[Federal Register Volume 68, Number 40 (Friday, February 28, 2003)]
[Rules and Regulations]
[Pages 9567-9580]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-4862]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 410, 414, and 485

[CMS-1204-F2]
RIN 0938-AL21


Medicare Program; Physician Fee Schedule Update for Calendar Year 
2003

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Final rule.

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

SUMMARY: This final rule revises the estimates used to establish the 
sustainable growth rates (SGRs) for fiscal years 1998 and 1999 for the 
purposes of determining future updates to the physician fee schedule 
and announces a 1.6 percent increase in the calendar year (CY) 2003 
physician fee schedule conversion factor (CF) for March 1 to December 
31, 2003. The physician fee schedule CF from March 1 to December 31, 
2003, will be

[[Page 9568]]

$36.7856. The anesthesia CF for this period will be $17.05. Any 
information contained in this final rule related to the CY 2003 
physician or anesthesia CFs takes the place of the information 
contained in the December 31, 2002, final rule. All other provisions of 
the December 31, 2002, final rule are unchanged by this final rule.

DATES: Effective date: This rule is effective on March 1, 2003.

FOR FURTHER INFORMATION CONTACT: Marc Hartstein, (410) 786-4539.

SUPPLEMENTARY INFORMATION:

I. Provisions of the Final Rule

    In the physician fee schedule final rule with comment period 
published on December 31, 2002 (67 FR 80018), following notice and 
comment, we announced a 4.4 percent reduction in the physician fee 
schedule conversion factor (CF) for 2003. As explained in the December 
31, 2002, final rule, we determined the 4.4 percent reduction to the CF 
using the formula specified in statute. We explained that the statute 
did not allow us to use later, after the fact, data to revise estimates 
that were used to determine the sustainable growth rates (SGRs) for 
fiscal year (FY) 1998 and FY 1999 for the purposes of determining 
future updates to the physician fee schedule. We further indicated our 
preference for revising these estimates and establishing a positive 
update to CY 2003 physician fee schedule rates, if the Congress changed 
the law to permit these revisions, and we requested comments on how 
physician fee schedule rates could and should be recalculated 
prospectively in the event that the Congress provided the Department 
with legal authority to revise estimates used to establish the SGRs for 
FY 1998 and FY 1999 and the MVPS for 1990 through 1996.
    On February 13, 2003, the Congress enacted the Consolidated 
Appropriations Resolution of 2003 (CAR), (Pub. L. 108-7) that was 
signed into law by the President on February 20, 2003. Before enactment 
of section 402(a) of the CAR, section 1848(i)(1)(C) of the Social 
Security Act (the Act) precluded judicial review of ``the determination 
of conversion factors under subsection (d).'' Section 402(a) of the CAR 
amended section 1848(i)(1)(C) of the Act to preclude judicial review of 
``the determination of conversion factors under subsection (d), 
including without limitation a prospective redetermination of the 
sustainable growth rates for any or all previous fiscal years.'' We 
believe that with this amendment, section 1848, read as a whole, now 
permits revision of all earlier fiscal year SGRs for the purposes of 
allowing prospective application of those revisions to future physician 
fee schedule updates (that is, to the CY 2003 physician fee schedule 
update). Thus, we are now revising the FY 1998 and FY 1999 SGRs for the 
purposes of determining future updates to the physician fee schedule 
including a new physician fee schedule update that will apply from 
March 1 to December 31, 2003.
    As we noted in our final rule of December 31, 2002, CMS believes 
the estimates used to set the SGRs for FY 1998 and FY 1999 were 6.4 
percent lower than if after-the-fact, actual data could have been used, 
with the greatest differences arising from fee-for-service enrollment 
in Medicare and real per capita growth in the gross domestic product 
(GDP). The reasons for the differences between these estimates and 
later, after-the-fact actual data for 1998 and 1999 are described in 
more detail below. We noted in our December 31, 2002, final rule that 
as a result of using estimates in determining the SGRs for FY 1998 and 
FY 1999, physicians would receive lower payments for their services 
than if the SGRs and allowed expenditures for those fiscal years were 
recalculated to reflect later, after-the-fact actual data.
    Although the estimates used to set the SGRs for 1998 and 1999 may 
have been different from later, after-the-fact actual data, before the 
enactment of section 402(a) of the CAR, section 1848 of the Act did not 
permit the SGRs for these two fiscal years (1998 and 1999) to be 
revised later, once ``actual'' data, or better estimated data became 
available.
    In addition to our final rule of December 31, 2002, we set forth 
this position in several of our annual notices in previous years in 
which we announced the CF for the coming year. (``We will not be able 
to make adjustments to the [1998 and 1999] SGRs based on later data.'' 
64 FR 53394. See also 63 FR 69188.) These notices indicated that 
section 1848 of the Act did not provide the necessary authority to 
revise the original estimates used to establish the SGRs for FY 1998 
and FY 1999 for the purposes of establishing physician fee schedule 
updates for future years. We believe that as amended by the recently 
enacted CAR, section 1848 as a whole now permits the prospective 
redetermination of SGRs for these two previous years.
    Section 402(a) of the CAR added language to the ``non-
reviewability'' provisions of section 1848(i) of the Act. Section 
402(a) added the phrase ``including without limitation a prospective 
redetermination of the sustainable growth rate for any or all previous 
fiscal years'' to a non-reviewability provision that already existed at 
section 1848(i)(1)(c). Use of the word ``including'' in statutory 
language is typically constructed to mean ``including but not limited 
to.'' In other words, we believe that the Congress added the new 
language as a new, non-exclusive example of the instances of non-
reviewability that already exist. The example in the added phrase 
refers to a ``prospective redetermination of the sustainable growth 
rate for any or all fiscal years.'' (Emphasis added). Prior to the 
enactment of section 402(a) of the CAR, the substantive provisions of 
section 1848 of the Act provided only for the prospective 
redetermination of the SGR for one ``fiscal year,'' that ``fiscal 
year'' being FY 2000. The Balanced Budget Refinement Act of 1999 (BBRA) 
amended section 1848(f)(3) of the Act to change the physician fee 
schedule to a calendar year system of calculating the SGR beginning in 
``calendar year'' 2000. Thus, we believe that section 402(a) 
demonstrates the Congress's intent that section 1848 as a whole be read 
to permit a prospective redetermination of the SGRs for ``any or all'' 
``fiscal'' years in the plural, to wit, fiscal years 1998 and 1999, in 
addition to fiscal year 2000. Section 402(a) of the CAR calls for a 
change in the agency's prior interpretation of section 1848 of the Act 
as precluding any revision of the SGRs for fiscal years 1998 and 1999 
to permit prospective redetermination of SGRs for these ``fiscal 
years'' in addition to existing authority for fiscal year 2000. This 
reading of section 402(a) of the CAR is consistent with the 
congressional intent behind section 402(a). The Conference Report for 
the CAR notes that section 402(a) is intended to ``[provide] legal 
protection for the Administration should they make corrections to data 
errors in the physician payment formula for past fiscal years.'' (House 
Rpt. 108-10).
    These prospective redeterminations will not have, and are not 
intended to have, any effect on physician fee schedule payment rates 
for previous years. (We are making no further revisions to the FY 2000 
SGR because section 1848(f)(3) of the Act expressly specifies that we 
were to make the final revisions to the FY 2000 SGR on the basis of the 
best data available to the Secretary as of September 1, 2001. 
Accordingly, we made our final revisions to the FY 2000 SGR in a final 
rule published in the Federal Register on November 1, 2001 (66 FR 
55319).)
    In this final rule, we are announcing that for the purposes of 
determining

[[Page 9569]]

future physician fee schedule updates, including the update for 2003, 
the SGR was 3.2 percent for FY 1998 and 4.2 percent for FY 1999. This 
is a change of 1.7 percentage points for FY 1998 and 4.5 percentage 
points for FY 1999. We will make no further revisions to the SGRs for 
these years. We are also announcing a 1.6 percent increase to the 
physician fee schedule CF that will apply from March 1 to December 31, 
2003. Therefore, the physician fee schedule CF from March 1 to December 
31, 2003, will be $36.7856, an increase of 1.6 percent from the 2002 
CF. The anesthesia CF for this period will be $17.05, an increase of 
2.7 percent from the 2002 anesthesia CF. In our December 31, 2002 final 
rule (67 FR 80032), we described our calculation of the 2003 physician 
fee schedule and anesthesia fee schedule CFs. Any information contained 
in this final rule related to the 2003 physician or anesthesia fee 
schedule CFs replaces the information contained in the December 31, 
2002, final rule. Further, we are making one revision to our estimate 
of the CY 2002 SGR. As described below, we are increasing our estimate 
of the 2002 SGR by 0.2 percentage points to reflect the costs of the 
new diabetes self-management training benefit. All other provisions of 
the December 31, 2002, final rule are unchanged by this final rule.
    In the December 31, 2002, final rule, we specifically requested 
comments on the revision of estimates used to establish the Medicare 
Volume Performance Standard from 1990 through 1996 and the SGRs from FY 
1998 and FY 1999. We will respond to any comments received on these 
issues in a future Federal Register publication.

II. Physician Fee Schedule Update

A. Calculation of the Physician Fee Schedule Update

    The physician fee schedule update is determined under a methodology 
specified by statute. Under section 1848(d)(4) of the Act, the update 
is equal to the product of 1 plus the percentage increase in the 
Medicare Economic Index (MEI) (divided by 100) and 1 plus the update 
adjustment factor. For CY 2003, the MEI is equal to 3.0 percent 
(1.030). The update adjustment factor is now equal to -1.1 percent 
(0.989). Section 1848(d)(4)(F) of the Act requires an additional -0.2 
percent (0.998) reduction to the update for 2003. Thus, the product of 
the MEI (1.030), the update adjustment factor (0.989), and the 
statutory adjustment factor (0.998) equals the CY 2003 update of 1.66 
percent (1.0166). As described below, we are also making an adjustment 
of -0.04 percent to maintain budget neutrality for the increase in 
anesthesia work. With the budget-neutrality adjustment, the increase in 
the physician fee schedule CF will be 1.62 percent (1.0162).

B. The Update Adjustment Factor

    Section 1848(d) of the Act provides that the physician fee schedule 
update is equal to the product of the MEI and an ``update adjustment 
factor.'' The update adjustment factor is applied to make actual and 
target expenditures (referred to in the law as ``allowed 
expenditures'') equal. Allowed expenditures are equal to actual 
expenditures in a base period updated each year by the SGR. The SGR 
sets the annual rate of growth in allowed expenditures and is 
determined by a formula specified in section 1848(f) of the Act.
    Under section 1848(d)(4)(A) of the Act, the physician fee schedule 
update for a year is equal to the product of-- (1) 1 plus the 
Secretary's estimate of the percentage increase in the MEI for the 
year, divided by 100 and (2) 1 plus the Secretary's estimate of the 
update adjustment factor for the year. Under section 1848(d)(4)(B) of 
the Act, the update adjustment factor is equal to the sum of the 
following--
    i. Prior Year Adjustment Component. An amount determined by--
    [sbull] Computing the difference (which may be positive or 
negative) between the amount of the allowed expenditures for 
physicians' services for the prior year (the year prior to the year for 
which the update is being determined) and the amount of the actual 
expenditures for such services for that year;
    [sbull] Dividing that difference by the amount of the actual 
expenditures for such services for that year; and
    [sbull] Multiplying that quotient by 0.75.
    ii. Cumulative Adjustment Component. An amount determined by--
    [sbull] Computing the difference (which may be positive or 
negative) between the amount of the allowed expenditures for 
physicians' services from April 1, 1996, through the end of the prior 
year and the amount of the actual expenditures for such services during 
that period;
    [sbull] Dividing that difference by actual expenditures for such 
services for the prior year as increased by the sustainable growth rate 
for the year for which the update adjustment factor is to be 
determined; and
    [sbull] Multiplying that quotient by 0.33.
    As explained above, we are making final prospective 
redeterminations to the FY 1998 and FY 1999 SGRs in this final rule for 
the purposes of determining future physician fee schedule updates. We 
are also making prospective redeterminations to allowed expenditures 
for the period from April 1, 1997, to March 31, 1999, because allowed 
expenditures during this period are affected by revisions to the FY 
1998 and FY 1999 SGRs. Further, allowed expenditures in all subsequent 
periods are based on allowed expenditures from this period and are also 
being prospectively redetermined. Table 1 shows annual and cumulative 
allowed expenditures for physicians' services from April 1, 1996, 
through the end of the current CY, including the transition period to a 
CY system that occurred in 1999, incorporating the redeterminations we 
are making to the SGRs for FY 1998 and FY 1999.

                                                     Table 1
----------------------------------------------------------------------------------------------------------------
                                            Annual        Cumulative
                                            allowed         allowed
                Period                   expenditures    expenditures            FY or CY SGR  (percent)
                                           (billion)       (billion)
----------------------------------------------------------------------------------------------------------------
 4/1/96-3/31/97.......................           $48.9           $48.9  N/A
4/1/97-3/31/98........................            50.5            99.4  FY 1998=3.2%
4/1/98-3/31/99........................            52.6           152.0  FY 1999=4.2%
1/1/99-3/31/99........................            13.3           (\1\)  FY 1999=4.2%
4/1/99-12/31/99.......................            42.1           (\2\)  FY 2000=6.9%
1/1/99-12/31/99.......................            55.3           194.1  FY 1999/FY 2000 \3\
1/1/00-12/31/00.......................            59.4           253.4  CY 2000=7.3%
1/1/01-12/31/01.......................            62.0           315.5  CY 2001=4.5%
1/1/02-12/31/02.......................            67.6           383.1  CY 2002=9.0%

[[Page 9570]]

 
1/1/03-12/31/03.......................            72.8           455.9  CY 2003=7.6%
----------------------------------------------------------------------------------------------------------------
\1\ Included in $152.0.
\2\ Included in $194.1.
\3\ Note: Allowed expenditures for the first quarter of 1999 are based on the FY 1999 SGR and allowed
  expenditures for the last three quarters of 1999 are based on the FY 2000 SGR. Allowed expenditures in the
  first year (April 1, 1996, through March 31, 1997) are equal to actual expenditures during the year. All
  subsequent figures are equal to quarterly allowed expenditure figures increased by the applicable SGR.
  Cumulative allowed expenditures are equal to the sum of annual allowed expenditures. We provide more detailed
  quarterly allowed and actual expenditure data on our Web site under the Medicare Actuary's publications at the
  following address: http://www.cms.hhs.gov/statistics/actuary/. We expect to update the web site with the most
  current information, including our estimate of the physician fee schedule update for 2004 on or about March 1.

    Consistent with section 1848(d)(4)(E) of the Act, Table 1 includes 
our final revision of allowed expenditures for 2001 and prior periods, 
a recalculation of allowed expenditures for 2002, and our initial 
estimate of allowed expenditures for 2003. We will be making further 
revisions to the 2002 and 2003 SGRs and allowed expenditures later this 
year through the normal rulemaking process. To determine the update 
adjustment factor for March 1 to December 31, 2003, we are using 
cumulative allowed expenditures from April 1, 1996, through December 
31, 2002, actual expenditures through December 31, 2002, and the SGR 
for 2003, as well as annual allowed and actual expenditures for 2002. 
We are using estimates of allowed expenditures for 2002 and 2003 that 
will subsequently be revised consistent with section 1848(d)(4)(E) of 
the Act. Because we are continuing to receive expenditure data for 
2002, we are using an estimate for this period. Any differences between 
current estimates and final figures will be taken into account in 
determining the update adjustment factor for future years.
    We are using figures from Table 1 in the statutory formula 
illustrated below:
[GRAPHIC] [TIFF OMITTED] TR28FE03.006

UAF = Update Adjustment Factor
Target02 = Allowed Expenditures for 2002 or $67.6 billion
    Actual02 = Estimated Actual Expenditures for 2002 = 
$69.1 billion
Target 4/96-12/02 = Allowed Expenditures from 4/1/1996--12/
31/2002 = $383.1 billion
Actuall4/96-12/02 = Estimated Actual Expenditures from 4/1/
1996-12/31/2002 = $381.9 billion
SGR03 = 7.6 percent (1.076)
[GRAPHIC] [TIFF OMITTED] TR28FE03.007

    Section 1848(d)(4)(A)(ii) of the Act indicates that 1 should be 
added to the update adjustment factor determined under section 
1848(d)(4)(B) of the Act. Thus, adding 1 to -0.011 makes the update 
adjustment factor equal to 0.989.

III. Medicare Sustainable Growth Rate

    As discussed above, the SGR is an annual growth rate that applies 
to physicians' services paid for by Medicare. The use of the SGR is 
intended to control growth in aggregate Medicare expenditures for 
physicians' services. Payments for services are not withheld if the 
percentage increase in actual expenditures exceeds the SGR. Rather, the 
physician fee schedule update, as specified in section 1848(d)(4) of 
the Act, is adjusted based on a comparison of allowed expenditures 
(determined using the SGR) and actual expenditures. If actual 
expenditures exceed allowed expenditures, the update is reduced. If 
actual expenditures are less than allowed expenditures, the update is 
increased.
    Section 1848(f)(2) of the Act specifies that the SGR is equal to 
the product of the following four factors:
    (1) The estimated change in fees for physicians' services.
    (2) The estimated change in the average number of Medicare fee-for-
service beneficiaries.
    (3) The estimated projected growth in real GDP per capita.
    (4) The estimated change in expenditures due to changes in law or 
regulations.
    In this final rule, we are making prospective redeterminations of 
the SGRs for FY 1998 and FY 1999 for the purposes of determining future 
physician fee schedule updates, including the update for 2003. We are 
also making a minor revision to the SGR for 2002.

A. Revised Sustainable Growth Rate for FY 1998

    The revised FY 1998 SGR is 3.2 percent. Table 2 shows the estimated 
figures that we used to determine the FY 1998 SGR from the October 31, 
1997, Federal Register (62 FR 59263), and the revised final figures.

[[Page 9571]]



                                 Table 2
------------------------------------------------------------------------
                                             10/31/97
            Statutory factors                estimate      Revised final
                                             (percent)       (percent)
------------------------------------------------------------------------
Fees....................................     2.3 (1.023)     2.0 (1.020)
Enrollment..............................    -2.4 (0.976)    -2.3 (0.977)
Real Per Capita GDP.....................     1.1 (1.011)     3.2 (1.032)
Law and Regulation......................     0.6 (1.006)     0.3 (1.003)
                                         -----------------
    Total...............................     1.5 (1.015)     3.2 (1.032)
------------------------------------------------------------------------

Factor 1--Changes in Fees for Physicians' Services (Before Applying 
Legislative Adjustments) for FY 1998
    This factor was calculated as a weighted average of the FY 1998 fee 
increases for the different types of services included in the 
definition of physicians' services for the SGR that applied in FY 1998. 
Medical and other health services paid using the physician fee schedule 
accounted for approximately 91.5 percent of total allowed charges 
included in the SGR in FY 1998 and are updated using the MEI. The 
weighted average of the MEI that applied for the calendar years 
included in FY 1998 was 2.2 percent. (``Incident to'' drugs, which are 
also included in the SGR, are paid using the average wholesale price 
methodology. Consistent with the methodology used prior to 2003, we 
used the MEI as a proxy for growth in ``incident to'' drug prices for 
both the FY 1998 and FY 1999 SGRs). Diagnostic laboratory tests 
represent approximately 8.5 percent of Medicare allowed charges 
included in the SGR in FY 1998. The costs of these tests are typically 
updated by the CPI-U. Although section 1833(h)(2)(A)(ii)(IV) of the Act 
required a 0.0 percent update for laboratory services for 1998 to 2002, 
we used a 3.0 percent update for laboratory services in 1998 to 
determine the estimated SGR. We are now using a 0.0 percent update for 
laboratory services for the 9 months of calendar year 1998 that are 
included in FY 1998. The weighted average of the laboratory update 
applied in the calendar years included in FY 1998 was 0.8 percent. We 
determined a weighted average of the MEI and the laboratory updates 
that applied in FY 1998 using the following information:

                                 Table 3
------------------------------------------------------------------------
                                                      Weight     Update
------------------------------------------------------------------------
MEI...............................................      0.915        2.2
Laboratory........................................      0.085        0.8
Weighted Average..................................      1.000        2.0
------------------------------------------------------------------------

    After taking into account the elements described in table 3, we now 
estimate that the weighted-average increase in fees for physicians' 
services in FY 1998 under the SGR (before applying any legislative 
adjustments) was 2.0 percent. This figure is 0.3 percentage points 
lower than the estimate we made of this factor in the October 31, 1997, 
Federal Register (62 FR 59265) because of the revision we have made to 
the update for laboratory services.
Factor 2--The Percentage Change in the Average Number of Part B 
Enrollees for FY 1998
    This factor is our estimate of the percent change in the average 
number of fee-for-service enrollees from FY 1997 to FY 1998. Services 
provided to Medicare+Choice (M+C) plan enrollees are outside the scope 
of the SGR and are excluded from this estimate. Our actuaries have now 
determined that the average number of Medicare Part B fee-for-service 
enrollees actually decreased by 2.3 percent from FY 1997 to FY 1998. 
Table 4 illustrates how this figure was determined:

                                 Table 4
------------------------------------------------------------------------
                                        FY 1998             FY 1999
------------------------------------------------------------------------
Overall.........................  36.368 million....  36.685 million
Medicare+Choice.................  4.463 million.....  5.510 million
Net.............................  31.905 million....  31.175 million
Percent Increase................  ..................  -2.3 percent
------------------------------------------------------------------------

    As we have stated repeatedly, an important factor affecting fee-
for-service enrollment is beneficiary enrollment in M+C plans. Because 
it is difficult to estimate the size of the M+C enrollee population 
before the start of a calendar year, we cannot predict how actual 
enrollment in M+C plans during the year will compare to our Actuary's 
estimates. Despite the difficulty in predicting these figures, the 
actual decrease in Medicare fee-for-service enrollment of 2.3 percent 
was almost identical to the Actuary's estimate in 1997 (-2.4 percent).
Factor 3--Estimated Real Gross Domestic Product Per Capita Growth for 
FY 1998
    Actual growth in real per capita GDP from FY 1997 to FY 1998 was 
3.2 percent or 2.1 percentage points higher than the 1.1 percent 
estimate we made in 1997. The large difference between our estimate and 
the actual growth in real per capita GDP reflects the difficulty in 
predicting economic growth before the beginning of a year.
Factor 4--Percentage Change in Expenditures for Physicians' Services 
Resulting From Changes in Law or Regulations in FY 1998 Compared With 
FY 1997
    The Balanced Budget Act (BBA) of 1997 established or changed 
coverage for screening mammography, colorectal cancer screening, and 
screening PAP smears. The BBA also included payment provisions related 
to nurse practitioners, clinical nurse specialists and physician 
assistants, Medicare secondary payer, and clinical diagnostic 
laboratory services. In 1997, we estimated that the net cost of these 
provisions would increase the FY 1998 SGR by 0.6

[[Page 9572]]

percent. Based on the lower than anticipated expenditures for screening 
mammography and nurse practitioners, clinical nurse specialists and 
physician assistants, we now estimate that the net cost of these 
provisions increased the FY 1998 SGR by 0.3 percent.

B. Revised Sustainable Growth Rate for FY 1999

    The revised SGR for FY 1999 is 4.2 percent for the purposes of 
determining future physician fee schedule updates. Table 5 shows the 
estimated figures that we used to determine the FY 1999 SGR from the 
November 2, 1998, Federal Register (63 FR 59188), and the revised final 
figures.

                                 Table 5
------------------------------------------------------------------------
                                              11/2/98
            Statutory factors                estimate      Revised final
                                             (percent)       (percent)
------------------------------------------------------------------------
Fees....................................     2.1 (1.021)     2.1 (1.021)
Enrollment..............................    -4.3 (0.967)    -1.1 (0.989)
Real Per Capita GDP.....................     1.3 (1.013)     3.3 (1.033)
Law and Regulation......................     0.7 (1.007)    -0.1 (0.999)
                                         -------------------------------
  Total.................................    -0.3 (0.997)     4.2 (1.042)
------------------------------------------------------------------------

Factor 1--Changes in Fees for Physicians' Services (Before Applying 
Legislative Adjustments) for FY 1999
    This factor was calculated as a weighted average of the FY 1999 fee 
increases for the different types of services included in the 
definition of physicians' services for the SGR that applied in FY 1999. 
Medical and other health services paid using the physician fee schedule 
accounted for approximately 92 percent of total allowed charges 
included in the SGR in FY 1999 and are updated using the MEI. The 
weighted average of the MEI that applied for the calendar years 
included in FY 1999 was 2.3 percent. Diagnostic laboratory tests 
represent approximately 8.0 percent of Medicare allowed charges 
included in the SGR in FY 1999. During FY 1999, section 
1833(h)(2)(A)(ii)(IV) of the Act required a 0.0 percent update for 
laboratory services. We determined a weighted average of the MEI and 
the laboratory updates that applied in FY 1999 using the following 
information:

                                 Table 6
------------------------------------------------------------------------
                                                      Weight     Update
------------------------------------------------------------------------
MEI...............................................      0.920        2.3
Laboratory........................................      0.080        0.0
Weighted Average..................................      1.000        2.1
------------------------------------------------------------------------

    After taking into account the elements described in table 6, we now 
estimate that the weighted-average increase in fees for physicians' 
services in FY 1999 under the SGR (before applying any legislative 
adjustments) was 2.1 percent. This figure is unchanged from our 
original estimate of the weighted-average increase in fees for 
physicians' services in FY 1999.
Factor 2--The Percentage Change in the Average Number of Part B 
Enrollees for FY 1999
    This factor is our estimate of the percent change in the average 
number of fee-for-service enrollees from FY 1998 to FY 1999. Our 
actuaries have now determined that the average number of Medicare Part 
B fee-for-service enrollees (net of M+C enrollees) actually decreased 
by 1.1 percent. Table 7 illustrates how this figure was determined:

                                 Table 7
------------------------------------------------------------------------
                                                     FY 1998    FY 1999
                                                    (million)  (million)
------------------------------------------------------------------------
Overall...........................................     36.685     36.951
Medicare+Choice...................................      5.510      6.109
Net...............................................     31.175     30.841
                                                              ----------
  Percent Increase................................  .........       -1.1
------------------------------------------------------------------------

    As indicated above, the difficulty in predicting growth in M+C 
enrollment before the beginning of the year explains the 3.2 percentage 
point difference between our 1998 estimate of this factor (-4.3 
percent) and the actual measured decrease.
Factor 3--Estimated Real Gross Domestic Product Per Capita Growth for 
FY 1999
    Actual growth in real per capita GDP from FY 1998 to FY 1999 was 
3.3 percent or 2.0 percentage points higher than the 1.3 percent 
estimate we made in 1997. The large difference between our estimate and 
the actual growth in real per capita GDP reflects the difficulty 
predicting economic growth before the beginning of a year.
Factor 4--Percentage Change in Expenditures for Physicians' Services 
Resulting From Changes in Law or Regulations in FY 1999 Compared With 
FY 1998
    In the November 2, 1998, Federal Register (63 FR 59189) we 
increased the SGR by 0.7 percentage points to reflect the effects of 
the BBA on expenditures for physicians' services included in the SGR. 
However, we are now reducing the SGR by 0.1 percent for savings 
associated with BBA provisions. These savings are largely associated 
with the residual effects of the BBA's Medicare secondary payer 
provisions. We are also removing the costs associated with diabetes 
self-management training from the FY 1999 SGR because Medicare coverage 
associated with this service did not become effective until 2001.

C. Revised Sustainable Growth Rate for 2002

Factor 4--Percentage Change in Expenditures for Physicians' Services 
Resulting from Changes in Law or Regulations in 2002 Compared to 2001 
Changes
    Based on Medicare data from 2001, we have observed very little 
utilization of diabetes self-management training services. However, we 
believe it is likely that utilization of this new benefit increased in 
2002 and are including an adjustment to the 2002 SGR for this factor. 
This adjustment will increase the law and regulation factor and the 
total SGR for 2002 by 0.2 percentage points relative to the figures 
included in the December 31, 2002, final rule (67 FR 80028). All other 
factors included in the 2002 SGR are unchanged at this time. As 
indicated earlier, we expect to make revisions to all figures included 
in the 2002 SGR for the final time later this year.

[[Page 9573]]

IV. Anesthesia and Physician Fee Schedule Conversion Factors

    The 2003 physician fee schedule CF will be $36.7856. The 2003 
national average anesthesia CF will be $17.05.
    The specific calculations to determine the physician fee schedule 
and anesthesia CFs for 2003 are explained below.
    [sbull] Physician Fee Schedule Conversion Factor.
    Under section 1848(d)(1)(A) of the Act, the physician fee schedule 
CF is equal to the CF for the previous year multiplied by the update 
determined under section 1848(d)(4) of the Act. In addition, section 
1848(c)(2)(B)(ii)(II) of the Act requires that changes to relative 
value units (RVUs) cannot cause the amount of expenditures to increase 
or decrease by more than $20 million from the amount of expenditures 
that would have been made if such adjustments had not been made. We 
implement this requirement through a uniform budget neutrality 
adjustment to the CF. There is one change that will require us to make 
an adjustment to the CF to comply with the budget neutrality 
requirement in section 1848(c)(2)(B)(ii)(II) of the Act. We are making 
a 0.04 percent reduction (0.9996) in the CF to account for the increase 
in anesthesia work resulting from the 5-year review.
    We illustrate the calculation for the 2003 physician fee schedule 
CF in table 8:

                                 Table 8
------------------------------------------------------------------------
 
------------------------------------------------------------------------
2002 Conversion Factor.......................................   $36.1992
2003 Update..................................................     1.0166
Budget-Neutrality Adjustment: Increase in Anesthesia Work....     0.9996
2003 Conversion Factor.......................................   $36.7856
------------------------------------------------------------------------

    [sbull] Anesthesia Fee Schedule Conversion Factor.
    As described in the December 31, 2002, final rule (67 FR 80032), 
anesthesia services do not have RVUs like other physician fee schedule 
services. For this reason, we are accounting for the changes to 
anesthesia work and practice expenses through a 1.6 percent (1.016) 
adjustment to the anesthesia fee schedule CF. In addition, we are also 
applying the physician fee schedule update and the budget neutrality 
adjustment for the increase in anesthesia work that also apply to the 
physician fee schedule CF. To determine the anesthesia fee schedule CF 
for 2003, we used the following figures:

                                 Table 9
------------------------------------------------------------------------
 
------------------------------------------------------------------------
2002 Conversion Factor.......................................   $16.6055
Adjustments for Work and Practice Expense....................     1.0106
2003 Update..................................................     1.0166
Budget-Neutrality Adjustment: Increase in Anesthesia Work....     0.9996
2003 Conversion Factor.......................................   $17.0522
------------------------------------------------------------------------

V. Waiver of Proposed Rulemaking and Delay in Effective Date

    We ordinarily publish a notice of proposed rulemaking in the 
Federal Register and invite public comment on a proposed rule. The 
notice of proposed rulemaking includes a reference to the legal 
authority under which the rule is proposed, and the terms and 
substances of the proposed rule or a description of the subjects and 
issues involved. This procedure can be waived, however, if an agency 
finds good cause that a notice-and-comment procedure is impracticable, 
unnecessary, or contrary to the public interest and incorporates a 
statement of the finding and its reasons in the rule issued. In 
addition, the Administrative Procedure Act (APA) normally requires a 
30-day delay in the effective date of a final rule. Furthermore, the 
Congressional Review Act (CRA) generally requires an agency to delay 
the effective date of a major rule by 60 days in order to allow for 
congressional review of the agency action.
    We find it unnecessary to undertake notice-and-comment rulemaking 
prior to implementation of the revisions contained in this final rule. 
The revisions in this final rule constitute technical corrections to 
the final rule published on December 31, 2002, which are necessary in 
order to implement the Congress's decision to confer authority for CMS 
to make prospective redeterminations of the SGRs for the FY 1998 and FY 
1999 but do not otherwise change the policies announced in the final 
rule. In the December 31, 2002, final rule we expressly indicated that 
we would make these changes in the event that the Congress conferred 
the requisite authority upon the agency prior to the March 1, 2003, 
effective date of the rule. Accordingly, because this final rule simply 
makes technical modifications to a final rule that has previously gone 
through notice-and-comment rulemaking, we do not believe that this 
final rule is subject to notice-and-comment or the 30-day delay in the 
effective date under the APA. Even if this rule were something other 
than a technical correction or amendment to the final rule published on 
December 31, 2002, we believe good cause would exist under the APA to 
waive the requirements of notice-and-comment rulemaking and the 30-day 
delay in the effective date.
    As indicated above, on December 31, 2002, we announced that, 
effective March 1, 2003, Medicare physician fee schedule rates would be 
reduced by an average of 4.4 percent. We indicated in our December 31, 
2002, final rule (67 FR 79966) that the 4.4 percent reduction would be 
inappropriate because it would occur under a statutory methodology that 
did not allow us to reflect actual, after-the-fact data from earlier 
years in the determination of the SGR and allowed expenditures. We 
stated the Department was unable to revise those estimates without 
further congressional action. (``The Department intends to work closely 
with Congress to develop legislation that could permit a positive 
update, and hopes that such legislation can be passed before the 
negative update takes effect.'' Since we published the December 31, 
2002, final rule, as described above, the Congress has taken action 
that evinces the Congress's intent to permit revisions of all prior FY 
SGRs for the purposes of allowing for prospective application of those 
revisions to future physician fee schedule updates (that is, to the 
2003 physician fee schedule update.)
    To go through further notice-and-comment rulemaking at this time 
would be unnecessary, impracticable, and contrary to the public 
interest because, in our December 31, 2002, final rule we unequivocally 
expressed our intent to prospectively redetermine the SGRs for FYs 1998 
and 1999 in order to establish the 2003 CF. ``Because the Department 
would adopt a change in the formula that determines the physician 
update if the law permitted it, we have examined how proper adjustments 
to past data could result in a positive update.'' To go through notice-
and-comment rulemaking at this point, when we have already stated 
unequivocally our intent to recompute the CF for 2003 if the Congress 
were to act to permit a prospective redetermination of the SGRs for 
fiscal years 1998 and 1999, would be unnecessary and contrary to the 
public interest.
    Because the Department wished to make changes to the physician fee 
schedule update promptly in the event that the Congress acted 
legislatively, our December 31, 2002, final rule specifically requested 
public comment on revisions to the estimates that were used to 
establish the FY 1998 and FY 1999 SGRs, if the statute were to be 
amended to provide us with this authority. Because we have already 
requested public comments on the issues included in this final rule, we 
believe it is unnecessary and contrary to

[[Page 9574]]

the public interest to engage in further notice-and-comment rulemaking.
    The comment period for the December 31, 2002, rule has not yet 
closed, but in the event we receive any comments in response to our 
December 31, 2002, final rule, we will address them in a subsequent 
publication in the Federal Register. No comments have been received to 
date.
    Further, we believe engaging in notice-and-comment rulemaking and 
delaying the effective date of this final rule would be contrary to the 
public interest because the Congress specifically sought to avert the 
negative update to the physician fee schedule for 2003 that we 
announced on December 31, 2002, by enacting a law conferring upon CMS 
the authority to reflect actual, after-the-fact data from earlier 
fiscal years in the determination and allowed expenditures for the 
purposes of determining future physician fee schedule updates: the very 
authority, as previously stated in the Federal Register, that we would 
need to revise our prior estimates of the FY 1998 and FY 1999 SGRs to 
avoid the 4.4 percent reduction in rates on March 1 and establish a 1.6 
percent increase in the physician fee schedule CF. Any delay in 
implementation of this 1.6 percent increase would be contrary to the 
public interest of the CAR and would run precisely counter to the 
intent of the Congress in enacting section 402(a) of the CAR to enable 
CMS to ``make corrections to data errors in the physician payment 
formula for past fiscal years.'' (See House Rpt, 108-10). Moreover a 
delay in enacting this final rule could adversely affect the provision 
of services to Medicare beneficiaries because any delay in 
implementation of the payment increases for physician services provided 
under the Medicare program may have an adverse impact on Medicare 
beneficiaries' access to important healthcare services.
    Finally, we also note that notice-and-comment rulemaking is not 
required in this instance because section 1871(b)(2) of the Act 
provides that when an effective date is within 150 days of enactment of 
a law, the notice-and-comment requirement does not apply.
    With respect to the requirement of a 60-day delay in the effective 
date of any final rule pursuant to the CRA, see 5 U.S.C. section 801, 
the CRA provides that the 60-day delayed effective date shall not apply 
to any rule ``which an agency for good cause finds * * * that notice 
and public procedure thereon are impracticable, unnecessary, or 
contrary to the public interest'' (5 U.S.C. section 808(2)). For the 
reasons set forth above, we believe that additional notice-and-comment 
rulemaking on this subject would be impracticable, unnecessary, or 
contrary to the public interest. Therefore, we do not believe that the 
CRA requires a 60-day delay in the effective date of this final rule. 
Moreover, the Congress had 60 days to review the December 31, 2002, 
final rule. The Congress responded to that final rule by enacting a law 
to clarify the fee schedule update mechanism described and set forth in 
the December 31, 2002, final rule. Because we are incorporating this 
very statutory clarification as the basis for this new final rule, we 
believe it would be contrary to the CRA and the public interest to 
provide yet another 60-day review period under the CRA.

VI. Collection of Information Requirements

    This document does not impose information collection and record 
keeping requirements. Consequently, it does not need review by the 
Office of Management and Budget under the authority of the Paperwork 
Reduction Act of 1995.

VII. Regulatory Impact Analysis

    We have examined the impact of this final rule as required by 
Executive Order 12866 (September 1993, Regulatory Planning and Review), 
the Regulatory Flexibility Act (RFA) (September 16, 1980, Pub. L. 96-
354), section 1102(b) of the Social Security Act, the Unfunded Mandates 
Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132.
    Executive Order 12866 (as amended by Executive Order 13258, which 
reassigns responsibility of duties) directs agencies to assess all 
costs and benefits of available regulatory alternatives and, when 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis must be prepared for final rules with 
economically significant effects (that is, a final rule that would have 
an annual effect on the economy of $100 million or more in any 1 year, 
or would adversely affect in a material way the economy, a sector of 
the economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or tribal governments or 
communities). We estimate that the changes to the physician fee 
schedule update will increase Medicare expenditures for physicians' 
services by $1.1 billion in FY 2003, $2.0 billion in FY 2004 and $2.8 
billion in FY 2005 or an estimated $15.7 billion over 5 years and $49.6 
billion over ten years. Therefore, this rule is considered to be a 
major rule because it is economically significant, and, thus, we have 
prepared a regulatory impact analysis.
    The RFA requires that we analyze regulatory options for small 
businesses and other entities. We prepare a Regulatory Flexibility 
Analysis unless we certify that a rule would not have a significant 
economic impact on a substantial number of small entities. The analysis 
must include a statement in support of the objectives underlying the 
action being taken, the kinds and number of small entities the rule 
affects, and an explanation of any meaningful options that achieve the 
objectives with less significant adverse economic impact on the small 
entities.
    Section 1102(b) of the Act requires us to prepare a regulatory 
impact analysis for any final rule that 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 603 of the RFA. 
With the exception of hospitals located in certain New England 
counties, for purposes of section 1102(b) of the Act, we define a small 
rural hospital as a hospital that is located outside a Metropolitan 
Statistical Area or New England County Metropolitan Area (NECMA) and 
has fewer than 100 beds.
    For purposes of the RFA, physicians, non-physician practitioners, 
and suppliers, are considered small businesses if they generate 
revenues of $8.5 million or less. Approximately 96 percent of 
physicians are considered to be small entities. There are about 700,000 
physicians, other practitioners and medical suppliers that receive 
Medicare payment under the physician fee schedule.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that may result in expenditure in any 1 year by State, 
local, or tribal governments, in the aggregate, or by the private 
sector, of $110 million. This final rule will not result in any 
unfunded mandates for State, local or tribal governments or the private 
sector, as defined by section 202.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a rule that imposes substantial 
direct requirement costs on State and local governments, preempts State 
law, or otherwise has Federalism implications. We have examined this 
final rule in accordance with Executive Order 13132

[[Page 9575]]

and have determined that this regulation would not have any significant 
impact on the rights, roles, or responsibilities of State, local, or 
tribal governments.
    We have prepared the following analysis, which together with the 
rest of this preamble meets all assessment requirements. It explains 
the rationale for, and purposes of, the rule, details the costs and 
benefits of the rule, analyzes alternatives, and presents the measures 
we are using to minimize the burden on small entities. As indicated 
elsewhere, we are increasing the physician fee schedule CF for March 1 
to December 31, 2003, by 1.6 percent. The provisions of this rule are 
changing only Medicare payment rates for physician fee schedule 
services, and are not imposing any new regulatory requirements that 
will impose a burden on small entities.
    Table 10 shows the average change in Medicare payment by specialty. 
It shows the impact of changes in RVUs, the physician fee schedule 
update, the combined impact, and includes the effect of corrections 
made to the RVUs for several procedure codes. The table is analogous to 
Table 24 in the December 31, 2002, final rule (67 FR 80037) but 
includes the revised physician fee schedule update. The tables reflect 
application of the revised CF for the full calendar year. However, 
because the increased CF is only in effect from March 1 to December 31, 
2003, the actual impacts will be somewhat less than those shown here.
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    Table 11 shows the difference between 2002 and 2003 payment rates 
(March 1 to December 31) for selected high volume procedures. This 
table shows the combined impact of changes in RVUs and the physician 
fee schedule update on total payment for each procedure. The table is 
analogous to Table 25 in the December 31, 2002, final rule (67 FR 
80037) with the revised physician fee schedule update. There are 
separate columns that show the change in the facility rates and the 
nonfacility rates. For an explanation of facility and non-facility 
practice expense refer to Sec.  414.22(b)(5)(i).

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[GRAPHIC] [TIFF OMITTED] TR28FE03.004


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Impact on Beneficiaries

    We do not believe that any problems regarding beneficiary access to 
care will result from changes in this rule. Moreover, it is possible 
that potential problems regarding beneficiary access to care that could 
have resulted from the 4.4 percent reduction contained in the December 
31, 2002, final rule (67 FR 79966) will be alleviated by the increase 
in payment being announced in this rule. Nevertheless, we believe it 
remains important to continue our efforts to monitor beneficiary access 
to care.
    Any change in Medicare payments will have an impact on beneficiary 
cost-sharing. If the 4.4 percent reduction were to go into effect and 
beneficiary access to care were reduced, it is possible that 
beneficiaries would have lower coinsurance costs but might have 
problems with access to services (for example, whether physicians 
continue to see existing or new Medicare beneficiaries). Because we do 
not know the impact of the 4.4 percent reduction on beneficiary access 
to care, it is difficult to estimate the effect on out-of-pocket costs. 
Assuming beneficiary access to care were unaffected, we estimate that 
the increase in the 1.6 percent increase in the CF compared to a 4.4 
percent reduction would increase beneficiary coinsurance liabilities by 
approximately $300 million in FY 2003 or about $80 million more than if 
the rates applied in 2002 remained in effect for the remainder of 2003. 
Some of the increased costs of beneficiary coinsurance may be incurred 
by the many policies that supplement Medicare. We would note that the 
1.6 percent increase will only marginally increase out-of-pocket costs 
for beneficiaries that do not have any insurance other than Medicare.
    In accordance with the provisions of Executive Order 12866, the 
Office of Management and Budget reviewed this regulation.
    This final rule is issued under the authority of sections 1102 and 
1871 of the Social Security Act (42 U.S.C. 1302 and 1395hh).

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

    Dated: February 19, 2003.
Thomas A. Scully,
Administrator, Centers for Medicare & Medicaid Services.

    Dated: February 24, 2003.
Tommy G. Thompson,
Secretary.
[FR Doc. 03-4862 Filed 2-26-03; 11:47 am]
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