As indicated in the summary discussion of the current SGR update process, the magnitude of the UAF is a key determinant of the size of Medicare payment updates. Without the UAF portion of the SGR process, payments would be updated using the MEI. The UAF is the means by which the update process recovers over-spending.
The UAF used to calculate the CF for year t consists of two parts – a reward/penalty for under-/over-spending during the previous year, and the accumulation of under-/over-spending through the previous year. The previous-year component is calculated from the amount of under-/over-spending for the previous year as a percent of total spending for the year. Thus, for example, the previous-year component of the UAF for 2007 is over-spending during 2006 as a percent of 2006 spending. Using data from Table 9, the previous-year term is
(target spending - actual spending) / actual spending
= ($81.7 b – $97.4 b) / $97.4 b
= - 0.161.
Thus, over-spending is about 16 percent of actual spending for 2006.
The portion of the UAF that measures the accumulation of over-/under-spending (hereafter, the “cumulated spending” component) is calculated as the difference between cumulated target and actual spending, as a percent of next year’s spending under “good behavior” – current year spending, increased by the value of the SGR that will be used to calculate target spending for the following year. For 2006, the cumulated spending component of the UAF is
(cumulated target spending - accumulated actual spending) / (actual spending * SGR factor)
= ($693.6 b – $741.0 b) / ($97.4 b * 1.007)
= - 0.483.
Thus, cumulated over-spending is about 48 percent of expected spending for 2007. The total value of the UAF for 2006 is calculated as the sum of the previous-year and accumulation components, after weighting the former by 0.75 and the latter by 0.33, the UAF for 2006 is (-0.161 x 0.75) + (-0.483 x 0.33) = (-0.12) + (-0.16) = -0.28 (the total UAF value in Table 9). As -0.28 is less than the floor (-0.07), the floor becomes the effective UAF for 2006, and is used to calculate the update for CY 2007. It is clear from Table 9 that the UAF for spending during years 2007-2013 is expected to be less than the floor. During these years, actual spending will exceed target spending, the UAF value will be its floor value, and CFs will continue to decline as UAFs more than offset the MEI.
The size of expected future reductions in CFs can be reduced with changes in the structure of the UAF. In the remainder of this section, effects of changes in UAF floor and relative importance of the previous-year and cumulated spending terms of the UAF are explored.