United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Health, 

Committee on Energy and Commerce, 

House of Representatives 

MEDICARE SPENDING

Preliminary Findings 

Regarding an Approach 

Focusing on Physician 

Practice Patterns to Foster 

Program Efficiency 

Statement of A. Bruce Steinwald 

Director, Health Care 

For Release on Delivery

Expected at 9:30 a.m. EST 

Tuesday, March 6, 2007 

 

GAO-07-567T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

March 6, 2007

MEDICARE SPENDING

Preliminary Findings Regarding an 

Approach Focusing on Physician 

Practice Patterns to Foster Program 

Efficiency 

Highlights of GAO-07-567T, a testimony 

before the Subcommittee on Health, 

Committee on Energy and Commerce, 

House of Representatives

Medicare’s current system of 

spending targets used to moderate 

spending growth for physician 

services and annually update

physician fees is problematic. This

spending target system—called the 

sustainable growth rate (SGR) 

system—adjusts physician fees

based on the extent to which actual 

spending aligns with specified 

targets. In recent years, because 

spending has exceeded the targets,

the system has called for fee cuts. 

Since 2003, the cuts have been

averted through administrative or

legislative action, thus postponing

the budgetary consequences of 

excess spending. Under these 

circumstances, policymakers are

seeking reforms that can help 

moderate spending growth while 

ensuring that beneficiaries have

appropriate access to care. For 

today’s hearing, this subcommittee,

which is exploring options for 

improving how Medicare pays

physicians, asked GAO to share the 

preliminary results of its ongoing

study related to this topic. 

GAO’s statement addresses 

(1) approaches taken by other 

health care purchasers to address

physicians’ inefficient practice 

patterns, (2) GAO’s efforts to

estimate the prevalence of

inefficient physicians in Medicare, 

and (3) the methodological tools 

available to identify inefficient 

practice patterns programwide. 

GAO ensured the reliability of the

claims data used in this report by

performing appropriate electronic 

data checks and by interviewing 

agency officials who were 

knowledgeable about the data.

Consistent with the premise that physicians play a central role in the 

generation of health care expenditures, some health care purchasers 

examine the practice patterns of physicians in their network to promote 

efficiency. GAO selected 10 health care purchasers for review because they 

assess physicians’ performance against an efficiency standard. To measure 

efficiency, the purchasers we spoke with generally compared actual 

spending for physicians’ patients to the expected spending for those same 

patients, given their clinical and demographic characteristics. Most 

purchasers said they also evaluated physicians on quality. The purchasers

linked their efficiency analysis results and other measures to a range of 

strategies—from steering patients toward the most efficient providers to 

excluding a physician from the purchaser’s provider network because of 

poor performance. Some of the purchasers said these efforts produced 

savings. 

Having considered the efforts of other health care purchasers in evaluating

physicians for efficiency, GAO conducted its own analysis of physician 

practices in Medicare. GAO used the term efficiency to mean providing and 

ordering a level of services that is sufficient to meet patients’ health care 

needs but not excessive, given a patient’s health status. GAO focused the 

analysis on generalists—physicians who described their specialty as general 

practice, internal medicine, or family practice—and selected metropolitan 

areas that were diverse geographically and in terms of Medicare spending 

per beneficiary. GAO found that individual physicians who were likely to 

practice medicine inefficiently were present in each of 12 metropolitan areas

studied. 

The Centers for Medicare & Medicaid Services (CMS), the agency that 

administers Medicare, also has the tools to identify physicians who are likely

to practice medicine inefficiently. Specifically, CMS has at its disposal 

comprehensive medical claims information, sufficient numbers of physicians 

in most areas to construct adequate sample sizes, and methods to adjust for 

differences in beneficiary health status. 

A primary virtue of examining physician practices for efficiency is that the 

information can be coupled with incentives that operate at the individual 

physician level, in contrast with the SGR system, which operates at the 

aggregate physician level. Efforts to improve physician efficiency would not, 

by themselves, be sufficient to correct Medicare’s long-term fiscal

imbalance, but such efforts could be an important part of a package of 

reforms aimed at future program sustainability. 

www.gao.gov/cgi-bin/getrpt?GAO-07-567T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact A. Bruce 

Steinwald at (202) 512-7101 or 

steinwalda@gao.gov. 
Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today as you discuss options for improving how 

Medicare pays physicians. Your task is not simple, as you seek reforms 

that can help moderate spending growth while ensuring that beneficiaries 

have appropriate access to high-quality physician services and physicians 

receive fair compensation for providing those services. Medicare’s current 

system of spending targets used to moderate spending growth and 

annually update physician fees is problematic. 

This spending target system—called the sustainable growth rate (SGR) 

system—adjusts Medicare’s physician fees based on the extent to which 

actual spending aligns with specified targets. If the growth in the number 

of services provided per 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. From 1999—the first 

year that the SGR system was used to update physician fees—through 

2001, physicians received fee increases annually. Since 2002, actual 

Medicare spending on physician services has exceeded SGR targets, and 

the SGR systems has called for fee cuts to offset the excess spending. In 

2002 the SGR system reduced physician fees by nearly 5 percent. Fee 

declines in subsequent years were averted only by administrative and 

legislative actions that modified or temporarily overrode the SGR system.1

In the absence of additional administrative or legislative action, the SGR 

system will likely reduce fees by about 5 percent a year for the next 

several years. 

The potential for a sustained period of declining fees has raised 

policymakers’ concerns about the appropriateness of the SGR system for 

updating physician fees and about physicians’ continued participation in

the Medicare program. A particular concern is that the SGR system acts as 

a blunt instrument in that all physicians are subject to the consequences of

excess spending—namely, downward fee adjustments—that may stem 

from the excessive use of resources by only some physicians. However, as 

we have discussed in our prior work, the SGR system serves an important 

 1

For example, the Medicare Prescription Drug, Improvement, and Modernization Act of 

2003 (MMA) specified a minimum update of 1.5 percent for both 2004 and 2005. Pub. L. 

No. 108-173, § 601(a)(1), 117 Stat. 2066, 2300. 

Page 1 GAO-07-567T
role in alerting policymakers to the need for fiscal discipline.2

 Specifically, 

fee cuts under the SGR system signal to physicians collectively and to the 

Congress that spending due to volume and intensity has increased more 

than allowed. 

Some of the higher volume and intensity that drives spending growth may 

not be medically necessary. In fact, the wide geographic variation in 

Medicare spending per beneficiary—unrelated to beneficiary health status

or outcomes—provides evidence that health needs alone do not determine 

spending.3

 Medicare physician payment policy does little to change this 

situation; payments under the Medicare program are not designed to foster 

individual physician responsibility for the most effective medical 

practices. In contrast, some public and private health care purchasers have

initiated programs to identify efficient physicians and encourage patients 

to obtain care from these physicians.

With these circumstances in mind, and in fulfillment of a 2003 mandate to 

examine aspects of physician compensation in Medicare,4

 we conducted a 

study focusing on efficiency with respect to physician practices. In our 

study, we use the term efficiency to mean providing and ordering a level of 

services that is sufficient to meet a patient’s health care needs but not 

excessive, given a patient’s health status. My remarks today will address 

(1) physician-focused approaches taken by other health care purchasers to 

address inefficient medical practices, (2) our efforts to estimate the 

prevalence of inefficient physicians in Medicare, and (3) the 

methodological tools available to the Centers for Medicare & Medicaid 

Services (CMS) to identify inefficient physician practice patterns 

programwide. My remarks today are based on our study’s preliminary 

findings. 

 2

GAO, Medicare Physician Payments: Trends in Service Utilization, Spending, and Fees 

Prompt Consideration of Alternative Payment Approaches, GAO-06-1008T (Washington,

D.C.: July 25, 2006) and Medicare Physician Payments: Concerns about Spending Target

System Prompt Interest in Considering Reforms, GAO-05-85 (Washington, D.C.: Oct. 8,

2004). 

3

Elliot S. Fisher, et al., “The Implications of Regional Variations in Medicare Spending. 

Part 1: The Content, Quality, and Accessibility of Care,” Annals of Internal Medicine, 

vol. 138, no. 4 (2003): 273-287.

4

MMA, Pub. L. No. 108-173, § 953, 117 Stat. 2066, 2428. 

Page 2 GAO-07-567T
In conducting our study, we interviewed representatives of 10 health care 

purchasers,5

 including 5 commercial health plans, 1 provider network, 1 

trust fund jointly managed by employers and a union, and 3 government 

agencies—2 in U.S. states and 1 in a Canadian province. We selected these 

purchasers because their programs that examine physician practices 

explicitly assess efficiency—unlike many such programs that assess 

quality only. We also estimated the prevalence in Medicare of physicians 

likely to practice inefficiently. To do this work, we examined 2003

Medicare claims data from 12 metropolitan areas. We ensured the 

reliability of the claims data used in this report by performing appropriate 

electronic data checks and by interviewing officials at CMS who were 

knowledgeable about the data. In addition, we discussed the facts 

contained in this statement with CMS officials. The study on which these 

remarks are based has been conducted beginning September 2005 in 

accordance with generally accepted government auditing standards. 

In summary, the health care purchasers we studied examined the practice 

patterns of physicians in their networks and used the results to promote 

efficiency. They adopted a range of incentives—from steering patients 

toward the most efficient providers to excluding a physician from the 

network—to encourage physicians to provide care efficiently; some 

reported savings as a result of these efforts. Using our own methodology 

to analyze the practice patterns of physicians in Medicare, we found that 

physicians who were likely to be practicing medicine inefficiently were

present in all 12 of the metropolitan areas studied. CMS also has the tools 

to identify physicians in Medicare who are likely to practice medicine 

inefficiently, including comprehensive claims information, sufficient 

numbers of physicians in most areas to construct adequate sample sizes, 

and methods to adjust for differences in beneficiary health status. 

 5

In our study, we use “purchaser” to mean health plans as well as agencies that manage

care purchased from health plans; one of the entities we interviewed is a provider network

that contracts with several insurance companies to provide care to their enrollees. 

Page 3 GAO-07-567T
Consistent with the premise that physicians play a central role in the 

generation of most health care expenditures, some health care purchasers 

employ physician profiling to promote efficiency. We selected 10 health 

care purchasers that profiled physicians in their networks—that is, 

compared physicians’ performance to an efficiency standard to identify 

those who practiced inefficiently. To measure efficiency, the purchasers 

we spoke with generally compared actual spending for physicians’ patients 

to the expected spending for those same patients, given their clinical and 

demographic characteristics.6

 Most purchasers said they also evaluated 

physicians on quality. The purchasers linked their efficiency profiling 

results and other measures to a range of physician-focused strategies to 

encourage the efficient provision of care. Some of the purchasers said 

their profiling efforts produced savings. 

Some Health Care 

Purchasers Use 

Physician Profiling 

Results to Encourage 

Efficient Medical 

Practice 

Health Care Purchasers 

Profiled Physicians across 

Several Dimensions to 

Evaluate Physician 

Performance 

The 10 health care purchasers we examined used two basic profiling 

approaches to identify physicians whose medical practices were 

inefficient. One approach focused on the costs associated with treating a

specific episode of illness—such as a stroke or heart attack. The other 

approach focused on costs, within a specific period, associated with the 

patients in a physician’s practice. Both approaches used information from 

medical claims data to measure resource use and account for differences

in patients’ health status. In addition, both approaches assessed physicians

(or physician groups) based on the costs associated with services that they 

may not have provided directly, such as costs associated with a 

hospitalization or services provided by a different physician.

Although the methods used by purchasers to predict patient spending 

varied, all used patient demographics and diagnoses. The methods they 

used generally computed efficiency measures as the ratio of actual to 

expected spending for patients of similar health status. In addition, all of 

the purchasers we interviewed profiled specialists and all but one also 

profiled primary care physicians. Several purchasers said they would only 

profile physicians who treated an adequate number of cases, since such 

analyses typically require a minimum sample size to be valid. 

 6

Generally, estimates of an individual’s expected spending are based on factors such as 

patient diagnoses and demographic traits. 

Page 4 GAO-07-567T
The health care purchasers we examined directly tied the results of their 

profiling methods to incentives that encourage physicians in their 

networks to practice efficiently. The incentives varied widely in design, 

application, and severity of consequences. Purchasers used incentives that 

included 

• educating physicians to encourage more efficient care, 

• designating in their physician directories those physicians who met 

efficiency and quality standards, 

• dividing physicians into tiers based on efficiency and giving enrollees 

financial incentives to see physicians in particular tiers, 

• providing bonuses or imposing penalties based on efficiency and quality 

standards, and 

• excluding inefficient physicians from the network. 

Evidence from our interviews with the health care purchasers suggests 

that physician profiling programs may have the potential to generate 

savings for health care purchasers. Three of the 10 purchasers reported 

that the profiling programs produced savings and provided us with 

estimates of savings attributable to their physician-focused efficiency

efforts. For example, 1 of those purchasers reported that growth in 

spending fell from 12 percent to about 1 percent in the first year after it 

restructured its network as part of its efficiency program, and an actuarial 

firm hired by the purchaser estimated that about three quarters of the 

reduction in expenditure growth was most likely a result of the efficiency 

program. Three other purchasers suggested their programs might have

achieved savings but did not provide savings estimates, while four said 

they had not attempted to measure savings at the time of our interviews. 

Health Care Purchasers 

Linked Physician Profiling 

Results to a Range of 

Incentives Encouraging 

Efficiency 

Physician Profiling Has 

Potential for Savings 

Page 5 GAO-07-567T
Having considered the efforts of other health care purchasers in profiling 

physicians for efficiency, we conducted our own profiling analysis of 

physician practices in Medicare and found individual physicians who were 

likely to practice medicine inefficiently in each of 12 metropolitan areas 

studied. We focused our analysis on generalists—physicians who 

described their specialty as general practice, internal medicine, or family 

practice. We did not include specialists in our analysis. We selected areas 

that were diverse geographically and in terms of Medicare spending per 

beneficiary.

Under our methodology, we computed the percentage of overly expensive 

patients in each physician’s Medicare practice. To identify overly 

expensive patients, we grouped the Medicare beneficiaries in the 

12 locations according to their health status, using diagnosis and 

demographic information. Patients whose total Medicare expenditures—

for services provided by all health providers, not just physicians—far 

exceeded those of other patients in their same health status grouping were 

classified as overly expensive. Once these patients were identified and 

linked to the physicians who treated them, we were able to determine 

which physicians treated a disproportionate share of these patients 

compared with their generalist peers in the same location. We classified 

these physicians as outliers—that is, physicians whose proportions of 

overly expensive patients would occur by chance less than 1 time in 100.

We concluded that these outlier physicians were likely to be practicing 

medicine inefficiently.

7

Based on 2003 Medicare claims data, our analysis found outlier generalist 

physicians in all 12 metropolitan areas we studied. In two of the areas, 

outlier generalists accounted for more than 10 percent of the area’s 

generalist physician population. In the remaining areas, the proportion of 

outlier generalists ranged from 2 percent to about 6 percent of the area’s 

generalist population. 

Through Profiling, We

Found That 

Physicians Likely to 

Practice Inefficiently 

in Medicare Were 

Present in All 

Selected Areas 

 7

Our approach to estimating outlier physicians was conservative in that it captures only the

most extreme practice patterns; therefore, our analysis does not mean that all nonoutlier

physicians were practicing efficiently. 

Page 6 GAO-07-567T
Medicare’s data-rich environment is conducive to identifying physicians 

who are likely to practice medicine inefficiently. Fundamental to this 

effort is the ability to make statistical comparisons that enable health care 

purchasers to identify physicians practicing outside of established 

standards. CMS has the tools to make statistically valid comparisons, 

including comprehensive medical claims information, sufficient numbers 

of physicians in most areas to construct adequate sample sizes, and 

methods to adjust for differences in patient health status. 

Among the resources available to CMS are the following: 

CMS Has Tools 

Available to Profile 

Physicians for 

Efficiency 

• Comprehensive source of medical claims information. CMS maintains a 

centralized repository, or database, of all Medicare claims that provides a 

comprehensive source of information on patients’ Medicare-covered 

medical encounters. Using claims from the central database, each of which

includes the beneficiary’s unique identification number, CMS can identify

and link patients to the various types of services they received and to the

physicians who treated them. 

• Data samples large enough to ensure meaningful comparisons across 

physicians. The feasibility of using efficiency measures to compare 

physicians’ performance depends, in part, on two factors: the availability 

of enough data on each physician to compute an efficiency measure and 

numbers of physicians large enough to provide meaningful comparisons. 

In 2005, Medicare’s 33.6 million fee-for-service enrollees were served by 

about 618,800 physicians. These figures suggest that CMS has enough 

clinical and expenditure data to compute efficiency measures for most 

physicians billing Medicare. 

• Methods to account for differences in patient health status. Because 

sicker patients are expected to use more health care resources than 

healthier patients, the health status of patients must be taken into account 

to make meaningful comparisons among physicians. Medicare has 

significant experience with risk adjustment. Specifically, CMS has used 

increasingly sophisticated risk adjustment methodologies over the past 

decade to set payment rates for beneficiaries enrolled in managed care 

plans. 

To conduct profiling analyses, CMS would likely make methodological

decisions similar to those made by the health care purchasers we 

interviewed. For example, the health care purchasers we spoke with made 

choices about whether to profile individual physicians or group practices; 

which risk adjustment tool was best suited for a purchaser’s physician and

enrollee population; whether to measure costs associated with episodes of

Page 7 GAO-07-567T
care or the costs, within a specific time period, associated with the 

patients in a physician’s practice; and what criteria to use to identify 

inefficient practice patterns. 

Our experience in examining what health care purchasers other than 

Medicare are doing to improve physician efficiency and in analyzing 

Medicare claims has enabled us to gain some insights into the potential of

physician profiling to improve Medicare program efficiency. A primary 

virtue of profiling is that, coupled with incentives to encourage efficiency,

it can create a system that operates at the individual physician level. In this 

way, profiling can address a principal criticism of the SGR system, which 

only operates at the aggregate physician level. Although savings from 

physician profiling alone would clearly not be sufficient to correct 

Medicare’s long-term fiscal imbalance, it could be an important part of a 

package of reforms aimed at future program sustainability. 

Mr. Chairman, this concludes my prepared remarks. I will be pleased to 

answer any questions you or the subcommittee members may have. 

For future contacts regarding this testimony, please contact 

A. Bruce Steinwald at (202) 512-7101 or at steinwalda@gao.gov. Contact 

points for our Offices of Congressional Relations and Public Affairs may 

be found on the last page of this statement. Other individuals who made 

key contributions include James Cosgrove and Phyllis Thorburn, Assistant 

Directors; Todd Anderson; Alex Dworkowitz; Hannah Fein; 

Gregory Giusto; Richard Lipinski; and Eric Wedum. 

Concluding 

Observations 

GAO Contacts and 

Acknowledgments 

(290614) Page 8 GAO-07-567T
This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
GAO’s Mission The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To

have GAO e-mail you a list of newly posted products every afternoon, go 

to www.gao.gov and select “Subscribe to Updates.” 

The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to: 

U.S. Government Accountability Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

PRINTED ON RECYCLED PAPER