Note 28. SMI Part B Physician Update Factor

The projected Part B expenditure growth reflected in the accompanying SOSI is significantly reduced as a result of the structure of physician payment updates under current law.  In the absence of legislation, this structure would result in multiple years of significant reductions in physician payments, totaling an estimated 41 percent over the next 9 years.  Reductions of this magnitude are very unlikely to occur fully.  For example, Congress has overridden scheduled negative updates for each of the last 5 years.  However, since these reductions are required in the future under the current-law payment system, they are reflected in the accompanying SOSI as required under generally accepted accounting principles.  Consequently, the projected actuarial present values of Part B expenditure shown in the accompanying SOSI are likely to be understated.

The potential magnitude of the understatement of Part B expenditures due to the physician payment mechanism can be illustrated using two hypothetical examples of changes to current law.  These examples were developed by management for illustrative purposes only; the calculations have not been audited; and the examples do not attempt to portray likely or recommended future outcomes.  Thus, the illustrations are useful only as general indicators of the substantial impacts that could result from future legislation on physician payments under Medicare and of the broad range of uncertainty associated with such impacts. 

Under current law, the projected 75-year present value of future Part B expenditures is $18.2 trillion.  An alternate scenario indicates that if Congress were to set future physician payment updates at zero percent per year, then, absent other provisions to offset these costs, the projected present value would increase to $22.6 trillion.  Similarly, if Congress were to set future physician payment updates equal to the Medicare Economic Index (projected to be 2 to 2.5 percent per year), the present value would be $25.4 trillion. 

The extent to which actual future Part B costs could exceed the projected current-law amounts due to physician payments depends on both the level of physician payment updates that might be legislated and on whether Congress would pass further provisions to help offset such costs (as it did, for example in the Deficit Reduction Act in 2006).  As noted, these examples only reflect hypothetical changes to physician payments. 

It is likely that in the coming years Congress will consider, and pass, numerous other legislative proposals affecting Medicare.  Many of these would likely be designed to reduce costs in an effort to make the program more affordable.  In practice, it is not possible to anticipate what actions Congress might take, either in the near term or over longer periods.

Report Date: November 15, 2007

AFR Section II Links:

• Message from the Chief Financial Officer
• Office of Inspector General Transmittal
• Independent Auditor's Reports
• Financial Statements and Notes
• Required Supplementary Stewardship Information
• Required Supplementary Information