Trends in Performance Targets and Updates

Trend data for updates, targets, and conversion factors for Medicare physician services were collected from final rules published for physician payment updates, volume performance standards, and the sustainable growth rate in the Federal Register between 1991and 1998. Data on updates and targets are reported in their original form.

Targets for growth in Part B expenditures for physician services during the 1990s are shown in Table 5. In 1990, physicians were collectively expected to hold expenditure growth to 9.1 percent; overall, the targets for expenditure growth remained between 7.3 and 10 percent until 1996. In 1996 the target was reduced to 1.8 percent, and then to -0.3% in 1997.

Table 5

Medicare volume performance standard, 1990-1997, and sustainable growth rate 1998¹.

When the VPS was introduced, there were separate targets for surgical and other nonsurgical services. The surgical services target was 3.3 percent in 1991 and increased to 8.4 percent in 1993 and to 9.1 percent in 1994 and 1995. In 1996, the surgical target decreased to -0.5 percent and then to -3.7 percent in 1997. In 1994, the primary care target was introduced and set at 10.5 percent. Primary care targets increased substantially between 1994 and 1997, peaking at 13.8 percent in 1995. Targets for other nonsurgical services increased in the 1990s between 8.6 percent in 1991 and 9.2 percent in 1994, falling to 0.5 percent in 1997. In 1998, the Sustainable Growth Rate of 1.5 percent replaced the other separate targets.

Updates and Conversion Factors

Update factors determine the year-to-year change in the dollar conversion factor, used to reimburse physicians and others reimbursed through the physician fee schedule. Table 6 shows the trends in the updates to the fee schedules between 1992 and 1997 and the single conversion factor introduced in 1998. The update to the fee schedule in 1993 was below 2 percent. In 1994 and 1995 the weighted average update surged to around 7 percent, but then the update factor dropped below 1 percent in 1996 through 1998. Between 1993 and 1997 the fee schedule updates contained different update factors for surgical services, primary care (after 1994), and nonsurgical services; but the Balanced Budget Act replaced these updates with a single update factor and conversion factor.¹¹

Table 6

Physician fee schedule updates and conversion factors by service type, 1993-1998.

The update factors determine the changes in prices paid per RVU over the period 1993 to 1998. Table 6 shows the update factors and correspondingly updated dollar conversion factors. (The conversion factors are multiplied by the RVUs for a physician service to produce payment amount.) Updates are shown in percentages while conversion factors are shown in dollars (rounded to two decimal places). In 1998 the single conversion factor was rebased at $36.69.

The Balanced Budget Act and the move to a single rebased conversion factor had the most significant impact on surgical services. The surgical conversion factor increased from $31.96 in 1993 to $41.00 in 1997. After the introduction of the single conversion factor, surgical services were reimbursed at the uniform conversion factor of $36.70 in 1998.

The first column of Table 7 shows the cumulative increase in the conversion factors for different service types between 1993 and 1998. The cumulative increase in the conversion factor for surgical services was 14.7 percent. Primary care and nonsurgical services increased by 17.3 percent between 1993 and 1998. The cumulative increase for surgical services over this period was lower than the increase for other services because of introduction of the uniform conversion factor in 1998. Table 6 shows the difference between primary and nonsurgical conversion factors, which is not reflected in the cumulative growth of 17.3 between 1993 and 1998 in Table 7. The cumulative primary and nonsurgical rate is the same because primary services were updated by the nonsurgical update in 1993, and in 1998 the conversion factors were also identical.

Table 7

Average annual percentage change in all conversion factors.

Table 7 compares the annualized growth rate between 1993 and 1997 (center column) and 1993 and 1998, shown in the final column. The impact of the single conversion factor introduced in 1998 is shown in the final column. Between 1993 and 1997 the annualized growth rate for surgical services was 6.4 percent, but between 1993 and 1998 the growth rate was lower at 2.8 percent, reflecting the influence of the lower uniform conversion factor. Primary care services grew at relatively similar rates between 1993 and 1997 and between 1993 and 1998, mainly because the 1998 uniform conversion factor was based on the 1997 primary care services conversion factor. Nonsurgical services grew at an average rate of 2 percent between 1993 and 1997 and by 3.2 percent between 1993 and 1998.

Changes in the update factors during the study period largely reflect the feedback loop between target and actual expenditures. As reported in Table 3 of Chapter 1, the Performance Adjustment Factor for surgical services was 0.4 percent in 1993, 12.8 percent in 1995 and -0.1 percent in 1997. This was because expenditures in years prior to 1995 had not met the VPS targets, while those in 1993 and 1997 were close to targets. The Medicare Economic Index was fairly stable between 1993 and 1998. During the study period, the Medicare Economic Index ranged between 2.0 and 2.7 percent. The fee schedule update ranged between 0.6 percent and 7.5 percent. In addition, especially in the early years of the 1990s, there were relatively high initial expenditure targets for most types of services.

Historical Trends in Health Expenditures

Expenditure Trends

The 1990s saw major shifts in the financing of health care, which influenced the rate of health care inflation in the public and private sectors. Whereas in 1990 total health expenditures grew from the previous year by almost 12 percent, expenditure growth was 5.4 percent over the previous year in 1995, and 5.6 percent in 1999. These lower growth rates for health expenditure were experienced by private, Federal, State and local payers, and across all types of care except for drugs, home health services, and some types of personal health care services and supplies.

Table 8 compares the trends in total (per capita) health expenditures of privately insured Americans over the last thirty years compared to Americans insured under Medicare. The real average annual change in expenditures for the Medicare insured was 5.3 percent, compared to 6.5 percent for privately insured Americans. Between 1985 and 1991, Medicare's inflation-adjusted annual growth slowed to around 3.3 percent compared to 8.1 percent per enrollee for the privately insured. As more privately insured Americans enrolled in managed care insurance plans in the early and mid-1990s, average growth rates fell for this group compared to Medicare. Private insurance expenditures began to grow more rapidly towards the end of the 1990s. Between 1997 and 1998, Medicare's expenditures fell by .1 percent in real terms while expenditures for privately insured Americans increased 5.9 percent.

Table 8

Average annual growth in per enrollee Medicare and private health insurance expenditure for all services.

Although year-to-year growth in total national health expenditures was slowing in the middle years of the 1990s, personal health expenditures were increasing at a faster rate than all health expenditures (see Table 9). Expenditure trends for physicians' services mirrored the trends of slower growth in total health expenditures during most of the 1990s. Physician and clinical service expenditure increased at a faster rate than hospital care, but not as fast as total personal health expenditure. Hospital services grew at a much slower rate than physician and clinical services in the latter half of the 1990s.

Table 9

Year-to-year percentage increase in health expenditure (all payers).

Table 10 shows that between 1970 and 1999 third party payments increased as a proportion of total expenditures for physician and clinical services. Direct consumer payments decreased as a percentage of all payments while third party payments increased. Third party payers accounted for 54 percent of physician service expenditure in 1970. By 1990 third party payers were funding 81 percent of physician service expenditure. Through the 1990s this trend continued and by 1999 third party payers were responsible for almost 89 percent of physician expenditures.

Table 10

Sources of payments for physician and clinical services, selected calendar years, 1970-1999.

Direct consumer payments for physician and clinical services declined from 19 percent in 1990 to 11 percent of total expenditures in 1999. The decreasing share of out-of-pocket payments for physician services reflects changing insurance coverage and the role of public programs such as Medicaid and Medicare in paying for physician services. The proportion of payments for physicians' services made by private insurance grew between 1970 and 1999, from 30 percent to 43 percent in 1990 and to 48 percent of physician expenditures by 1999. Medicare's share of payments increased from 12 percent in 1970 to 19 percent in 1990. Throughout the 1990s Medicare's share remained between 18 and 20 percent of total physician expenditures.

For services provided by other health professionals, out-of-pocket payments also fell as private third party payments for these services increased between 1970 and 1999. Out-of-pocket payments for other professional services fell from 44 to 30 percent of all expenditures for these services, as shown in Table 11. Whereas the public sector has increased its expenditures over time for physician services, the share of expenditures paid by Federal, State, and local sources for other professional services declined in relation to other payers between 1970 and 1999. The decline in the share of public payments occurred outside of the Medicare and Medicaid programs. Medicare financed 5 percent of these services in 1970 and 11 percent in 1999, while Medicaid expenditures decreased by one percentage point relative to other payers.

Table 11

Sources of payments for other health professional services,selected calendar years, 1970-1999.

Table 12 shows the increases in expenditures by private insurers and individuals between 1990 and 1999. Per person expenditures for physician, clinical, other professional, and dental services increased from $411 in 1990 to $716 in 1999 (592 in constant 1990 dollars), real increase of 44 percent. Total private insurance expenditures increased by 57 percent for physician and clinical services.

Table 12

Total and per person private insurance and out-of-pocket expenditures, 1990-1999, in 1990 constant dollars.

Medicaid expenditures for physician and clinical services were considerably lower than expenditures in either Medicare or by private insurers (Table 10), but the rate of growth in total expenditures was higher (Table 13). In part this was a result of increased enrollment throughout this period, rather than comparatively faster increases in per person expenditures. Medicaid expenditures per enrollee increased nearly 27 percent in real terms between 1990 and 1998 (Table 14). Physician and other clinical service expenditures increased by almost 24 percent, and other professional service expenditures 49 percent in real terms.

Table 13

Total Medicaid expenditure on physician, clinical, and other professional services, 1990-1999, in 1990 constant dollars.

Table 14

Medicaid expenditure on physicians' services per recipient, 1990-1998, in 1990 constant dollars.

Table 15 shows growth in Medicare expenditures in the 1990s and the effect of payment policy changes across different types of services. Expenditures for some services grew more rapidly than expenditures for others. Medicare inpatient hospital costs for the period 1992-1997 were increasing at a rate of almost 6 percent, while physician services grew on average by just under 5 percent. Between 1992 and 1997, the fastest growing areas of Medicare expenditure were skilled nursing facility providers and home health providers. Growth in expenditures per beneficiary was fastest before 1998, partly because of high growth in home health and skilled nursing facility expenditures. Following the Balanced Budget Act, the average change in expenditures for physician services was under 4 percent, and expenditures declined by 0.5 percent in the hospital sector.

Table 15

Average annual Medicare expenditure growth rates by provider sector: before and after the Balanced Budget Act.

Medicare expenditures for physician, clinical, dental, and other professional services between 1990-1999 are shown in Table 16. The rows at the top of the table are based on National Health Accounts and the lower rows show program expenditure estimates. National Health Accounts data show considerably higher overall expenditures, probably as a result of including managed care enrollees. Total expenditures on physician, clinical, dental, and other professional services increased from almost $32 billion in 1990 to almost $60 billion in 1999 (46.5 billion in 1990 constant dollars), a real increase of 46 percent between 1990 and 1998, with an average annual growth rate of 4.8 percent. Physician and clinical services increased by 42.6 percent over the period, with an average annual growth rate of 4.5 percent. Other professional service expenditures increased by 97 percent in real terms between 1990 and 1998, an average annual increase of 8.9 percent. (Dentists' expenditures were very low in dollar terms at the start of the decade ($2 million) but they increased at a rapid rate between 1990 and 1998.)

Table 16

Total Medicare expenditure on physician services, 1990-1998, in 1990 constant dollars.

Data from benefits paid are shown in the lower section of the table. Medicare program expenditures on physicians and suppliers grew from $29.6 billion in 1990 to $44.2 billion in 1998 ($37 billion in 1990 dollars). These expenditures are for non-ESRD fee-for-service enrollees only, and during this period the number of Medicare enrollees enrolling in Medicare managed care plans increased. Over this period the expenditures grew 25 percent, with an average annual increase of 2.8 percent. Physician fee schedule expenditures, which are a subset of national health expenditures and physician and supplier expenditures, are also shown in Table 16. Total expenditures paid for under the physician fee schedule grew at similar rate. Medicare physician fee schedule expenditures grew by 2.3 percent annually between 1993 and 1998.

Per person (enrollee) estimates of Medicare expenditures are shown in Table 17. Medicare expenditure data for each year from the National Health Accounts was divided by the number of Part B enrollees.¹⁶ Physician fee schedule and physician and suppliers expenditures were divided by the number of fee-for-service or non-ESRD fee-for-service enrollees.

Table 17

Annual Medicare expenditures per enrollee, 1990-1999, in 1990 constant dollars.

National Health Accounts data show that Medicare expenditures increased from $978 to $1590 per enrollee between 1990 and 1998 ($1316 in constant dollars), a real increase of 29.4 percent (Table 17). This parallels the expenditures for private health insurers discussed above. The real average annual percentage increase for per person physician services expenditures paid by Medicare was 3.4 percent. Physician and clinical services increased 26.5 percent and other professional service expenditures 73.9 percent in real terms between 1990 and 1999.

Medicare program expenditures show similar trends to National Health Accounts estimates, although the time periods available differ. Physician and supplier expenditures increased at a real average annual rate of 3.4 percent per year. This is close to the National Health Accounts average annual increase of 3.3 percent. Physician fee schedule expenditures increased at a real annualized rate of 3.2 percent, from $820 per person to $1065 per person in 1998 ($893 in constant dollars).

In conclusion, the real average annual increases for Medicare benefits paid for physicians and suppliers were 3.4 percent for the period 1990 through 1997. Medicare expenditures for physician and clinical services estimated by the National Health Accounts show a similar 3.3 percent annualized average growth rate for physician and clinical services for the period 1990 through 1998. These estimates are close to the annualized percentage growth rates shown in Table 9 for the period 1990 through 1998 of 3.7 percent for physician and clinical service expenditures across all payers. These growth rates suggest some similarities in expenditures for physician and clinical services, despite different enrollee populations.

Discussion

The 1990s were a period of important changes in the health care sector, as payers in the public and private sectors sought greater control over costs. Within the Medicare program, a number of policy changes were introduced that affected the financing of Medicare Part B services. The physician fee schedule update and the expenditure targets discussed in the Background and Introduction sections of Chapter 1 were the principal tools used to influence expenditure growth in the Medicare program.

The broad trends suggest similarities in expenditure increases during the 1990s for physician services across a variety of payers. Per person private expenditures increased at a real annual average rate of 4 percent between 1990 and 1999. Medicaid expenditures increased by 3.0 percent (Table 13 and 14). Per person National Health Accounts estimates of physician and clinical services expenditures financed by Medicare also showed a real annual average increase (between 1990 and 1999) of 3.3 percent, and Medicare program expenditure data showed a real average annual increase of 3.4 percent between 1990 and 1998.

Similar trends in expenditure growth by payers across National Health Accounts data raise the question of what common factors are driving these trends. Aggregate expenditure data do not enable us to understand the factors driving these trends. As mentioned in the Data and Methods section of this chapter, comparisons between public and private sector expenditures are made possible using the National Health Accounts, which have similar data collection strategies and service definitions. However, there are differences between Medicare and private health insurance programs in terms of the health and demographic characteristics of the population covered and the range and level of benefits provided, among other factors.

These increases in Medicare expenditures may be explained by a number of factors, including the types of benefits provided, the mix and intensity of services utilized by Medicare beneficiaries, and changes in the enrolled population. The next chapter of the report assesses the direction of these trends by examining data on the utilization and expenditures of Medicare beneficiaries.

Footnotes

11

Prior to 1994, primary care services were updated using the nonsurgical services update. When the primary care update and conversion factor was introduced in 1994, the name of the nonsurgical update was changed to “other nonsurgical services.”

12

These do not include beneficiary out-of-pocket expenditures.

13

In our analyses in chapter 3 we use raw claims level data that we can aggregate to match the statutory definition of physicians' services.

14

Published data on Medicare physician program expenditures are based on Health Care Financing Administration data. The published sources consulted included Health Care Financing Review Statistical Abstract (1999), the House Ways and Means Green Book series, and the Statistical Abstract of the United States.

15

Medicare Program expenditures for “physician and suppliers” under Medicare Supplementary Medical Insurance (Part B) includes the package of services defined in the introduction. For example, this includes medical care; anesthesia; X-rays; mammography; psychological, physical and occupational therapy; lab tests; and some drugs. “Physicians and Suppliers” excludes expenditures for prepaid or managed care plans, home health agencies, and independent laboratories. However, this category also includes “durable medical equipment” and “other services” that are not part of the package of services included in this study. Therefore, this estimate will tend to overstate expenditures.

16

As mentioned in the discussion on data and methods, National Health Accounts data do not allocate expenditures to managed care and fee-for-service enrollees; therefore, the expenditures are divided by the number of total Part B enrollees.