Short-Term Fixes to the Sustainable Growth Rate Process . 5.2 Rebasing Target Spending

10/30/2006

The current SGR process was implemented with an initial target level based on actual spending levels in the late 1990s.  Since that time, each year’s target has been increased using the SGR.  Over time, the rate of spending has increased and the cumulated difference between annual actual and target spending levels has grown rapidly.  Effects of these trends are evident from the lack of update effects associated with relatively large increases in target spending beginning in 2007 (described in the previous section). 

An SGR refinement is to “restart” the target.  An important policy question is how target spending should be re-defined.  Recall that the UAF under the current SGR process is based on comparisons of actual and target spending, as follows:

UAFt = { 0.75 * [ (targett-1 – actualt-1) / actualt-1 ] }
+ { 0.33 * [ (targetc – actualc) / (actualt-1 *  SGRt) ] }.

Target spending for year t-1 is the target for year t-2, updated using the SGR for year t-1, and cumulated spending and target spending are based on levels dating back to the late 1990s.  The simplest revised target mechanism is to rebase the SGR formula -- that is, reset the target so that payment incentives are more realistically in line with current spending goals.  There may be more support among providers for conscientious control over spending if payment changes are more directly tied to current behavior. 

The project team rebased the SGR process, beginning with data used to calculate the CF for 2007.  Target non-E&M spending for 2006 was reset to actual non-E&M 2006 spending, and cumulated actual and target spending levels were reset to the 2006 actual spending level in the formula for calculating the UAF for the 2007 update.  In other words,
UAF2007 = { 0.75 * [ (target2006 – actual2006) / actual2006 ] }
+ { 0.33 * [ (target2006 – actual2006) / (actual2006 *  SGR2007) ] }

And when the 2006 target is reset to actual spending for 2006,

UAF2007 = { 0.75 * [ (actual2006 – actual2006) / actual2006 ] }
+ { 0.33 * [ (actual2006 – actual2006) / (actual2006 *  SGR2007) ] }

= { 0.75 * [ (0) / actual2006 ] } + { 0.33 * [ (0) / (actual2006 *  SGR2007) ] }
           
= 0.

In other words, this simple re-definition of target spending would eliminate the UAF penalty for 2007, but re-start cumulated spending for the calculation of CFs for the years 2008-2014. 

Table 13a. Effects of Rebasing: CFs, 2007-2014
   

Current Law
Baseline

Rebased

Update
  Year (t)

SGR

CFt

Percent
Change

CFt

Percent
Change

2007

1.007

36.16

-4.58

38.88

2.60

2008

1.039

34.37

-4.96

37.19

-4.36

2009

1.035

32.63

-5.05

35.35

-4.95

2010

1.029

30.93

-5.23

33.55

-5.08

2011

1.034

29.34

-5.14

32.51

-3.10

2012

1.042

27.86

-5.05

32.23

-0.87

2013

1.045

26.50

-4.86

32.39

0.50

2014

1.039

25.21

-4.86

32.74

1.08

Notes: Baseline estimates are as in Table 7a; baseline data in italics subject to change.  Rebased estimates were calculated using the SGR formula, but with actual and target spending amounts  'rebased' to 2006.  Rebased means that in calculating the CF for 2007, the target for 2006 is estimated spending for 2006, and initial cumulated actual and target spending amounts are set to total estimated 2006 spending.  The SGR formula was then applied for years 2007-2014.

Effects of rebasing are summarized in Tables 13a and 13b.  Rebasing would increase the CF for 2007 by 2.6 percent (Table 13a).  Conversion factors would decline from 2008 to 2012, but continue to exceed baseline levels due to the initial increase for 2007 and smaller declines relative to baseline during 2008-2013.  Spending would be higher than under baseline by 6 percent during 2007-2010 (Table 13b).  The CF would begin to increase in 2013, contributing to a 12 percent increase in spending over baseline during the 2011-2013 period.

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