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entitled 'Medicare Physician Payments: Trends in Service Utilization, 
Spending, and Fees Prompt Consideration of Alternative Payment 
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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: 

GAO Highlights: 

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

Why GAO Did This Study: 

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). 

What GAO Found: 

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. 

[Hyperlink, http://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. 

[End of Section] 

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.[Footnote 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.[Footnote 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. 

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.[Footnote 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.[Footnote 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.[Footnote 5],[Footnote 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. 

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.[Footnote 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 1989[Footnote 8] required the establishment of both a national 
fee schedule[Footnote 9] and a system of spending targets, which 
together first affected physician fees in 1992.[Footnote 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.[Footnote 11] 

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

[See PDF for image] 

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

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. 

[End of figure] 

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. 

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.[Footnote 
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;[Footnote 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. 

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.[Footnote 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. 

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.[Footnote 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)[Footnote 16] and the 
Deficit Reduction Act of 2005 (DRA)[Footnote 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. 

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: 

[See PDF for image] 

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

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. 

[End of figure] 

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.[Footnote 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: 

[See PDF for image] 

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

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

[End of figure]

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: 

[See PDF for image] 

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

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

[End of figure] 

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: All services; 
Annual percentage change in the number of services per beneficiary 
(volume): 4.4; 
Annual percentage change in the intensity of services per beneficiary, 
as measured in relative value units (RVU): 5.2. 

Type of service: Evaluation and management services; 
Annual percentage change in the number of services per beneficiary 
(volume): 2.4; 
Annual percentage change in the intensity of services per beneficiary, 
as measured in relative value units (RVU): 3.7. 

Type of service: Procedures; 
Annual percentage change in the number of services per beneficiary 
(volume): 5.7; 
Annual percentage change in the intensity of services per beneficiary, 
as measured in relative value units (RVU): 4.3. 

Type of service: Procedures: Major; 
Annual percentage change in the number of services per beneficiary 
(volume): -0.7; 
Annual percentage change in the intensity of services per beneficiary, 
as measured in relative value units (RVU): 2.3. 

Type of service: Procedures: Minor; 
Annual percentage change in the number of services per beneficiary 
(volume): 6.3; 
Annual percentage change in the intensity of services per beneficiary, 
as measured in relative value units (RVU): 5.2. 

Type of service: Imaging; 
Annual percentage change in the number of services per beneficiary 
(volume): 6.9; 
Annual percentage change in the intensity of services per beneficiary, 
as measured in relative value units (RVU): 10.5. 

Type of service: Tests; 
Annual percentage change in the number of services per beneficiary 
(volume): 9.1; 
Annual percentage change in the intensity of services per beneficiary, 
as measured in relative value units (RVU): 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. 

[End of table] 

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.[Footnote 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.[Footnote 20] 

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

[See PDF for image] 

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

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. 

[End of figure] 

On average, total allowed charges per physician billing Medicare 
increased by about 41 percent from April 2000 to April 2005.[Footnote 
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.[Footnote 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. 

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: 

[See PDF for image] 

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

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

[End of figure] 

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.[Footnote 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.[Footnote 24],[Footnote 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.[Footnote 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.[Footnote 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,[Footnote 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.[Footnote 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. 

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 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. 

FOOTNOTES 

[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). 

[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). 

[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. 

[10] The 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. 

[11] See 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. 

[12] This 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. 

[13] CMS 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. 

[14] To 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. 

[15] Most 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). 

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

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

[18] Using 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. 

[19] The 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. 

[20] Because 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. 

[21] Includes charges for services that were provided during the first 
28 days of April in 2000 and 2005. 

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

[23] GAO, Medicare Physician Payments: Considerations for Reforming the 
Sustainable Growth Rate System, GAO-05-326T (Washington, D.C.: Feb. 10, 
2005). 

[24] See Medicare Payment Advisory Commission, Report to the Congress: 
Medicare Payment Policy (Washington, D.C.: March 2001, 2002, 2003, and 
2004). 

[25] 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. 

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

[27] Medicare 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. 

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

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