1.) Over time, Medicare’s spending target system  has been revised and renamed. 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 spending  increases caused by excess growth in volume and intensity. The  sustainable growth rate is the product of the estimated percentage change  in (1) input prices for physician services and other SGR-covered services;  (2) the average number of Medicare beneficiaries in the traditional fee-for- service program; (3) national economic output, as measured by real  (inflation-adjusted) GDP per capita; and (4) expected expenditures for  physician services and other SGR-covered services resulting from changes  in laws or regulations. Under the SGR system, the volume and intensity of physician services and  other SGR-covered services—that is, spending per beneficiary adjusted for  the estimated underlying cost of providing those services—is allowed to  grow at the same rate that the national economy grows over time on a per  capita basis. If cumulative spending on SGR-covered services is in line with the SGR  system’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). The SGR system places limits  on the extent to which fee updates can deviate from MEI. Rapid Growth in Volume and Intensity and Legislated Minimum Updates Contribute to Projected Decline in Medicare Physician Fees under SGR System

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 by reducing fees to lower future spending. From 2000 through  2005, based on an analysis of physician services claims from April of each  year, average annual growth in the volume and intensity of Medicare  physician services exceeded 5 percent—more than double the  approximately 2.2 percent growth rate permitted under the SGR system. Legislated minimum updates for 2004 through 2006 have also contributed  to future physician fee cuts. The Medicare Prescription Drug,  Improvement, and Modernization Act of 2003 (MMA) and the Deficit  Reduction Act of 2005 (DRA) averted fee reductions projected for 2004  through 2006 by specifying minimum updates to physician fees for those  years. These legislated minimum fee  updates have resulted in additional aggregate spending. Because neither  MMA nor DRA made corresponding revisions to the SGR system’s  spending targets, the SGR system must offset the additional spending by  reducing fees beginning in 2007. Overall, the  volume of services provided increased as well as the intensity (and thus  costliness) of the services provided. Our analysis also found that the  number of physicians billing Medicare and allowed charges per physician  increased over the period as did the proportion of claims for which  physicians accepted Medicare payment as payment in full. Growth in Spending for Physician Services Exceeded Growth in Medicare Fees

From 2000 through 2005, while Medicare physician fees rose by   4.5 percent, program spending on physician services grew by nearly   60 percent. Because there were increases in both the proportion of beneficiaries  obtaining services from physicians and the number of services provided to  each beneficiary who obtained care, the overall volume of services  increased from 2000 through 2005. 5.) 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  2005, we testified that potential alternatives cluster around two basic  approaches. One approach would end the use of spending targets as a  method for updating physician fees and encouraging fiscal discipline. The  other would retain spending targets but modify the current SGR system to  address its perceived shortcomings. If no other actions were taken, Medicare  spending for physician services would rise relative to projected spending  under the SGR system.
Why GAO Did This Study

In 2002, the system Medicare uses to determine annual changes to physician fees--the sustainable growth rate (SGR) system--reduced fees by almost 5 percent. Subsequent administrative and legislative actions averted fee declines in 2003 through 2006. Absent additional actions, fee reductions are projected for 2007 through 2015. Consequently, the appropriateness of the SGR system has been questioned. At the same time, there are concerns about the impact of increased physician services spending on the long-term fiscal sustainability of Medicare. GAO was asked to discuss the SGR system and Medicare physician payments. This statement addresses (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, (3) trends in the use of services provided by physicians and spending for those services from 2000 through 2005, and (4) options for revising or replacing the SGR system. This statement is based on two GAO reports: Medicare Physician Services: Use of Services Increasing Nationwide and Relatively Few Beneficiaries Report Major Access Problems ( GAO-06-704 , July 21, 2006), and Medicare Physician Payments: Concerns about Spending Target System Prompt Interest in Considering Reforms ( GAO-05-85 , Oct. 8, 2004).

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 the estimated increase in the average cost of providing physician services. 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. Recent growth in spending due to volume and intensity increases has been more than double that allowed under the SGR system, resulting in excess spending that must be recouped through reduced fee updates. Legislative actions that specified minimum updates for 2004 through 2006 have also contributed to future physician fee cuts. These actions, which averted fee reductions, did not revise the spending targets. Therefore, the SGR system must offset the additional spending resulting from the excess volume and intensity and the minimum fee updates by reducing fees beginning in 2007. From 2000 through 2005, Medicare spending for services provided by physicians grew rapidly. Our analysis of Medicare claims submitted during the first 28 days of April in these years shows that an increasing proportion of beneficiaries obtained services and the volume and intensity of the services provided increased. While Medicare physician fees rose by 4.5 percent over the period, program spending on physician services per beneficiary grew by approximately 45 percent. The number of physicians billing Medicare and total allowed charges per billing physician also increased, as did the proportion of claims for which physicians accepted Medicare payment as payment in full. Potential alternatives to the SGR system cluster around two basic approaches: (1) ending the use of spending targets as a method for updating physician fees and encouraging fiscal discipline and (2) retaining spending targets but modifying the current SGR system to address perceived shortcomings. Either approach could be complemented by focused efforts to moderate volume and intensity growth directly. 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.