Oregon Rheumatology Alliance

Sustainable Growth Rate: Calculating Medicare Physician Fee Updates

Nov. 1, 2005, the Center for Medicare Services (CMS) will announce a new sustainable growth rate (SGR), a number that the department will use to adjust Medicare physician fees for 2006. The SGR method has come under some debate since 2002 when CMS dropped physician fees by almost 5 percent. Legislation modified or overrode the SGR system to avert fee declines in 2003, 2004, and 2005. However, projected fee reductions for 2006 to 2012 have raised new concerns about the SGR system.      

How it Works:

To moderate Medicare spending for physician services, the SGR system sets spending targets for the year and then adjusts physician fees for the next year based on the extent to which actual spending aligns with specified targets. For example, if physician expenditures in 2005 are less than the target spending set forth by CMS, then CMS would raise physician fees in 2006. However, if physician expenditures overshoot target spending for the year, the SGR method would determine that physician fees need to be reduced in order to keep spending under wraps.

The equation to calculate the SGR (Table 1) considers four variables to determine whether, and by how much, the physician fee update will be reduced:

• The estimated percentage change in fees for physician services
• The estimated change in the average number of Medicare fee-for-service beneficiaries
• The estimated 10-year average annual growth in real gross domestic product (GDP) per capita
• The estimated change in expenditures due to changes in law or regulations.
  

Table 1. Calculating the Estimated Sustainable Growth Rate 2006

SGR = IP x ME x GDP x LR = 2.5% When: IP = Input Prices = 2.8% ME = Traditional Medicare Enrollment = -2.5 % GDP = real Gross Domestic Product per capita = 2.3% LR = Change due to law and regulations = 0.0 (Percents are converted to ratios and multiplied to produce SGR)

When the SGR is determined, it is used in a statutory formula to produce a performance adjustment (Table 2, 3). Because the MMA does not allow the performance adjustment for a given year to be less than -7.0 percentage points, the performance adjustment for 2006 is estimated at -7.0 instead of a calculated -21.1 percent.

Table 2. Calculating Performance Adjustment Factor

PAF 2006 = Target 2005   - Actual 2005 x 0.75 + Target 4/96-12/05   - Actual 4/96-12/ 05      x 0.33 Actual 2005                                    Actual 2005 x (1+ SGR 2006 ) When: Target 05 = Estimated Allowed Expenditures for CY 2005 = $79.9 billion Actual 05 =   Estimated Actual Expenditures for CY 2005 = $92.9 billion Target 4/96-12/05 = Estimated Cumulative Allowed Expenditures 4/1/96 - 12/31/05 = $611.2 billion SGR 2006 = Estimated Sustainable Growth Rated for 2006 = 2.5 percent or 0.025 PAF 2006 = 79.9-92.9 x 0.75 +   611.2-641.7   x0.33 = -0.211= -21.1%                         92.9                          92.9x 1.025

Table 3. Calculating Performance Adjustment

PA = PAF 2006 When:   3.0% >= PAF 2006 >=   -7.0%

Next, the PA is used to find a calculated increase (CI) that is multiplied by the previous year's conversion factor (CF) to find this year's estimated conversion factor (Table 4). The CF 2006 determines physician fee changes for the following year when physician offices multiply it by the Relative Value Unit (RVU) for the region set forth by the Federal Registry.

Table 4. Calculating Conversion Factor 2006

MEI x PA = CI CY 2005 CF x CI = CY2006 CF When: MEI = Medicare Economic Index   = 2.9% (1.029)   PA = Performance Adjustment   = -7.0% (0.930) CI = Calculated Increase   = -4.3% (0.957) CY 2005 Conversion Factor = $37.8975 CY 2006 Conversion Factor = $36.2679 CI = (1.029) x (0.930) = 0.957 CY2006 CF = $37.8975 x (0.957) = $36.2679

The SGR was designed to promote fiscal responsibility by decreasing fees when spending gets out of hand. However, physicians worry that by decreasing fees, CMS may be inappropriately punishing physicians for service cost increases out of their control. If growth in the number of services provided to each beneficiary (volume) and growth in average complexity and costliness of services (intensity) are high enough, spending will exceed a limited allowance and therefore, the SGR target. If such growth exceeds the average growth in the national economy (GDP), fee updates are set lower than inflation in the cost of operating a medical practice.

In March 2005, the Medicare Payment Advisory Commission (MedPAC) published an estimated CF for 2006 (Table 4). Visit www.cms.hhs.gov/providers/sgr for more information and the final CF published Nov. 1, 2005.

What is the source of the increased costs?   Medicare's director Herb Kuhn in a letter to MedPac found spending increased in five main areas in 2004; longer and more intensive office visits (29 percent), more use of minor procedures (26 percent, including some physical therapy procedures, dermabrasion and chemotherapy administration fees), more patients receiving more frequent and complex imaging such as MRI scans and echocardiograms (18 percent), more laboratory and other tests (11 percent), and more utilization of prescription drugs in doctors' offices (11 percent), (Table 5). Drug payments declined and drug administration fees increased in 2004 as a result of the Medicare law and administrative actions by CMS to make drug payments reflect competitive prices and to assure adequate payment for drug administration.   Expect future spending restrictions to focus on the five areas in Table 5.