005 by specifying an update to physician fees of no less than 1.5
percent for those 2 years.[Footnote 68] The MMA increases replaced SGR
system fee reductions of 4.5 percent in 2004 and an estimated 3.6
percent in 2005. The fee increases will result in additional aggregate
spending. Because MMA did not make corresponding revisions to the SGR
system's spending targets, its fee increases will require the SGR
system to offset the additional spending by reducing fees beginning in
2006. In addition, recent growth in spending due to volume and
intensity, which has been larger than SGR system targets allow, will
further compound the excess spending that needs to be recouped.
[End of section]
Appendix III: Comments from the Centers for Medicare & Medicaid
Services:
DEPARTMENT OF HEALTH & HUMAN SERVICES:
Centers for Medicare & Medicaid Services:
Washington, DC 20201:
DATE: SEP 27 2004:
TO: A. Bruce Steinwald:
Director, Health Care-Economic and Payment Issues:
Government Accountability Office:
FROM: Mark B. McClellan, M.D., Ph.D.
Administrator:
Initialed by Mark B. McClellan:
SUBJECT: Government Accountability Office's (GAO) Draft Report:
MEDICARE PHYSICIAN PAYMENTS: Concerns About Spending Torget System
Prompt Interest in Considering Reforms (GAO-04-1027):
Thank you for the opportunity to review and comment on the draft
report. We appreciate the interest of the Congressional Committees in
the physician fee schedule (PFS) rates under the sustainable growth
rate (SGR) system and the efforts of GAO to consider potential
improvements to the system.
We agree with GAO that appropriately updating the physician payment
rates requires a balance between adjusting physician fees in a stable
and predictable manner and encouraging fiscal discipline with scarce
Medicare resources. As a result of joint collaboration between Congress
and the Administration, enactment of the Medicare Prescription Drug,
Improvement and Modernization Act (MMA) guarantees that the 2004 and
2005 physician fee schedule updates would be no less than 1.5 percent.
The MMA improves access to high-quality care by recognizing that
Medicare beneficiaries cannot get such care without paying physicians
appropriately. As a result we have increased payments for doctors this
year and will increase them again in 2005, instead of decreasing
payment rates as would have been required by the Medicare law if the
MMA had not been passed. As a result of the MMA, physicians will
receive roughly 4 percent more in Medicare revenues in 2004 and 2005.
The Centers for Medicare & Medicaid Services (CMS) has taken several
actions within its administrative authority to improve Medicare
payments for physicians' services. For instance, CMS changed its policy
to adjust the Medicare Economic Index (MEI) for multifactor
productivity in place of labor productivity beginning in 2003. This
change increased the PFS update by 0.7 percentage points for 2003. We
estimate that the change to the MEI increased Medicare spending by
$14.5 billion over ten years. For 2004, we increased the weight of
malpractice costs in the MEI from 3.2 to 3.9 percent, a 21 percent
increase. We also incorporated a 16.9 percent increase in malpractice
premiums into the 2004 MEI. The increased weight for malpractice in
the MEI makes the index a more accurate representation of inflation in
physician office costs.
The GAO report notes that CMS can take certain administrative actions
to address the physician update situation. The report correctly notes
that these administrative proposals will have significant long-term
cost implications but will not have an impact in 2006 and the
subsequent few years. Therefore, without a change in law, there will
still be a reduction in physicians' fee schedule rates for 2006 and
subsequent years. Nevertheless, as we consider changes to the physician
fee schedule for 2006 and future years, we are committed to looking
thoroughly at these suggestions.
The CMS is also currently working to implement numerous provisions of
the MMA that make vital improvements to the Medicare program, such as
adding important preventive benefits and taking steps to reward health
professionals for avoiding complications and reducing costs. We are
also investigating new approaches that may reduce adverse incentives in
the current payment system and allow Medicare to pay for better rather
than more care. We are implementing innovative coordinated care and
disease management pilots and demonstration programs such as the
Chronic Care Improvement Program that may provide insight on new and
innovative ways to control expenditure growth in the future. Further,
we are currently assessing the impact of provisions of the MMA on
physician spending targets.
Once again, thank you for the opportunity to review this draft report
and CMS looks forward to working with Congress on potential changes to
the physician payment system that will control Medicare spending and
lead to equitable updates to physician fee schedule payment rates, as
well as ensuring access to high quality health care.
[End of section]
FOOTNOTES
[1] The SGR system reduced fees by 4.8 percent. Additional adjustments
resulted in a total fee reduction of 5.4 percent.
[2] See Pub. L. No. 101-239, §6102, 103 Stat. 2106, 2169-89.
[3] See Pub. L. No. 105-33, §4503, 111 Stat. 251, 433-34. BBA set a
specific fee update for 1998. See BBA, §4505, 111 Stat. 435-39.
Physician fees were first affected by the SGR system in 1999.
[4] Specifically, from 1992 through 2001, fee updates resulting from
the SGR and its predecessor system, increased by 39.7 percent, whereas
input prices increased by 25.9 percent. These updates do not reflect
other required adjustments, such as those for legislated changes and
for budget neutrality.
[5] See Pub. L. No. 108-173, §953, 117 Stat. 2066, 2427-28.
[6] Boards of Trustees of the Federal Hospital Insurance and Federal
Supplementary Medical Insurance Trust Funds, 1998 Annual Report of the
Board of Trustees of the Federal Supplementary Medical Insurance Trust
Fund (Washington, D.C.: Apr. 28, 1998), and 2004 Annual Report of the
Board of Trustees of the Federal Hospital Insurance and Federal
Supplementary Medical Insurance Trust Funds (Washington, D.C.: Mar. 23,
2004).
[7] MedPAC is an independent federal body that advises the Congress on
issues affecting the Medicare program.
[8] CMS OACT has the program responsibility to calculate Medicare's
spending targets for physician services and annual physician fee
updates. In producing these simulations, CMS OACT used the agency's
assumptions regarding the various factors that affect the SGR system,
such as projected fee-for-service enrollment.
[9] The Part B premium amount is adjusted each year so that expected
premium revenues equal 25 percent of expected Part B spending.
Beneficiaries must pay coinsurance--usually 20 percent--for most Part B
services.
[10] This rate incorporates the 10-year moving average of real GDP per
capita.
[11] The change in the cost of providing physician services is measured
by the Medicare Economic Index (MEI). MEI measures input prices for
resources needed to provide physician services. It is designed to
estimate the increase in the total cost for the average physician to
operate a medical practice.
[12] The SGR system permits annual physician fee updates to vary by as
much as 7 percent below to 3 percent above the estimated change in
physicians' cost of providing services as measured by MEI.
[13] PPRC, established by the Congress in the Consolidated Omnibus
Budget Reconciliation Act of 1985, Pub. L. No. 99-272, §9305, 100 Stat.
82, 190-91 (1986), was charged with advising the Congress on methods to
reform payment to physicians under the Medicare program and with making
recommendations annually. Subsequent legislation expanded PPRC's
responsibilities to include, among other things, setting standards for
expenditure growth and updating fees and monitoring beneficiary access
and financial liability. In 1997, BBA dissolved PPRC and the
Prospective Payment Assessment Commission and formed MedPAC. BBA,
§4022, 111 Stat. 350-355.
[14] John E. Wennberg, Elliot S. Fisher, and Jonathan S. Skinner,
"Geography And The Debate Over Medicare Reform," Health Affairs Web
Exclusive, February 13, 2002; E.S. Fisher et al., "The Implications of
Regional Variations in Medicare Spending, Part 1: The Content, Quality,
and Accessibility of Care," Annals of Internal Medicine (2003): 273-
287; and E.S. Fisher et al.,"The Implications of Regional Variations in
Medicare Spending, Part 2: Health Outcomes and Satisfaction with Care,"
Annals of Internal Medicine (2003): 288-298.
[15] Beginning in 1975, increases in prevailing charges were limited to
the change in MEI.
[16] Under MVPS, the fee updates depended on both the change in MEI and
the difference between actual spending and the performance standard.
[17] Inflation was measured as a weighted average of input price
increases, estimated by MEI for physician services and the consumer
price index for urban consumers (CPI-U) for laboratory services.
[18] Physician Payment Review Commission, 1995 Annual Report to
Congress (Washington, D.C.: 1995).
[19] The MVPS spending target was based, in part, on a 5-year
historical trend in volume and intensity reduced by a specified number
of percentage points. Because of this design and the fact that volume
and intensity growth dropped dramatically after the adoption of the
MVPS system, the target for future volume and intensity increases fell
too.
[20] The SGR system was revised by the Medicare, Medicaid, and SCHIP
Balanced Budget Refinement Act of 1999 (BBRA), (Pub. L. No. 106-113,
App. F, §211(b), 113 Stat. 1501A-321, 348-49) and by MMA (see §601(b),
117 Stat. 2301).
[21] This recent growth in volume and intensity for physician services
is higher than the 3 percent a year that CMS OACT is projecting for
2005 through 2014.
[22] In 2002, a year in which physicians' fees fell by 5.4 percent,
volume and intensity grew by 6.1 percent, the largest growth in a
single year since the fee schedule and spending targets were
introduced.
[23] This figure does not include spending associated with Medicare's
private plan option.
[24] GAO, Medicare: Financial Challenges and Considerations for Reform,
GAO-03-577T (Washington, D.C.: Apr. 10, 2003); Congressional Budget
Office, Medicare's Long-Term Financial Condition, testimony before the
Joint Economic Committee (Apr. 10, 2003); Office of Management and
Budget, Analytical Perspectives, Budget of the United States
Government, Fiscal Year 2005 (Washington, D.C.: Feb. 2, 2004); and
Boards of Trustees of the Federal Hospital Insurance and the Federal
Supplementary Medical Insurance Trust Funds, 2004 Report of the Boards
of Trustees of the Federal Hospital Insurance and the Federal
Supplementary Medical Insurance Trust Funds.
[25] Physician Payment Review Commission, 1995 Annual Report to
Congress.
[26] This allowed rate is the sustainable growth rate from which the
SGR system derives its name. For the purposes of this report, we use
the abbreviation SGR when referring to the system and the full term of
"sustainable growth rate" when referring to the allowed rate of
increase.
[27] CMS calculates changes in physician input prices based on the
growth in the costs of providing physician services as measured by MEI,
growth in the costs of providing laboratory tests as measured by CPI-U,
and growth in the cost of Medicare Part B prescription drugs included
in SGR spending.
[28] Under the SGR and MVPS systems, the Secretary of Health and Human
Services defined "physician services" to include "services and supplies
incident to physicians' services," such as laboratory tests and most
Part B prescription drugs.
[29] The SGR system changed from a fiscal year basis to a calendar year
basis in 2000.
[30] The base year is the 12-month period ending March 31, 1997.
[31] See BBRA, §211(b), 113 Stat. 1501A348-49.
[32] Revisions to targets first affected fee updates in 2001. In
setting the target for that year, CMS revised only the 2000 SGR target.
According to CMS, the agency was not authorized to revise the 1998 or
1999 SGR targets.
[33] Estimates of the fee update for the following year are made in the
spring. The final fee update is announced in November.
[34] The formula used in the SGR system spreads the recoupment of
excess spending over several years. Statutory limits on the PAF can
increase the time necessary to recoup excess spending.
[35] See MMA, §601(a)(1), 117 Stat. at 2300.
[36] For 2005, the product of the change in input prices multiplied by
the PAF is equal to
[(1+.028) x (1 - 0.07)] -1 = -0.044, or - 4.4 percent.
[37] The fee for each service is determined using a resource-based
relative value scale in which the resources required for a service are
valued in relation to the resources required to provide all other
physician services adjusted for the differences in the costs of
providing services across geographic areas. To arrive at a fee, the
service's relative value is multiplied by the dollar conversion factor.
[38] The update to the dollar conversion factor represents the
aggregate of increases and decreases across all services. Because the
relative value of individual services can change yearly, fee changes
for specific services may be different than the overall fee update.
[39] See MMA, §601(b), 117 Stat. at 2301.
[40] Physician Payment Review Commission, 1995 Annual Report to
Congress.
[41] Most of the Part B drugs that Medicare covers fall into three
categories: those typically provided in a physician office setting
(such as chemotherapy drugs), those administered through a durable
medical equipment item (such as a respiratory drug given in conjunction
with a nebulizer), and those that are patient-administered and covered
explicitly by statute (such as certain immunosuppressives).
[42] In general, payment for covered outpatient prescription drugs is
made under Medicare Part B and is equal to either 85 percent or 95
percent of the average wholesale price, depending on the drug. MMA
provided for the implementation of a new payment methodology beginning
in 2005. See MMA, §303, 117 Stat. 2233-2255. The legislation also
establishes a new voluntary prescription drug benefit program under a
new Part D of Title XVIII of the Social Security Act that will be
effective January 1, 2006.
[43] CMS is required to publish the final conversion factor update for
the upcoming calendar year by November 1. In the period prior to
publishing the final update--a period that usually runs from August to
October--CMS collects public comments in response to its proposed rule.
It is at this time that physician groups are able to submit formal
comments on CMS's estimate of this factor.
[44] CMS OACT has analyzed the results of these studies. See Office of
the Actuary, Centers for Medicare & Medicaid Services, "Physician
Volume and Intensity Response Memorandum," August 13, 1998.
[45] The 2005 fee update will be higher than allowed by the SGR system
owing to an MMA minimum update of 1.5 percent.
[46] In its March 2004 baseline CBO projected the percentage of
beneficiaries in FFS would remain relatively flat at about 86 percent
to 87 percent over the 2005-2014 period.
[47] GAO, Medicare Physician Payments: Spending Targets Encourage
Fiscal Discipline, Modifications Could Stabilize Fees, GAO-02-441T
(Washington, D.C.: Feb. 14, 2002).
[48] The projection under current law, which is used as a comparison to
projections under various options, assumes that the fee updates
determined by the SGR system will not be altered by any legislative
action. However, many parties, such as the Medicare Trustees, believe
it is unlikely that the projected negative fee updates will be allowed
to take effect.
[49] The projections are included to aid comparisons among the various
options and are not intended to serve as predictions for what would
occur if the SGR system was replaced or modified. In addition, there is
a degree of uncertainty surrounding any projection and that uncertainty
tends to increase with the number of years for which the projection is
made.
[50] For some of these options we present, CBO has developed budget
scores, which are specific cost estimates that include only federal
expenditures and exclude spending from other sources, such as
beneficiary cost sharing. When available, we present CBO's cost
estimates for the options.
[51] Volume and intensity growth for physician services alone is
projected to be 3 percent per year. Overall volume and intensity
growth--that is, including outpatient prescription drugs and other
services included under the SGR system--is projected at about 4 percent
per year.
[52] Medicare Payment Advisory Commission, Report to the Congress:
Medicare Payment Policy (Washington, D.C.: March 2001).
[53] Medicare Payment Advisory Commission, Report to the Congress:
Medicare Payment Policy (Washington, D.C.: March 2002, 2003, and 2004).
[54] Medicare Payment Advisory Commission, Report to the Congress:
Medicare Payment Policy (Washington, D.C.: March 2004).
[55] In May 2004 testimony before the Subcommittee on Health, House
Committee on Energy and Commerce, CBO estimated that if this option
went into effect in 2005, it would raise net federal mandatory outlays
by about $95 billion over the 2005-2014 period. CBO's estimates differ
from those of CMS OACT in that CBO's estimates exclude beneficiary cost
sharing and are based on different underlying assumptions about the
various factors that affect the SGR system.
[56] Medicare Payment Advisory Commission, Payment for Physician
Services in the Medicare Program, testimony before the Subcommittee on
Health, House Committee on Energy and Commerce (May 5, 2004).
[57] In May 2004 testimony, CBO estimated that this option would raise
net federal mandatory outlays by about $15 billion through 2014. CBO's
estimates differ from those of CMS OACT in that CBO's estimates exclude
beneficiary cost sharing and are based on different underlying
assumptions about the various factors that affect the SGR system.
[58] GAO-02-441T.
[59] Both the SGR and MVPS systems provided for updates that could
exceed MEI if spending fell below their respective targets.
[60] Physician Payment Review Commission, 1997 Annual Report to
Congress (Washington, D.C.: 1997), 248.
[61] In May 2004 testimony, CBO estimated that this option would raise
net federal mandatory outlays by about $35 billion over the 2008-2014
period. CBO's estimates differ from those of CMS OACT in that CBO's
estimates exclude beneficiary cost sharing and are based on different
underlying assumptions about the various factors that affect the SGR
system.
[62] We use GDP plus 1 percentage point as the allowance for volume and
intensity growth for illustrative purposes only.
[63] See 68 Fed. Reg. 63196, 63239-45.
[64] Some annual fee updates are adjusted for additional factors. For
example, a budget neutrality adjustment is used to account for changes
in the calculations used to determine the amount of resources
associated with physician services. In 2002, CMS reduced the update by
an additional 0.64 percent resulting in a total fee decline of 5.4
percent.
[65] BBRA required CMS to use the most recent data to revise the
estimates used to set the spending targets, beginning with the
estimated spending target in 2000. BBRA, §211(b)(5), 113 Stat. 348-49.
[66] See Pub. L. No. 108-7, Div. N. Title IV, §402, 117 Stat. 11, 548.
[67] The law allowed for a recalculation of prior years' spending
targets, which resulted in a 1.7 increase in fees applied to spending
on physician services provided on or after March 1, 2003. Over 12
months, the increase averaged 1.4 percent. The Congressional Budget
Office estimated that this provision would increase the baseline for
Medicare spending by $800 million in 2003 and $53.4 billion over the
2003-2013 period.
[68] See MMA, §601(a), 117 Stat. 2300.
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