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. 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. 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. 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. 2.) 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. 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. 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. 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. The extent to which spending growth would be moderated  would depend upon the efficacy of separate efforts to address growth in  volume and intensity. 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. 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 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. The fee increases  will result in additional aggregate spending.
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.