Statement of

Donald B. Marron

Acting Director

Medicare’s Physician Payment Rates

and the Sustainable Growth Rate

before the

Subcommittee on Health

Committee on Energy and Commerce

U.S. House of Representatives

July 25, 2006

This document is embargoed until it is delivered at

10:00 a.m. (EDT), Tuesday, July 25, 2006. The

contents may not be published, transmitted, or

otherwise communicated by any print, broadcast,

or electronic media before that time.

Mr. Chairman, Congressman Brown, and Members of the Subcommittee, I am

pleased to appear before you today to discuss the Sustainable Growth Rate (SGR)

mechanism for setting Medicare’s physician payment rates.

The Supplemental Medical Insurance program (Part B of Medicare) uses a fee

schedule to pay for covered medical services provided by physicians. According

to CBO’s projections, payments to physicians under the fee schedule represent

16 percent of Medicare’s total spending for benefits in fiscal year 2006—

$60 billion of total expenditures of $375 billion.

Today, I am here to discuss how those fees are updated each year. My testimony

will cover the following topics:

# The current mechanism for updating payment rates for physicians’

services—the Sustainable Growth Rate method—has two key

components: a target level of expenditures (measured on both an annual

and a cumulative basis) and a method for adjusting payment rates in an

attempt to bring expenditures in line with the targets over time. If the SGR

method as currently specified is allowed to operate without legislative

changes, the Congressional Budget Office (CBO) estimates that fees for

physicians’ services will be reduced by between 4 percent and 5 percent

annually for at least the next several years.

# Legislation has prevented such cuts in recent years, and the Congress may

choose to override the SGR mechanism again or may choose to change or

replace it in the future. However, replacing projected reductions in

payment rates with annual increases would be costly.

# Setting appropriate fees for physicians’ services entails balancing the need

to pay providers enough to ensure beneficiaries’ access to care against the

budgetary pressures created by ever-growing health care costs and an

aging population.

# The Congress has a wide range of options for changing or replacing the

SGR mechanism. One important question is whether payment rates in the

future should be reduced to recoup the spending already incurred that

exceeded the SGR targets, along with any future spending above the

targeted amounts. I will discuss CBO’s estimates of the impact of three

illustrative approaches, including a one-year override of the scheduled

2007 reduction with the additional costs recouped in future years, a oneyear override without such recoupment, and replacing the SGR

mechanism with automatic updates to payment rates based on inflation.

The task of setting payment rates for Medicare services must be addressed in the

context of challenging long-run budgetary trends. The aging of the baby-boom

generation will significantly boost Medicare spending. If the nation spent the
1. The Medicare economic index measures changes in the cost of physicians’ time and operating

expenses; it is a weighted sum of the prices of inputs in those two categories. Most of the

components of the index come from the Bureau of Labor Statistics. Changes in the cost of

physicians’ time are measured using changes in nonfarm labor costs. Changes in “all-factor”

productivity are also incorporated into the index as a way of accounting for improvements in

physicians’ productivity. In practice, since there are usually gains in productivity from one year to

the next, including the productivity adjustment as part of the MEI results in a smaller rate of

growth than the price adjustments by themselves.

2. For a more detailed discussion of the history of payment rates, see the statement of Douglas HoltzEakin, Director, Congressional Budget Office, Medicare’s Physician Fee Schedule, before the

Subcommittee on Health, House Committee on Energy and Commerce (May 5, 2004).

2

same fraction of gross domestic product (GDP) on each Medicare beneficiary in

2030 that is spent today—a proposition that reflects only the increased number of

beneficiaries at that point (along with their projected mix by age and sex)—

Medicare spending in that year would reach a 5 percent share of GDP, compared

with today’s share of 3 percent, CBO projects. The fiscal implications of the baby

boomers’ aging are compounded by the fact that health care costs per beneficiary

have also been growing significantly faster than the economy as measured on a

per capita basis. If those trends continue and current law remains unchanged,

Medicare spending could climb to 7 percent of GDP—or higher—by 2030.

Historical Background

Since the Medicare program was created in 1965, several ways of determining

how much it pays physicians for each covered service have been used. Initially,

the program compensated physicians on the basis of their charges and allowed

them to bill beneficiaries for the full amount above what Medicare paid for each

service. In 1975, Medicare payments were still linked to what physicians charged,

but the annual increase in fees was limited by the Medicare economic index, or

MEI.1 Because those changes were not enough to prevent total payments from

rising more than desired, from 1984 though 1991 the yearly change in fees was

determined by legislation.

Starting in 1992, the charged-based payment system was replaced by the

physician fee schedule. The fee schedule bases payment for individual services on

measures of the relative resources used to provide them. The schedule itself was

not intended to control spending—it was designed to redistribute spending among

various physicians’ specialties. The schedule was updated using a combination of

the MEI and an adjustment factor designed to counteract changes in the volume

of services being delivered per beneficiary. That adjustment factor, known as the

volume performance standard (VPS), was based on the historical trend in volume.

However, the VPS mechanism led to highly variable changes in payment rates,

and the Congress replaced it with the current Sustainable Growth Rate method

starting in 1998.2
3

Experience Under the SGR Mechanism

The SGR mechanism aims to control spending on physicians’ services provided

under Part B of Medicare. It does so by setting an overall target amount of

spending (measured on both an annual and a cumulative basis) on certain types of

goods and services provided under Part B: payments for physicians’ services as

well as payments that Medicare makes for items—such as laboratory tests,

imaging services, and physician-administered drugs—that are furnished “incident

to” (in connection with) physicians’ services. Payment rates are adjusted annually

to reflect differences between actual spending and the spending target—upward if

spending is below the target, downward if spending is above the target.

The Congress had two main goals when it adopted the SGR mechanism: ensuring

adequate access to physicians’ services and controlling federal spending on those

services in a more predictable way than the VPS mechanism did. The SGR

mechanism has a mixed record with regard to those goals.

More than 90 percent of physician and nonphysician providers agree to

participate in Part B, and surveys generally show that beneficiaries do not

experience significant difficulties in getting access to care. However, that

situation may change if payment rates are significantly reduced, as will occur if

the SGR mechanism operates as currently specified in law.

From 1997 (which is when the SGR method started measuring expenditures)

through 2005, per-beneficiary spending on services paid for under the physician

fee schedule grew by 65 percent, or about 6.5 percent per year. In contrast, perbeneficiary spending in the rest of Medicare (excluding Medicare Advantage)

grew by about 35 percent over that same time period.

Aside from growth in Part B enrollment, which has averaged about 1 percent

annually since 1997, increases in spending subject to the fee schedule can be

attributed mainly to increases in the fees themselves and in the volume and

intensity of services being provided by physicians. Since 1997, the fees that

Medicare pays for each service have increased annually by an average of about

2 percent. Although some of the remaining increase has resulted from the addition

of covered services, most of the rest is attributable to growth in the volume and

intensity of services, which has averaged about 4.5 percent per year over the

period.

Since 2002, spending measured by the SGR method has consistently been above

the targets established by the formula. In 2005, expenditures counted under the

SGR method totaled $94.5 billion, about $14 billion more than the $80.4 billion

expenditure target for that year. Total spending since the SGR method was put

into place in 1997 now stands at about $30 billion above the system’s cumulative
3. Those figures include both spending by the Medicare program and beneficiaries’ cost-sharing

obligations for services. Cost sharing amounts to roughly 20 percent of the total spending counted

under the targets.

4. It is uncertain when such responses to declining payment rates would have a significant negative

effect on Medicare patients’ access to physicians’ services. Several organizations, including the

Government Accountability Office, the Medicare Payment Advisory Commission, and the Center

for Studying Health System Change, are monitoring changes in the willingness of physicians to

participate in Medicare and to accept new Medicare patients.

4

target.3 As a result, the SGR mechanism, under current law, will substantially

reduce payment rates for physicians’ services over the next several years.

Payment rates could decline by a total of 25 percent to 35 percent during that

period if physicians continue to provide services at the current rate.

Projected Spending for Physicians’ Services

Because of the impending reductions in payment rates required under current law,

Medicare spending on services provided by physicians is projected to grow

relatively slowly for the next several years. CBO estimates that the decline in

payment rates will be slightly more than offset by increases in enrollment and

growth in the volume and intensity of services being delivered. As a result, CBO

projects, Medicare spending on physicians’ services will grow in coming years,

but in 2012 it will be only 13 percent higher than it was in 2005, reflecting an

average annual growth rate of less than 2 percent. In contrast, from 1997 through

2005, such spending grew by an average of about 7.7 percent annually.

Considerable evidence exists that a reduction in payment rates leads physicians to

increase the volume and intensity of the services they perform. Although

their participation rates are currently very high, CBO also expects that some

physicians are likely to respond to continuing reductions in payment rates by

declining to participate in the Medicare program.4 Such responses to changes in

payment rates do not explicitly affect CBO’s projections of spending on

physicians’ services over the long-term because the SGR mechanism will adjust

payment rates to offset changes in the volume of physicians’ services furnished to

Medicare patients. As a result, the reductions in payment rates will be smaller

than the estimated 25 percent to 35 percent if the volume of physicians’ services

provided to Medicare participants declines because of either changes in the

number of participating physicians or in the volume of services being provided.

From 1997 through 2001, cumulative spending governed by the SGR mechanism

was slightly below the expenditure target set by the formula (see Figure 1).

Starting in 2002, cumulative spending rose above the cumulative target.

According to CBO’s projections through 2016, if the current SGR mechanism is
5. CBO projects that cumulative spending will fall slightly below the cumulative target in 2015 and

remain below for a short period of time. That is the result of the gradual nature of the adjustments

to bring spending in line with the expenditure targets.

5

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

-40

0

40

80

120

160

200

Actual Projected

Spending Counted

Toward SGR Target

Cumulative Spending

Over/Under Targets

SGR Expenditure Target

Figure 1.

Sustainable Growth Rate Spending Compared with

Expenditure Targets

(Billions of dollars)

Source: Congressional Budget Office.

Note: SGR = sustainable growth rate.

permitted to operate, the cumulative deficit will continue to grow for several more

years but will then shrink as the annual growth in spending is slowed by the

reductions in payment rates called for by the SGR mechanism. Toward the end of

the period, CBO’s projections show cumulative spending coming back into line

with the cumulative target.5 The SGR mechanism is designed in such a way so

that if viewed over a long enough period of time, cumulative spending will equal

the cumulative target.

How the SGR Mechanism Works

The SGR mechanism consists of three components, each of which is based on

statutory formulas:
6. Payments for some services, such as laboratory tests, are based on their own fee schedules, which

are usually updated annually for inflation. Payments for physician-administered drugs are based on

market prices.

6

# Expenditure targets, which are established by applying a growth rate

(calculated by formula) to spending during a base period;

# The growth rate; and

# Annual adjustments to payment rates for physicians’ services, which are

designed to bring spending in line with the expenditure targets over time.

The Expenditure Targets

The SGR mechanism establishes both year-by-year and cumulative spending

targets (the law refers to the target spending levels as “allowed expenditures”).

Included in the targets is Medicare’s spending on services covered by the

physician fee schedule and services provided “incident to” a visit to a physician.

The fee schedule determines how much physicians get paid for each of the

services they provide. The “incident-to” goods and services include laboratory

tests and physician-administered drugs, such as chemotherapeutic ones; payment

rates for those services are not determined by the physician fee schedule.6

Services on that fee schedule accounted for about 85 percent of all spending

counted toward the SGR target in 2005.

The SGR method uses spending that occurred between April 1, 1996, and

March 31, 1997, as the base for all future spending counted toward the targets.

During that base period, the amount of spending counted under the method

totaled $48.9 billion. Each year, the spending target is updated from the base level

to reflect the growth rate determined by the SGR formula. That formula produced

a sustainable growth rate of 3.2 percent for 1998. Consequently, the expenditure

target that year was $50.5 billion ($48.9 multiplied by 1.032).

The annual targets are added together (along with the original base amount) to

produce a cumulative target. The cumulative target in 1998 was $99.4 billion

($48.9 billion plus $50.5 billion); according to the Centers for Medicare and

Medicaid Services (CMS), the cumulative target in 2005 had reached

$611.8 billion.

The Growth Rate

The expenditure targets are updated each year by applying a growth rate (the

SGR) that is designed to account for various factors that contribute to changes in

Part B spending. That growth rate incorporates the following factors:
7. The reduction in the SGR due to changes in law or regulation is mainly attributable to provisions

enacted in the Deficit Reduction Act (P.L. 109-362), most notably reductions in payment rates for

imaging services.

7

# First, it includes an adjustment for inflation that takes into account

changes in the prices of goods and services used by physicians’ practices

and in the prices that Medicare pays for “incident-to” services. The change

in prices of goods and services used by physicians’ practices is measured

by the Medicare economic index, which incorporates an adjustment for

changes in productivity, as measured by the change in “all-factor”

productivity in the economy as a whole. (When productivity rises, that

adjustment reduces the MEI below where it would be if based on price

increases alone.) The aggregate of those factors will be 2.6 percent for

2007, according to CMS’s estimate.

# Second, the rate incorporates changes in enrollment in Medicare’s fee-forservice sector, which CMS estimates will be a decline of 2.9 percent for

2007.

# Third, the SGR incorporates the estimated 10-year average annual growth

rate in real (inflation-adjusted) gross domestic product per capita, which

CMS estimates will be 2.2 percent.

# Fourth, the growth rate takes into account the effect of changes in law or

regulation that would affect spending for services subject to the SGR

mechanism—such as adding coverage of new benefits—which CMS

estimates will be -1.0 percent.7

Those four factors are multiplied to yield an overall growth rate that CMS

estimates will be 0.7 percent in 2007:

Change in physicians’ prices (1.026) x change in enrollment (0.971) x

change in real GDP per capita (1.022) x changes in law or regulation

(0.990) = 1.007

The expenditure target for services covered by the physician fee schedule in 2006

is $81.7 billion. (That amount includes both spending by the Medicare program

and cost-sharing obligations of beneficiaries.) Increasing the 2006 target by

0.7 percent results in an expenditure target of $82.3 billion for 2007.

In essence, the SGR method allows spending per beneficiary to grow with

inflation, with these additional adjustments:

# A reduction that assigns the benefits of productivity improvements to the

Medicare program;
8

# An increase—which could be considered an allowance for growth in the

volume and intensity of services—equal to the real change in GDP per

capita; and

# An increase or decrease to reflect any changes in the coverage offered by

the program.

Once a determination of the SGR has been made for a given calendar year

(usually around November 1 of the preceding year), it is not necessarily fixed. If

actual experience for one or more of the four growth factors differs from the

estimates in the original calculation, the SGR for that year can be changed. In

other words, if the SGR for 2007 is set assuming that fee-for-service enrollment

will decrease by 2.9 percent and in actuality it changes by a different amount, the

SGR for that year will subsequently be adjusted. In that case, the rates paid in

2007 would not change, but the cumulative target for subsequent years would be

adjusted. The SGR—and therefore the expenditure targets—for a particular year

can be retroactively adjusted for up to two years.

Annual Adjustments to Payment Rates

The annual update to payment rates under the physician fee schedule involves two

components: an inflation adjustment according to the MEI and an “update

adjustment factor.” The adjustment factor is based on the relationship between

actual spending for services subject to the SGR and the formula’s expenditure

targets. If actual spending under the SGR does not deviate from the expenditure

targets, payment rates under the physician fee schedule are simply increased by

the MEI.

If actual spending deviates from the expenditure targets, annual updates to

payment rates for physicians’ services are adjusted. Those adjustments are

designed so that, over a period of several years, cumulative spending will be

brought back into line with the cumulative expenditure target. The update

adjustment formula takes into account both the relationship between spending in a

given year and that year’s expenditure target and the relationship between

cumulative spending and the cumulative expenditure target.

If actual spending is more than the targets, the update adjustment factor will be

negative (that is, it will reduce the amount of the increase that would otherwise

occur to reflect inflation); if actual spending is less than the targets, the update

adjustment factor will be positive. The law sets an upper and lower limit on the

update adjustment factor—it cannot exceed an increase of 3 percent or a reduction

of 7 percent. For 2006, CMS determined that cumulative spending was about

$30 billion above the expenditure targets and that the update adjustment factor

determined by the formula would have been -21 percent; thus, the statutory limit
8. (1 + 0.028) x (1 - 0.07) = 0.956.

9

of -7 percent was used. Consequently, in 2006, payment rates for physicians were

scheduled to decrease by 4.4 percent: a 2.8 percent inflation adjustment was more

than offset by an update adjustment factor of -7 percent.8 However, the Deficit

Reduction Act overrode the formula for 2006 and held payment rates constant at

their 2005 level.

Looking forward, CBO projects that spending for physicians’ services will

continue to exceed the cumulative target for the next several years. Unless it is

modified again, the SGR method will reduce payment rates beginning in 2007

and will keep updates below inflation through at least 2012.

It is important to note that under the SGR mechanism, the adjustment factor

applies only to the physician fee schedule and not to payment rates for “incidentto” services, which account for about 15 percent of the spending counted toward

the SGR targets. Consequently, the SGR mechanism will adjust payment rates for

physicians’ services in future years to offset any difference between the rate of

growth of spending for “incident-to” services and the growth rate of the SGR

expenditure targets. If spending for the “incident-to” services grows faster than

the SGR targets, payment rates for physicians’ services will be reduced to

compensate for that increase. Prior to changes in the way physician-administered

drugs were paid for in 2004, such “incident-to” spending experienced several

years of double-digit growth. The share of SGR-related spending accounted for

by physician-administered drugs increased from about 7 percent in 2001 to

9 percent in 2005.

Recent Legislation Affecting the SGR

Since 2002, the SGR method has called for reductions in physician payment rates.

In 2002, payment rates were cut by 4.8 percent, and CMS determined that rates

would be further reduced by 4.4 percent in 2003. In the Consolidated

Appropriation Resolution of 2003 (P.L. 108-7), the Congress responded to that

imminent reduction by allowing the Administration to boost the cumulative SGR

expenditure target, thereby producing a 1.6 percent increase in payment rates for

physicians’ services in 2003.

Spending continued to exceed the target and—if it had been allowed to

operate—the SGR mechanism would have reduced payment rates in 2004. The

Congress and the President acted to prevent such a reduction. As part of the

Medicare Modernization Act (P.L. 108-173), they replaced the scheduled rate

reduction with increases of 1.5 percent in both 2004 and 2005. The Deficit

Reduction Act (P.L. 109-362) held 2006 payment rates at their 2005 level,

overriding an impending reduction of 4.4 percent.
9. Any increase in spending for physicians’ services would increase the “benchmarks” that Medicare

uses to determine how much the program pays for beneficiaries in the Medicare Advantage

program. At the same time, about one-quarter of the changes in spending for physicians’ services

and for Medicare Advantage would be offset by changes in receipts from premiums that

beneficiaries pay the government. However, legislation could specify that Part B premiums would

not be adjusted to reflect changes in spending resulting from changes in payment rates for

physicians' services. But such a "premium hold-harmless" provision would increase federal costs

by about 30 percent. The appendix includes estimates for several options that would include such a

provision.

10

The budgetary effect of legislative actions to override cuts in 2004, 2005, and

2006 was twofold. Federal spending on Medicare Part B benefits grew more than

it would have otherwise. In addition, because of the specification that increases in

the payment rates should not be considered a change in law or regulation for

purposes of determining the expenditure target, the gap between cumulative

spending and the cumulative target became larger than it would have been

otherwise. Under the current SGR rules, growth in spending occurring as a result

of those rate increases will eventually be recouped by future adjustments to

payment rates. Consequently, the budgetary cost of any future legislative

increases in payment rates was increased.

Budgetary Implications of Changing the SGR

With the application of the SGR mechanism in current law likely to reduce

physician payment rates by between 4 percent and 5 percent annually for the next

several years, various options have been put forward to modify that mechanism.

This testimony presents estimates for three illustrative examples, including fully

replacing the SGR targets with annual updates based on inflation (the appendix

includes estimates for a number of other options). Each policy option would

increase payments for physicians’ services relative to those that would be made

under current law and, thereby, also increase the Part B premiums that

beneficiaries pay to the government and the payments that the government makes

for beneficiaries enrolled in Medicare Advantage.9 The budget estimates reflect

all three of those effects. (The upcoming graphs, however, focus solely on the

gross changes in spending for physicians’ services.)

Option 1: Increase payment rates by 1 percent in 2007 but do not treat the update

as a change in law or regulation. This option would override the update

adjustment factor during 2007 and increase the payment rate under the physician

fee schedule by 1 percent that year. If that action was not considered a change in

law or regulation, the SGR expenditure targets would remain the same, and the

difference between cumulative spending and the cumulative expenditure targets

would be larger than is estimated under current law. Thus, the increase in

spending attributed to the higher payment rate would eventually be recouped by

the SGR mechanism, causing payment rates to be lower in the future than they

would otherwise have been. Because the maximum adjustment factor of
11

Figure 2.

Spending on Physicians’ Services with a 1 Percent Update

in 2007 That Is Not Considered a Change in Law or

Regulation

(Billions of dollars)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

0

50

60

70

80

90

100

110

120

130

Baseline

Physician Spending

Physician Spending

Under Option

Source: Congressional Budget Office.

-7 percent is projected to apply for the next several years, recouping the costs of

this option would begin after that period has ended.

Spending for physicians’ services under this option would be higher through 2012

and lower in subsequent years than the amount projected under current law (see

Figure 2). According to CBO’s estimates, this option would increase net federal

outlays by $13 billion over the 2007-2011 period and by $6 billion over the 2007-

2016 period. Under this option, spending per beneficiary would be about

5 percent lower in 2016 than it would be under current law.

Option 2: Increase payment rates by 1 percent in 2007 and do treat the update as

a change in law or regulation. This option would override the update adjustment

factor during 2007 and increase payment rates under the physician fee schedule

by 1 percent that year. If that action was considered a change in law or regulation,

the SGR would be adjusted to account for the increased payment rate, and the

difference between cumulative spending and the cumulative targets would be
12

Figure 3.

Spending on Physicians’ Services with a 1 Percent Update

in 2007 That Is Considered a Change in Law or

Regulation

(Billions of dollars)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

0

50

60

70

80

90

100

110

120

130

Baseline

Physician Spending

Physician Spending

Under Option

Source: Congressional Budget Office.

largely unchanged from current law. Spending increases resulting from this

option would not be recouped by the SGR mechanism.

Spending for physicians’ services under this option would be higher in every year

than under current law (see Figure 3). By CBO’s estimates, this option would

increase net federal outlays by $13 billion over the 2007-2011 period and by

$31 billion over the 2007-2016 period. Under this option, spending per

beneficiary would be about 5 percent higher in 2016 than it would be under

current law.

Option 3: Allow payment rates to increase by medical inflation. This option

would repeal the current SGR mechanism and increase payment rates each year

by the Medicare economic index. Instead of being reduced by 4 percent to

5 percent annually for the next several years, payment rates would increase by

between 2 percent and 3 percent annually. Those updates would not be subject to

further adjustments, and spending increases would not be recouped.
13

Figure 4.

Spending on Physicians’ Services If the Sustainable

Growth Rate Is Replaced with Updates Based on the

Medicare Economic Index

(Billions of dollars)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

0

50

60

70

80

90

100

110

120

130

Baseline

Physician Spending

Physician Spending

Under Option

Source: Congressional Budget Office.

Spending for physicians’ services under this option would grow at an average

annual rate of about 7.4 percent over the next 10 years, CBO estimates, compared

with a 4.5 percent increase projected under current law. According to CBO’s

estimates, this option would increase net federal outlays by $58 billion over the

2007-2011 period and $218 billion over the 2007-2016 period. Under this option,

spending per beneficiary would be about 30 percent higher in 2016 than it would

be under current law (see Figure 4).

15

Appendix A

Budget Estimates for Proposals to

Change Physician Payment Rates

Table A-1.

Estimated Changes in Net Federal Outlays from Alternative Proposals

for Changing Physician Payment Rates

(Billions of dollars, by fiscal year)

Proposal 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

2007-

2011

2007-

2016

0 Percent Update in 2007 1.1 2.4 2.4 2.5 2.5 2.2 -0.1 -2.3 -2.8 -3.2 10.8 4.7

0 Percent Update in 2007 and

Premium Hold Harmless 1.7 3.1 3.1 3.1 3.1 2.7 -0.5 -3.0 -3.6 -4.0 14.1 5.6

0 Percent Update in 2007 and 2008 1.1 3.7 4.9 4.9 5.0 4.7 2.1 -2.5 -5.0 -5.7 19.6 13.2

0 Percent Update in 2007 and 2008 and

Premium Hold Harmless 1.7 5.0 6.2 6.2 6.3 5.9 2.1 -3.6 -6.4 -7.3 25.4 16.1

0.5 Percent Update in 2007 1.2 2.7 2.7 2.7 2.7 2.5 -0.1 -2.6 -3.3 -3.6 12.0 4.9

1 percent Update in 2007 1.3 2.9 2.9 3.0 3.0 2.7 * -2.7 -3.6 -4.0 13.1 5.5

1 Percent Update in 2007 and

Premium Hold Harmless 2.0 3.7 3.7 3.8 3.8 3.4 -0.4 -3.6 -4.6 -5.1 17.0 6.6

1.5 Percent Update in 2007 1.4 3.2 3.2 3.2 3.2 3.0 0.3 -2.8 -3.8 -4.3 14.2 6.7

1.5 Percent Update in 2007 and

Premium Hold Harmless 2.2 4.0 4.0 4.1 4.1 3.7 -0.1 -3.7 -4.9 -5.4 18.4 8.0

1.5 Percent Update in 2007 and 2008 1.4 4.9 6.5 6.5 6.6 6.4 3.7 -1.5 -5.9 -7.8 25.9 20.7

1.5 Percent Update in 2007 and 2008 and

Premium Hold Harmless 2.2 6.6 8.2 8.2 8.3 8.0 4.2 -2.6 -7.9 -10.0 33.6 25.3

Automatic MEI Update (Replace SGR) 1.6 6.3 11.1 16.4 22.7 27.7 31.9 33.0 33.5 34.2 58.0 218.2

Automatic MEI Update (Replace SGR) and

Premium Hold Harmless 2.4 8.3 14.3 20.9 28.7 35.0 39.8 41.1 41.7 42.5 74.7 274.7

Freeze Physician Payment Rates at 2006

Level Through at Least 2016 1.1 4.2 7.3 10.8 15.0 18.3 20.4 20.1 16.8 13.1 38.4 127.1

Source: Congressional Budget Office.

Notes: Except for the last three options, estimates assume that the SGR mechanism would apply after the specified period. They also

assume that proposed changes to updates are not considered changes in law or regulation, and therefore increases in spending

would be subject to being recouped by application of the SGR mechanism. Proposals that include a “premium hold-harmless”

provision would exclude increases or decreases in spending attributable to them from calculations of the Part B premium.

* = cost or savings of less than $50 million.

MEI = Medicare economic index; MA = Medicare Advantage; SGR = sustainable growth rate.