Medicare Physician Payments
Information on Spending Trends and Targets Gao ID: GAO-04-751T May 5, 2004The Sustainable Growth Rate (SGR) system, implemented in 1998 and subsequently revised, is used to update Medicare's physician fees and moderate the growth in Medicare spending for physician services. SGR, and a predecessor system implemented in 1992, were designed to reduce physician fee updates if spending growth exceeded a specified target. Although spending growth slowed substantially under both systems, concerns about SGR arose when the system caused fees to decline by 5.4 percent in 2002. GAO was asked to discuss (1) Medicare physician spending trends both before and after the implementation of spending targets and (2) the evolution and mechanics of the SGR system. This statement is largely based on GAO's previous work on Medicare spending trends and the SGR system.
Medicare spending on physician services grew rapidly through the 1980s, at an average annual rate of 13.4 percent, even though physician fee increases were subject to some limits. The spending growth was driven by increases in the number of services provided to each beneficiary--referred to as volume--and an increase in the average complexity and costliness of those services--referred to as intensity. Recognizing that expenditure growth of this magnitude was not sustainable, the Congress attempted to impose fiscal discipline by establishing a system of spending targets for Medicare physician services along with a fee schedule beginning in 1992. Following the introduction of spending targets, volume and intensity growth slowed substantially during the 1990s. In recent years, under the SGR system, volume and intensity growth has increased, but not by the rates experienced during the 1980s before spending targets were in place. SGR, the current system of spending targets, evolved from the target system that went into effect in 1992. Under the SGR system, physician fees are adjusted up or down, depending on whether actual spending has fallen below or has exceeded the target. Fees increase at least as fast as the costs of providing physician services as long as volume and intensity growth remains below a specified rate--currently, a little more than 2 percent a year. If volume and intensity grows faster than the specified rate, SGR lowers fee increases or causes fees to fall. Physicians raised concerns about SGR when fees dropped significantly in 2002, a decline that was, in part, a correction for fees that had been set too high in prior years because of errors in forecast estimates and other data. Congressional action averted fee reductions, and projected fee reductions, for 2003 through 2005. However, beginning in 2006, fees are projected to resume falling for several years, partly to recoup the excess spending accumulated from averted cuts in previous years and partly because real per beneficiary spending on physician services is projected to grow faster than allowed under SGR. A dilemma for policymakers posed by projected fee reductions is that while SGR's automatic responses work as intended from a budgetary perspective, the consequences for physicians and their patients are uncertain.
GAO-04-751T, Medicare Physician Payments: Information on Spending Trends and Targets
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Testimony:
Before the Subcommittee on Health, Committee on Energy and Commerce,
House of Representatives:
United States General Accounting Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EDT:
Wednesday, May 5, 2004:
Medicare Physician Payments:
Information on Spending Trends and Targets:
Statement of A. Bruce Steinwald:
Director, Health Care--Economic and Payment Issues:
GAO-04-751T:
GAO Highlights:
Highlights of GAO-04-751T, a testimony before the Subcommittee on
Health, Committee on Energy and Commerce, House of Representatives
Why GAO Did This Study:
The Sustainable Growth Rate (SGR) system, implemented in 1998 and
subsequently revised, is used to update Medicare‘s physician fees and
moderate the growth in Medicare spending for physician services. SGR,
and a predecessor system implemented in 1992, were designed to reduce
physician fee updates if spending growth exceeded a specified target.
Although spending growth slowed substantially under both systems,
concerns about SGR arose when the system caused fees to decline by 5.4
percent in 2002.
GAO was asked to discuss (1) Medicare physician spending trends both
before and after the implementation of spending targets and (2) the
evolution and mechanics of the SGR system. This statement is largely
based on GAO‘s previous work on Medicare spending trends and the SGR
system.
What GAO Found:
Medicare spending on physician services grew rapidly through the 1980s,
at an average annual rate of 13.4 percent, even though physician fee
increases were subject to some limits. The spending growth was driven
by increases in the number of services provided to each beneficiary”
referred to as volume”and an increase in the average complexity and
costliness of those services”referred to as intensity. Recognizing that
expenditure growth of this magnitude was not sustainable, the Congress
attempted to impose fiscal discipline by establishing a system of
spending targets for Medicare physician services along with a fee
schedule beginning in 1992. Following the introduction of spending
targets, volume and intensity growth slowed substantially during the
1990s. In recent years, under the SGR system, volume and intensity
growth has increased, but not by the rates experienced during the 1980s
before spending targets were in place.
SGR, the current system of spending targets, evolved from the target
system that went into effect in 1992. Under the SGR system, physician
fees are adjusted up or down, depending on whether actual spending has
fallen below or has exceeded the target. Fees increase at least as fast
as the costs of providing physician services as long as volume and
intensity growth remains below a specified rate”currently, a little
more than 2 percent a year. If volume and intensity grows faster than
the specified rate, SGR lowers fee increases or causes fees to fall.
Physicians raised concerns about SGR when fees dropped significantly in
2002, a decline that was, in part, a correction for fees that had been
set too high in prior years because of errors in forecast estimates and
other data. Congressional action averted fee reductions, and projected
fee reductions, for 2003 through 2005. However, beginning in 2006, fees
are projected to resume falling for several years, partly to recoup the
excess spending accumulated from averted cuts in previous years and
partly because real per beneficiary spending on physician services is
projected to grow faster than allowed under SGR. A dilemma for
policymakers posed by projected fee reductions is that while SGR‘s
automatic responses work as intended from a budgetary perspective, the
consequences for physicians and their patients are uncertain.
www.gao.gov/cgi-bin/getrpt?GAO-04-751T.
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]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today as you discuss the Sustainable Growth
Rate (SGR) system that Medicare uses to update physician fees and
moderate the growth in spending for physician services. As you know,
the current SGR system evolved from the Medicare Volume Performance
Standard (MVPS) system, which, along with a fee schedule for physician
services, was established in 1992. MVPS, and later SGR, were designed
to reduce physician fee updates if spending growth exceeded a specified
target. Under both systems, spending growth slowed substantially.
However, concerns about SGR arose when the system and other factors
caused fees to decline by 5.4 percent in 2002. In February of that
year, we testified before this Subcommittee and discussed the reasons
for the fee decline and potential SGR modifications.[Footnote 1]
Subsequent administrative and legislative actions modified or overrode
the SGR system and resulted in fee increases for 2003, 2004, and 2005.
Absent additional legislative action, fees are expected to fall by
approximately 5 percent each year beginning in 2006 and continuing
through 2012. These projected declines have raised concerns about the
appropriateness of the SGR system for updating physician fees and
physicians' continued participation in the Medicare program.
My comments today are intended to describe the current situation
pertaining to physician fees and how we arrived at this juncture.
Specifically, I will discuss (1) Medicare physician spending trends
both before and after the implementation of spending targets and (2)
the evolution and mechanics of the SGR system, explaining how it is
designed to help control spending growth. My testimony is based on our
previous work on Medicare spending trends and the SGR system--updated
to include recent information on spending, fees, and projections--and
was prepared during April 2004 according to generally accepted
government auditing standards. In our February 2002 testimony, we
discussed the need to maintain fiscal discipline to help ensure the
long-term sustainability of the Medicare program for future
generations. The Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA) requires us to study the
appropriateness of the factors used in SGR and consider alternatives to
the system.[Footnote 2] Our work on that study is currently underway.
We look forward to working with the Subcommittee and others in Congress
as policymakers seek to ensure appropriate physician payments.
In summary, Medicare spending on physician services grew rapidly
through the 1980s, at an average annual rate of 13.4 percent, even
though physician fee increases were subject to some limits. The
spending growth was driven by increases in the number of services
provided to each beneficiary--referred to as volume--and an increase in
the average complexity and costliness of those services--referred to as
intensity. Recognizing that expenditure growth of this magnitude was
not sustainable, the Congress attempted to impose fiscal discipline by
requiring the establishment of spending targets for Medicare physician
services along with a fee schedule beginning in 1992. Following the
introduction of spending targets, volume and intensity growth slowed
substantially during the 1990s. In recent years, under the SGR system,
volume and intensity growth has increased, but not by the rates
experienced during the 1980s before spending targets were in place.
SGR, the current system of spending targets, evolved from the target
system that went into effect in 1992. Under the SGR system, physician
fee updates are adjusted up or down, depending on whether actual
spending has fallen below or has exceeded the target. Over time, fees
tend to increase at least as fast as the costs of providing physician
services as long as volume and intensity growth remains below a
specified rate--currently, a little more than 2 percent a year. If
volume and intensity grows faster than the specified rate, SGR lowers
fee increases or causes fees to fall. Physicians raised concerns about
SGR when fees dropped significantly in 2002, a decline that was, in
part, a correction for fees that had been set too high in prior years
because of errors in forecast estimates and other data. Congressional
action averted fee reductions, and projected fee reductions, for 2003
through 2005. However, beginning in 2006, fees are projected to resume
falling for several years, partly to recoup the excess spending
accumulated from averted cuts in previous years and partly because real
per beneficiary spending on physician services is projected to grow
faster than allowed under SGR. The dilemma for policymakers posed by
projected fee reductions is that while SGR's automatic responses work
as intended from a budgetary perspective, the consequences for
physicians and their patients are uncertain.
Background:
The Omnibus Budget Reconciliation Act of 1989 (OBRA 1989) reformed the
way Medicare pays for physician services in the traditional fee-for-
service (FFS) program.[Footnote 3] OBRA 1989 required the establishment
of a physician fee schedule and a system of spending growth targets,
known as MVPS, that became effective in 1992. In 1998, the SGR system
of spending targets replaced MVPS. Both spending target systems were
designed to moderate growth in the volume and intensity of services
provided to beneficiaries.
Prior to the establishment of the fee schedule, Medicare payment rates
for physician services were based on historical charges for these
services.[Footnote 4] The establishment of a fee schedule was an
attempt to break the link between physicians' charges and Medicare
payments. The fee schedule was not designed to reduce spending levels
overall but to redistribute payments for services based on the relative
resources used by physicians to provide different types of care. Under
the fee schedule, Medicare pays for more than 7,000 physician services.
[Footnote 5] To arrive at Medicare's fee, the service's relative value
is multiplied by a dollar conversion factor.
Currently, under SGR, the Centers for Medicare & Medicaid Services
(CMS), the agency that administers Medicare, uses the dollar conversion
factor to calculate Medicare fees and updates the conversion factor
each calendar year to account for the change in the cost of providing
physician services (as measured by the Medicare Economic Index (MEI)),
adjusted for the extent to which actual spending aligns with spending
targets. Fee updates represent the aggregate of increases and decreases
across all services; the fees for specific services may rise or fall
each year.
Medicare Spending for Physician Services Grew Rapidly in 1980s, Slowed
After Implementation of Spending Targets:
In 1980, Medicare spending for physician services totaled $7.5
billion.[Footnote 6] (See fig. 1.) By 2003, Medicare spending on these
services totaled $47.9 billion. During much of this period, increases
in both the volume and intensity of services physicians provided to
each beneficiary were an important factor in spending growth.
Figure 1: Medicare Spending for Physician Services, 1975-2005:
[See PDF for image]
Notes: Amounts represent Medicare spending for aged and disabled
beneficiaries in the traditional FFS program, net of beneficiary cost
sharing. Spending for end stage renal disease (ESRD) patients is not
included. Amounts for 1975-1990 are for the years ending June 30 and
amounts for 1995-2005 represent calendar years. The estimate for 2005
is based on Trustees' projections under intermediate assumptions.
[End of figure]
In 1980s, Spending for Physician Services Grew Rapidly:
Before the physician fee schedule was implemented, Medicare payments
for physician services were largely based on historical charges.
Experience in the 1980s repeated the experience of the prior decade:
the Congress froze fees or limited fee increases, but spending
continued to rise. From 1980 through 1991, for example, Medicare
spending per beneficiary for physician services grew at an average
annual rate of about 11.6 percent. (See fig. 2.):
Figure 2: Average Annual Change in Medicare Spending for Physician
Services per Beneficiary, 1980-2003:
[See PDF for image]
Notes: Amounts for 1980-1991 are for the years ending June 30 and
represent weighted average Medicare spending for aged and disabled
beneficiaries in the traditional FFS program, net of beneficiary cost
sharing. Spending for ESRD patients is not included. Amounts for 1992-
1997 and 1998-2003 are for calendar years and represent total allowed
charges--Medicare spending, including beneficiary cost sharing--for
aged and disabled beneficiaries in the traditional FFS program.
[End of figure]
Total Medicare spending for physician services depends on the fee paid
for each service, the number of beneficiaries served, the number of
services provided to each beneficiary (volume), and the mix of those
services--that is, the combination of more and less expensive services
(intensity). Of these factors, physicians directly influence only the
volume and intensity of services provided to beneficiaries.
Much of the spending growth resulted from increases in the volume and
intensity of services. For example, from 1986 until 1992, physician
payment rates grew by less than 2 percent annually, while the volume
and intensity of services rose, on average, by almost 8 percent per
year. In 1986, the Congressional Budget Office stated that "[b]oth the
price and the volume of services must be controlled to constrain
costs—."[Footnote 7] In 1989, citing the need for spending targets to
limit spending growth for physician services, the Secretary of Health
and Human Services (HHS) testified that "Medicare physician spending
has increased at compound annual rates of 16 percent over the past 10
years. And in spite of our best efforts to control volume and rein in
expenditures, Medicare physician spending is currently out of control—.
An expenditure target—sets an acceptable level of growth in the volume
and intensity of physician services."[Footnote 8]
In 1990s, Growth in Spending on Physician Services Slowed Under
Spending Target Systems:
Annual spending growth during the 1990s was far lower than in the
preceding 10 years. Beginning in 1992, the Congress introduced spending
targets for physician services to help constrain the rise in Medicare
spending for physician services. Unlike prior attempts to control
spending, spending target systems sought to limit the growth in the
volume and intensity of services each year.
From 1992 until 1999, the growth in the volume and intensity of
physician services per Medicare beneficiary moderated. (See fig. 3.)
During this time period, the average annual increase in Medicare
spending due to changes in volume and intensity of services per
beneficiary was about 1 percent, in contrast with the average annual
growth of about 7 percent in the period from 1985 through 1991.
Figure 3: Growth in Volume and Intensity of Medicare Physician Services
per Beneficiary, 1975-2003:
[See PDF for image]
Notes: Data are for aged and disabled beneficiaries in the traditional
FFS program only. Data for ESRD patients are not included. From 1975
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]
The moderation of volume and intensity growth slowed the rate of
increase in spending on physician services. This spending grew from
$25.6 billion in 1992 to $36.9 billion in 2000æan average annual rate
of 4.7 percent. In contrast, from 1985 through 1991, total spending
increased at an average annual rate of about 10.8 percent.
In 2000s, Spending Growth for Physician Services Rose but Remained
Lower than Rates in the 1980s:
Beginning in 2000, the growth in volume and intensity of services per
Medicare beneficiary began to rise, although the average annual rate of
growth remained substantially below that experienced before spending
targets were introduced. From 2000 to 2003, volume and intensity rose
at an average annual rate of 5 percent. CMS actuaries project an
average annual growth in volume and intensity of 3 percent from 2004
through 2013. Total spending on physician services is projected to grow
by an average of 8 percent a year from 2000 through 2005.
Under SGR and Prior System, Physician Fee Updates Are Mechanism To
Bring Actual Spending in Line with Spending Targets:
A target for spending on physician services serves as a budgetary
control by automatically lowering fee updates in response to excess
volume and intensity growth. Under Medicare's SGR spending target
system and its MVPS predecessor, physician fees are adjusted annually
to help bring actual spending in line with spending targets. Projected
increases in volume and intensity, beyond what the current SGR targets
allow, are expected to contribute to annual fee reductions for several
years as the system tries to align spending with targets.
SGR System Evolved from Spending Target System Introduced with
Physician Fee Schedule in 1992:
The SGR system evolved from the MVPS system of spending targets, which
was introduced with the physician fee schedule in 1992. The goal of
MVPS was to provide an incentive for physicians to reduce volume and
intensity growth and thus slow the high annual rate of increase in
expenditures.[Footnote 9] Under MVPS, if a yearís actual spending
growth exceeded the target, future payment rates would be reduced,
relative to what they would have been if actual spending had equaled
the target, to offset the excess spending. If a yearís actual spending
growth fell short of the target, future payment rates would be
increased.
oncerns about the MVPS spending target prompted the Congress to create
SGR's system of spending targets.[Footnote 10] In its 1996 report to
Congress, the Physician Payment Review Commission noted that, under
MVPS, physician fees would fall over time unless there were continual
declines in the volume and intensity of services provided.[Footnote 11]
In response to the system's perceived shortcomings, the Congress took
action in 1997 to replace it with the SGR system.
SGR System Differs From Prior System in Important Ways:
The SGR system was created in the Balanced Budget Act of 1997
(BBA)[Footnote 12] and revised by the Medicare, Medicaid, and SCHIP
Balanced Budget Refinement Act of 1999 (BBRA)[Footnote 13] and, most
recently, by MMA.[Footnote 14] Similar to MVPS, SGR sets spending
targets for physician services and updates fees to bring spending in
line with those targets. Under the SGR system, if spending exceeds the
target, future fee updates are reduced. If spending falls short of the
target, future fee updates are increased. By adjusting fees when prior-
year spending has deviated from the target, SGR attempts to moderate
the growth in total Medicare outlays for physician services.
Specifically, the SGR formula establishes expenditure targets as
follows: from a base year--1996[Footnote 15]--the targets are updated
each year[Footnote 16] to account for four factors: (1) changes in the
number of Medicare beneficiaries in traditional fee-for-service; (2)
growth in the costs of providing physician services, laboratory tests,
and Medicare-covered outpatient prescription drugs; (3) growth in the
overall economy, as measured by changes in real per capita gross
domestic product (GDP); and (4) changes in expenditures that result
from changes in laws or regulations. Spending and targets are estimated
from data available in the fall, when CMS sets physician fees for the
next calendar year. Because SGR spending targets are cumulative, the
target set for a specific year is affected by the targets set in all
prior years. BBRA required CMS, in calculating each year's SGR spending
target and fee update, to revise the targets set for the two previous
years using the most recent available data.[Footnote 17]
SGR differs from MVPS in two key ways. The first relates to volume and
intensity growth limits. MVPS relied, in part, on historical trends in
volume and intensity growth to set new targets each year, whereas SGR
ties allowable volume and intensity increases to the growth in real GDP
per capita. Under SGR, real spending per beneficiary--that is, spending
adjusted for the underlying cost of providing physician services--is
allowed to grow at the same rate that the national economy grows over
time on a per-capita basis--currently projected to be about 2 percent
annually. If volume and intensity grow faster, the annual increase in
physician fees will be less than the estimated increase in the cost of
providing services. Conversely, if volume and intensity grow more
slowly than 2 percent annually, the SGR system permits physicians to
benefit from fee increases that exceed the increased cost of providing
services. To reduce the effect of business cycles on physician fees,
economic growth is measured as the 10-year moving average change in
real per capita GDP. This measure is projected to range from 2.1
percent to 2.5 percent during the 2005 through 2014 period.
A second difference is that MVPS compared target and actual
expenditures in a single year, whereas SGR compares targets and actual
expenditures cumulatively from a base year. The cumulative nature of
SGR's spending targets increases the potential volatility of physician
fee updates because the system requires that excess spending in any
year be recouped in future years. Conceptually, this means that if
spending has exceeded the SGR targets, fee updates in future years must
be lowered sufficiently to offset the excess spending. Conversely, the
system also requires that if spending has fallen short of the targets,
fees must be increased to boost future spending.
SGR limits how much fees can be adjusted when spending has missed the
target. SGR's performance adjustment may decrease fees by as much as 7
percentage points below the percentage change in MEI when spending has
exceeded the target and may increase fees by as much as 3 percentage
points above the percentage change in MEI when spending has fallen
short of the target. SGR adjustments to the fees are determined by how
much the cumulative amount of spending on physician services since 1996
differs from the cumulative spending target since that base year.
Legislative Action Temporarily Avoided Fee Declines; Fees Projected to
Decline Beginning in 2006:
Since the introduction of the fee schedule in 1992 through 2001,
physicians generally experienced real increases in their fees--that is,
fees increased more than the increase in the cost of providing
physician services, as measured by MEI. Specifically, during that
period, fees increased by 39.7 percent, whereas MEI increased by 25.9
percent. In 2002, however, SGR reduced fees by 4.8 percent,[Footnote
18] despite an estimated 2.6 percent increase in the costs of providing
physician services. (See fig. 4.):
Figure 4: Figure 4. Percentage Change in MEI, Fee Schedule Update, and
Medicare Physician Services Spending Per Beneficiary, 1998-2005:
[See PDF for image]
Note: Spending per beneficiary represents Medicare spending for aged
and disabled beneficiaries in the traditional FFS program, net of
beneficiary cost sharing. Spending for end stage renal disease (ESRD)
patients is not included.
[End of figure]
SGR reduced fees in 2002 because estimated spending for physician
servicesócumulative since 1996óexceeded the target by approximately
$8.9 billion, or 13 percent of projected 2002 spending. In part, the
fee reduction occurred because CMS revised upward its estimates of
previous yearsí 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 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 percentage points
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.
However, 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 fee-for-service enrollment and real per capita GDP that
actual experience had shown 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 19] Without such revisions, the cumulative spending
targets remained lower than if errors had not been made.
In late 2002, the estimate of SGR called for a negative 4.4 percent fee
update in 2003. With the passage of the Consolidated Appropriations
Resolution of 2003,[Footnote 20] CMS determined that it was authorized
to correct the 1998 and 1999 spending targets. Because SGR targets are
cumulative measures, these corrections resulted in an average 1.4
percent increase in physician fees for services for 2003.[Footnote 21]
In 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 2004 and 2005.[Footnote 22] The MMA increases replaced SGR
fee reductions of 4.5 percent in 2004 and an estimated 3.6 percent in
2005. Because MMA did not make corresponding revisions to SGR's
spending targets, SGR will reduce fees beginning in 2006, to offset the
additional spending caused by MMA's fee increases. In addition, recent
growth in volume and intensity, which has been larger than SGR targets
allow, will further compound the problem of excess spending that needs
to be recouped.
The 2004 Medicare Trustees Report announced that the projected
physician update would be about negative 5 percent for 7 consecutive
years beginning in 2006; the result is a cumulative reduction in
physician fees of more than 31 percent from 2005 to 2012, while
physicians' costs of providing services, as measured by MEI, are
projected to rise by 19 percent.[Footnote 23]
Concluding Observations:
To a large extent, the physician fee cuts projected by Medicare's
Trustees are required under SGR's system of cumulative spending targets
to make up for excess spending in earlier years. MMA added to the
excess spending by specifying minimum fee updates for 2004 and 2005
without resetting the spending targets for those years. As a result,
physician fee cuts were postponed, not avoided.
In considering the projected fee cuts, however, it is important to
recall that Congress originally established Medicare spending targets
for physician services in response to runaway spending in the 1980s.
The recent increase in volume and intensity growth suggests that
Medicare faces a fundamental physician spending growth problem even if
the SGR slate of missed spending targets were somehow wiped clean.
Currently, projected Medicare spending for physician services exceeds
what policymakers have specified--through the parameters of the SGR
system--is the appropriate amount to spend. Because of expected
increases in the volume and intensity of services provided by
physicians, real spending per beneficiary is projected to grow by more
than 3 percent per year. SGR, designed to promote fiscal discipline,
allows such spending to grow by just over 2 percent per year. If the
growth in real spending per beneficiary is not lowered through other
means, SGR will mechanically reduce fee updates in an attempt to impose
fiscal discipline and moderate total spending increases. Although this
mechanical response may be desirable from a budgetary perspective, any
consequences for physicians and their patients are uncertain.
Mr. Chairman, this concludes my prepared statement. I will be happy to
answer questions you or other Subcommittee Members may have.
Contact and Acknowledgments:
For further information regarding this testimony, please contact A.
Bruce Steinwald at (202) 512-7101. James Cosgrove, Jessica Farb, Hannah
Fein, and Jennifer Podulka contributed to this statement.
FOOTNOTES
[1] U. S. General Accounting Office, Medicare Physician Payments:
Spending Targets Encourage Fiscal Discipline, Modifications Could
Stabilize Fees, GAO-02-441T (Washington, D.C.: Feb. 14, 2002).
[2] See Pub. L. No. 108-173, §953, 117 Stat. 2066, 2427-28.
[3] See Pub. L. No. 101-239, §6102, 103 Stat. 2106, 2169-89.
[4] 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).
[5] The fee for each service is determined using a resource-based
relative value scale--that is, the resources required for that service
relative to the resources required to provide all other physician
services adjusted for the differences in the costs of providing
services across geographic areas.
[6] This includes spending, net of beneficiary cost-sharing, for aged
and disabled beneficiaries in the traditional FFS program.
[7] Congressional Budget Office, Physician Reimbursement Under
Medicare: Options for Change (Washington, D.C.: Apr. 1986).
[8] Testimony before the Subcommittee on Medicare and Long-term Care,
Committee on Finance, U.S. Senate, 101st Congress, 1st Session (June
16, 1989).
[9] At that time, the Secretary of HHS defined ìphysician servicesî to
include ìservices and supplies incident to physiciansí services,î such
as laboratory tests and Medicare-covered outpatient prescription drugs.
This definition remains today.
[10] 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.
[11] Physician Payment Review Commission, 1996 Annual Report to
Congress (Washington, D.C.: Physician Payment Review Commission, 1996).
[12] See Pub. L. No. 105-33, §4503, 111 Stat. 251, 433-34.
[13] See Pub. L. No. 106-113, App. F, §211(b), 113 Stat. 1501A-321,
348-49.
[14] See Section 601(b), 117 Stat. 2301.
[15] The base year is set equal to the 12-month period ending March 31,
1997.
[16] SGR changed from a fiscal year basis to a calendar year basis in
2000.
[17] The first year of fee updates to be based on revised targets was
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.
[18] CMS reduced 2002 fees by an additional 0.64 percent to offset an
increase in spending projected to occur as a result of changes in the
calculations used to determine the amount of resources associated with
physician services. As a result of both the SGR reduction and this
additional offset, 2002 fees declined by 5.4 percent.
[19] BBRA required CMS to use actual, after-the-fact data to revise the
estimates used to set the spending targets, beginning with the
estimated spending target in 2000.
[20] See Pub. L. No. 108-7, Div. N, Title IV, §402, 117 Stat. 11, 548.
[21] 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. CBO 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.
[22] See Section 601(a), 117 Stat. 2300.
[23] Boards of Trustees, Federal Hospital Insurance and Federal
Supplementary Medical Insurance Trust Funds, 2004 Annual Report of the
Boards of Trustees of the Federal Hospital Insurance and Federal
Supplementary Medical Insurance Trust Funds (Washington, D.C.: Mar. 23,
2004).
