[Federal Register Volume 61, Number 227 (Friday, November 22, 1996)]
[Notices]
[Pages 59717-59724]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-29557]



  Federal Register / Vol. 61, No. 227 / Friday, November 22, 1996 / 
Notices  

[[Page 59717]]



DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration
[BPD-853-FN]
RIN 0938-AH41


Medicare Program; Physician Fee Schedule Update for Calendar Year 
1997 and Physician Volume Performance Standard Rates of Increase for 
Federal Fiscal Year 1997

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

ACTION: Final notice.

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

SUMMARY: This final notice announces the calendar year 1997 updates to 
the Medicare physician fee schedule and the Federal fiscal year 1997 
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 updates for 
calendar year 1997 are 1.9 percent for surgical services, 2.5 percent 
for primary care services, and -0.8 percent for other nonsurgical 
services. While it does not affect payment for any particular service, 
there was a 0.6 percent increase in the update for all physicians' 
services for 1997. The physician volume performance standard rates of 
increase for Federal fiscal year 1997 are -3.7 percent for surgical 
services, 4.5 percent for primary care services, -0.5 percent for other 
nonsurgical services, and a weighted average of -0.3 percent for all 
physicians' services.

EFFECTIVE DATE: The provisions in this final notice pertaining to the 
Medicare volume performance standard rates of increase are effective 
October 1, 1996, and the provisions pertaining to the Medicare 
physician fee schedule update are effective January 1, 1997, as 
provided by the Medicare statute. Ordinarily, 5 U.S.C. section 801 
requires that agencies submit major rules to Congress 60 days before 
the rules are scheduled to become effective. However, the 104th 
Congress adjourned on October 4, 1996, and the 105th Congress is not 
scheduled to convene until January 7, 1997. The Department has 
concluded that, in this instance, a further delay in the effective 
dates in order to satisfy section 801 would not serve the law's intent, 
since Congress will not be in session during this period, and such 
delay in the effective dates established by the Medicare statute is 
unnecessary and contrary to the public interest. The Department finds, 
on this basis, that there is good cause for establishing these 
effective dates pursuant to 5 U.S.C. section 808(2).

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

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. As is discussed in section IV.C.1. of the 
final rule for the 1997 physician fee schedule, ``Medicare Program; 
Revisions to Payment Policies and Five-Year Review of and Adjustments 
to the Relative Value Units Under the Physician Fee Schedule for 
Calendar Year 1997,'' published elsewhere in this Federal Register 
issue, there is a separate adjustment to the work RVUs in 1997. (This 
rule is referenced from now on as the 1997 physician fee schedule final 
rule.) Therefore, for 1997, the work RVUs are adjusted by this separate 
factor, and all RVUs are adjusted by a geographic practice cost index 
and multiplied by a conversion factor to obtain the physician fee 
schedule payment amounts. We plan on eliminating this separate adjuster 
in 1998 when we implement resource-based practice expense RVUs.
    The 1997 conversion factors are $16.68 for anesthesia services, 
$40.9603 for surgical services, $35.7671 for primary care services, and 
$33.8454 for other nonsurgical services.

[[Page 59718]]

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 1997 update would equal the 1997 MEI increased or 
decreased by the difference between the rate of increase in 
expenditures for fiscal year 1995 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 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 1997 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 1996 and calendar year 1997 contained in fiscal year 
1997.
     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 1996 
to fiscal year 1997.
     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 1991 through fiscal year 1996.
     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 1997 as compared with expenditures for 
physicians' services in fiscal year 1996.
    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, and the corresponding 
updates in the second subsequent calendar year.

[[Page 59719]]



                                               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
    All services \1\........................................  ...........  ...........  ...........          1.4
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
    All services \1\........................................  ...........  ...........  ...........          7.0
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
    All services \1\........................................  ...........  ...........  ...........          7.7
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
    All services \1\........................................  ...........  ...........  ...........          0.8
CY 1997:                                                                                                        
    Surgical................................................          2.0         -0.1  ...........          1.9
    Primary care............................................          2.0          0.5  ...........          2.5
    Other nonsurgical.......................................          2.0         -2.8  ...........         -0.8
    All services \1\........................................  ...........  ...........  ...........          0.6
----------------------------------------------------------------------------------------------------------------
\1\ The all services update is the weighted average of the category updates and, except for 1992, does not      
  affect payment.                                                                                               


         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          9.3         -0.1
    Primary care.................         13.8         13.3          0.5
    Other nonsurgical............          4.4          7.2         -2.8
FY 1996:                                                                
    Surgical.....................         -0.5                          
    Primary care.................          9.3                          
    Other nonsurgical............          0.6                          
FY 1997:                                                                
    Surgical.....................         -3.7                          
    Primary care.................          4.5                          
    Other nonsurgical............        -0.5                           
------------------------------------------------------------------------
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.                         


[[Page 59720]]

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 included 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) (Pub. L. 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) (Pub. L. 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 1997 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 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 1996. For the 1997 
classification of the new 1996 codes, however, we used 6 months of 1996 
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.
    Beginning in 1996, we 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 in the 
Federal Register on December 8, 1995 (60 FR 63155 through 63156).
    Also, Addendum B of the 1997 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.

II. Provisions of This Final Notice

A. Physician Fee Schedule Update for Calendar Year 1997

    Under the requirements of section 1848(d)(3) of the Act, the fee 
schedule update for calendar year 1997 will be 1.9 percent for surgical 
services, 2.5 percent for primary care services, and -0.8 percent for 
other nonsurgical services. The weighted average update across all 
services for 1997 will be 0.6 percent. We determined this update as 
follows:

[[Page 59721]]



------------------------------------------------------------------------
                                                  Primary               
                                     Surgical       care     Nonsurgical
                                     services     services     services 
------------------------------------------------------------------------
                                                                        
(2) (In Percent)                                                        
1997 MEI.........................          2.0          2.0          2.0
MVPS Adjustment..................         -0.1          0.5         -2.8
1997 Update......................          1.9          2.5         -0.8
------------------------------------------------------------------------

    As discussed in our December 8, 1995 final rule for the 1996 
physician fee schedule (60 FR 63172 through 63173), we began applying 
budget-neutrality adjustments to the conversion factors rather than to 
the RVUs in 1996. As we discuss in section IX of the 1997 physician fee 
schedule final rule, published elsewhere in this Federal Register 
issue, there will be two separate budget neutrality adjustments in 
1997. The first will be a budget neutrality adjustment applied to the 
work RVUs when calculating Medicare physicians' fees for 1997. This 
budget neutrality adjustment, 8.3 percent, will account for fee changes 
related to the 5-year review of work RVUs. The second budget neutrality 
adjustment, 1.5 percent, will be applied uniformly to the conversion 
factors to account for both the fee schedule changes unrelated to the 
5-year review and the anticipated volume and intensity response to all 
fee schedule changes unrelated to the conversion factor updates. 
Because anesthesia services are not paid on the basis of work RVUs, an 
equivalent -7.5 percent adjustment will be made to the anesthesia 
conversion factor to account for both these budget neutrality 
adjustments.
    Applying the updates and conversion factor budget neutrality 
adjustment to the 1996 conversion factors of $40.7986 for surgical 
services (other than anesthesia services), $35.4173 for primary care 
services, and $34.6293 for nonsurgical services yields 1997 conversion 
factors of $40.9603 for surgical services, $35.7671 for primary care 
services, and $33.8454 for other nonsurgical services. The 1996 
anesthesia conversion factor of $15.28, which includes the effect of 
the 1996 budget neutrality adjustment, will be updated by the surgical 
update to $16.68 for 1997, after adjusting for the 1997 budget 
neutrality adjustments.
    The specific calculations to determine the fee schedule updates for 
physicians' services for calendar year 1997 are explained in section 
III.A. of this notice.

B. Physician Volume Performance Standard Rates of Increase for Fiscal 
Year 1997

    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 1997 are -3.7 percent 
for surgical services, 4.5 percent for primary care services, -0.5 
percent for other nonsurgical services, and a weighted average of -0.3 
percent for all physicians' services.
    This determination is based on the following statutory factors:

------------------------------------------------------------------------
                                                  Primary               
        Statutory factors            Surgical       care     Nonsurgical
                                     services     services     services 
------------------------------------------------------------------------
                                                                        
(2) (In Percent)                                                        
                                                                        
Fees.............................          2.0          2.0          2.2
Enrollment.......................         -1.1         -1.1         -1.1
                                                                        
(2) (In Percent)                                                        
Volume and Intensity.............          1.6          4.0          4.0
Legislation......................         -2.1          3.4         -1.5
Performance Standard Factor......          4.0          4.0          4.0
      Total......................         -3.7          4.5         -0.5
------------------------------------------------------------------------

    The specific calculations to determine the volume performance 
standard rates of increase for physicians' services for fiscal year 
1997 are explained in section III.B. of this notice.

III. Detail on Calculation of the Calendar Year 1997 Physician Fee 
Schedule Update and the Fiscal Year 1997 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

[[Page 59722]]

and percent changes for price proxies for the 1997 update. The calendar 
year 1997 MEI is 2.0 percent.

 Increase in the Medicare Economic Index Update for Calendar Year 1997 1
------------------------------------------------------------------------
                                                               CY 1997  
                                                    1989       percent  
                                                 weights 2     changes  
------------------------------------------------------------------------
Medicare Economic Index Total.................        100.0          2.0
    1. Physician's Own Time \3\ \4\...........         54.2          2.0
        a. Wages and Salaries: Average hourly                           
         earnings private nonfarm, net of                               
         productivity.........................         45.3          2.2
        b. Fringe Benefits: Employment Cost                             
         Index, benefits, private nonfarm, net                          
         of productivity......................          8.8          1.0
    2. Physician's Practice Expense \3\.......         45.8          2.0
        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          2.0
            2. Fringe Benefits: Employment                              
             Cost Index, fringe benefits,                               
             white collar, net of productivity          2.5          1.4
        b. Office Expense: Consumer Price                               
         Index for Urban Consumers (CPI-U),                             
         housing..............................         10.3          2.8
        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          2.2
        d. Professional Liability Insurance:                            
         HCFA professional liability insurance                          
         survey \5\...........................          4.8         -1.1
        e. Medical Equipment: PPI, medical                              
         instruments and equipment............          2.3          1.6
        f. Other Professional Expense.........          6.9          2.8
            1. Professional Car: CPI-U,                                 
             private transportation...........          1.4          2.3
            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          0.9
    Physician's Own Time, not productivity                              
     adjusted.................................         54.2          2.9
        Wages and salaries, not productivity                            
         adjusted.............................         45.3          3.1
        Fringe benefits, not productivity                               
         adjusted.............................          8.8          1.9
    Nonphysician Employee Compensation, not                             
     productivity adjusted....................         16.3          2.8
        Wages and salaries, not productivity                            
         adjusted.............................         13.8          2.9
        Fringe benefits, not productivity                               
         adjusted.............................          2.5         2.3 
------------------------------------------------------------------------
\1\ The rates of change are for the 12-month period ending June 30,     
  1996, which is the period used for computing the calendar year 1997   
  update. The price proxy values are based upon the latest available    
  Bureau of Labor Statistics data as of September 1996.                 
\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+.031=1.031 by one
  plus the decimal form of the percent change in the 10-year moving     
  average of labor productivity (1+.009=1.009) equals one plus the      
  change in average hourly earnings net of the change in output per     
  manhour (1.031/1.009=1.022). 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.      
\5\ Derived from a HCFA survey of several major insurers (the latest    
  available historical percent change data are for calendar year 1995). 
  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 0.5 percentage points for primary care 
services and decreasing it by 0.1 percentage points for surgical and 
2.8 percentage points for other nonsurgical services to reflect the 
percentage increase in expenditures between fiscal year 1994 and fiscal 
year 1995 relative to the volume performance standard rates of increase 
for fiscal year 1995.
    Our estimate of the percentage growth in surgical services between 
fiscal year 1994 and fiscal year 1995 is 9.3 percent. Because the 
volume performance standard rate of increase for fiscal year 1995 was 
9.2 percent, the rate of increase in expenditures for surgical services 
was greater than the volume performance standard rate of increase by 
0.1 percentage points. For primary care services, the rate of increase 
in expenditures was 13.3 percent, 0.5 percentage points less than the 
volume performance standard rate of increase of 13.8 percent. For other 
nonsurgical services, the rate of increase in expenditures was 7.2 
percent, 2.8 percentage points greater than the volume performance 
standard rate of increase of 4.4 percent.

B. Fiscal Year 1997 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 1997.

[[Page 59723]]

Factor 1--Weighted-Average Percentage Increase in Fees for Physicians' 
Services (Before Applying Legislative Reductions) for Months of 
Calendar Years 1996 and 1997 Included in Fiscal Year 1997

    This factor was calculated as a weighted average of the fee 
increases that apply to fiscal year 1997; that is, the fee increases 
that apply to the last 3 months of calendar year 1996 multiplied by 25 
percent plus the fee increases that apply to the first 9 months of 
calendar year 1997 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 1997 is adjusted by the number of percentage points that 
the rate of increase in expenditures in fiscal year 1995 compared to 
fiscal year 1994 was less than the volume performance standard rate of 
increase for the category of physicians' services in fiscal year 1995. 
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 physicians' fees.

  Table 2.--Medicare Economic Index and Consumer Price Index for Urban  
               Consumers for Calendar Years 1996 and 1997               
------------------------------------------------------------------------
                                                          1996     1997 
------------------------------------------------------------------------
MEI...................................................      2.0      2.0
CPI-U.................................................      3.2      2.7
------------------------------------------------------------------------

    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 1997 before applying the legislative changes 
will be 2.0 percent for surgical services, 2.0 percent for primary care 
services, 2.2 percent for other nonsurgical services, and a weighted 
average of 2.1 percent for all physicians' services.

Factor 2--The Percentage Increase in the Average Number of Part B 
Enrollees from Fiscal Year 1996 to Fiscal Year 1997

    We estimate that average Medicare Part B enrollment in fiscal year 
1997, excluding 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) will be 32.170 million.
    The corresponding figure for 1996 is estimated to be 32.532 million 
total Part B enrollees not enrolled in risk health maintenance 
organizations. This represents a 1.1 percent decrease in enrollment 
from fiscal year 1996 to fiscal year 1997 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 1992 Through Fiscal Year 1996

    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 1992 through fiscal year 1996. 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 charges, which are not influenced by the Part B 
deductible. Increases in expenditures, however, 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 1997 volume performance 
standards were calculated using category-specific volume and intensity. 
The 5-year average rate of increase in volume and

[[Page 59724]]

intensity equals 1.6 percent for surgical services, 4.0 percent for 
primary care services, and 4.0 percent for other nonsurgical services. 
The weighted-average increase for all physicians' services is 3.4 
percent.

Factor 4--Percentage Increase in Expenditures for Physicians' Services 
Resulting From Changes in Law or Regulations in Fiscal Year 1997 
Compared With Fiscal Year 1996

    Legislative changes enacted in OBRA 1993 and changes in the 
regulations required by this law, as well as implementation of the 
physician fee schedule (including changes made in the RVUs for 1996 and 
1997) will have an impact on the volume performance standard rates of 
increase for fiscal year 1997.
    The net effect of implementing the physician fee schedule after 
making RVU changes for 1996 and 1997 is to increase payment rates for 
primary care services and the volume performance standard for those 
services. Similarly, the net effect of refining the RVUs and 
implementing the fee schedule reduces 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 increase the volume 
performance standard rates of increase for all physicians' services 
because, although the net effect of increases in fees for certain 
services and decreases in fees for other services will have a budget 
neutral effect on fees for all physicians' services, an adjustment is 
required to ensure that changes in volume and intensity related to the 
fee changes do not cause an increase in expenditures. The MVPS targets 
are increased by this volume and intensity adjustment.
    After taking into account these provisions, this factor equals -2.1 
percent for surgical services, 3.4 percent for primary care services, 
and -1.5 percent for other nonsurgical services, and a weighted average 
of -0.7 percent for all physicians' services.

IV. 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 1996 and are effective on 
October 1, 1996. 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, 1997, 
which is more than 30 days beyond the publication date of this notice.

V. Collection of Information Requirements

    This document does not impose information collection and 
recordkeeping requirements. Consequently, it need not be reviewed by 
the Office of Management and Budget under the authority of the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.).

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.
    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 7, 1996.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.

    Dated: November 12, 1996.
Donna E. Shalala,
Secretary.
[FR Doc. 96-29557 Filed 11-15-96; 11:51 am]
BILLING CODE 4120-01-P