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Volume Growth in Medicare. An Investigation of Ten Physicians' Services

Publication Date
Nov 30, 2008

Medicare’s Sustainable Growth Rate (SGR) is a target rate of growth in spending for physicians’ services. Payments for physicians’ services are supposed to automatically adjust in response to actual spending falling either above or below the target. But since 2002, when the SGR policy led to a 4.8 percent reduction in payment rates, policymakers have been searching for ways to avoid fee reductions without adding to the Medicare program’s overall expenditures. Recently, the Medicare Payment Advisory Commission (MedPAC) examined alternative mechanisms for controlling expenditures on physicians, but did not propose any single alternative. As a result, Congress overrode the SGR policy for the sixth time this year to give physicians small fee increases and found various policy changes to offset those costs. Each year, however, the costs of circumventing the SGR policy increase as do demands for a permanent “fix” to the SGR.

In this paper, we examined the underlying causes of growth in ten medical services that saw significant increases in utilization and associated spending among Medicare beneficiaries between 2000 and 2006. We considered the role that multiple factors such as the aging of the population, the development of new clinical standards of practice, and financial incentives could have on explaining the observed growth. Scans of guidelines and literature summaries were augmented by structured interviews with national experts in relevant disciplines. The methods we developed to investigate the observed growth for these ten medical services could inform alternatives to Medicare's SGR Policy.


To shed light on the underlying causes of volume growth, we sought to identify ten services with significant increases in utilization, and associated spending, among Medicare beneficiaries between 2000 and 2006. We used a combination of qualitative and quantitative methods to select the ten services for analysis. Our quantitative objective was to identify services for which Medicare expenditures were increasing rapidly and for which significant sums were spent by Medicare. We used data from the Physician/Supplier Procedure Summary files for 2000 and 2006 to examine these two aspects of Medicare physician spending. We also sought to represent a variety of clinical areas covering a range of diseases and conditions – particularly diseases and conditions associated with substantial morbidity or mortality – in our final list of ten services.

We then explored the reasons for growth in these ten services. Our examination of the factors leading to the increased use of physicians’ services had three interrelated phases: we first selected and interviewed relevant clinical experts, then we reviewed sources of information on changes in the clinical indication for the services, and finally we conducted supplemental searches to flesh out other reasons for growth suggested by our clinical experts.


Our syntheses revealed that clinical factors, service diffusion, and financial factors drove growth to varying degrees across the ten services. (Table 3 in our full report summarizes these reasons for the growth in each of our ten services and classifies it as a major reason for growth, a contributing reason for growth, or not a reason for growth.) Interestingly, clinical factors and patient demand were factors for eight of the services we studied, but were major factors for only three. New technologies and new scientific evidence stimulated the growth of two services and patient demand drove six. A change in the size of the potentially eligible population was not a major factor for any of the services. Nevertheless, for most services, the potentially eligible population was quite large, setting the stage for rapid growth once other factors came into play. In contrast, financial factors or increased uptake by providers were factors for all ten services and were major factors for seven. Among major financial factors, Medicare coverage decisions influenced two services and reimbursement rates influenced two others. Overall, uptake by providers was the single most important factor, being a major driver of growth for seven services. Provider uptake and financial factors appeared synergistic, such that providers shifted toward providing more profitable services rather than alternatives and established in some cases independent specialty centers, in part to increase revenue.

Conclusions and Policy Implications

Our results point to the important role that the diffusion of new technology and financial factors play in increasing expenditures for physicians’ services – even in the absence of any new clinical evidence or epidemiologic trends. One reason this is the case is that consensus about the appropriate use of most services and procedures simply does not exist, leaving room for other factors to influence care patterns. But determining appropriateness requires rigorous reviews of the clinical evidence, expert panels, or other measures that are usually time- and resource-intensive. In addition, there are potentially a huge number of services that would benefit from examination: it is not simply new technologies that must be reviewed but new and expanded uses of existing technology and services. While over the longer term Congress might appropriate funding for the Centers for Medicare and Medicaid Services (CMS) or another government agency to conduct reviews of appropriateness and cost-effectiveness, other methods will be needed to rationalize spending growth in physicians’ services over the near term.

Fortunately, our results do point to a number of ways to address potentially inappropriate growth in service use – and ways not to address it. We’ll start with what does not appear to be working. Cutting or increasing the payment for all services uniformly, as the SGR policy does, is not producing greater efficiency. Among the ten high-growth services we examined some were clearly delivering high value while others were not. Indeed, we heard repeatedly that declining (relative) payments for Evaluation and Management (E&M) services caused by the SGR were partially to blame for physicians’ attempt to make up in procedure volume what they were not compensated for during regular office visits. Second, we cannot rely on existing clinical guidelines to determine what types of volume growth are appropriate; guidelines are simply not specific enough to translate directly into appropriateness measures, a conclusion that others have also drawn when examining CMS coverage decisions.

Annual review of growing codes. We would, however, recommend implementa-tion of a multi-pronged approach to controlling spending growth, rooted in the methods we piloted in this project. Specifically, the methods developed in this study for identifying high-growth services could be very valuable for targeting reviews and policy changes. While there are over 6000 codes on the Current Procedural Terminology (CPT) schedule, the top 600 account for more than 90 percent of spending and those 600 can be grouped into a much smaller number of code “families.” It is reasonable to believe that the top 600 codes could be systematically reviewed on an annual basis.

The annual review of growth in the top codes could incorporate clinical expert advice. We found during this study that that the clinical experts we interviewed were fully capable of absorbing the data presented to them during interviews about growth in service use and reflecting on multiple causes of that growth. Our interviews revealed multiple types of actionable information, such as:

  • services for which the relative value units (RVUs) which determine payment, and especially the practice expense RVUs, might be out of line with true underlying resource costs, making the services relatively profitable;
  • intense manufacturer marketing and promotion efforts that signaled over-valued services that were growing for reasons unrelated to concrete evidence of benefit; and
  • new technologies being billed and delivered under existing codes that may not provide sufficient benefit.

In addition, the growth in imaging reinforced the importance of acting on the recommendations of other researchers and government bodies who have sounded warnings about these services. All of these findings could be followed-up on and adjustments made to payment rates, billing codes, coverage criteria, or other Medicare policies. With respect to practice expenses, we would also note that the evidence suggests that they should be reduced in a cost-saving way, rather than the budget-neutral way that RVU changes are currently implemented.

Systemic changes to address growth. Moreover, there are a few ways in which CMS could begin to address more systematic problems with physicians’ services growth. First, we were repeatedly told that the payment differentials between E&M services on the one hand and tests and procedures on the other were contributing to inefficient practice patterns. Although the principle behind the Resource-Based Relative Value Scale (RBRVS) system of reimbursing at the level of the average costs of each service is admirable, failure to estimate average prices correctly is clearly having perverse effects. E&M rates are not keeping up with new technologies that are being added to the fee schedule. They should be increased so that providers’ incentives to over-utilize tests and procedures to increase revenue are mitigated and so that managing chronic diseases becomes more remunerative. Of course, this also means that fees for over-valued tests and procedures must be reduced – otherwise there is a risk that volume growth in both areas will continue. Second, CMS should seek the authority to augment the local medical review procedures conducted by the Medicare Administrative Contractors. These procedures could include the types of prior authorization activities that private insurers are implementing to limit technology use to indications for which it has been proven to be effective. Consistent with other efforts that CMS is considering, such as case management payments for “medical homes,” payments for episodes of care, and incentive payments for achieving cost and quality targets, these measures would move the Medicare program in the direction of rewarding value, rather than simply reimbursing costs. Over the long term, this is the only way for the program to break out of the cycle of constantly adjusting thousands of individual service prices in an attempt to align providers’ incentives with those of the country as a whole.


Medicare Beneficiaries