Medicare Physician Payments: Trends in Service Utilization, Spending, and Fees Prompt Consideration of Alternative Payment Approaches
Published: 2006-07-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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).
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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. 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.
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  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. We  updated these findings to include information on Medicare physician fee  updates and spending in 2005 from the 2006 report of the Medicare  trustees. 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.
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).
Unless otherwise noted, the term “physician services” in this statement refers to items and  services listed in Social Security Act § 1848(j)(3). 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.
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.
subsections: section_title: Background
paragraphs: 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.  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.
The ineffectiveness of fee controls alone led Congress to reform the way  that Medicare set physician fees. The Omnibus Budget Reconciliation Act  of 1989 required the establishment of both a national fee schedule and a  system of spending targets, which together first affected physician fees in  1992. 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  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.
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.
section_title: SGR System Designed to Limit or Reduce Physician Fee Updates in Response to Excess Growth in Volume and Intensity
paragraphs: 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.
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. The  sustainable growth rate is the product of the estimated percentage change  in (1) input prices for physician services and other SGR-covered services;  (2) the average number of Medicare beneficiaries in the traditional fee-for- service program; (3) national economic output, as measured by real  (inflation-adjusted) GDP per capita; and (4) expected expenditures for  physician services and other SGR-covered services resulting from changes  in laws or regulations. 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.
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.  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.
section_title: Rapid Growth in Volume and Intensity and Legislated Minimum Updates Contribute to Projected Decline in Medicare Physician Fees under SGR System
paragraphs: 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. 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.
Legislated minimum updates for 2004 through 2006 have also contributed  to future physician fee cuts. The Medicare Prescription Drug,  Improvement, and Modernization Act of 2003 (MMA) and the Deficit  Reduction Act of 2005 (DRA) averted fee reductions projected for 2004  through 2006 by specifying minimum updates to physician fees for those  years. The MMA-specified minimum annual increase of 1.5 percent  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.
section_title: Medicare Spending on Physician Services Increased Substantially as Physicians Provided More Services and More Costly Types of Services
paragraphs: 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.
subsections: section_title: Growth in Spending for Physician Services Exceeded Growth in Medicare Fees
paragraphs: 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.
section_title: Proportion of Beneficiaries Receiving Physician Services Grew
paragraphs: 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.
Nationwide, this measure increased in both urban and rural areas. 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.
section_title: Physician Services Increased in Volume and Intensity
paragraphs: 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.
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.
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  compared to other services. 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.
section_title: Number of Physicians Serving Medicare Beneficiaries and Allowed Charges per Physician Increased
paragraphs: 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.
On average, total allowed charges per physician billing Medicare increased  by about 41 percent from April 2000 to April 2005. 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.
section_title: Proportion of Services for Which Physicians Accepted Medicare Payment in Full Increased
paragraphs: 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. 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  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.
section_title: Alternatives for Updating Physician Fees Would Eliminate Spending Targets or Revise Current SGR System
paragraphs: The projected sustained period of declining physician fees and the  potential for beneficiaries’ access to physician services to be disrupted  have heightened interest in alternatives for the current SGR system. In  2005, we testified that potential alternatives cluster around two basic  approaches. One approach would end the use of spending targets as a  method for updating physician fees and encouraging fiscal discipline. The  other would retain spending targets but modify the current SGR system to  address its perceived shortcomings.
subsections: section_title: Eliminate Spending Targets, Base Fee Updates on Physician Cost Increases
paragraphs: 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.
See Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment  Policy (Washington, D.C.: March 2001, 2002, 2003, and 2004).
MedPAC 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. 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.
section_title: Retain Spending Targets, Modify Current SGR System
paragraphs: 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, 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. 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.
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.
section_title: Contact and Acknowledgements
paragraphs: 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.
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