Mindnumbing: How Medicare fees are calculated

“To arrive at the spending target for 2006, for example, officials first looked at the target for 2005, which reflects the cumulative difference between actual expenditures and allowed expenditures for all years between 2005 and the base year of 1996.

Next, they calculated the ‘sustainable growth rate’ or SGR, which measures changes in four areas: physician fees (including lab fees and the cost of physician-administered drugs); Medicare fee-for-service enrollment; the 10-year annual average change in real (inflation-adjusted) GDP per capita; and expenditures for physician services resulting from new laws and regulations. Their calculations gave them an estimated SGR of 2.5 percent. They then updated the 2005 spending target by this amount.

Next, the government fed all this data —along with the difference between actual and target expenditures for 2005 alone —into a mind-dizzying formula that spits out something called the ‘update adjustment factor’ (UAF). For 2006, this came to an eye-popping –21.1 percent. Fortunately, federal law dictates that the UAF can’t be less than –7 percent in any one year, so the number-crunchers were forced to overrule their own calculations for 2006.

To account for the annual rise in the cost of conducting a medical practice, the government adjusts the current year’s Medicare Economic Index (MEI) —which measures the change in the cost of things like wages, fringe benefits, office expenses, and professional liability insurance —by the UAF.

Multiplying the current MEI of 2.9 percent by the statutorily adjusted –7 percent UAF results in an update for 2006 of –4.3 percent. This will be the across-the-board reduction in physician fees for 2006 —unless, of course, Congress intercedes.”