Short-Term Fixes to the Sustainable Growth Rate Process . 4.2.1 The UAF Floor

10/30/2006

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.

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