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Target expenditures can be calculated once the sustainable growth rateis known.
In my last article ("Sustainable growth rate directs plans for expansion," Sept. 15, 2004 at http://www.ophthalmologytimes.com/ ) I defined the sustainable growth rate as the annual percentage increase in sales that a firm can support without changing its present mix of liabilities and equities. In the context of Medicare, the sustainable growth rate is the rate of growth in spending for physician services endorsed by the government.
There is some similarity in the treatment of the term in the two settings. Both describe the increase in payments by some entity (either customers or the government) that can be supported under a particular financial structure (either company assets or the federal budget.)
Determination of growth rate The sustainable growth rate is determined prospectively by a formula that takes several factors into account. These factors are all estimated values. They include estimates of the changes in physicians' fees, changes in the average number of Medicare beneficiaries, changes in expenditures due to regulatory changes, and growth in per capita gross domestic product. Sustainable growth rates were 8.3%, 6.7%, and 7.4% in 2002, 2003, and 2004, respectively.
Target expenditures can be calculated once the sustainable growth rate is known. The target expenditures for a given quarter equal the previous year's target expenditures for the same quarter with a percentage increase equal to the sustainable growth rate. Since the sustainable growth rate is determined through estimates, target expenditures are inherently based on estimates as well.
For example, given the 2004 sustainable growth rate of 7.4%, target expenditures for the fourth quarter of 2004 will be 7.4% more than winter 2003's target expenditure of $18.2 billion, or $19.5 billion.
The federal government calculates an index annually that is modified by variances between actual and target expenditures. Eventually, a fee schedule update is determined that is then used to change the conversion factor from 1 year to the next. The conversion factor is the number multiplied by the geographically adjusted relative value units of a CPT code to determine the fee schedule amount for the service. (For more details on the resource-based relative value system, see my previous article, "Resource-based relative value scale dictates revenue stream," Dec. 15, 2003 at http://www.ophthalmologytimes.com/)