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

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.

• 4.2.1 The UAF Floor

  • An option that retains some cost-containment incentives but does not lead to negative payment updates is to set the UAF floor such that the largest over-spending penalty would completely offset the MEI.  Under this option, the floor is a negative percent that would be just large enough in magnitude to offset the MEI, producing a 0-percent update.  The formula used to calculate the CF for year t is as follows:

    (1)        CFt = CFt-1 * (1+MEIt) * (1+UAFt) * (1+OTHERt),

    where MEIt is the MEI fraction for year t, e.g., 0.029 (2.9 percent), UAFt is the UAF fraction, and OTHERt is the fractional change in the CF attributed to other factors by CMS.  The OTHER factor is determined by CMS, and reflects effects of laws and regulations; if this factor is ignored (assumed to equal 0) as it is under baseline for years beyond 2008, formula (1) becomes

    CFt = CFt-1 * (1+MEIt) * (1+UAFt).

    The update is 0 when the CF is unchanged, CFt=CFt-1.  This occurs when
     
    (1+MEIt) * (1+UAFt) = 1.

    If it is assumed that the MEI is always a positive fraction – that costs faced by providers increase each year – then the 0-update floor is algebraically determined as the value of the UAF given by UAFft,

    (2)        UAFft  = -MEIt/(1+MEIt).
    In other words, if the UAF floor is calculated each year using equation (2), the floor for the year is a negative fraction that at worst, offsets the MEI, and results in a 0, not negative, update.

    The SGR model was used to examine effects of adoption of the 0-update floor.  Intuitively, this 0-update floor would become binding whenever the -7 percent floor becomes binding.  The CF would decline from $37.90 in 2007 to $37.82 in 2008.  The CF would remain at this value through 2014.  Thus, between 2006 and 2014, the CF would decline by less than 0.3 percent (from $37.90 to $37.82), whereas the baseline CF is expected to decline by 34 percent (from $37.90 to $25.21) during the same period.  Spending implications of the 0-update floor beginning in 2007 are significant.  The “price” of payment stability between 2006 and 2013 is a 15 percent increase in spending relative to baseline, a 10 percent increase in total spending for the period, 2000-2013 (Table 10).

    Table 10. Effects of '0-Update Floor': Spending, 2000-2013

    	Baseline (billions)			With 0-Update Floor (billions)			Spending Ratio
    Period	Physician	Lab and Drug	Total	Physician	Lab and Drug	Total
    2000-2005	380.4	74.6	455.0	380.4	74.6	455.0	1.00
    2006-2010	401.8	99.0	500.8	444.4	99.0	543.4	1.08
    2011-2013	228.1	80.3	308.5	309.6	80.3	390.0	1.26
    Total	1010.4	253.9	$1,264.3	1134.5	253.9	$1,388.3	1.10
    Notes: 0-Update Floor estimates are based on CFs derived by modifying the floor of the UAF to offset the MEI each year, such that the revised floor is a 0-update.  The Spending Ratio is the ratio of spending under the 0-floor and baseline spending.

• 4.2.2 The Size of the UAF Penalty

  • In addition to changes in the UAF penalty floor, the size of the UAF penalty for over-spending can be reduced by lowering the weights applied to the measures of over-spending in the previous year and cumulated spending.  A rationale for the cumulated spending term of the UAF is that CFs can be adjusted to help the Medicare program recover a portion of spending in excess of targets.  On the other hand, it may take years for the program to recover over-spending, even during a time when contemporaneous spending is less than the target.

    One way of placing relatively more emphasis on recent practice behavior is to eliminate the cumulated spending term of the UAF.¹¹  Implementing this change beginning in 2007, however, would have little impact.  The CF would not change from its baseline level until 2012 because even without the cumulative component of the UAF, the previous year over-spending penalty is large enough to trigger the -7 percent floor (see Table 9).  As expected, spending from 2006-2013 would increase, but by only 1 percent over baseline.

    Another policy option is to reduce the size of the penalty levied against previous year spending.  Effects of simultaneously eliminating the cumulative term of the UAF and reducing the magnitude of the penalty for prior year over-spending by one-half were studied using the model.¹²  With these changes, the CF for 2007 would decline from its 2006 level by less than under baseline (a decline of 3.6 percent vs. 4.6 percent under baseline, Table 11a).  For 2008-2014, the CF would continue its descent, but at slower rates than under baseline.  Spending with these changes, of course, would exceed baseline spending by 4 percent during 2006-2013, 2 percent during 2000-2013 (Table 11b).

    Table 11a. Effects of Simultaneous Changes in the UAF: CFs, 2000-2014

    		Baseline				With Revised UAF Spending Weights (billions)
    Update Year (t)	SGR	Weight on Prior Year Spending	Weight on Cumulated Spending	CFt	Percent Change	Weight on Prior Year Spending	Weight on Cumulated Spending	CFt	Percent Change
    2000	1.021	0.75	0.33	36.61	5.42	0.75	0.33	36.61	5.42
    2001	1.056	0.75	0.33	38.26	4.49	0.75	0.33	38.26	4.49
    2002	1.056	0.75	0.33	36.20	-5.38	0.75	0.33	36.20	-5.38
    2003	1.075	0.75	0.33	36.79	1.62	0.75	0.33	36.79	1.62
    2004	1.074	0.75	0.33	37.34	1.50	0.75	0.33	37.34	1.50
    2005	1.043	0.75	0.33	37.90	1.50	0.75	0.33	37.90	1.50
    2006	1.017	0.75	0.33	37.90	0.00	0.75	0.33	37.90	0.00
    2007	1.007	0.75	0.33	36.16	-4.58	0.38	0.00	36.53	-3.60
    2008	1.039	0.75	0.33	34.37	-4.96	0.38	0.00	34.95	-4.33
    2009	1.035	0.75	0.33	32.63	-5.05	0.38	0.00	33.55	-4.00
    2010	1.029	0.75	0.33	30.93	-5.23	0.38	0.00	32.21	-3.99
    2011	1.034	0.75	0.33	29.34	-5.14	0.38	0.00	31.14	-3.32
    2012	1.042	0.75	0.33	27.86	-5.05	0.38	0.00	30.36	-2.51
    2013	1.045	0.75	0.33	26.50	-4.86	0.38	0.00	29.84	-1.73
    2014	1.039	0.75	0.33	25.21	-4.86	0.38	0.00	29.47	-1.22
    								30.20	-2.19
    Notes: Simulation estimates are based on revisions to the UAF beginning in 2007.  Revisions include deleting the portion of the UAF that penalizes/rewards providers for cumulative over-/under-spending, and cutting the weight on the previous-year over-/under-spending by 50 percent, to 0.375.  Baseline data in italics are subject to change.

     

    Table 11b. Effects of Simulaneous Changes in the UAF: Spending, 2000-2013

    	Baseline (billions)			With Revised UAF Spending Weights (billions)			Spending Ratio
    Period	Physician	Lab and Drug	Total	Physician	Lab and Drug	Total
    2000-2005	380.4	74.6	455.0	380.4	74.6	455.0	1.00
    2006-2010	401.8	99.0	500.8	409.6	99.0	508.6	1.02
    2011-2013	228.1	80.3	308.5	249.1	80.3	329.5	1.07
    Total	1010.4	253.9	$1,264.3	1039.2	253.9	$1,293.1	1.02
    Notes: Spending estimates were derived using CFs displayed in Table 11a, adjusted for data corrections routinely reported by CMS.  The Spending Ratio is the ratio of simulated to baseline spending.

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