Short-Term Fixes to the Sustainable Growth Rate Process . 4.2 Changes in the Design of the UAF

10/30/2006

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. 

Table 9. Target and Actual SGR Spending and UAF Components, 2000-2013
Calendar
Year
Baseline Spending UAF and Components
Target Actual Over-Spending Previous
Year
Cumu-
lated
Total Effective

$

%
Change

$

%
Change

$

% Actual
Spending

 

2000

56.6

8.6

55.1

9.0

-1.5

-2.7

0.02

0.02

0.04

0.03

2001

59.3

4.8

66.3

20.3

7.0

10.6

-0.08

0.01

-0.07

-0.07

2002

67.6

14.0

69.1

4.2

1.5

2.2

-0.02

0.01

-0.01

-0.01

2003

71.7

6.1

77.8

12.6

6.1

7.8

-0.06

-0.03

-0.09

-0.07

2004

77.1

7.5

84.9

9.1

7.8

9.2

-0.07

-0.05

-0.12

-0.07

2005

80.4

4.3

93.3

9.9

12.9

13.8

-0.10

-0.11

-0.21

-0.07

2006

81.7

1.6

97.4

4.4

15.7

16.1

-0.12

-0.16

-0.28

-0.07

2007

82.3

0.7

98.3

0.9

16.0

16.3

-0.12

-0.20

-0.33

-0.07

2008

85.5

3.9

100.3

2.0

14.8

14.8

-0.11

-0.25

-0.36

-0.07

2009

88.5

3.5

102.3

2.0

13.9

13.5

-0.10

-0.29

-0.39

-0.07

2010

91.0

2.9

102.4

0.1

11.4

11.1

-0.08

-0.32

-0.41

-0.07

2011

94.1

3.4

102.2

-0.2

8.1

7.9

-0.06

-0.35

-0.41

-0.07

2012

98.1

4.2

102.8

0.5

4.7

4.6

-0.03

-0.36

-0.39

-0.07

2013

102.5

4.5

103.5

0.7

1.0

0.9

-0.01

-0.36

-0.37

-0.07

Notes: Over-spending is the difference between actual and target spending levels.  The Previous Year UAF component is calculated by multiplying over-spending as a fraction of actual spending by the fraction, 0.75; the Cumulated component is calculated as cumulated target spending less cumulated actual spending, divided by actual spending updated by the SGR, multiplyed by the fraction, 0.33.  The total UAF is the sum of the Previous Year and Cumulated fractions.  The Effective UAF is the value of the total UAF used to calculate the update -- the value of the UAF after applying the floor or ceiling, -0.07 or 0.03.

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.

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