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Sustainable Growth Rate Formula for Setting Medicare's Physician Payment Rates 1 (September 2006)

handle is hein.congrec/cbo9290 and id is 1 raw text is: SEPTEMBER 6, 2006 The Sustainable Growth Rate Formula for Setting Medicare's Physician Payment Rates SummarySince the Medicare program was created in 1965, several TheSumm methods have been used to determine how much it pays (Part B of Mednareich will cost about physicians for each covered service. Initially, the program $158 billion in 2006, pays for physicians' services, compensated physicians on the basis of their charges and $158bilion n 206, aysforphyscias' srviesallowed them to bill beneficiaries for the full amount outpatient hospital services, durable medical equip- above what Medicare paid for each service. In 1975, ment, physical therapy, and certain other out- Medicare payments were still linked to what physicians patient services. About 38 percent of those expendi- charged, but the annual increase in fees could not exceed tures are payments for services provided by physi- the increase in the Medicare economic index, or MEL cians, which are based on a schedule of fees that Because those changes were not enough to prevent total specifies the amount to be paid for each type of ser- payments from rising more than policymakers desired, vice. Most of Medicare's payment rates are simply from 1984 through 1991 the yearly change in fees was adjusted each year for inflation-but not those for determined by legislation. physicians' services. Those rates are governed by a complex formula-the Sustainable Growth Rate Starting in 1992, the payment system based on physi- (SGR) mechanism-that, unless overridden by leg- cians' charges was replaced by a fee schedule. That sched- islation, will reduce fees by about 4 percent or ule bases payment for individual services on measures of 5 percent annually for at least the next several years. the relative resources used to provide them. The schedule Legislation has overridden the formula's results inwas not intended to control spending it was designed to each of the past four years, and the prospect of fu-Te e s ewanuated annuallysbyiancombiation ture, year-after-year rate reductions raises the ques- tion of whether the SGR formula is a viable mecha- nism-and if not, what alternatives might be appropriate. This brief describes the SGR mecha- nism and presents the potential budgetary effects of several other approaches. Many of the possible al- physicians' time and operating expenses; it is a weighted sum of ternatives would be costly. For example, overriding the prices of inputs in those two categories. Most of the compo- the formula with a 1 percent rate increase in 2007 nents of the index come from the Bureau of Labor Statistics. would raise outlays by $6 billion over the next 10 Changes in the cost of physicians' time are measured using years. Replacing the formula with an inflation index changes in nonfarm labor costs. Changes in all-factor productiv- would cost more than $200 billion over the coming ity are also incorporated into the index as a way of accounting for decade. improvements in physicians' productivity. The productivity adjustment to the ME reduces its rate of growth.

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