United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Health, 

Committee on Energy and Commerce, 

House of Representatives 

MEDICARE PHYSICIAN 

PAYMENTS 

Trends in Service 

Utilization, Spending, and 

Fees Prompt Consideration 

of Alternative Payment 

Approaches 

Statement of A. Bruce Steinwald 

Director, Health Care 

For Release on Delivery

Expected at 10:00 a.m. EDT 

Tuesday, July 25, 2006

 

GAO-06-1008T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

July 25, 2006

MEDICARE PHYSICIAN PAYMENTS

Trends in Service Utilization, Spending, 

and Fees Prompt Consideration of 

Alternative Payment Approaches 

Highlights of GAO-06-1008T, a testimony 

before the Subcommittee on Health, 

Committee on Energy and Commerce, 

House of Representatives

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).

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.

www.gao.gov/cgi-bin/getrpt?GAO-06-1008T.

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 Medicare’s payments to 

physicians and consider potential payment reforms to 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. As you know, Medicare uses a 

system based on spending targets, known as the sustainable growth rate 

(SGR) system, to annually update physician fees. From 1999—the first 

year that the SGR system was used to update Medicare’s physician fees—

through 2001, annual fee increases ranged from 2.3 percent to 5.5 percent. 

However, 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 Medicare trustees project that the SGR system will 

likely reduce fees by about 5 percent per year for 9 years beginning in 

2007.

2

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. At the same time, there are also concerns about 

Medicare spending growth and the long-term fiscal sustainability of the 

program. 

As you requested, my comments today describe the issues that Medicare 

faces in annually updating physician fees, recent growth in the provision 

of physician services, and considerations for potential physician fee 

update reforms. Specifically, I will discuss (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 

 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. 

2

Boards of Trustees of the Federal Hospital Insurance (HI) and Federal Supplementary 

Medical Insurance (SMI) Trust Funds, 2006 Annual Report of the Boards of Trustees of the 

Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds 

(Washington, D.C.: May 1, 2006). 

Page 1 GAO-06-1008T 
those services from 2000 through 2005, and (4) options for revising or 

replacing the SGR system. 

My testimony today is based on two previously issued GAO reports. 

Specifically, my comments on the SGR system, its projected effect on 

physician fees, and potential alternatives for that system are based on 

findings contained in our October 2004 report on the SGR system.3

 We 

updated these findings to include information on Medicare physician fee 

updates and spending in 2005 from the 2006 report of the Medicare 

trustees.4

 My comments on trends in physicians’ provision of services and 

spending for those services are derived from our July 2006 report on 

Medicare physician services.5, 6

 To study trends, we analyzed 100 percent of 

physician claims for services performed during the first 28 days of April in 

each year from 2000 through 2005. Whereas our 2004 report included all 

physician services regardless of whether they were performed by a 

physician or a physician replacement—such as physician assistant—our 

2006 report focused exclusively on services performed by a physician. All 

references to physicians, beneficiaries, services, and spending in this 

statement pertain exclusively to Medicare’s traditional fee-for-service 

(FFS) program, except where otherwise noted. Our work to update our 

2004 report was performed during July 2006; all work was done according 

to generally accepted government auditing standards. 

In summary, the SGR system is designed to apply financial brakes 

whenever spending for physician services and certain other items and 

services commonly performed by physicians or furnished in a physician’s

office exceeds predefined spending targets. The SGR system allows for 

some increases in the number of services delivered to each beneficiary—

known as volume—and the complexity or costliness of those services—

known as intensity. However, if spending growth caused by increases in 

volume and intensity exceeds the average growth in the national economy, 

 3

GAO, Medicare Physician Payments: Concerns about Spending Target System Prompt

Interest in Considering Reforms, GAO-05-85 (Washington, D.C.: Oct. 8, 2004). 

4

Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical 

Insurance Trust Funds. 

5

GAO, Medicare Physician Services: Use of Services Increasing Nationwide and

Relatively Few Beneficiaries Report Major Access Problems, GAO-06-704 (Washington,

D.C.: July 21, 2006). 

6

Unless otherwise noted, the term “physician services” in this statement refers to items and 

services listed in Social Security Act § 1848(j)(3). 

Page 2 GAO-06-1008T 
as measured by the gross domestic product (GDP) per capita, the SGR 

system reduces fee updates to help moderate spending growth. 

There are two principal reasons why physician fees are projected to 

decline under the SGR system beginning in 2007. One reason is that 

volume and intensity spending increases have been growing at more than 

double the rate allowed under the SGR system. The other reason is that 

legislation mandated minimum physician fee updates for the years 2004 

through 2006, but did not raise the spending targets for those years. The 

SGR system, which is designed to keep spending in line with its targets, 

must reduce fees beginning in 2007 to offset the excess spending 

attributable to both volume and intensity increases and the legislated fee 

updates. 

From 2000 through 2005, Medicare spending for physician services grew 

rapidly. Our analysis of Medicare claims shows that an increasing 

proportion of beneficiaries obtained care from physicians and the volume

and intensity of the services provided increased from April 2000 to April 

2005. Similarly, the number of physicians billing Medicare and the total 

allowed charges per billing physician also increased. 

In general, proposals to reform Medicare’s method for updating physician

fees would either (1) eliminate spending targets and establish new 

considerations for the annual fee updates or (2) retain spending targets, 

but modify certain aspects of the current system. Either approach could be

complemented by focused efforts to moderate volume and intensity 

growth directly. 

Medicare faces the challenge of moderating the growth in spending for 

physician services while ensuring that physicians are paid fairly so that 

beneficiaries have appropriate access to their services. Concerns have 

been raised that access to physician services could eventually be 

compromised if the SGR system is left unchanged and the projected fee 

cuts become a reality. Although the trend could be reversed if fees were to

decline substantially, our analysis of data from April 2000 to April 2005 

indicates that in recent years beneficiary access to physicians and the 

services they provide has increased. The increased use of physician 

services, however, raises concerns about the accompanying growth in 

Medicare spending for those services. 

Page 3 GAO-06-1008T 
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. As policymakers 

consider options for updating physician fees, it is important to be mindful 

of the serious financial challenges facing Medicare and the need to design 

policies that help ensure the long-term sustainability and affordability of 

the program. 

Although the current focus of concern is largely on the potential for 

several years of declining physician fees, the historic and continuing 

challenge for Medicare is to find ways to moderate the rapid growth in 

spending for physician services. Before 1992, the fees that Medicare paid

for those services were largely based on physicians’ historical charges.7

Spending for physician services grew rapidly in the 1980s, at a rate that the

Secretary of Health and Human Services (HHS) characterized as out of 

control. Although Congress froze fees or limited fee increases in the 1980s, 

spending continued to rise because of increases in the volume and 

intensity of physician services. From 1980 through 1991, for example, 

Medicare spending per beneficiary for physician services grew at an 

average annual rate of 11.6 percent.

Background 

The ineffectiveness of fee controls alone led Congress to reform the way 

that Medicare set physician fees. The Omnibus Budget Reconciliation Act 

of 19898

 required the establishment of both a national fee schedule9 and a 

system of spending targets, which together first affected physician fees in 

1992.

10 From 1992 through 1997, annual spending growth for physician 

services was far lower than in the previous decade. The decline in 

spending growth was the result in large part of slower volume and 

 7

Medicare paid physicians on the basis of “reasonable charge,” defined as the lowest of the

physician’s actual charge, the customary charge (the amount the physician usually charged 

for the service), or the prevailing charge (based on comparable physicians’ customary 

charges). 

8

See Pub. L. No. 101-239, § 6102, 103 Stat. 2106, 2169-89. 

9

Medicare sets fees for more than 7,000 physician services based on the resources required 

to provide each service, adjusted for differences in the costs of providing services across 

geographic areas. 

10The first system of spending growth targets, known as the Medicare Volume Performance

Standard (MVPS), was in effect from 1992 through 1997. In 1998, the SGR system of 

spending targets replaced MVPS. 

Page 4 GAO-06-1008T 
intensity growth. (See fig. 1.) Over time, Medicare’s spending target system

has been revised and renamed. The SGR system, Medicare’s current 

system for updating physician fees, was established in the Balanced 

Budget Act of 1997 (BBA) and was first used to adjust fees in 1999.11

Figure 1: Growth in Volume and Intensity of Medicare Physician Services per Beneficiary, Selected Years, 1980-2005 

Percentage

-2

0

2

4

6

8

10

1980 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: GAO analysis of data from CMS and the Boards of Trustees of the Federal HI and SMI Trust Funds.

8.3

3.7

7.6

9.7

3.9

6.5

9.0

9.4

0.2

-0.7

-0.2

1.5

2.9

2.0

1.2

3.9 4.1

6.3

4.5

6.1

7.3

1.7

Note: Represents combined effect of volume and intensity growth. Data are for beneficiaries in the 

traditional FFS program. Spending for end-stage renal disease patients is not included. From 1980 

through 1992, volume and intensity of services changes are based on Medicare outlays for all 

physician services. From 1993 through 2005, volume and intensity of services changes are based on

Medicare outlays for physician services covered by the fee schedule. 

Following the implementation of the fee schedule and spending targets in 

1992 through 1999, average annual growth in volume and intensity of 

service use per beneficiary fell to 1.1 percent. More recently, volume and

intensity growth has trended upward, rising at an average annual rate of 

more than 5 percent from 2000 through 2005. Although this average annual 

rate of growth remains below that experienced before spending targets 

were introduced, the recent increases in volume and intensity growth are a 

reminder that inflationary pressures continue to challenge efforts to 

moderate growth in physician expenditures. 

 11See Pub. L. No. 105-33, § 4503, 111 Stat. 251, 433-34. BBA set a specific fee update for 

1998. See BBA, § 4505, 111 Stat. 435-37. 

Page 5 GAO-06-1008T 
The SGR system establishes spending targets to moderate spending 

increases caused by excess growth in volume and intensity. Services 

covered by the SGR system’s spending targets include physician services 

and other items and services, such as clinical laboratory services, specified

by the Secretary of HHS, that are commonly performed or furnished by 

physicians or in a physician’s office. The SGR system’s spending targets do

not cap expenditures for SGR-covered services. Instead, spending in 

excess of the target triggers a reduced fee update or a fee cut. In this way, 

the SGR system applies financial brakes to spending for SGR-covered 

services and thus serves as an automatic budgetary control device. In 

addition, reduced fee updates signal physicians collectively and Congress 

that spending because of volume and intensity has increased more than 

allowed. 

SGR System Designed 

to Limit or Reduce 

Physician Fee 

Updates in Response 

to Excess Growth in 

Volume and Intensity 

To apply the SGR system, every year the Centers for Medicare & Medicaid 

Services (CMS) follows a statutory formula to estimate the allowed rate of

increase for spending on SGR-covered services and uses that rate to 

construct the spending target for the following calendar year.

12 The 

sustainable growth rate is the product of the estimated percentage change 

in (1) input prices for physician services and other SGR-covered services;13

(2) the average number of Medicare beneficiaries in the traditional fee-forservice 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. SGR spending targets are cumulative. That is, the 

sum of all spending for SGR-covered services since 1996 is compared to 

the sum of all annual targets since the same year to determine whether 

spending has fallen short of, equaled, or exceeded the SGR targets. The 

use of cumulative targets means, for example, that if actual spending has 

exceeded the SGR system targets, fee updates in future years must be 

lowered sufficiently both to offset the accumulated excess spending and to

slow expected spending for the coming year. 

 12This allowed rate is the sustainable growth rate from which the SGR system derives its

name. We use the abbreviation SGR when referring to the system and the full term of

sustainable growth rate when referring to the allowed rate of increase. 

13CMS calculates changes in physician input prices based on the growth in the costs of 

providing physician services as measured by the Medicare Economic Index, growth in the 

costs of providing laboratory tests as measured by the consumer price index for urban 

consumers, and growth in the cost of Medicare Part B prescription drugs included in SGR 

spending. 

Page 6 GAO-06-1008T 
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. When the SGR system was established, economic growth was 

seen as a benchmark that would allow for affordable increases in volume

and intensity. Currently, the SGR system’s benchmark for volume and 

intensity growth is projected to be about 2.2 percent annually.

14

Consequently, volume and intensity growth that exceeds 2.2 percent 

causes Medicare SGR-covered spending to exceed the SGR system’s 

target, while slower volume and intensity growth leads to spending that 

falls below the SGR target. 

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). If 

cumulative spending exceeds the target, the annual physician fee update

will be less than the change in MEI or may even be negative. Conversely, if 

cumulative spending falls short of the target, physicians benefit because 

the update will exceed the change in MEI. The SGR system places limits 

on the extent to which fee updates can deviate from MEI. In general, with 

an MEI of about 2 percent, the largest allowable fee decrease would be 

about 5 percent and the largest fee increase would be about 5 percent. 

 14To reduce the effect of business cycles on physician fees, MMA modified the SGR system 

to require that economic growth be measured as the 10-year moving average change in real

per capita GDP beginning in 2003. 

Page 7 GAO-06-1008T 
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. 

To offset the resulting excess spending, the SGR system calls for 

reductions in physician fees. 

Additional downward pressure on physician fees arises from the growth in 

spending for other Medicare services that are included in the SGR system, 

but that are not paid for under the physician fee schedule. Such services 

include laboratory tests and many Part B outpatient prescription drugs 

that physicians provide to patients.15 Because physicians influence the 

volume of services they provide directly—that is, fee schedule services—

as well as other items and services commonly performed by physicians or

furnished in a physician’s office, expenditures for both types of services 

were included when spending targets were introduced. To the extent that

spending for these other services grows larger as a share of overall SGR 

spending, additional pressure is put on fee adjustments to offset excess 

spending and bring overall SGR spending in line with the system’s targets. 

This occurs because the SGR system attempts to moderate spending only 

through the fee schedule, even when the excess spending is caused by 

expenditures for SGR-covered services which are not paid for under the 

fee schedule. 

Rapid Growth in

Volume and Intensity 

and Legislated 

Minimum Updates 

Contribute to 

Projected Decline in 

Medicare Physician 

Fees under 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)16 and the Deficit 

Reduction Act of 2005 (DRA)17 averted fee reductions projected for 2004

through 2006 by specifying minimum updates to physician fees for those 

years. The MMA-specified minimum annual increase of 1.5 percent 

 15Most of the Part B drugs that Medicare covers fall into three categories: those typically 

provided in a physician office setting (such as chemotherapy drugs), those administered 

through a durable medical equipment item (such as a respiratory drug given in conjunction 

with a nebulizer), and those that are patient administered and covered explicitly by statute 

(such as certain immunosuppressives). 

16Pub. L. No. 108-173, §601 (a)(1), 117 Stat. 2066, 2300. 

17Pub. L. No. 109-171, §5104(a)(2), 120 Stat. 4, 40-1 (2006). 

Page 8 GAO-06-1008T 
replaced SGR system fee reductions of 4.5 percent in 2004 and 3.3 percent 

in 2005. DRA had the effect of replacing a fee reduction of 4.4 percent in 

2006 with a 0.2 percent fee increase. 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. 

From 2000 through 2005, Medicare spending on physician services grew 

far faster than the growth in physician fees and the number of eligible

beneficiaries. Our analysis of Medicare claims data for services provided

during the first 28 days of April of each year indicates that from April 2000 

to April 2005 a growing percentage of beneficiaries obtained services from 

physicians. Among those beneficiaries who obtained such services, there 

were increases in the average number of services provided. 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. 

Medicare Spending on 

Physician Services 

Increased 

Substantially as 

Physicians Provided 

More Services and 

More Costly Types of 

Services 

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. On a per beneficiary basis, spending for physician services 

grew by approximately 45 percent. Annual per beneficiary spending 

increases ranged from a low of 2 percent in 2002 to a high of about 

11 percent in both 2001 and 2004. (See fig. 2.) It is important to note that 

even in 2002, a year in which fees were reduced by nearly 5 percent, 

Medicare spending per beneficiary for physician services went up. 

Page 9 GAO-06-1008T 
Figure 2: Percentage Change from Previous Year in Physician Fee Update and

Physician Services Spending per Beneficiary, 2001-2005

-6

-4

-2

0

2

4

6

10

12

2001 2002 2003 2004 2005

Percentage

Source: GAO analysis of data from the Boards of Trustees of the Federal HI and SMI Trust Funds.

Fee update

Spending per FFS beneficiary

8

4.8

10.7

1.9

-4.8

1.7

6.2

1.5

10.5

1.5

9.6

Note: Spending per beneficiary represents Medicare spending for beneficiaries in the traditional FFS 

program, net of beneficiary cost sharing. Spending for end-stage renal disease patients is not 

included. The physician fee schedule update figures shown do not reflect additional required 

adjustments, such as those for legislated changes and for budget neutrality. 

Proportion of Beneficiaries 

Receiving Physician 

Services Grew 

In general, the proportion of beneficiaries who received services from a 

physician rose during the period covered in our review. (See fig. 3.) 

Specifically, from 2000 through 2005, the proportion of beneficiaries 

receiving services during the month of April rose from about 41 percent to

about 45 percent. Although this measure declined slightly in April 2003, the 

proportion of beneficiaries receiving services remained a percentage point

higher than in April 2000 and the upward trend resumed in 2004. 

Page 10 GAO-06-1008T 
Nationwide, this measure increased in both urban and rural areas.18 The 

proportion of beneficiaries receiving services rose from about 42 percent 

in April 2000 to about 46 percent in April 2005 in urban areas and from 

about 39 percent in April 2000 to about 42 percent in April 2005 in rural 

areas. 

Figure 3: Percentage of Medicare Beneficiaries Receiving Physician Services in April, 2000-2005 

Percentage 

0 

10 

20 

30 

40 

50 

41.3 42.0 43.2 42.3 43.3 44.8

42.1 42.7 44.0 43.1

45.6

39.1 40.2 41.3

39.9 41.2 42.3

44.1

Source: GAO analysis of Medicare Part B claims and enrollment data from CMS.

2000

2001

2002

2003

2004

2005

Total Urban Rural

Note: Beneficiaries were included if they received a physician service in the first 28 days of April. 

 18Using the Office of Management and Budget’s system for defining metropolitan statistical 

areas, we classified the nation’s counties as urban or rural. We consolidated the urban

counties and rural counties in each state and the District of Columbia, and created 99

geographic areas. There were 51 urban areas and 48 rural areas. There are no rural areas in

New Jersey, Rhode Island, and the District of Columbia. 

Page 11 GAO-06-1008T 
From April 2000 to April 2005, an increasing number of services were 

provided to beneficiaries who were treated by a physician. Specifically, in

that period, the average number of services provided per 1,000 

beneficiaries who were treated rose by 14 percent—from about 3,400 to 

about 3,900. (See fig. 4.) The number of services provided per 1,000 

beneficiaries was higher in urban areas (3,516 services per 1,000 

beneficiaries who received services in 2000) relative to rural areas (3,196

services per 1,000 beneficiaries who received services in 2000). However, 

in percentage terms, the urban and rural areas experienced similar 

increases in the number of services per treated beneficiary—15 percent in 

urban areas, compared with 12 percent in rural areas. 

Physician Services 

Increased in Volume and 

Intensity 

Figure 4: Number of Physician Services Provided per 1,000 Medicare Beneficiaries Served in April, 2000-2005 

Services per 1,000 beneficiaries served

0 

500 

1,000 

1,500 

2,000 

2,500 

3,000 

3,500 

4,000 

4,500 

Source: GAO analysis of Medicare Part B claims and enrollment data from CMS.

2000

2001

2002

2003

2004

2005

Total Urban Rural

3,433

3,925

3,516 3,626 3,723 3,769 3,874 4,035

3,774 3,630 3,672 3,539

3,196 3,290 3,356 3,376 3,470 3,587

Note: Beneficiaries and services were included if services were provided during the first 28 days of 

April. 

Page 12 GAO-06-1008T 
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. That is, the number of physician 

services per beneficiary, including beneficiaries who obtained care and 

those that did not, increased. Volume generally increased across broad 

categories of services—evaluation and management, procedures, imaging 

services, and tests. On average, volume for all physician services increased

at an annual rate of 4.4 percent. (See table 1.) The volume of evaluation 

and management services, a category that includes office visits, increased 

at an average annual rate of 2.4 percent. There was a small average annual 

decline in the volume of major procedures (less than 1 percent), although 

minor procedures grew at an average annual rate of 6.3 percent. Volume 

grew most rapidly (9.1 percent average annual rate) for tests. 

Table 1: Changes in Volume and Intensity of Physician Services Provided per 

Medicare Beneficiary, April 2000 to April 2005 

Type of service

Annual percentage change 

in the number of services 

per beneficiary (volume) 

Annual percentage 

change in the intensity of 

services per beneficiary, 

as measured in relative 

value units (RVU)

All services 4.4 5.2

Evaluation and

management services 2.4 3.7

Procedures 5.7 4.3

Major -0.7 2.3

Minor 6.3 5.2

Imaging 6.9 10.5

Tests 9.1 13.9

Source: GAO analysis of Medicare Part B claims and enrollment data from CMS. 

Notes: Services were included in the calculation of average annual percentage changes if the 

services were provided during the first 28 days of April. To account for complexity of services, we

used RVU weights for 2005. 

From April 2000 to April 2005, the services that physicians provided to 

beneficiaries also increased in intensity. The fee schedule expresses this 

intensity through relative value units (RVU), which account for the amount 

of physician time, expertise, and resources required to deliver a service

Page 13 GAO-06-1008T 
compared to other services.19 Because Medicare’s fee for a service is based 

on the number of RVUs associated with it, more intense services are also 

more costly. Overall, physician services per beneficiary rose in intensity, 

as measured in RVUs, at an average annual rate of about 5 percent. 

Intensity increases occurred among all categories of services, including 

major procedures. Intensity grew most rapidly among imaging services 

(10.5 percent average annual rate) and tests (13.9 percent average annual 

rate). Thus, taken as a whole, beneficiaries’ increased utilization of 

physician services has manifested itself in both increased volume and 

increased intensity of services for the 6 years reviewed. 

Number of Physicians 

Serving Medicare 

Beneficiaries and Allowed 

Charges per Physician 

Increased 

An increasing number of physicians billed Medicare from April 2000 to 

April 2005. (See fig. 5.) In April 2000, the number of physicians billing 

Medicare was about 419,000, and in April 2005, that number had increased 

to a little more than 467,000. While Medicare experienced an 11 percent

increase in the number of physicians billing the program, the number of 

beneficiaries in Medicare—FFS and managed care combined—rose by 

8 percent.20

 19The relative intensiveness or complexity—as measured by the costliness—of each service 

is compared to a benchmark service, defined as a midlevel office visit. For example, if a 

midlevel office visit had an RVU value of 1.000, a service with 1.475 RVUs is estimated to be 

47.5 percent more costly to provide than the midlevel office visit; while a service with 

0.925 RVUs is estimated to be 7.5 percent less costly than the midlevel office visit. In this 

way, RVU weights quantify the complexity of services provided. 

20Because the majority of physicians serving FFS Medicare beneficiaries also likely serve 

beneficiaries in Medicare managed care, we report the change in the total number of 

Medicare beneficiaries—FFS and managed care combined. The number of FFS 

beneficiaries increased by 13 percent, an increase driven in part by a decline of about 

18 percent in the number of enrollees in managed care, from 6.8 million to 5.6 million.

Page 14 GAO-06-1008T 
Figure 5: Number of Physicians Billing Medicare for Services Provided to Medicare 

Beneficiaries in April, 2000-2005 

0 

100 

200 

300 

400 

500 

2000 2001 2002 2003 2004 2005 

Physicians (in thousands) 

Source: GAO analysis of Medicare Part B claims data from CMS.

419 427 437 447 456 467 

Notes: Physicians were included if they served a beneficiary in the first 28 days of April. We counted 

each occurrence of the unique physician identification number once.

On average, total allowed charges per physician billing Medicare increased 

by about 41 percent from April 2000 to April 2005.21 A portion of this 

increase can be attributed to the changes in Medicare’s fees, which 

increased by about 4.5 percent over the period. However, most of the 

increase was the result of physicians providing more services and more 

intense, and thus more costly, services. 

Proportion of Services for 

Which Physicians 

Accepted Medicare 

Payment in Full Increased 

From April 2000 to April 2005, the vast majority of Medicare physician 

services were performed by participating physicians—that is, physicians 

who formally agreed to submit all claims on assignment.22 The percentage

of services submitted by participating physicians increased from 

95 percent to over 96 percent. (See fig. 6.) By submitting all Medicare 

claims on assignment, these physicians agreed to accept Medicare’s fee as 

 21Includes charges for services that were provided during the first 28 days of April in 2000

and 2005. 

22Physicians may decide annually whether they will be Medicare participating physicians. 

Page 15 GAO-06-1008T 
payment in full for all of the services they provided. This includes the 

coinsurance amount (usually 20 percent) paid by the beneficiary. 

Nonparticipating physicians could choose for each service they provided 

to submit an assigned claim, thereby accepting Medicare’s fee as payment 

in full, or an unassigned claim. Nonparticipating physicians who submitted 

an unassigned claim could charge the beneficiary an additional amount, 

within set limits, for that service—a practice referred to as balance billing.

During the same period, the overall percentage of services paid on 

assignment—that is, services performed by both participating and 

nonparticipating physicians who accepted assignment—also increased. In

April 2000, 98.2 percent of services were paid on assignment, and in April 

2005, 99.0 percent of services were paid on assignment. Fewer 

beneficiaries were likely to be subject to balance billing for physician 

services in 2005 than in 2000 as the percentage of services for which 

physicians were permitted to balance bill Medicare beneficiaries fell from 

1.8 percent to 1.0 percent. 

Figure 6: Proportion of Physician Services by Medicare Participation and Assignment Status, April 2000 and April 2005 

95.0% 96.3% 

Source: GAO analysis of Medicare Part B claims data from CMS.

1.8% 

3.2% 

Nonparticipating/

unassigned

Nonparticipating/

assigned

Participating/assigned 

1.0% 

2.7% 

Nonparticipating/

unassigned

Nonparticipating/

assigned

Participating/assigned 

April 2000 April 2005 

Note: Services were included if they were provided during the first 28 days in April. 

Page 16 GAO-06-1008T 
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.23 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. 

Alternatives for 

Updating Physician 

Fees Would Eliminate 

Spending Targets or 

Revise Current SGR 

System

Eliminate Spending 

Targets, Base Fee Updates 

on Physician Cost 

Increases 

The Medicare Payment Advisory Commission (MedPAC) has 

recommended replacing the SGR system with a system that bases the 

annual fee updates on changes in the cost of efficiently providing care as 

measured by MEI.24, 25 Under this approach, efforts to control aggregate 

spending would be separate from the mechanism used to update fees. 

The advantage of eliminating spending targets would be greater fee update

stability. Although basing physician fee updates on changes in MEI would 

limit the annual increases in the price that Medicare pays for each service,

this approach does not contain an explicit mechanism for constraining 

aggregate spending resulting from increases in the volume and intensity of

services physicians provide. If no other actions were taken, Medicare 

spending for physician services would rise relative to projected spending 

under the SGR system. 

An annual fee update system based on MEI that considered multiple 

objectives, such as the moderation of spending growth or quality of care 

improvements, could be implemented. For example, H.R. 3617, introduced 

in 2005, would base physician fee updates on the MEI and also gradually 

phase in a pay-for-performance system under which fee updates would be 

linked to quality and efficiency performance objectives.26 In 2005 

testimony, MedPAC stated that fee updates for physician services should 

 23GAO, Medicare Physician Payments: Considerations for Reforming the Sustainable

Growth Rate System, GAO-05-326T (Washington, D.C.: Feb. 10, 2005). 

24See Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment

Policy (Washington, D.C.: March 2001, 2002, 2003, and 2004). 

25MedPAC suggested that other adjustments to the update might be necessary, for example, 

to ensure overall payment adequacy, correct for previous MEI forecast errors, and address

other factors. 

26See H.R. 3617, 109th Cong. § 2 (2005). 

Page 17 GAO-06-1008T 
not be automatic, but should be informed by changes in beneficiaries’ 

access to services, the quality of services provided, the appropriateness of 

cost increases, and other factors, similar to those that are considered for 

other provider payment updates.27

Retain Spending Targets, 

Modify Current SGR 

System 

An alternative approach for modifying the current SGR system would 

retain spending targets but modify one or more elements of the system. 

The key distinction of this approach, in contrast to basing updates on MEI, 

is that fiscal controls designed to moderate spending would continue to be 

integral to the system used to update fees. Although spending for 

physician services would likely also rise under this approach, the 

advantage of retaining spending targets is that the fee update system 

would automatically work to moderate spending if volume and intensity 

growth began to increase above allowable rates. 

As presented in our 2004 report,28 the SGR system could be modified in a 

number of ways. For example, Congress could raise the allowance for 

increased spending due to volume and intensity growth by some factor 

above the percentage change in real GDP per capita. The Secretary of HHS 

could, under current authority, consider excluding Part B drugs from the 

definition of services furnished “incident to” physician services for the 

purposes of the SGR system. DRA mandated that MedPAC study a variety 

of SGR reforms, such as setting regional, instead of national, spending 

targets.29 The effects on overall Medicare spending for physician services, 

relative to projected spending under the current SGR system, would 

depend on whether the reforms simply allowed for higher fees or provided 

meaningful incentives for physicians to moderate volume and intensity 

growth. 

 27Medicare Payment Advisory Commission, Medicare Payments to Physicians, testimony 

before the Subcommittee on Health, House Committee on Energy and Commerce (Nov. 17, 

2005). 

28GAO-05-85. 

29See Pub. L. No. 109-171, § 5104(c), 120 Stat. 4, 41. 

Page 18 GAO-06-1008T 
Mr. Chairman, this concludes my prepared statement. We look forward to 

working with the Subcommittee and others in Congress as policymakers 

seek to moderate program spending growth while ensuring appropriate 

physician payments. I will be happy to answer questions you or the other 

Members of the Subcommittee may have. 

For further information regarding this testimony, please contact A. Bruce 

Steinwald at (202) 512-7101 or steinwalda@gao.gov. James Cosgrove, 

Assistant Director; Todd Anderson; Jessica Farb; and Eric Wedum 

contributed to this statement. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this statement. 

Page 19 GAO-06-1008T 

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