Short-Term Fixes to the Sustainable Growth Rate Process . 5.3 Elimination of Drug and Lab Spending from the SGR

10/30/2006

An argument raised by some providers and critics of the SGR process is that the payment update should not be based on events beyond control of providers.  An example is spending for drugs and lab tests.  These components of SGR spending are less within the control of providers than services and procedures routinely provided under the MFS.  Drug and lab test prices are not subject to the same controls as under the MFS.  Physicians write prescriptions, but have little control over drug pricing. 

Table 13b. Effects of Rebasing: Spending, 2007-2014
 

Baseline (billions)

Rebased (billions)

Spending
Ratio

Period

Physician

Lab and
Drug

Total

Physician

Lab and
Drug

Total

2007-2010

321.3

82.2

403.4

347.4

82.2

429.6

1.06

2011-2013

228.1

80.3

308.5

265.0

80.3

345.4

1.12

Total

549.4

162.5

$711.9

612.4

162.5

$774.9

1.09

Notes: Spending estimates were derived using CFs displayed in Table 13a, adjusted for data corrections routinely reported by CMS.  The Spending Ratio is the ratio of rebased to baseline spending.

In fact, baseline drug and lab spending components of SGR spending are expected to increase more rapidly than physician spending in the near future.  The average annual rate of increase in total baseline physician spending between 2006 and 2013 is -1.6 percent, whereas the increase for the total of drug and lab spending is 7.4 percent per year during this time period (calculated from Appendix Table A1). 

The rebased version of the model was used to examine the effects of deleting drug and lab spending from SGR spending beginning in 2007.  In this application of the rebased model, the UAF for 2007 was calculated by comparing actual SGR physician spending (e.g., total SGR spending less spending on drugs and lab tests) to target spending, defined as SGR physician spending in 2006, and CFs were calculated using SGR physician spending only for 2008-2014.

Table 14a. Effects of Rebasing and Eliminating Drug and Lab Spending from SGR Spending: CFs, 2007-2014
   

Rebased

Less Drug and Lab
Spending

Update
  Year (t)

SGR

CFt

Percent
Change

CFt

Percent
Change

2007

1.007

38.88

2.60

38.88

2.60

2008

1.039

37.19

-4.36

37.27

-4.15

2009

1.035

35.35

-4.95

35.87

-3.74

2010

1.029

33.55

-5.08

34.69

-3.31

2011

1.034

32.51

-3.10

34.41

-0.81

2012

1.042

32.23

-0.87

34.81

1.17

2013

1.045

32.39

0.50

35.44

1.80

2014

1.039

32.74

1.08

36.10

1.88

Notes: Rebased estimates are as in Table 13a; baseline data in italics subject to change.  Estimates on right side are derived by deleting drug and lab spending from SGR spending and rebasing so that actual and target spending levels exclude drug and lab spending.  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.

Conversion factors would decline between 2008 and 2011 with elimination of drug and lab spending as with simple rebasing (left side of Table 14a), but CF levels would be higher without than when drug and lab spending are counted in the UAF.  In 2010, for example, the CF would be $34.69 without lab and drug spending, $33.55 with simple rebasing (Table 14a), and $30.93 under the current SGR process (Table 7a).

Total spending would increase as a consequence of rebasing after eliminating re-defining SGR spending.  Spending would be 3 percent higher than with rebasing only, and 12 percent higher than is expected under the current SGR process (Tables 14b and 13b). 

Table 14b. Effects of Rebasing and Eliminating Drug and Lab Spending from SGR Spending: Spending, 2007-2013
 

Rebased (billions)

Less Drug and
Lab Spending

Spending
Ratio

Period

Physician

Lab and
Drug

Total

Physician

Lab and
Drug

Total

2007-2010

347.4

82.2

429.6

351.8

82.2

434.0

1.01

2011-2013

265.0

80.3

345.4

285.7

80.3

366.0

1.06

Total

612.4

162.5

$774.9

637.5

162.5

$800.0

1.03

Notes: Spending estimates were derived using CFs displayed in Table 14a, adjusted for data corrections routinely reported by CMS.  The Spending Ratio is the ratio of spending without drug and lab spending included, to baseline rebased spending.

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