Short-Term Fixes to the Sustainable Growth Rate Process . 3.2 Current Law Baseline

10/30/2006

On the surface, study of the SGR payment process is straightforward.  The process can be described as a recursive model, consisting of a set of algebraic relationships that are linked over time.  This view, however, is somewhat naïve, as noted above.  Changes in data alter future but not past values of SGR process relationships, and predictions of updates for future years are subject to uncertainties.  Application of the process’ relationships is straightforward at each point in time, but data in each year’s calculations are subject to change in future years.  CMS incorporates these changes into calculations over time (e.g., the accumulation of actual and target spending as spending data change and components of the SGR change), but payment updates cannot be changed retroactively.  For example, changes in estimated SGR expenditures for 2004 due to more complete data for 2004 in 2006 can be factored into future calculations using the formula, but are not used to change the update paid to physicians for work performed in 2005, even though the update would have differed had full information been available when the 2005 update was calculated.  Projected values of the update for future years require projections on various components of spending that enter the SGR calculations. 

The primary baseline against which changes to the SGR mechanism will be analyzed below is the SGR process under current law.  Payment updates and spending estimates are displayed in Tables 7a and 7b.  SGR values beginning in 2005 are subject to change, as are other data items used to calculate the update (see Figure 2) beginning in 2007.  

The conversion factor for CY 2000 was about $36.61, an increase of over 5 percent relative to the average conversion factor (CF) implemented (under VPS) for 1999 (Table 7a).  Part of this increase reflected spending during 1999 that did not exceed the target for that year.  The CF for 2001 increased by 4.5 percent.  During 2001, however, actual SGR spending exceeded target spending (by $7.0 billion), a consequence of which was that the CF for CY 2002 declined by 5.4 percent.  Even though over-spending continued through 2002, the CF increased for CY 2003 because the MEI more than offset the UAF penalty for spending through 2002. 

Table 7a. Current Law Baseline: Conversion Factors, 2000-2014
Update
  Year (t)

SGR

CFt

Percent
Change

2000

1.021

36.61

5.42

2001

1.056

38.26

4.49

2002

1.056

36.20

-5.38

2003

1.075

36.79

1.62

2004

1.074

37.34

1.50

2005

1.043

37.90

1.50

2006

1.017

37.90

0.00

2007

1.007

36.16

-4.58

2008

1.039

34.37

-4.96

2009

1.035

32.63

-5.05

2010

1.029

30.93

-5.23

2011

1.034

29.34

-5.14

2012

1.042

27.86

-5.05

2013

1.045

26.50

-4.86

2014

1.039

25.21

-4.86

Notes: SGR values through 2006 are those used by CMS to calculate CFs as implemented, and are from the Federal Registers that document the payment update process (see Appendix).  Values for 2007-2014 are calculated using the SGR formula and various data sources noted in the text.  Values in italics are subject to change.  CF values for 2007-2014 are estimated. 

During the years 2003-2005, actual spending exceeded target levels.  (Over-spending amounts used to estimate corresponding CFs for years 2004-2006 were $6 billion, $8 billion, and $13 billion.)  For each of these three years, the UAF was negative and the factor’s magnitude exceeded 7 percent each year.  These UAFs activated the floor of the UAF to -7 percent.  Conversion factors for the years 2004-2006 (based on spending during 2003 through 2005, respectively) would have declined, had not Congress intervened.  Rather than payment reductions of 4.5 percent and 4.3 percent for 2004 and 2005, Congressional intervention propped updates at 1.5 percent for these years.  Rules for CY 2006 published in November 2005 called for a payment reduction of about 4.5 percent, but Congressional action negated the payment reduction, keeping the CF for 2006 at the 2005 level. 

Application of the current SGR process is expected to lead to continued declines in the CF from 2007 through 2014.  For each of these years, the UAF is expected to exceed 7 percent in magnitude, which triggers the implementation of the UAF floor (-7 percent).  The model predicts over-spending (spending in excess of target levels) for years 2006-2013, during which time the UAF is -7 percent each year.  The SGR model predicts that by the end of 2013, total spending will exceed target spending since 1996 by about $117 billion.  

Baseline spending between 2006 and 2010 is expected to be about $501 billion, more than 80 percent for physician services and the remainder for laboratory and drug spending that are currently part of total SGR spending (Table 7b).  Total spending for years 2000 through 2013 is expected to exceed $1,264 billion.

Table 7b. Current Law Baseline: SGR Spending, 2000-2013

Period

Physician
(billions)

Lab and
Drug
(billions)

Total
(billions)

2000-2005

380.4

74.6

455.0

2006-2010

401.8

99.0

500.8

2011-2013

228.1

80.3

308.5

Total

1010.4

253.9

$1,264.3

Note: Spending estimates were derived using CFs displayed in Table 7a, adjusted for data corrections reported by CMS in various Federal Registers

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