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. 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). An expenditure target…sets an acceptable level of  growth in the volume and intensity of physician services.”

		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. 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. 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. 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. Concerns about the MVPS spending target prompted the Congress to  create SGR’s system of spending targets. Under the SGR system, if  spending exceeds the target, future fee updates are reduced. Specifically, the SGR formula establishes expenditure targets as follows:  from a base year—1996—the targets are updated each year 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. 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. 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. 4.) 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. As a result, physician fee cuts were  postponed, not avoided. 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.
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.