[Federal Register Volume 60, Number 236 (Friday, December 8, 1995)]
[Notices]
[Pages 63358-63366]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29754]




  Federal Register / Vol. 60, No. 236 / Friday, December 8, 1995 / 
Notices   

[[Page 63358]]


DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration
[BPD-828-FN]
RIN 0938-AH03


Medicare Program; Physician Fee Schedule Update For Calendar Year 
1996 and Physician Volume Performance Standard Rates of Increase for 
Federal Fiscal Year 1996

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Final notice.

-----------------------------------------------------------------------

SUMMARY: This final notice announces the calendar year 1996 updates to 
the Medicare physician fee schedule and the Federal fiscal year 1996 
volume performance standard rates of increase for expenditures for 
physicians' services under the Medicare Supplementary Medical Insurance 
(Part B) program as required by sections 1848 (d) and (f), 
respectively, of the Social Security Act. The fee schedule update for 
calendar year 1996 is 3.8 percent for surgical services, -2.3 percent 
for primary care services, and 0.4 percent for other nonsurgical 
services. While it does not affect payment for any particular service, 
there was a 0.8 percent increase in the update for all physicians' 
services for 1996. The physician volume performance standard rates of 
increase for Federal fiscal year 1996 are -0.5 percent for surgical 
services, 9.3 percent for primary care services, 0.6 percent for other 
nonsurgical services, and a weighted average of 1.8 percent for all 
physicians' services.
    In our July 26, 1995 proposed rule concerning revisions to payment 
policies under the Medicare physician fee schedule for calendar year 
1996, we proposed using category-specific volume and intensity growth 
allowances in calculating the default Medicare Volume Performance 
Standard (MVPS). We received 20 comments on this proposal. Since this 
proposal is related to the MVPS and this notice deals with MVPS issues, 
we are responding to those comments in this notice instead of in the 
final rule for the fee schedule entitled ``Medicare Program; Revisions 
to Payment Policies and Adjustments to the Relative Value Units Under 
the Physician Fee Schedule for Calendar Year 1996'' published elsewhere 
in this Federal Register issue.

EFFECTIVE DATE: The volume performance standard rates of increase are 
effective on October 1, 1995. The Medicare physician fee schedule 
update is effective on January 1, 1996.

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FOR FURTHER INFORMATION CONTACT: Ordering information: See ADDRESSES 
section.
    Content information: Contact either Don Thompson, (410) 786-4586, 
or Rick Ensor, (410) 786-5617.

SUPPLEMENTARY INFORMATION:

I. Background and Summary of Legislation

A. The Physician Fee Schedule Update and Medicare Volume Performance 
Standard

    Section 1848 of the Social Security Act (the Act) requires the 
Secretary of Health and Human Services to--
     Establish annual updates to payment rates under the 
Medicare physician fee schedule, and
     Establish volume performance standard rates of increase to 
help control the rate of growth in expenditures for physicians' 
services.
    Under section 1848(b)(1) of the Act, payment for physicians' 
services, except for anesthesia services, equals the product of the 
relative value units (RVUs) for a service, a geographic adjustment 
factor, and a conversion factor. Anesthesia services are paid under a 
different relative value system, and payment is equal to the sum of the 
base and time units for the service multiplied by a geographically 
adjusted anesthesia-specific conversion factor. The RVUs and anesthesia 
base units reflect the relative amount of resources used by physicians 
to furnish the service, and the geographic adjustment factor measures 
practice cost differences between areas. The geographically adjusted 
RVUs are multiplied by a conversion factor to obtain the physician fee 
schedule payment amounts. The 1996 conversion factors are $15.28 for 
anesthesia services, $40.7986 for surgical services, $35.4173 for 
primary care services, and $34.6293 for other nonsurgical services.
1. Physician Fee Schedule Update
    Section 1848(d) of the Act requires the Secretary to provide the 
Congress with her recommendation of a physician fee schedule update by 
April 15 of each year. Under section 1848(d)(2)(A) of the Act, the 
Secretary is required to consider a number of factors, including the 
following:
     The percentage change in the Medicare economic index 
(MEI), a measure of the change in the cost of operating a medical 
practice.
     The growth in actual expenditures for physicians' services 
in the prior fiscal year.
     The relationship between that growth and the volume 
performance standard rate of increase.
     Changes in the volume and intensity of services.
     Access to services.
     Other factors that may contribute to changes in the volume 
and intensity of services or access to services.
    If the Congress does not set the update, section 1848(d)(3) of the 
Act establishes the process for updating the physician fee schedule. 
Under section 1848(d)(3), unless otherwise specified by the Congress, 
the fee schedule update for a category of physicians' services equals 
the appropriate update index (the MEI) adjusted by the number of 
percentage points by which expenditure growth exceeded or was less than 
the volume performance standard rates of increase for the second 
preceding year for that category of physicians' services. That is, the 
calendar year 1996 update would equal the 1996 MEI increased or 
decreased by the difference between the rate of increase in 
expenditures for fiscal year 1994 and the volume performance standard 
for that year. However, section 1848(d)(3)(B) of the Act limits the 
maximum downward adjustment for 1995 and any succeeding year to 5.0 
percentage points. There is 

[[Page 63359]]
no restriction on upward adjustments to the MEI.
    Section 1848(d)(1)(C) of the Act requires the Secretary to publish 
in the Federal Register, within the last 15 days of October, the 
updates for the following calendar year.
    The updates are required by the Medicare statute, and any budget 
implications associated with them are due to the requirements of the 
law and not this notice.
    2. Medicare Volume Performance Standard Rates of Increase Section 
1848(f) of the Act requires the Secretary to establish volume 
performance standard rates of increase for Medicare expenditures for 
physicians' services. The use of volume performance standard rates of 
increase is intended to control the rate of increase in expenditures 
for physicians' services.
    The volume performance standard rates of increase are not limits on 
expenditures. Payments for services are not withheld if volume 
performance standard rates of increase are exceeded. Rather, the 
appropriate fee schedule update, as specified in section 1848(d)(3)(A) 
of the Act, is adjusted to reflect the success or failure in meeting 
the volume performance standard rates of increase.
    Section 1848(f) of the Act sets forth the process for establishing 
the volume performance standard rates of increase by requiring the 
Secretary to recommend to the Congress the physician volume performance 
standard rates of increase for the following Federal fiscal year by not 
later than April 15. The Secretary is required to recommend MVPS rates 
for surgical, primary care, other nonsurgical, and all physicians' 
services. In making the recommendations, the Secretary is required to 
confer with organizations that represent physicians and to consider the 
following factors:
     Inflation.
     Changes in the number and age composition of Medicare 
enrollees under Part B (excluding risk health maintenance organization 
enrollees).
     Changes in technology.
     Evidence of inappropriate utilization of services.
     Evidence of lack of access to necessary physicians' 
services.
     Other appropriate factors as determined by the Secretary.
    If the Congress does not set the volume performance standard rates 
of increase, section 1848(f)(2) (A) and (B) of the Act requires the 
Secretary to set MVPS rates for all physicians' services and each 
category of physicians' services equal to the product of the following 
four factors reduced by a performance standard factor, which for fiscal 
year 1996 is 4.0 percentage points:
     1.0 plus the Secretary's estimate of the weighted-average 
percentage increase (divided by 100) in fees for all physicians' 
services or for the category of physicians' services for the portions 
of calendar year 1995 and calendar year 1996 contained in fiscal year 
1996.
     1.0 plus the Secretary's estimate of the percentage change 
(divided by 100) in the average number of Part B enrollees (excluding 
risk health maintenance organization enrollees) from fiscal year 1995 
to fiscal year 1996.
     1.0 plus the Secretary's estimate of the average annual 
percentage growth (divided by 100) in the volume and intensity of all 
physicians' services or of the category of physicians' services for 
fiscal year 1990 through fiscal year 1995.
     1.0 plus the Secretary's estimate of the percentage change 
(divided by 100) in expenditures for all physicians' services or of the 
category of physicians' services that will result from changes in law 
or regulations in fiscal year 1996 as compared with expenditures for 
physicians' services in fiscal year 1995.
    Section 1848(f)(1)(C) of the Act requires the Secretary to publish 
in the Federal Register within the last 15 days of October of each year 
the volume performance standard rates of increase for all physicians' 
services and for each category of physicians' services for the Federal 
fiscal year that began on October 1 of that year. (The MVPS for all 
physicians' services has no practical effect on the update. We publish 
it only because we are required to do so by section 1848(f) of the 
Act.)
3. Past Years' Medicare Volume Performance Standard Rates of Increase 
and Physician Fee Schedule Updates
    MVPS rates have been established under section 1848 of the Act 
since fiscal year 1990. Calendar year 1992 was the first year in which 
the update was affected by expenditures under the MVPS system. The 
following tables illustrate the MVPS rates in each fiscal year since 
their inception, the actual rates of increase in expenditures, and the 
corresponding updates in the second subsequent calendar year.

                                               Fee Schedule Update                                              
                                                  [In percent]                                                  
----------------------------------------------------------------------------------------------------------------
                                                                    Performance     Legislative                 
                  Calendar year                         MEI         adjustment      adjustment        Update    
----------------------------------------------------------------------------------------------------------------
CY 1992:                                                                                                        
    All services................................             3.2            -0.9            -0.4            -1.9
CY 1993:                                                                                                        
    Surgical....................................             2.7             0.4  ..............             3.1
    Nonsurgical.................................             2.7            -1.9  ..............             0.8
CY 1994:                                                                                                        
    Surgical....................................             2.3            11.3            -3.6            10.0
    Primary care................................             2.3             5.6             0.0             7.9
    Other nonsurgical...........................             2.3             5.6            -2.6             5.3
CY 1995:                                                                                                        
    Surgical....................................             2.1            12.8            -2.7            12.2
    Primary care................................             2.1             5.8             0.0             7.9
    Other nonsurgical...........................             2.1             5.8            -2.7             5.2
CY 1996:                                                                                                        
    Surgical....................................             2.0             1.8  ..............             3.8
    Primary care................................             2.0            -4.3  ..............            -2.3
    Other Nonsurgical...........................             2.0            -1.6  ..............             0.4
----------------------------------------------------------------------------------------------------------------


                                                                                                                

[[Page 63360]]
                             Medicare Volume Performance Standard Rates of Increase                             
                                                  [In percent]                                                  
----------------------------------------------------------------------------------------------------------------
                           Fiscal year                                 MVPS           Actual        Difference  
----------------------------------------------------------------------------------------------------------------
FY 1990:                                                                                                        
    All services................................................             9.1            10.0            -0.9
FY 1991:                                                                                                        
    Surgical....................................................             3.3             2.9             0.4
    Nonsurgical.................................................             8.6            10.5            -1.9
FY 1992:                                                                                                        
    Surgical....................................................             6.5            -4.8            11.3
    Nonsurgical.................................................            11.2             5.6             5.6
FY 1993:                                                                                                        
    Surgical....................................................             8.4            -4.4            12.8
    Nonsurgical.................................................            10.8             5.0             5.8
FY 1994:                                                                                                        
    Surgical....................................................             9.1             7.3             1.8
    Primary care................................................            10.5            14.8            -4.3
    Other nonsurgical...........................................             9.2            10.8            -1.6
FY 1995:                                                                                                        
    Surgical....................................................             9.2  ..............  ..............
    Primary care................................................            13.8  ..............  ..............
    Other nonsurgical...........................................             4.4  ..............  ..............
FY 1996:                                                                                                        
    Surgical....................................................            -0.5  ..............  ..............
    Primary care................................................             9.3  ..............  ..............
    Other nonsurgical...........................................             0.6  ..............  ..............
----------------------------------------------------------------------------------------------------------------
Separate MVPS rates for surgical and nonsurgical services were not required until fiscal year 1991. Separate fee
  schedule updates were not required until calendar year 1993. Beginning with the calendar year 1994 fee        
  schedule update and the fiscal year 1994 MVPS, we established separate updates and MVPS rates of increase for 
  surgical, primary care, and other nonsurgical services.                                                       



B. Physicians' Services

    Section 1848(f)(5)(A) of the Act defines physicians' services for 
purposes of the volume performance standard rates of increase as 
including other items or services (such as clinical diagnostic 
laboratory tests and radiology services), specified by the Secretary, 
that are commonly performed by a physician or furnished in a 
physician's office. Section 1861(s) of the Act defines medical and 
other health services covered under Part B. As provided for in the 
fiscal year 1990 volume performance standard rates of increase notice 
in the Federal Register on December 29, 1989 (54 FR 53819), we are 
including the following medical and other health services in section 
1861(s) of the Act in the physician volume performance standard rates 
of increase if bills for the items are processed and paid for by 
Medicare carriers:
     Physicians' services.
     Services and supplies furnished incident to physicians' 
services.
     Outpatient physical therapy and speech therapy services, 
and outpatient occupational therapy services.
     Antigens prepared by or under the direct supervision of a 
physician.
     Services of physician assistants, certified registered 
nurse anesthetists, certified nurse midwives, clinical psychologists, 
clinical social workers, nurse practitioners, and clinical nurse 
specialists.
     Diagnostic x-ray tests, diagnostic laboratory tests, and 
other diagnostic tests.
     X-ray, radium, and radioactive isotope therapy.
     Surgical dressings, splints, casts, and other devices used 
for reduction of fractures and dislocations.
    As stated in our December 8, 1994 final notice (59 FR 63638) 
announcing the fiscal year 1995 volume performance standard rates of 
increase, we are including outpatient diagnostic laboratory tests paid 
through intermediaries in the MVPS definition of physicians' services 
beginning in fiscal year 1996 (59 FR 63640).

C. Definition of Surgical, Primary Care, and Other Nonsurgical Services

    As described in the December 2, 1993 notice (58 FR 63858) 
containing our definitions of surgical, primary care, or other 
nonsurgical services, we consider a procedure to be surgical if the 
following conditions are met:
     In the HCFA Part B data system, the service is classified 
under ``type of service'' as a ``surgery.''
     The service is performed by surgical specialists more than 
50 percent of the time.
    As also discussed in the December 1993 notice, section 1842(i)(4) 
of the Act defines primary care services as ``office medical services, 
emergency department services, home medical services, skilled nursing, 
intermediate care, and long-term care medical services, or nursing 
home, boarding home, domiciliary, or custodial care medical services.'' 
Since this language was the result of an amendment to the Act made by 
section 4042(b) of the Omnibus Budget Reconciliation Act of 1987 (OBRA 
1987) (Public Law 100-203), enacted on December 22, 1987, we rely on 
the conference report accompanying OBRA 1987 (H. R. Rep. No. 100-495, 
100th Congress, 1st Session 594-595 (1987)) to determine the HCFA 
Common Procedure Coding System (HCPCS) codes to be included in the 
definition of primary care services. In addition, section 6102(f)(10) 
of the Omnibus Budget Reconciliation Act of 1989 (OBRA 1989) (Public 
Law 101-239), enacted on December 19, 1989, indicated intermediate and 
comprehensive office visits for eye examinations and treatments for new 
patients were to be considered primary care services.
    We classify physicians' services not meeting the surgical or 
primary care definitions as nonsurgical services.
    For a procedure code that is new in 1996 and does not meet the 
primary care definition, we do not have any data for determining how 
often the procedure is performed by surgical specialists and therefore 
whether the service should be classified as surgical or nonsurgical. We 
categorized these codes as surgical or nonsurgical based on the 
judgment of our medical staff. To 

[[Page 63361]]
assist us in making these determinations, we considered the type-of-
service classification within the Physicians' Current Procedural 
Terminology (CPT) and the relationship of services represented by the 
new codes to surgical services meeting the above-described criteria. We 
followed a similar process to classify codes that were new in 1995. For 
the 1996 classification of the new 1995 codes, however, we used 6 
months of 1995 data to determine whether they meet the criteria for 
being considered surgical services. Based on these data, we did not 
need to reclassify any codes as surgical or nonsurgical.
    For 1996, we have classified monthly end-stage renal disease 
services (HCPCS codes 90918 through 90921) as primary care services. 
For a full discussion of this classification, see the final rule with 
comment period entitled ``Medicare Program; Revisions to Payment 
Policies and Adjustments to the Relative Value Units Under the 
Physician Fee Schedule for Calendar Year 1996'' published elsewhere in 
this Federal Register issue and hereafter referred to as the physician 
fee schedule final rule.
    Also, Addendum B of the physician fee schedule final rule, 
published elsewhere in this Federal Register issue, lists the RVUs and 
related information used in determining Medicare payments for HCPCS 
codes. For the purposes of the physician fee schedule, we have assigned 
the following surgical, primary care, or other nonsurgical service 
update indicators to these codes:

------------------------------------------------------------------------
         Update indicator                      Interpretation           
------------------------------------------------------------------------
S.................................  Surgical services.                  
P.................................  Primary care services.              
N.................................  The physician fee schedule update   
                                     applies, but the code is not       
                                     defined as surgical or primary     
                                     care.                              
O.................................  The physician fee schedule update   
                                     does not apply.                    
------------------------------------------------------------------------

    The MVPS indicator for a procedure code is identical to the update 
indicator for codes that have a surgical, primary care, or other 
nonsurgical service update indicator. However, we consider some codes 
with an update indicator of ``O'' to be nonsurgical for the purposes of 
the MVPS, most notably the clinical diagnostic laboratory codes.
    The update indicators for codes new or revised in 1996 are shown in 
Addendum C of the physician fee schedule final rule, published 
elsewhere in this Federal Register issue.

II. Analysis of and Responses to Public Comments

    In our July 26, 1995 proposed rule (60 FR 38400) concerning 
revisions to payment policies under the Medicare physician fee schedule 
for calendar year 1996, we invited public comments on a proposal to use 
category-specific volume and intensity growth allowances in calculating 
the default MVPS (60 FR 38416). Since this proposal is related to the 
MVPS and this notice deals with MVPS issues, we are responding to those 
comments in this notice instead of in the physician fee schedule, 
published elsewhere in this Federal Register issue. Our responses to 
the comments follow:
    Comment: Several commenters stated that the use of category-
specific volume and intensity growth allowances is counter to the 
spirit of the MVPS since categories with higher than average volume and 
intensity growth receive higher MVPS targets, and categories with lower 
than average volume and intensity growth receive lower targets.
    Response: The use of category-specific volume and intensity is more 
consistent with section 1848(f)(2)(A) of the Act, which describes the 
calculation of the volume performance standards. Section 1848(f)(2)(A) 
states that one of the factors in calculating the volume performance 
standards for all physicians' services and for each category of 
physicians' services shall be equal to ``1 plus the Secretary's 
estimate of the annual percentage growth (divided by 100) in the volume 
and intensity of all physicians' services or of the category of 
physicians' services, respectively, under this part for the 5-fiscal-
year period ending with the preceding fiscal year * * *'' As stated in 
our July 26, 1995 proposed rule, although historically the data 
available to us allowed an accurate estimate of the overall growth in 
the volume and intensity of physicians' services, they did not allow us 
to estimate the volume and intensity growth for each individual 
category of service with the degree of accuracy required for the MVPS 
calculation. More recent data now allow us to do this. So while it is 
true that the targets move in the direction of volume and intensity 
growth, this is a result of the statutory volume performance standard 
methodology.
    Comment: Several commenters stated that the proposed change in 
methodology does not take into account the ``appropriateness'' of the 
differential volume and intensity growth allowances.
    Response: As stated in the response to the prior comment, the use 
of category-specific volume and intensity growth allowances is more 
consistent with section 1848(f)(2)(A) of the Act. The appropriateness 
of the volume performance standards in any given year, or of the 
statutory methodology itself, can be handled through the MVPS 
recommendation process. Section 1848(f)(1) of the Act requires the 
Secretary and the Physician Payment Review Commission to provide 
recommendations to the Congress on the MVPS for the coming year. The 
Congress can choose to act on these recommendations or can set the MVPS 
itself.
    Comment: One commenter opposed the use of category-specific volume 
and intensity growth allowances on the grounds that it was a 
``stopgap'' policy and recommended a legislative change to a single 
conversion factor and volume performance standard.
    Response: As we stated in our July 26, 1995 proposed rule, we 
proposed this change in our regulations to address immediate problems 
in the physician fee schedule. The Act does not allow us to create a 
single conversion factor and volume performance standard for all 
Medicare physician fee schedule services.
    Comment: One commenter believed that we provided no justification 
for our proposal other than to increase payment for primary care 
services.
    Response: As stated above, the use of category-specific volume and 
intensity is more consistent with section 1848(f)(2)(A) of the Act. In 
addition, although for fiscal year 1996 this change in methodology 
would result in a higher primary care MVPS, this does not necessarily 
mean the change would have a similar result in future years. The impact 
on any individual category of physicians' services is dependent on the 
future relationship between the average volume and intensity growth for 
that category and for physicians' services overall. If future growth in 
the volume and intensity of primary care services is lower than overall 
growth in physicians' services, this change would result in a lower 
MVPS for primary care services. Similar reasoning applies to the 
categories of surgical services and nonsurgical services other than 
primary care.
    Comment: Several commenters believed that use of category-specific 
volume and intensity growth allowances would provide a more accurate 
baseline against which to compare volume and intensity growth. They 
also stated that the proposal was more consistent with our use of 
category-specific estimates of the MVPS factors for the weighted-
average increase in physicians' fees and the percentage change in 
expenditures 

[[Page 63362]]
resulting from changes in law or regulations.
    Response: The use of category-specific volume and intensity growth 
will make the volume performance standards more comparable with the 
actual growth in allowed charges for a given category of physicians' 
services. In addition, we agree that the use of category-specific 
volume and intensity growth allowances is more consistent with our use 
of category-specific estimates of the MVPS factors for fees and changes 
in law or regulations. The language in section 1848(f)(2)(A) of the Act 
regarding these two MVPS factors is similar to the language describing 
the volume and intensity factor.
    Final decision: Beginning with fiscal year 1996, we will use 
category-specific volume and intensity growth allowances in calculating 
the default volume performance standards.

III. Provisions of This Final Notice

A. Physician Fee Schedule Update for Calendar Year 1996

    Under the requirements of section 1848(d)(3) of the Act, the fee 
schedule update for calendar year 1996 will be 3.8 percent for surgical 
services, -2.3 percent for primary care services, and 0.4 percent for 
other nonsurgical services. While it does not affect payment, there was 
a 0.8 percent increase in the update for all physicians' services for 
1996. We determined this update as follows:

----------------------------------------------------------------------------------------------------------------
                                                                     Surgical      Primary care     Nonsurgical 
                                                                     services        services        services   
----------------------------------------------------------------------------------------------------------------
1996 MEI........................................................             2.0             2.0             2.0
MVPS Adjustment.................................................             1.8            -4.3            -1.6
1996 Update.....................................................             3.8            -2.3             0.4
----------------------------------------------------------------------------------------------------------------

    In our July 26, 1995 proposed rule (60 FR 38400) concerning 
revisions to payment policies under the Medicare physician fee schedule 
for calendar year 1996, we proposed applying budget-neutrality 
adjustments to the conversion factors rather than to the RVUs (60 FR 
38401 to 38402). As discussed in the physician fee schedule final rule, 
published elsewhere in this Federal Register issue, the 0.36 percent 
budget-neutrality adjustment for 1996 will be made on the conversion 
factors. However, if in the future the Congress explicitly sets a 
conversion factor at a fixed dollar amount for a given year, we will 
consider establishing a separate budget-neutrality adjuster or applying 
the adjustment to the RVUs.
    Applying the updates and budget neutrality adjustment to the 1995 
conversion factors of $39.447 for surgical services (other than 
anesthesia services), $36.382 for primary care services, and $34.616 
for nonsurgical services yields 1996 conversion factors of $40.7986 for 
surgical services, $35.4173 for primary care services, and $34.6293 for 
other nonsurgical services. The 1995 anesthesia conversion factor of 
$14.77, which includes the effect of the 1995 RVU budget-neutrality 
adjustment, will be updated by the surgical update to $15.28 for 1996, 
after adjusting for the 1996 budget-neutrality adjustment.
    The specific calculations to determine the fee schedule updates for 
physicians' services for calendar year 1996 are explained in section 
IV.A. of this notice.

B. Physician Volume Performance Standard Rates of Increase for Fiscal 
Year 1996

    Under the requirements in section 1848(f)(2) (A) and (B) of the 
Act, we have determined that the volume performance standard rates of 
increase for physicians' services for fiscal year 1996 are -0.5 percent 
for surgical services, 9.3 percent for primary care services, 0.6 
percent for other nonsurgical services, and a weighted average of 1.8 
percent for all physicians' services.
    This determination is based on the following legislative factors:

----------------------------------------------------------------------------------------------------------------
                                                                     Surgical      Primary care     Nonsurgical 
                       Legislative factors                           services        services        services   
----------------------------------------------------------------------------------------------------------------
Fees............................................................             2.1             2.1             2.3
Enrollment......................................................            -0.3            -0.3            -0.3
Volume and Intensity............................................             2.3             5.3             5.1
Legislation.....................................................            -0.6             5.7            -2.4
Performance Standard Factor.....................................             4.0             4.0             4.0
                                                                 -----------------------------------------------
      Total.....................................................            -0.5             9.3             0.6
----------------------------------------------------------------------------------------------------------------


[[Page 63363]]

    The specific calculations to determine the volume performance 
standard rates of increase for physicians' services for fiscal year 
1996 are explained in section IV.B. of this notice.

IV. Detail on Calculation of the Calendar Year 1996 Physician Fee 
Schedule Update and the Fiscal Year 1996 Physician Volume Performance 
Standard Rates of Increase

A. Physician Fee Schedule Update

1. The Percentage Change in the Medicare Economic Index
    The MEI measures the weighted-average annual price change for 
various inputs needed to produce physicians' services. The MEI is a 
fixed-weight input price index, with an adjustment for the change in 
economy-wide labor productivity. This index, which has 1989 base 
weights, is comprised of two broad categories: (1) Physician's own 
time, and (2) physician's practice expense.
    The physician's own time component represents the net income 
portion of business receipts and primarily reflects the input of the 
physician's own time into the production of physicians' services in 
physicians' offices. This category consists of two subcomponents, wages 
and salaries and fringe benefits. These components are adjusted by the 
10-year moving average percent change in output per man-hour for the 
nonfarm business sector to eliminate double counting for productivity 
growth in physicians' offices and the general economy.
    The physician's practice expense category represents the rate of 
price growth in nonphysician inputs to the production of services in 
physicians' offices. This category consists of wages and salaries and 
fringe benefits for nonphysician staff and other nonlabor inputs. Like 
physician's own time, the nonphysician staff categories are adjusted 
for productivity using the 10-year moving average percent change in 
output per man-hour for the nonfarm business sector. The physician's 
practice expense component also includes the following categories of 
nonlabor inputs: office expense, medical materials and supplies, 
professional liability insurance, medical equipment, professional car, 
and other expense. The table below presents a listing of the MEI cost 
categories with associated weights and percent changes for price 
proxies for the 1996 update. The calendar year 1996 MEI is 2.0 percent.

                 Increase in the Medicare Economic Index                
                    [Update for Calendar Year 1996 1]                   
------------------------------------------------------------------------
                                                               CY 1966  
                                                    1989       percent  
                                                 weights 2     changes  
------------------------------------------------------------------------
Medicare Economic Index Total.................        100.0          2.0
    1. Physician's Own Time 3 4...............         54.2          1.7
        a. Wages and Salaries: Average hourly                           
         earnings private nonfarm, net of                               
         productivity.........................         45.3          1.6
        b. Fringe Benefits: Employment Cost                             
         Index, benefits, private nonfarm, net                          
         of productivity......................          8.8          2.1
    2. Physician's Practice Expense 3.........         45.8          2.4
        a. Nonphysician Employee Compensation.         16.3          1.9
            1. Wages and Salaries: Employment                           
             Cost Index, wages and salaries,                            
             weighted by occupation, net of                             
             productivity.....................         13.8          1.8
            2. Fringe Benefits: Employment                              
             Cost Index, fringe benefits,                               
             white collar, net of productivity          2.5          2.8
        b. Office Expense: Consumer Price                               
         Index for Urban Consumers (CPI-U),                             
         housing..............................         10.3          2.4
        c. Medical Materials and Supplies:                              
         Producer Price Index (PPI), ethical                            
         drugs/PPI, surgical appliances and                             
         supplies/CPI-U, medical equipment and                          
         supplies (equally weighted)..........          5.2          2.8
        d. Professional Liability Insurance:                            
         HCFA professional liability insurance                          
         survey 5.............................          4.8          2.9
        e. Medical Equipment: PPI, medical                              
         instruments and equipment............          2.3          0.9
        f. Other Professional Expense.........          6.9          3.3
            1. Professional Car: CPI-U,                                 
             private transportation...........          1.4          4.8
            2. Other: CPI-U, all items less                             
             food and energy..................          5.5          2.9
Addendum:                                                               
    Productivity: 10-year moving average of                             
     output per man-hour, nonfarm business                              
     sector...................................          N/A          1.2
    Physician's Own Time, not productivity                              
     adjusted.................................         54.2          2.9
        Wages and salaries, not productivity                            
         adjusted.............................         45.3          2.8
        Fringe benefits, not productivity                               
         adjusted.............................          8.8          3.3
    Nonphysician Employee Compensation, not                             
     productivity adjusted....................         16.3          3.1
        Wages and salaries, not productivity                            
         adjusted.............................         13.8          3.0
        Fringe benefits, not productivity                               
         adjusted.............................          2.5          4.0
------------------------------------------------------------------------
\1\ The rates of change are for the 12-month period ending June 30,     
  1995, which is the period used for computing the calendar year 1996   
  update. The price proxy values are based upon the latest available    
  Bureau of Labor Statistics data as of September 1995.                 
\2\ The weights shown for the MEI components are the 1989 base-year     
  weights, which may not sum to subtotals or totals because of rounding.
  The MEI is a fixed-weight, Laspeyres-type input price index whose     
  category weights indicate the distribution of expenditures among the  
  inputs to physicians' services for calendar year 1989. To determine   
  the MEI level for a given year, the price proxy level for each        
  component is multiplied by its 1989 weight. The sum of these products 
  (weights multiplied by the price index levels) over all cost          
  categories yields the composite MEI level for a given year. The annual
  percent change in the MEI levels is an estimate of price change over  
  time for a fixed market basket of inputs to physicians' services.     
\3\ The Physician's Own Time and Nonphysician Employee Compensation     
  category price measures include an adjustment for productivity. The   
  price measure for each category is divided by the 10-year moving      
  average of output per man-hour in the nonfarm business sector. For    
  example, the wages and salaries component of Physician's Own Time is  
  calculated by dividing the rate of growth in average hourly earnings  
  by the 10-year moving average rate of growth of output per man-hour   
  for the nonfarm business sector. Dividing one plus the decimal form of
  the percent change in the average hourly earnings (1+.028=1.028 by one
  plus the decimal form of the percent change in the 10-year moving     
  average of labor productivity (1+.012=1.012) equals one plus the      
  change in average hourly earnings net of the change in output per man-
  hour (1.028/.012=1.016. All Physician's Own Time and Nonphysician     
  Employee Compensation categories are adjusted in this way. Due to a   
  higher level of precision the computer-calculated quotient may differ 
  from the quotient calculated from rounded individual percent changes. 
\4\ The average hourly earnings proxy, the Employment Cost Index        
  proxies, as well as the CPI-U, housing and CPI-U, private             
  transportation are published in the Current Labor Statistics Section  
  of the Bureau of Labor Statistics' Monthly Labor Review. The remaining
  CPIs and PPIs in the revised index can be obtained from the Bureau of 
  Labor Statistics' CPI Detailed Report or Producer Price Indexes.      

[[Page 63364]]
                                                                        
\5\ Derived from a HCFA survey of several major insurers (the latest    
  available historical percent change data are for calendar year 1994). 
  This is consistent with prior computations of the professional        
  liability insurance component of the MEI.                             
N/A Productivity is factored into the MEI compensation categories as an 
  adjustment to the price variables; therefore, no explicit weight      
  exists for productivity in the MEI.                                   


2. Medicare Volume Performance Standard Performance Adjustment
    As required by section 1848(d)(3)(B)(i) of the Act, we are 
increasing the update by 1.8 percentage points for surgical services 
and decreasing it by 4.3 percentage points for primary care and 1.6 
percentage points for other nonsurgical services to reflect the 
percentage increase in expenditures between fiscal year 1993 and fiscal 
year 1994 relative to the volume performance standard rates of increase 
for fiscal year 1994.
    Our estimate of the percentage growth in surgical services between 
fiscal year 1993 and fiscal year 1994 is 7.3 percent. Because the 
volume performance standard rate of increase for fiscal year 1994 was 
9.1 percent, the rate of increase in expenditures for surgical services 
was less than the volume performance standard rate of increase by 1.8 
percentage points. For primary care services, the rate of increase in 
expenditures was 14.8 percent, 4.3 percentage points greater than the 
volume performance standard rate of increase of 10.5 percent. For other 
nonsurgical services, the rate of increase in expenditures was 10.8 
percent, 1.6 percentage points greater than the volume performance 
standard rate of increase of 9.2 percent.

B. Fiscal Year 1996 Physician Volume Performance Standard Rates of 
Increase

    Below we explain how we determined the increases for each of the 
four factors used in determining the volume performance standard rates 
of increase for fiscal year 1996.
Factor 1--Weighted-Average Percentage Increase in Fees for Physicians' 
Services (Before Applying Legislative Reductions) for Months of 
Calendar Years 1995 and 1996 Included in Fiscal Year 1996
    This factor was calculated as a weighted average of the fee 
increases that apply to fiscal year 1996; that is, the fee increases 
that apply to the last 3 months of calendar year 1995 multiplied by 25 
percent plus the fee increases that apply to the first 9 months of 
calendar year 1996 multiplied by 75 percent. Beginning with calendar 
year 1992, physicians' services are updated by a physician fee schedule 
update factor that is based on the MEI adjusted for several statutory 
factors. The update factor for a category of physicians' services for 
calendar year 1996 is adjusted by the number of percentage points that 
the rate of increase in expenditures in fiscal year 1994 compared to 
fiscal year 1993 was less than the volume performance standard rate of 
increase for the category of physicians' services in fiscal year 1994. 
Laboratory services are updated by increases in the Consumer Price 
Index for Urban Consumers (CPI-U).
    Table 2 shows the updates that were used to determine the weighted-
average percentage increase in physician fees.

  Table 2.--Medicare Economic Index and Consumer Price Index for Urban  
               Consumers for Calendar Years 1995 and 1996               
------------------------------------------------------------------------
                                                           1995    1996 
------------------------------------------------------------------------
MEI.....................................................     2.1     2.0
CPI-U...................................................     2.8     3.2
------------------------------------------------------------------------

    Physicians' services make up approximately 90 percent of the total 
expenditures in the definition of physicians' services used for 
purposes of the volume performance standard rates of increase; 
laboratory services represent approximately 10 percent.
    In addition to the annual updates and individual weights of the 
above services, one other element has an effect on the rate of increase 
in physician fees. Section 1842(h)(1) of the Act provides for 
``participating physicians'' who agree to accept Medicare payment as 
payment in full and to bill Medicare beneficiaries only for the 20 
percent coinsurance amount and any unmet portion of the $100 annual 
deductible amount. Sections 1842(b)(4)(A)(iv) and 1848(a)(3) of the Act 
provide that nonparticipating physicians are paid 5 percent less for 
their Medicare services than participating physicians. The 
nonparticipating physicians are given an opportunity at the end of each 
calendar year to enroll as participating physicians for the next 
calendar year. Participation rates have increased each year, and we 
assume that this trend will continue. The increase in the number of 
participating physicians and the fact that they are paid at a rate 
higher than nonparticipating physicians also add to the rate of 
increase in the weighted-average percentage increase in physician fees.
    After taking into account all the elements described above, we 
estimate that the weighted-average increase in fees for physicians' 
services in fiscal year 1996 before applying the legislative changes 
will be 2.1 percent for surgical services, 2.1 percent for primary care 
services, 2.3 percent for other nonsurgical services, and a weighted 
average of 2.2 percent for all physicians' services.
Factor 2--The Percentage Increase in the Average Number of Part B 
Enrollees from Fiscal Year 1995 to Fiscal Year 1996
    We estimate that average Medicare Part B enrollment in fiscal year 
1996 will be 36.2 million. Decreasing that figure by the estimated 
enrollment in risk health maintenance organizations of 3.1 million 
(those enrolled in risk health maintenance organizations whose 
Medicare-covered medical care is paid for through the adjusted average 
per capita cost mechanism and is therefore outside the scope of the 
MVPS) results in an estimate of 33.0 million Part B enrollees in fiscal 
year 1996 not in risk health maintenance organizations.
    The corresponding figures for 1995 are estimated to be 35.5 million 
total Part B enrollees and 2.4 million risk health maintenance 
organization enrollees, which result in an estimate of 33.1 million 
Part B enrollees not in risk health maintenance organizations. We 
estimate that there will be 0.1 million fewer Part B enrollees not in 
risk health maintenance organizations in fiscal year 1996 than in 
fiscal year 1995, which represents a -0.3 percent decrease from fiscal 
year 1995 to fiscal year 1996 for surgical services, primary care 
services, other nonsurgical services, and the average of all 
physicians' services.
Factor 3--Average Annual Growth in the Volume and Intensity of 
Physicians' Services for Fiscal Year 1991 through Fiscal Year 1995
    Section 1848(f)(2)(A)(iii) of the Act requires the Secretary to 
estimate the average annual percentage growth in the volume and 
intensity of physicians' services or of the category of physicians' 
services for fiscal year 1991 through fiscal year 1995. This estimate 
must be based upon information contained in the most recent annual 
report issued by the Board of Trustees of the Supplementary Medical 
Insurance Trust Fund (Trustees' Report).
    The data on the percentage increase in the volume and intensity of 
services in the Trustees' Report are based on historical trends in 
increases in allowed 

[[Page 63365]]
charges, which are not influenced by the Part B deductible. The volume 
performance standard rates of increase under this notice, however, have 
historically been compared to increases in expenditures, which are 
influenced by the Part B deductible. Section 1832(b) of the Act 
specifies that the Part B deductible will be $100 for calendar year 
1991 and subsequent years. The effect of the deductible remaining fixed 
at $100 is that the overall annual increases in allowed charges for 
MVPS physicians' services are lower than the overall annual increases 
in expenditures. Although we believe it would be consistent with a 
literal interpretation of section 1848(f)(2)(A)(iii) of the Act, it 
would be inappropriate to base the volume and intensity component on 
the lower 5-year growth in allowed charges and compare the volume 
performance standards to the higher growth in expenditures, so we 
instead compare the standards to the growth in allowed charges.
    Consistent with data contained in the Trustees' Report, we 
estimated Factor 3 using a definition of physicians' services that 
includes certain supplies and nonphysician services not otherwise 
included in computing the volume performance standard rates of increase 
(primarily durable medical equipment and ambulance services). We 
included data for these services because we were required to base the 
estimate on data contained in the Trustees' Report, and it was not 
feasible to recompute the data from the 5-year period to exclude these 
supplies and nonphysician services. We believe the inclusion of these 
nonphysician supplies and services in this component has a minimal 
effect on the estimate because the component measures rates of change. 
Since durable medical equipment and ambulance services constitute only 
about 10 percent of the total charges used in the Trustees' Report, the 
rate of change for these nonphysician services and supplies would have 
to be significantly different from the rate of change for physicians' 
services to have any measurable impact on this volume and intensity 
increase factor. (Factor 3 is the only component of the volume 
performance standard rate of increase that was estimated using data 
that included nonphysician services and supplies.) The volume increases 
for services performed in independent laboratories were included in the 
calculation of the physician increases, as were the volume increases 
for clinical laboratory tests performed in hospital outpatient 
departments.
    As described earlier, the fiscal year 1996 volume performance 
standards were calculated using category-specific volume and intensity. 
The 5-year average rate of increase in volume and intensity equals 2.3 
percent for surgical services, 5.3 percent for primary care services, 
5.1 percent for other nonsurgical services. The weighted-average 
increase for all physicians' services is 4.4 percent.
Factor 4--Percentage Increase in Expenditures for Physicians' Services 
Resulting from Changes in Law or Regulations in Fiscal Year 1996 
Compared with Fiscal Year 1995
    Legislative changes enacted in OBRA 1993 and changes in the 
regulations required by this law, as well implementation of the 
physician fee schedule (including refinements made in the RVUs for 1995 
and 1996) will have an impact on the volume performance standard rates 
of increase for fiscal year 1996.
    The net effect of implementing the physician fee schedule after 
making the RVU refinements for 1995 and 1996 will increase payment 
rates and, therefore, the volume performance standard for primary care 
services. Similarly, the net effect of refining the RVUs and 
implementing the fee schedule will reduce payment rates for most 
surgical services and many nonsurgical services other than primary 
care, thus, lowering the volume performance standard rates of increase 
for these services. Implementing the fee schedule will have no effect 
on the volume performance standard rates of increase for all 
physicians' services because the net effect of increases in payment for 
certain services and decreases in payment for other services will have 
a budget-neutral effect on payment for all physicians' services.
    The net adjustments to the physician fee schedule updates will have 
the effect of increasing the volume performance standard rate for 
surgical services and decreasing the rate for primary care services. It 
will have no effect on the rate for other nonsurgical services. OBRA 
1993 also included a provision to lower payment for practice expenses 
for certain services paid under the physician fee schedule, which will 
have the effect of lowering the MVPS for both surgical and nonsurgical 
services. After taking into account these provisions, this factor 
equals -0.6 percent for surgical services, 5.7 percent for primary care 
services, and -2.4 percent for other nonsurgical services, and a 
weighted average of -0.5 percent for all physicians' services.

V. Inapplicability of 30-Day Delay in Effective Date

    We usually provide a delay of 30 days in the effective date for 
final Federal Register documents. In this case, however, the volume 
performance standard rates of increase are required by law to be 
published in the last 15 days of October 1995 and are effective on 
October 1, 1995. Thus, the Congress has clearly indicated its intent 
that the rates of increase be implemented without the usual 30-day 
delay in the effective date and has foreclosed any discretion by us in 
this matter. Therefore, the requirement for a 30-day delay in the 
effective date does not apply to this notice. With regard to the 
physician fee schedule, the effective date will be January 1, 1996, 
which is more than 30 days beyond the publication date of this notice.

VI. Regulatory Impact Statement

A. Regulatory Flexibility Act

    We generally prepare a regulatory flexibility analysis that is 
consistent with the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 
through 612) unless the Secretary certifies that a notice will not have 
a significant economic impact on a substantial number of small 
entities. For purposes of the RFA, States and individuals are not 
entities, but we consider all physicians to be small entities.
    We are not preparing a regulatory flexibility analysis since we 
have determined, and the Secretary certifies, that this notice will not 
have a significant economic impact on a substantial number of small 
entities.
    Also, section 1102(b) of the Act requires the Secretary to prepare 
a regulatory impact analysis if a notice may have a significant impact 
on the operations of a substantial number of small rural hospitals. 
This analysis must conform to the provisions of section 604 of the RFA. 
For purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 50 beds.
    We are not preparing a rural impact analysis since we have 
determined, and the Secretary certifies, that this notice will not have 
a significant impact on the operations of a substantial number of small 
rural hospitals. 

[[Page 63366]]


B. Effects of the Proposal for Using Category-Specific Volume and 
Intensity Growth Allowances in Calculating the Physician Volume 
Performance Standard Rates of Increase

    The use of category-specific volume and intensity growth allowances 
in the calculation of the MVPS is budget-neutral overall, although it 
does have redistributional effects on the surgical, nonsurgical, and 
primary care categories.
    In accordance with the provisions of Executive Order 12866, this 
notice was reviewed by the Office of Management and Budget.

(Sections 1848(d) and (f) of the Social Security Act) (42 U.S.C. 
1395w-4 (d) and (f))

(Catalog of Federal Domestic Assistance Program No. 93.774, 
Medicare--Supplementary Medical Insurance Program)

    Dated: November 28, 1995.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.
    Dated: December 1, 1995.
Donna E. Shalala,
Secretary.
[FR Doc. 95-29754 Filed 12-1-95; 4:08 pm]
BILLING CODE 4120-01-P