1.) 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. 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. 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 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. 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. 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. 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. 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. 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. 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. 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 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. The first  approach—eliminating targets—emphasizes fee stability while the second  approach—retaining and modifying targets—includes an automatic fiscal  brake. 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.
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.