Since 1992, Medicare has paid for physician services using a fee schedule. The SGR target for total spending is based on spending in an  initial, or base, year and the estimated growth in real per capita GDP each  year and three other factors that affect overall spending on physician  services—the changes in the cost of inputs used to produce physicians’  services (as measured by the Medicare Economic Index (MEI)), the  number of Medicare beneficiaries in the traditional fee-for-service program,  and expenditures that result from changes in laws or regulations. Several Factors Associated With 2002 Fee Reductions

The application of the SGR system in 2002 resulted in a 5.4 percent  reduction in physician payment rates, despite an estimated 2.6 percent  increase in the costs of inputs used to provide physician services. The  reduction occurred because estimated cumulative physician services  spending since 1996 exceeded the target for cumulative spending by  approximately $8.9 billion, or 13 percent of projected 2002 spending. The SGR system sets spending targets for physician services and adjusts  payment rates to bring spending in line with those targets. In setting payment rates for 2002, CMS updated its estimates of past  spending and recalculated past targets. The reduction would have been almost 4  percentage points greater, but the SGR system limits how much fees can be  adjusted for the differences between actual and target spending. Modifying how spending targets are set could also reduce year-to-year  fluctuations in rates. But health care needs of Medicare beneficiaries are not cyclical. Any changes to the SGR must balance the desire for greater rate stability  with the need for fiscal discipline. Monitoring Beneficiary Access to Physicians

Ensuring that the use of spending targets does not compromise appropriate  access to services is a key concern. Concluding Observations

The SGR mechanism uses information about physician spending in relation  to cost increases, changes in the number of beneficiaries, and growth in the  overall economy to impose fiscal discipline on Medicare outlays for these  services.
What GAO Found

Congress implemented a physician fee schedule and a fee update formula to moderate spending growth relative to specified Medicare spending targets. These spending targets increase annually to reflect higher costs for physician services, the growth in the overall economy, and changes in the number of Medicare beneficiaries. Physician fees are adjusted for changes in the costs of providing services and on actual cumulative spending compared to the cumulative targets. Physician fees are updated to reflect higher costs to provide services. These updates are adjusted up or down on actual spending either falling below or exceeding the targets. In November 2001, the Centers for Medicare and Medicaid announced that updating Medicare's fees will decline 5.4 percent from what was paid in 2001, despite an estimated 2.6 percent increase in the cost of physician inputs. This reduction accounts for historical cumulative spending that exceeded the target by $8.9 billion, or 13 percent of estimated 2002 spending. Several factors contributed to the disparity between actual and targeted spending, including the correction of substantial errors in past spending estimates and the revision of targets for prior years. The current update mechanism could be modified to moderate fluctuations in physician fees and to ensure adequate payments, while retaining the fiscal discipline created by having a spending target. Such modifications would need to balance concerns about preserving fiscal discipline on physician spending with the need to maintain adequate payment rates to ensure that beneficiaries have access to physician services. Because the paramount consideration in setting payment rates is ensuring appropriate beneficiary access to services, timely and detailed data on Medicare beneficiary service use are essential to achieving this balance.