Medicare Physician Payments: Trends in Service Utilization,	 
Spending, and Fees Prompt Consideration of Alternative Payment	 
Approaches (25-JUL-06, GAO-06-1008T).				 
                                                                 
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).	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-1008T					        
    ACCNO:   A57419						        
  TITLE:     Medicare Physician Payments: Trends in Service	      
Utilization, Spending, and Fees Prompt Consideration of 	 
Alternative Payment Approaches					 
     DATE:   07/25/2006 
  SUBJECT:   Cost analysis					 
	     Health care services				 
	     Medical expense claims				 
	     Medical fees					 
	     Medicare						 
	     Payments						 
	     Physicians 					 
	     Prices and pricing 				 
	     Systems analysis					 
	     Medicare Sustainable Growth Rate System		 

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GAO-06-1008T

     

     * Background
     * SGR System Designed to Limit or Reduce Physician Fee Updates
     * Rapid Growth in Volume and Intensity and Legislated Minimum
     * Medicare Spending on Physician Services Increased Substantia
          * Growth in Spending for Physician Services Exceeded Growth in
          * Proportion of Beneficiaries Receiving Physician Services Gre
          * Physician Services Increased in Volume and Intensity
          * Number of Physicians Serving Medicare Beneficiaries and Allo
          * Proportion of Services for Which Physicians Accepted Medicar
     * Alternatives for Updating Physician Fees Would Eliminate Spe
          * Eliminate Spending Targets, Base Fee Updates on Physician Co
          * Retain Spending Targets, Modify Current SGR System
     * Contact and Acknowledgements
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs

Testimony

Before the Subcommittee on Health, Committee on Energy and Commerce, House
of Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 10:00 a.m. EDT

Tuesday, July 25, 2006

MEDICARE PHYSICIAN PAYMENTS

Trends in Service Utilization, Spending, and Fees Prompt Consideration of
Alternative Payment Approaches

Statement of A. Bruce Steinwald

Director, Health Care

GAO-06-1008T

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
those services from 2000 through 2005, and (4) options for revising or
replacing the SGR system.

1For 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, S: 601(a)(1), 117 Stat. 2066,
2300.

2Boards 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).

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, as measured
by the gross domestic product (GDP) per capita, the SGR system reduces fee
updates to help moderate spending growth.

3GAO, Medicare Physician Payments: Concerns about Spending Target System
Prompt Interest in Considering Reforms, GAO-05-85 (Washington, D.C.: Oct.
8, 2004).

4Boards of Trustees of the Federal Hospital Insurance and Federal
Supplementary Medical Insurance Trust Funds.

5GAO, 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).

6Unless otherwise noted, the term "physician services" in this statement
refers to items and services listed in Social Security Act S: 1848(j)(3).

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.

                                   Background

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.

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
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

7Medicare 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).

8See Pub. L. No. 101-239, S: 6102, 103 Stat. 2106, 2169-89.

9Medicare 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.

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

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, S: 4503, 111 Stat. 251, 433-34. BBA set a
specific fee update for 1998. See BBA, S: 4505, 111 Stat. 435-37.

  SGR System Designed to Limit or Reduce Physician Fee Updates in Response to
                     Excess Growth in Volume and Intensity

The SGR system establishes spending targets to moderate spending increases
caused by excess growth in volume and intensity. 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.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-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.

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.

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.

 Rapid Growth in Volume and Intensity and Legislated Minimum Updates Contribute
        to Projected Decline in Medicare Physician Fees under SGR System

Recent growth in spending due to volume and intensity increases has been
larger than SGR targets allow, resulting in excess spending that must be
recouped by reducing fees to lower future spending. From 2000 through
2005, based on an analysis of physician services claims from April of each
year, average annual growth in the volume and intensity of Medicare
physician services exceeded 5 percent-more than double the approximately
2.2 percent growth rate permitted under the SGR system. 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.

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 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.

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, S:601 (a)(1), 117 Stat. 2066, 2300.

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

 Medicare Spending on Physician Services Increased Substantially as Physicians
            Provided More Services and More Costly Types of Services

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.

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.

Figure 2: Percentage Change from Previous Year in Physician Fee Update and
Physician Services Spending per Beneficiary, 2001-2005

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.

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

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.

Physician Services Increased in Volume and Intensity

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.

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

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

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

                             Annual percentage    Annual percentage change in 
                       change in the number of  the intensity of services per 
                                  services per    beneficiary, as measured in 
Type of service        beneficiary (volume)     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
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.

Figure 5: Number of Physicians Billing Medicare for Services Provided to
Medicare Beneficiaries in April, 2000-2005

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
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.

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.

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

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

  Alternatives for Updating Physician Fees Would Eliminate Spending Targets or
                           Revise Current SGR System

The projected sustained period of declining physician fees and the
potential for beneficiaries' access to physician services to be disrupted
have heightened interest in alternatives for the current SGR system. In
2005, we testified that potential alternatives cluster around two basic
approaches.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.

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 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

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. S: 2 (2005).

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).

28 GAO-05-85 .

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

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.

                          Contact and Acknowledgements

For further information regarding this testimony, please contact A. Bruce
Steinwald at (202) 512-7101 or [email protected]. 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.

(290563)

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

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Highlights of GAO-06-1008T , a testimony before the Subcommittee on
Health, Committee on Energy and Commerce, House of Representatives

July 25, 2006

MEDICARE PHYSICIAN PAYMENTS

Trends in Service Utilization, Spending, and Fees Prompt Consideration of
Alternative Payment Approaches

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.
*** End of document. ***