February 2014
Health Care Reform Vignette

The Medicare Conversion Factor

Factors for Conversion to Global Health Care Budgets

David Seidenwurm

David Seidenwurm

The Medicare Conversion factor is the amount paid per unit of work in fee-for-service Medicare. The Conversion Factor (CF) forms the basis for numerous payment plans in other governmental and nongovernmental health systems as well. The annual calculation of the conversion factor remains controversial because it affects the budget processes of the federal government by helping to determine the cost of one of the largest, fastest-growing, and most complicated governmental activities. The principal area of controversy each year is the Sustainable Growth Rate (SGR) formula, which until the recent recession and passage of the Patient Protection and Affordable Care Act, became more and more unsustainable financially and politically each year.

The SGR formula takes into account changes in the potential resources for and demands upon the American health care system. With respect to resources, the formula includes the size of the Gross Domestic Product (GDP) and thus the potential tax base. Obviously, a society cannot indefinitely spend more than it produces, and it must allocate its resources among a multitude of activities. Regarding demands, the formula takes into account the size and age distribution of the Medicare population, changes in medical practices, and evolution of medical technologies, along with inflation.

When one thinks about the question of how much our society might be willing to spend on medicine in general, and Medicare in particular, these seem to be the things we would want to know. As such, the SGR formula and CF permit us to understand what the components for a global Medicare budget or even a regional or national health care budget might look like. These components also point to the way forward in our discussion about resources for health care. A larger and faster-growing economy can provide more resources for health care and, of course, for other activities. Changing the demands on Medicare could mean changing eligibility to affect the size of the covered population or attempting to affect the practice of medicine to modulate costs.

Thus, the CF helps us to understand how society allocates resources to medical care now, and provides a window into the types of changes we may expect to see in the future.

Read this article at AJNR.org . . .