Medicare Physician Payments
Considerations for Reforming the Sustainable Growth Rate System Gao ID: GAO-05-326T February 10, 2005Concerns were raised about the system Medicare uses to determine annual changes to physician fees--the sustainable growth rate (SGR) system--when it reduced physician fees by almost 5 percent in 2002. Subsequent administrative and legislative actions modified or overrode the SGR system to avert fee declines in 2003, 2004, and 2005. However, projected fee reductions for 2006 to 2012 have raised new concerns about the SGR system. Policymakers question the appropriateness of the SGR system for updating physician fees and its effect on physicians' continued participation in the Medicare program if fees are permitted to decline. At the same time, there are concerns about the impact of increased spending on the long-term fiscal sustainability of Medicare. GAO was asked to discuss the SGR system. Specifically, this statement addresses the following: (1) how the SGR system is designed to moderate the growth in spending for physician services, (2) why physician fees are projected to decline under the SGR system, and (3) options for revising or replacing the SGR system and their implications for physician fee updates and Medicare spending. This statement is based on GAO's most recent report on the SGR system, Medicare Physician Payments: Concerns about Spending Target System Prompt Interest in Considering Reforms (GAO-05-85).
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, spending will exceed the SGR target. While the SGR system allows for some volume and intensity spending growth, this allowance is limited. If such growth exceeds the average growth in the national economy, as measured by the gross domestic product per capita, fee updates are set lower than inflation in the cost of operating a medical practice. A large gap between spending and the target may result in fee reductions. There are two principal reasons why physician fees are projected to decline under the SGR system beginning in 2006. One problem is that projected volume and intensity spending growth exceeds the SGR allowance for such growth. Second, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) increased the update for 2004 and 2005--thus increasing spending--but did not raise the spending targets for those years. The SGR system, which is designed to keep spending in line with its targets, must reduce fees beginning in 2006 to offset excess spending attributable to both volume and intensity growth and the MMA provision. In general, proposals to reform Medicare's method for updating physician fees would either (1) eliminate spending targets and establish new considerations for the annual fee updates or (2) retain spending targets, but modify certain aspects of the current system. The first approach emphasizes stable and positive fee updates, while the second approach automatically applies financial brakes whenever spending for physician services exceeds predefined spending targets. Either approach could be complemented by focused efforts to moderate volume and intensity growth directly. As policymakers consider options for updating physician fees, it is important to be mindful of the serious financial challenges facing Medicare and the need to design policies that help ensure the long-term sustainability and affordability of the program.
GAO-05-326T, Medicare Physician Payments: Considerations for Reforming the Sustainable Growth Rate System
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Testimony:
Before the Subcommittee on Health, Committee on Ways and Means, House
of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EST:
Thursday, February 10, 2005:
Medicare Physician Payments:
Considerations for Reforming the Sustainable Growth Rate System:
Statement of A. Bruce Steinwald, Director, Health Care--Economic and
Payment Issues:
GAO-05-326T:
GAO Highlights:
Highlights of GAO-05-326T, a testimony before the Subcommittee on
Health, Committee on Ways and Means, House of Representatives:
Why GAO Did This Study:
Concerns were raised about the system Medicare uses to determine annual
changes to physician fees”the sustainable growth rate (SGR) system”when
it reduced physician fees by almost 5 percent in 2002. Subsequent
administrative and legislative actions modified or overrode the SGR
system to avert fee declines in 2003, 2004, and 2005. However,
projected fee reductions for 2006 to 2012 have raised new concerns
about the SGR system. Policymakers question the appropriateness of the
SGR system for updating physician fees and its effect on physicians‘
continued participation in the Medicare program if fees are permitted
to decline. At the same time, there are concerns about the impact of
increased spending on the long-term fiscal sustainability of Medicare.
GAO was asked to discuss the SGR system. Specifically, this statement
addresses the following: (1) how the SGR system is designed to moderate
the growth in spending for physician services, (2) why physician fees
are projected to decline under the SGR system, and (3) options for
revising or replacing the SGR system and their implications for
physician fee updates and Medicare spending. This statement is based on
GAO‘s most recent report on the SGR system, Medicare Physician
Payments: Concerns about Spending Target System Prompt Interest in
Considering Reforms (GAO-05-85).
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, spending will exceed the SGR target. While
the SGR system allows for some volume and intensity spending growth,
this allowance is limited. If such growth exceeds the average growth in
the national economy, as measured by the gross domestic product per
capita, fee updates are set lower than inflation in the cost of
operating a medical practice. A large gap between spending and the
target may result in fee reductions.
There are two principal reasons why physician fees are projected to
decline under the SGR system beginning in 2006. One problem is that
projected volume and intensity spending growth exceeds the SGR
allowance for such growth. Second, the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (MMA) increased the update
for 2004 and 2005”thus increasing spending”but did not raise the
spending targets for those years. The SGR system, which is designed to
keep spending in line with its targets, must reduce fees beginning in
2006 to offset excess spending attributable to both volume and
intensity growth and the MMA provision.
In general, proposals to reform Medicare‘s method for updating
physician fees would either (1) eliminate spending targets and
establish new considerations for the annual fee updates or (2) retain
spending targets, but modify certain aspects of the current system. The
first approach emphasizes stable and positive fee updates, while the
second approach automatically applies financial brakes whenever
spending for physician services exceeds predefined spending targets.
Either approach could be complemented by focused efforts to moderate
volume and intensity growth directly. As policymakers consider options
for updating physician fees, it is important to be mindful of the
serious financial challenges facing Medicare and the need to design
policies that help ensure the long-term sustainability and
affordability of the program.
www.gao.gov/cgi-bin/getrpt?GAO-05-326T.
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]
Madam 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. A brief look at
the updates resulting from the SGR system since it was enacted by
Congress puts current concerns in context. From 1999--the first year
that the SGR system was used to update Medicare's physician fees--
through 2001, annual fee increases ranged from 2.3 percent to 5.5
percent. However, in 2002 the SGR system reduced physician fees by
nearly 5 percent. Fee declines in subsequent years were averted only by
new legislation that modified or temporarily overrode the SGR system.
For example, the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA) specified a minimum update of 1.5
percent for both 2004 and 2005.[Footnote 1] Absent additional
administrative or legislative action, however, the SGR system is
projected to reduce fees by about 5 percent per year for several years
beginning in 2006. These projected declines have raised policymakers'
concerns about the appropriateness of the SGR system for updating
physician fees and about physicians' continued participation in the
Medicare program. At the same time, there are concerns about Medicare
spending growth and the long-term fiscal sustainability of the program.
My comments today are intended to describe the issues that Medicare
faces in annually updating physician fees and potential approaches for
addressing those issues. Specifically, I will discuss (1) how the SGR
system is designed to moderate the growth in spending for physician
services, (2) why physician fees are projected to decline under the SGR
system, and (3) options for revising or replacing the SGR system and
their implications for physician fee updates and Medicare spending. My
testimony today is based on the findings contained in our October 2004
report on this subject.[Footnote 2] This work was performed between
January 2004 through September 2004 according to generally accepted
government auditing standards.
In summary, the SGR system is designed to apply financial brakes
whenever spending for physician services exceeds predefined spending
targets. It does this by reducing physician fees or limiting their
annual increase. Historically, efforts that limited fees but did not
set spending targets failed to moderate spending growth. Increases in
the number of services delivered to each beneficiary--known as volume-
-and the complexity or costliness of those services--known as
intensity--caused continued increases in spending. The SGR system
allows for some volume and intensity spending growth, but if such
growth exceeds the average growth in the national economy, as measured
by the gross domestic product (GDP) per capita, fee updates are
reduced. There are two principal reasons why physician fees are
projected to decline under the SGR system beginning in 2006. One reason
is that projected spending growth attributable to volume and intensity
increases exceeds the SGR allowance for such growth. The MMA is also
partly responsible because it increased the update for 2004 and 2005--
thus increasing spending--but did not raise the spending targets for
those years. The SGR system, which is designed to keep spending in line
with its targets, must reduce fees beginning in 2006 to offset the
excess spending attributable to both volume and intensity increases and
this MMA provision. In general, proposals to reform Medicare's method
for updating physician fees would either (1) eliminate spending targets
and establish new considerations for the annual fee updates or (2)
retain spending targets, but modify certain aspects of the current
system. Either approach could be complemented by focused efforts to
moderate volume and intensity growth directly.
Background:
Although the current focus of concern is largely on the potential for
several years of declining physician fees, the historic challenge for
Medicare has been to find ways to moderate the rapid growth in spending
for physician services. Before 1992, the fees that Medicare paid for
those services were largely based on physicians' historical
charges.[Footnote 3] Spending for physician services grew rapidly in
the 1980s, at a rate that the Secretary of Health and Human Services
(HHS) characterized as out of control. Although Congress froze fees or
limited fee increases, spending continued to rise because of increases
in the volume and intensity of physician services. From 1980 through
1991, for example, Medicare spending per beneficiary for physician
services grew at an average annual rate of 11.6 percent.
The ineffectiveness of fee controls alone led Congress to reform the
way that Medicare set physician fees. The Omnibus Budget Reconciliation
Act of 1989 (OBRA 1989)[Footnote 4] established both a national fee
schedule and a system of spending targets,[Footnote 5] which first
affected physician fees in 1992.[Footnote 6] From 1992 through 1997,
annual spending growth for physician services was far lower than the
previous decade. The decline in spending growth was the result in large
part of slower volume and intensity growth. (See fig. 1.) Over time,
Medicare's spending target system has been revised and renamed. The SGR
system, Medicare's current system for updating physician fees, was
established in the Balanced Budget Act of 1997 (BBA) and was first used
to adjust fees in 1999.[Footnote 7]
Figure 1: 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 fee-for-service
(FFS) program only. Data for end stage renal disease patients are not
included. From 1980 through 1992, volume and intensity of service
changes are based on Medicare outlays for all physician services. From
1993 through 2003, volume and intensity of service changes are based on
Medicare outlays for physician services covered by the fee schedule.
[End of figure]
Following the implementation of the fee schedule and spending targets
in 1992, through 1999, average annual growth in volume and intensity of
service use per beneficiary fell to 1.1 percent. More recently volume
and intensity growth has trended upward, rising at an average annual
rate of about 5 percent from 2000 through 2003. Although this average
annual rate of growth remains substantially below that experienced
before spending targets were introduced, the recent increases in volume
and intensity growth are a reminder that inflationary pressures
continue to challenge efforts to moderate growth in physician
expenditures.
SGR System Designed to Limit or Reduce Physician Fee Updates in
Response to Excess Growth in Volume and Intensity:
The SGR system establishes spending targets to moderate physician
services spending increases caused by excess growth in volume and
intensity. SGR's spending targets do not cap expenditures for physician
services. Instead, spending in excess of the target triggers a reduced
fee update or a fee cut. In this way, the SGR system applies financial
brakes to physician services spending and thus serves as an automatic
budgetary control device. In addition, reduced fee updates signal
physicians collectively and Congress that spending due to volume and
intensity has increased more than allowed.
To apply the SGR system, every year the Centers for Medicare & Medicaid
Services (CMS) follows a statutory formula to estimate the allowed rate
of increase in spending for physician services and uses that rate to
construct the spending target for the following calendar year.[Footnote
8] The sustainable growth rate is the product of the estimated
percentage change in (1) input prices for physician services;[Footnote
9],[Footnote 10] (2) the average number of Medicare beneficiaries in
the traditional fee-for-service (FFS) program; (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. SGR spending targets are cumulative. That is,
the sum of all physician services spending since 1996 is compared to
the sum of all annual targets since the same year to determine whether
spending has fallen short of, equaled, or exceeded the SGR targets. The
use of cumulative targets means, for example, that if actual spending
has exceeded the SGR system targets, fee updates in future years must
be lowered sufficiently both to offset the accumulated excess spending
and to slow expected spending for the coming year.
Under SGR, spending per beneficiary adjusted for the estimated
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 slightly more than 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, MMA modified
the SGR system to require that economic growth be 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.
When the SGR system was established, GDP growth was seen as a benchmark
that would allow for affordable increases in volume and intensity. In
its 1995 annual report to Congress, the Physician Payment Review
Commission stated that limiting real expenditure growth to 1 or 2
percentage points above GDP would be a "realistic and affordable
goal."[Footnote 11] Ultimately, BBA specified the growth rate of GDP
alone. This limit was an indicator of what the 105th Congress thought
the nation could afford to spend on volume and intensity increases.
If cumulative spending on physician services is in line with SGR's
target, the physician fee schedule update for the next calendar year is
set equal to the estimated increase in the average cost of providing
physician services as measured by the Medicare Economic Index (MEI). If
cumulative spending exceeds the target, the fee update will be less
than the change in MEI or may even be negative. If cumulative spending
falls short of the target, the update will exceed the change in MEI.
The SGR system places bounds on the extent to which fee updates can
deviate from MEI. In general, with an MEI of about 2 percent, the
largest allowable fee decrease would be about 5 percent and the largest
fee increase would be about 5 percent.
Continued Volume and Intensity Growth and Legislated Fee Updates
Contribute to Projected Decline in Physician Fees:
The 2004 Medicare Trustees Report announced that the projected
physician fee 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 12] According to projections
made by CMS Office of the Actuary (OACT) in July 2004, maximum fee
reductions will be in effect from 2006 through 2012, while fee updates
will be positive in 2014. (See fig. 2.) There are two principal reasons
for the projected fee declines: increases in volume and intensity that
exceed the SGR's allowance--partly as a result of spending for Part B
prescription drugs--and the minimum fee updates for 2004 and 2005
specified by MMA.
Figure 2: Projected MEI and Fee Update under Current Law:
[See PDF for image]
Note: Projections are as of July 2004.
[End of figure]
Volume and Intensity Growing Rapidly, Partly as a Result of Included
Spending for Outpatient Drugs:
Recent growth in spending due to volume and intensity increases has
been larger than SGR targets allow, resulting in excess spending that
must be recouped through reduced fee updates. In general, the SGR
system allows physician fee updates to equal or exceed the MEI as long
as spending growth due to volume and intensity increases is no higher
than the average growth in real GDP per capita--about 2.3 percent
annually. However, in July 2004, CMS OACT projected that the volume and
intensity of physician services paid for under the physician fee
schedule would grow by 3 percent per year. To offset the resulting
excess spending, the SGR system will have to reduce future physician
fee updates.
Additional downward pressure on physician fees arises from the growth
in spending for other Medicare services that are included in the SGR
system, but that are not paid for under the physician fee schedule.
Such services include laboratory tests and many Part B outpatient
prescription drugs that physicians provide to patients.[Footnote 13]
Because physicians influence the volume of services they provide
directly--that is, fee schedule services--as well as these other
services, defined by the Secretary of HHS as "incident to" physician
services, expenditures for both types of services were included when
spending targets were introduced. In July 2004, CMS OACT projected that
SGR-covered Part B drug expenditures would grow more rapidly than other
physician service expenditures, thus increasing the likelihood that
future spending would exceed SGR system targets. To the extent that
spending for SGR Part B drugs and other "incident to" services grows
larger as a share of overall SGR spending, additional pressure is put
on fee adjustments to offset excess spending and bring overall SGR
spending in line with the system's targets. This occurs because the SGR
system attempts to moderate spending only through the fee schedule,
even when the excess spending is caused by expenditures for "incident
to" services, such as Part B drugs, which are not paid for under the
fee schedule.
MMA's Minimum Updates for 2004 and 2005 Contribute to Future Physician
Fee Cuts:
The MMA averted 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. The MMA increases replaced SGR system fee reductions of
4.5 percent in 2004 and 3.3 percent in 2005 and thus will result in
additional aggregate spending. Because MMA did not make corresponding
revisions to the SGR system's spending targets, the SGR system must
offset the additional spending by reducing fees beginning in 2006.
An examination of the SGR fee update that would have gone into effect
in 2005, absent the MMA minimum updates, illustrates the impact of the
system's cumulative spending targets. To begin with, actual
expenditures under the SGR system in 2004 are estimated to be $84.9
billion, whereas target expenditures for 2004 were $77.1 billion. As a
result, SGR's 2005 fee updates would have needed to offset the $7.8
billion deficit from excess spending in 2004 plus the accumulated
excess spending of $5.9 billion from previous years to realign expected
spending with target spending. Because the SGR system is designed to
offset accumulated excess spending over a period of years, the deficit
for 2004 and preceding years reduces fee updates for multiple years.
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 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
include such options as removing the prescription drug expenditures
that are currently counted in the SGR system; resetting the targets and
not requiring the system to recoup previous excess spending; and
raising the allowance for increased spending due to volume and
intensity growth.
Alternatives to the SGR system would increase fees and thus aggregate
spending--both government outlays and beneficiary cost sharing,
including Part B premiums, for physician services relative to projected
spending under current law.[Footnote 14],[Footnote 15] (See table 1.)
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.
Table 1: Projected Effect on Fee Updates and Physician Services
Spending under Current Law and Selected Potential Options for the SGR
System, 2006 to 2014:
Options: Current law;
Minimum fee update: -5.0%;
Years with negative fee update: 8;
Maximum fee update: +3.9%;
Cumulative expenditures increase relative to current law: ó.
Options: Eliminate spending targets;
Minimum fee update: +2.1%;
Years with negative fee update: 0;
Maximum fee update: +2.4%;
Cumulative expenditures increase relative to current law: 22%.
Options: Modify spending targets: Set allowable growth to GDP+1
percent;
Minimum fee update: - 5.0%;
Years with negative fee update: 6;
Maximum fee update: +5.3%;
Cumulative expenditures increase relative to current law: 4%.
Options: Modify spending targets: Reset spending base for SGR targets;
Minimum fee update: - 2.3%;
Years with negative fee update: 6;
Maximum fee update: +2.2%;
Cumulative expenditures increase relative to current law: 13%.
Options: Modify spending targets: Remove Part B drugs;
Minimum fee update: -5.0%;
Years with negative fee update: 5;
Maximum fee update: +5.3%;
Cumulative expenditures increase relative to current law: 5%.
Options: Modify spending targets: Combine all three modifications;
Minimum fee update: +2.2%;
Years with negative fee update: 0;
Maximum fee update: +2.8%;
Cumulative expenditures increase relative to current law: 23%.
Source: CMS OACT.
[End of table]
Eliminate Spending Targets, Base Fee Updates on Physician Cost
Increases:
In several reports to Congress, the Medicare Payment Advisory
Commission (MedPAC) has 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
as measured by MEI.[Footnote 16],[Footnote 17] 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. 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. (See table 1.) However, Medicare spending for physician
services would rise, resulting in cumulative expenditures that are 22
percent greater over a 10-year period than under current law, based on
CMS OACT estimates. 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 physicians provide. 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, similar to those that MedPAC takes into
consideration when considering updates for other providers.[Footnote
18]
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. Although spending for physician services would likely also
rise under this approach, the advantage of retaining spending targets
is that the fee update system would automatically work to moderate
spending if volume and intensity growth began to increase above
allowable rates. The SGR system could be modified in a number of ways:
for example, by raising the allowance for increased spending due to
volume and intensity growth; resetting the base for the spending
targets and not requiring the system to recoup previous excess
spending; or removing the prescription drug expenditures that are
currently counted in the SGR system.
Increase Allowance for Volume and Intensity Growth:
The current SGR system's allowance for volume and intensity growth
could be increased, through congressional action, 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 CMS OACT projected that volume and intensity
growth would be more than 3 percent per year. To offset the increased
spending associated with the higher volume and intensity growth, the
SGR system will reduce updates below the increase in MEI. 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.[Footnote 19] 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 estimated that cumulative expenditures over the 10-year period
would increase by 4 percent more than under current law.[Footnote 20]
(See table 1.)
Reset Spending Base for Future SGR System Targets:
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 21] 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 fee declines in 2004 and in 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 the resulting negative fee updates are considered
inappropriately low, one solution would be, through congressional
action, to use actual spending from a recent year as a basis for
setting future SGR system targets and forgiving the accumulated excess
spending attributable to MMA and other factors. The effect of this
action 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.
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 table 1.)
Remove Prescription 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. 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. There would be
positive updates beginning in 2011--3 years earlier than is projected
under current law. (See table 1.) CMS OACT estimated 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 22]
Combine Multiple Spending Target Modifications:
Together Congress and CMS could implement several modifications to the
SGR system, for example, by increasing the allowance for volume and
intensity growth to GDP plus 1 percentage point, resetting the spending
base for future SGR targets, and removing prescription drugs. 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. CMS OACT projected that the combined options would
increase aggregate spending by 23 percent over the 10-year period. (See
table 1.)
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. Concerns
have been raised that access to physician services could eventually be
compromised if the SGR system is left unchanged and the projected fee
cuts become a reality. These concerns have prompted policymakers to
consider two broad approaches for updating physician fees. The first
approach--eliminating targets--emphasizes fee stability while the
second approach--retaining and modifying targets--includes an
automatic fiscal brake. Either of the two approaches could be
implemented in a way that would likely generate positive fee updates
and each could be accompanied by separate, focused efforts to moderate
volume and intensity growth. Because multiple years of projected 5
percent fee cuts are incorporated in Medicare's budgeting baseline,
almost any change to the SGR system is likely to increase program
spending above the baseline. As policymakers consider options for
updating physician fees, it is important to be mindful of the serious
financial challenges facing Medicare and the need to design policies
that help ensure the long-term sustainability and affordability of the
program. We look forward to working with the Subcommittee and others in
Congress as policymakers seek to moderate program spending growth while
ensuring appropriate physician payments.
Madam Chairman, this concludes my prepared statement. I will be happy
to answer questions you or the 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] Pub. L. No. 108-173, §601 (a)(1), 117 Stat. 2067, 2300.
[2] GAO, Medicare Physician Payments: Concerns about Spending Target
System Prompt Interest in Considering Reforms, GAO-05-85 (Washington,
D.C.: Oct. 8, 2004).
[3] 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).
[4] See Pub. L. No. 101-239, §6102, 103 Stat. 2106, 2169-89.
[5] Medicare sets fees for more than 7,000 physician services based on
the resources required to provide each service, adjusted for
differences in the costs of providing services across geographic areas.
[6] The first system of spending growth targets, known as the Medicare
Volume Performance Standard (MVPS), was in effect from 1992 through
1997. In 1998, the SGR system of spending targets replaced MVPS.
[7] 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.
[8] This allowed rate is the sustainable growth rate from which the SGR
system derives its name. 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.
[9] CMS calculates changes in physician input prices based on the
growth in the costs of providing physician services as measured by the
Medicare Economic Index, growth in the costs of providing laboratory
tests as measured by the consumer price index for urban consumers, and
growth in the cost of Medicare Part B prescription drugs included in
SGR spending.
[10] 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.
[11] Physician Payment Review Commission, 1995 Annual Report to
Congress (Washington, D.C.: 1995).
[12] 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).
[13] 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).
[14] 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.
[15] See GAO-05-85 for more information about these alternatives.
[16] See Medicare Payment Advisory Commission, Report to the Congress:
Medicare Payment Policy (Washington, D.C.: March 2001, 2002, 2003, and
2004).
[17] MedPAC suggested that other adjustments to the update might be
necessary, for example, to ensure overall payment adequacy, correct for
previous MEI forecast errors, and to address other factors.
[18] 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).
[19] We use GDP plus 1 percentage point as the allowance for volume and
intensity growth for illustrative purposes only.
[20] In May 2004 testimony, CBO estimated that this option would raise
net federal mandatory outlays by about $35 billion over the 2008-2014
period. Congressional Budget Office, Medicare's Physician Fee Schedule,
testimony before the Subcommittee on Health, House Committee on Energy
and Commerce (May 5, 2004).
[21] GAO, Medicare Physician Payments: Spending Targets Encourage
Fiscal Discipline, Modifications Could Stabilize Fees, GAO-02-441T
(Washington, D.C.: Feb. 14, 2002).
[22] In May 2004 testimony, CBO estimated that this option would raise
net federal mandatory outlays by about $15 billion through 2014.
Congressional Budget Office, Medicare's Physician Fee Schedule,
testimony before the Subcommittee on Health, House Committee on Energy
and Commerce (May 5, 2004).
