Medicare Physician Fee Schedule: CMS Needs a Plan for Updating	 
Practice Expense Component (13-DEC-04, GAO-05-60).		 
                                                                 
Medicare's payments for the costs physicians incur in operating  
their practices are based on two sets of estimates: total	 
practice expenses and resource estimates for individual services.
Total practice expense estimates were derived from American	 
Medical Association (AMA) physician surveys, which the Centers	 
for Medicare & Medicaid Services (CMS) refines with supplemental 
data submitted by medical specialty societies. Resource estimates
for individual services were developed by expert panels and	 
refined by CMS with recommendations from another expert panel. In
response to a mandate in the Medicare, Medicaid, and SCHIP	 
Benefits Improvement and Protection Act of 2000, GAO evaluated	 
CMS's processes for updating total practice expense and resource 
estimates and whether CMS will have the data necessary to update 
the fee schedule at least every 5 years as mandated by law.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-60						        
    ACCNO:   A14337						        
  TITLE:     Medicare Physician Fee Schedule: CMS Needs a Plan for    
Updating Practice Expense Component				 
     DATE:   12/13/2004 
  SUBJECT:   Data collection					 
	     Evaluation criteria				 
	     Evaluation methods 				 
	     Health care programs				 
	     Health care services				 
	     Medical fees					 
	     Medical services rates				 
	     Physicians 					 
	     Health care costs					 
	     Health insurance					 
	     Medicare Program					 
	     AMA Socioeconomic Monitoring System		 
	     Survey						 
                                                                 

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GAO-05-60

     

     * Results in Brief
     * Background
          * SMS Survey Used to Estimate Specialties' Total Pr
          * Physician Specialty Societies May Submit Supplemental Data on
            Total Practice Expense Estimates
          * Expert Panels Establish and Refine Resource Estimates for
            Individual Services
     * Certain Aspects of CMS's Review Are Problematic
          * Review of Supplemental Data Is Necessary
          * Certain Aspects of Review Process Are Problematic
     * Updating Process Improved Resource Estimates for Individual Services,
       Although Certain CMS Changes Were Made without Adequate Justification
          * Stakeholders Agree that PEAC Improved Estimates
          * CMS Changed Certain Estimates without Adequate Justification
     * CMS Has Not Specified a Plan for Developing Appropriate Data to Update
       the Fee Schedule
     * Conclusions
     * Recommendations for Executive Action
     * Agency and Industry Comments and Our Evaluation
     * Appendix I: Medical Specialty Societies Interviewed for This Report
     * Appendix II: Scope and Methodology
     * Appendix III: Comments from the Centers for Medicare & Medicaid
       Services
     * Appendix IV: GAO Contact and Staff Acknowledgments
          * GAO Contact
          * Acknowledgments
               * Order by Mail or Phone

                 United States Government Accountability Office

Report to Congressional Committees

GAO

December 2004

MEDICARE PHYSICIAN FEE SCHEDULE

            CMS Needs a Plan for Updating Practice Expense Component

GAO-05-60

MEDICARE PHYSICIAN FEE SCHEDULE

CMS Needs a Plan for Updating Practice Expense Component

  What GAO Found

CMS reviews supplemental data from medical specialties on total practice
expenses to determine whether it should use the data, but aspects of CMS's
review may result in its not utilizing the best data. CMS's review is
necessary because it helps protect against perceived or actual bias in the
estimates. Risk of bias exists because only specialties that believe their
Medicare fees are too low are likely to submit supplemental data, and the
data are not audited. CMS, however, may still use certain data submissions
that are not representative of physician practices within a specialty. CMS
also may reject some data that are more representative of a specialty's
total practice expenses than the data currently used for that specialty.
In addition, CMS reviewed a 2002 data submission for accuracy, which is an
important additional check, yet when the data did not meet the accuracy
test, CMS did not reject the data. CMS has not stated whether it will
review the accuracy of all supplemental data submissions.

Stakeholders such as specialty societies and AMA said the expert panel
improved resource estimates for individual services because of the rigor
of its evaluation process. CMS and specialty societies generally accepted
the panel's estimates because the panel represented a broad range of
specialties and its collaborative evaluation process became increasingly
systematic. CMS implemented almost all of the panel's estimates but
appropriately changed some estimates that conflicted with Medicare
coverage rules and changed others to make them consistent across services.
In modifying other estimates, however, CMS did not always rely on adequate
data or explain its rationale. Certain physician groups told GAO that this
had diminished their confidence in the process for updating Medicare's
fees, and physicians' confidence in the process is important to ensure
their continued participation in Medicare.

CMS does not have a plan for developing and using appropriate data for the
mandated review of the fee schedule. CMS reported that it is in the
process of obtaining a contract to collect practice expense data from the
major physician and nonphysician specialties but did not provide
specifics. A plan for the data collection is important for several
reasons. Data sources that had been used no longer exist or are
insufficient. The AMA physician survey that provided total practice
expense data was last conducted in 1999 and was modified in 2000 such that
it no longer collected the necessary data. Data submitted voluntarily by
specialties to update these estimates are not an appropriate substitute
for a systematic data collection effort. In addition, the expert panel
that reviewed resource estimates for individual services completed its
work in its final meeting in March 2004. CMS indicated that an ongoing AMA
committee would continue to develop estimates for new and revised
services. While CMS officials told GAO they believe CMS can complete the
review of the fee schedule as required by 2007, without a specific plan
CMS cannot ensure that it will be able to collect the data and update the
fee schedule in a timely manner.

                 United States Government Accountability Office

Contents

  Letter 1

Results in Brief 3 Background 6 Certain Aspects of CMS's Review Are
Problematic 14 Updating Process Improved Resource Estimates for Individual

Services, Although Certain CMS Changes Were Made without

Adequate Justification 18 CMS Has Not Specified a Plan for Developing
Appropriate Data to

Update the Fee Schedule 20 Conclusions 21 Recommendations for Executive
Action 21 Agency and Industry Comments and Our Evaluation 22

Appendix I Medical Specialty Societies Interviewed for This Report 28

Appendix II Scope and Methodology

Appendix III Comments from the Centers for Medicare & Medicaid Services

  Appendix IV GAO Contact and Staff Acknowledgments 38

GAO Contact 38 Acknowledgments 38

  Tables

Table 1: CMS Criteria for Evaluating Specialty Society

Supplemental Data Submissions 9 Table 2: Supplemental Data Submissions by
Specialty, CMS

Decision, and Reasons for Rejection, 2000 through 2002 11

Abbreviations

AMA                  American Medical Association                          
AOA                             American Optometric Association            
ASCO                 American Society of Clinical Oncology                 
BLS                  Bureau of Labor Statistics                            
CMS                               Centers for Medicare & Medicaid Services 
CPEP                 clinical practice expert panels                       
HCFA                 Health Care Financing Administration                  
OIG                  Office of Inspector General                           
PEAC                 Practice Expense Advisory Committee                   
RUC                  RVS Update Committee                                  
SMS                             Socioeconomic Monitoring System            

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United States Government Accountability Office Washington, DC 20548

December 13, 2004

Congressional Committees

Medicare pays for physician services using a fee schedule based on the
resources required to deliver each service. Under this fee schedule, a
single fee is paid for each of the more than 7,000 services (such as
office visits, surgical procedures, and tests) delivered by physicians and
certain other health professionals, regardless of the medical specialty
performing the service. The fee is made up of three parts that recognize
different types of resources required to provide each service. The
physician work component provides payment for the physician's time, skill,
and training to perform the service. The malpractice component provides
payment for the expenses of obtaining professional liability insurance.
The practice expense component provides payment for the expenses incurred
in operating a practice, such as nurses' salaries, space, and equipment. 1
Almost half of the approximately $53 billion Medicare paid for services
under the physician fee schedule in 2003 compensated physicians for
practice expenses. The Centers for Medicare & Medicaid Services (CMS), the
agency within the Department of Health and Human Services (HHS) that
administers Medicare, is required to review and adjust the fees for all
physician services at least every 5 years to account for a number of
factors, including changes in medical practice. 2

Some medical specialty societies have raised concerns that Medicare's
practice expense payments do not cover their physicians' practice
expenses, in part because of inadequacies in the data used to establish
the payments. We previously reported that although the data used were the
best available at the time resource-based practice expense payments were
developed, they needed refinements to correct potential weaknesses. 3

1

This report refers to the practice expense component of payments as
"practice expense payments."

2

See 42 U.S.C. 1395w-4(c)(2)(B)(i), (ii).

3

GAO, Medicare Physician Payments: Need to Refine Practice Expense Values
During Transition and Long Term , GAO/HEHS-99-30 (Washington, D.C.: Feb.
24, 1999) and GAO, Medicare Physician Fee Schedule: Practice Expense
Payments to Oncologists Indicate Need for Overall Refinement,
GAO/HEHS-02-53 (Washington, D.C.: Oct. 31, 2001).

Practice expense payments are developed with (1) estimates of the total
practice expenses that physicians in each specialty incur to operate their
practices and (2) estimates of the resources required to perform each of
the individual services provided by the physicians in each specialty.
Total practice expenses were estimated originally using data from American
Medical Association (AMA) surveys of physicians. To refine total practice
expense estimates, CMS was required to establish a review process to
accept data submitted voluntarily by medical specialty societies that were
collected through a survey of physicians practicing in that specialty to
supplement the AMA survey data. 4 As of June 2004, six specialties had
submitted supplemental data, 5 and CMS had accepted three submissions. The
resources required to perform individual services originally were
estimated by panels of clinicians convened by the Health Care Financing
Administration (HCFA). 6 To refine these estimates, CMS made its own
changes but largely relied on recommendations from the AMA-sponsored
Practice Expense Advisory Committee (PEAC), which comprised expert panels
of physicians and other clinicians that developed service-specific
resource estimates based on information from specialty societies.

The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act
of 2000 directed that we review the processes and data used to refine
practice expense payments for all specialties. 7 As agreed with your
offices, we (1) evaluated CMS's process for reviewing the supplemental
data submitted by specialty societies on total practice expenses, (2)
evaluated CMS's process for updating estimates of resources required to
perform individual services, and (3) determined whether CMS will have the
data necessary to review and adjust the physician fee schedule at least
every 5 years, as required by law.

To conduct this work, we invited 50 medical specialty societies to meet
with us to discuss their experiences with developing and submitting

4

See Section 212 of the Medicare, Medicaid and SCHIP Balanced Budget
Refinement Act of 1999, Pub. L. No. 106-113, App. F, 113 Stat. 1501A-321,
1501A-350.

5

Since we sent our report to CMS for comment on June 15, 2004, CMS posted
information on its Web site about four additional supplemental data
submissions.

6

On July 1, 2001, the agency that administers the Medicare program was
renamed from HCFA to the Centers for Medicare & Medicaid Services (CMS).
In this report, we will refer to HCFA where our findings apply to
operations that took place before July 1, 2001.

7

Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of
2000, Pub. L. 106-554, Appendix F, Section 411, 114, Stat. 2763A-463,
2763A-508.

                                Results in Brief

supplemental practice expense data and their views of the PEAC process. We
met with representatives of the 32 specialty societies that responded and
reviewed written materials they gave us. (App. I lists the 32 medical
specialty societies that responded.) We evaluated CMS's review of the
supplemental total practice expense data by examining specialty societies'
submissions and reports from the contractor CMS hired to provide technical
assistance to the specialty societies and CMS on the supplemental data
submission process. We also interviewed CMS officials and the contractor
about the process CMS uses to review submissions. To evaluate CMS's
process for updating resource estimates for individual services, we
interviewed the specialties' representatives, attended PEAC meetings, and
examined supporting materials that specialties provided to the PEAC. To
determine CMS's decisions on PEAC recommendations and CMS's rationale for
other changes to resource estimates for individual services, we reviewed
relevant documents published in the Federal Register 8 and an HHS Office
of Inspector General (OIG) report.9 We also discussed with CMS staff CMS's
rationale for decisions regarding the refinement processes and its views
about prospects for obtaining data to perform the mandated reviews. We
performed our work from November 2001 through December 2004 in accordance
with generally accepted government auditing standards. (App. II provides
details of our scope and methodology.)

CMS's review of supplemental data provided by medical specialties on total
practice expenses is necessary to protect against the risk of bias
inherent in a voluntary submission process, since only those specialties
that believe their estimates are too low are likely to submit data.
However, certain aspects of the review may result in CMS's not utilizing
the best available data. First, in assessing whether the respondents to
the supplemental data survey are representative of all physician practices
within a specialty, CMS may not be examining physician practice
characteristics that affect practice expenses. For example, CMS does not
consider whether the respondents are in independent or hospital-based
practices, which may have a greater bearing on practice expenses than some
of the more general characteristics that are used, such as a

8See 64 Fed. Reg. 59,380, 59,399 - 59,403, (1999); 65 Fed. Reg. 65,376,
65,390 - 65,399 (2000); 66 Fed. Reg. 55,246, 55,255 - 55,262 (2001); 67
Fed. Reg. 79,966, 79,973 - 79,976 (2002).

9

HHS, OIG, Medicare Payment for Nonphysician Clinical Staff in
Cardiothoracic Surgery, OEI-09-01-00130 (Washington, D.C.: HHS, April
2002).

Page 3 GAO-05-60 Medicare Physician Practice Expenses

physician's gender or number of years in practice. Second, CMS's
assessment of the precision 10 of the estimates based on the data from the
supplemental survey has led the agency to reject submissions that might be
more representative of a specialty's total practice expenses than the data
CMS currently uses to establish practice expense estimates- particularly
for specialties that were not represented in the original AMA survey data,
such as optometry. CMS also elected to assess the accuracy, or
reasonableness, of a 2002 submission by comparing the data with benchmark
data from other sources. Although specific expense items were much higher
than comparable benchmark data, CMS ultimately accepted these data without
revisions. These data were deemed representative, even though they were
influenced by certain high-cost practices, indicating that CMS's test for
representativeness is problematic. Assessing submissions for accuracy is
important; however, CMS has not indicated whether it will assess the
accuracy of all supplemental data submissions. 11

Stakeholders such as AMA and specialty societies stated that the PEAC
recommendations CMS used to update resource estimates for individual
services improved these estimates, but certain specialty societies told us
that CMS modified estimates at times without adequate justification, and
our review of CMS's changes indicated that this had occurred. CMS and
specialty society officials expressed confidence in PEAC-recommended
estimates because the PEAC comprised representatives from multiple
specialties and a cross section of providers, and the PEAC's collaborative
process of developing estimates became increasingly systematic from its
inception in 1999. CMS implemented almost all of the PEAC-recommended
estimates for approximately 6,500 services but modified certain original
estimates and PEAC-recommended estimates at times without adequate
justification. For example, CMS decided to remove expenses for clinical
staff that certain surgeons bring to help them in the operating room and
elsewhere in the hospital before it requested and received a study from
the HHS OIG on this issue and without evidence that other Medicare
payments accounted for these expenses. Because CMS indicated that it would
not reverse this policy decision, the PEAC did not have the opportunity to
deliberate on this issue. The success of the PEAC process depended on
physician participation and acceptance, and physicians told us that CMS's

10

Precision measures how far the estimate may be from the true value; for
example, there is a 95 percent chance an estimate is +/-2 percent from the
true value.

11

CMS assessed the accuracy of three of the four recently posted data
submissions.

Page 4 GAO-05-60 Medicare Physician Practice Expenses

changes to estimates without adequate data or explanation lowered their
confidence in the process and the resulting estimates.

CMS has not developed a plan for systematically acquiring and using data
to update total practice expense estimates. CMS reported that it is in the
process of obtaining a contract to collect practice expense data from the
major physician and nonphysician specialties but did not provide
specifics. A plan for the data collection is important for several
reasons. Data sources that had been used no longer exist or are
insufficient. AMA's Socioeconomic Monitoring System (SMS) survey, which
was the source of total practice expense estimates for each specialty, was
last conducted in 1999 and had been modified such that it no longer
collected data detailed enough for this purpose. Data submissions from
specialty societies are voluntary and therefore unlikely to be
comprehensive. In addition, the PEAC process concluded in March 2004
because, according to AMA representatives, it had successfully completed
its work. CMS indicated that AMA's ongoing resource review committee would
update estimates for new or revised services. While CMS officials told us
they believe they can complete the review as required by 2007, they have
not laid out a plan to ensure that the necessary practice expense data are
available.

We are recommending that the CMS Administrator consistently assess the
accuracy of all supplemental data submissions, modify the assessment of
representativeness to ensure that supplemental data submissions better
reflect the variation in practice expenses within a specialty, and adjust
the precision requirement so that supplemental data submissions that would
improve the information currently used to set fees are accepted; base
changes to resource estimates for individual services on sufficient data
analysis and a documented and transparent rationale; and develop and
implement a plan to acquire representative data on total practice expenses
and the resources required for individual services. In commenting on a
draft of this report, CMS agreed with the need for a plan but said that it
had substantial concerns with our report. CMS stated that the agency
already conducted or planned to conduct most actions we recommended. We do
not agree that CMS has taken actions that obviate the need for our
recommendations; however, we have revised our report to reflect CMS's
recent actions. AMA did not comment on our recommendations. It agreed that
the PEAC process had improved resource estimates for individual services
but objected to our conclusions that CMS had not always provided adequate
justification for making changes and that this reduced physician
confidence in the process.

  Background

Practice expense payments under Medicare's physician fee schedule are
based on estimates of total practice expenses for each specialty and
estimates of the resources required for individual services. The adequacy
and appropriateness of fees are important to ensure Medicare beneficiary
access to physician services. If fees for a particular service are too
low, physicians may choose not to provide this service, which may limit
Medicare beneficiary access. If fees are too high, the Medicare program
will be wasting scarce resources. Determining the appropriateness of
physician fees is particularly difficult with regard to practice expenses.
The total expenses of operating a practice vary significantly, depending
on the specialty, organization of the practice, and services provided.
Further, these total expenses must be allocated to over 7,000 individual
services, and the expenses associated with individual services cannot be
easily identified because a large share of practice expenses, such as rent
and office equipment, are not associated with the delivery of any given
service but are incurred across all services provided by the practice. In
addition, the resources involved in delivering certain services may be
expected to shift over time with technological innovations or as wages
change for clinical staff. Every year, approximately 200 to 300 service
codes are added to the fee schedule, which could change resource
allocations for other services. The uncertainty of these considerations
underscores the importance of the method CMS employs to refine and update
the estimates underlying practice expense payments.

    SMS Survey Used to Estimate Specialties' Total Practice Expenses

HCFA derived its original estimates of total practice expenses for each
specialty using data from AMA's annual SMS surveys from 1995 through 1997.
The SMS survey, which was not specifically designed for this purpose,
gathered a broad range of information about economic and other
characteristics of physician practices and included questions on the
number of patient visits, medical practice revenues, and professional
expenses. The survey sample was randomly drawn from the AMA Physician
Masterfile, the most comprehensive available listing of physicians
practicing in the United States. Other health care professionals (such as
physical therapists or optometrists) paid under the physician fee schedule
were not included in the survey sample.

We have previously noted several potential problems with using SMS data to
estimate total practice expenses across all specialties. 12 First, the

12

GAO/HEHS-99-30 and GAO/HEHS-02-53.

    Physician Specialty Societies May Submit Supplemental Data on Total Practice
    Expense Estimates

reported practice expenses may not have been representative of all
physicians in some specialties because of a limited number of respondents.
Even though AMA adjusted the survey results to minimize the effects of
responding physicians who may not have been representative of all
physicians in a specialty, the number of respondents may have been too
small to ensure representative estimates. 13 For instance, the 1995
through 1997 SMS data HCFA used for oncologists were based on 27
respondents, and the data for allergists/immunologists were based on 31
respondents. Second, the SMS survey only distinguished among 26 major
physician specialties, while Medicare recognizes over 65 physician and
other health care professional specialties. Thus, HCFA had to use the
practice expenses of the major physician specialties as proxies to
represent the expenses of smaller specialties or other health care
professionals, even though their practice expenses might not have been
similar. 14 Third, the reported expenses in the SMS survey included items
that were not in Medicare's definition of practice expenses. For example,
some oncology practice respondents included chemotherapy drugs in their
supply expenses. Such expenses need to be excluded from estimates of
practice expenses in setting Medicare fees because Medicare pays for them
outside of the physician fee schedule; however, there was no way for CMS
to do this accurately with available data.

As the physician fee schedule was implemented, Congress required CMS to
establish a process to accept specialty-supplied total practice expense
data that could supplement the SMS survey data. Any specialty society may
submit data for CMS to consider in refining the physician fee schedule.
CMS evaluates the supplemental data collection method and the survey
respondents to ensure that they meet the criteria used in its review
process for acceptance. If CMS accepts a specialty society's submission,
the data are blended with the existing SMS data used to estimate that
specialty's practice expense payments, although for some nonphysician
specialties that were not represented in the original AMA survey, the

13

In making these adjustments, AMA considers characteristics such as AMA
membership, physician gender, years since the physician graduated from
medical school, physician membership in a medical specialty organization,
and board certification status.

14

Total practice expense estimates for smaller specialties or subspecialties
were based on practice expense data from the major specialty that was the
"closest fit." For example, data from internal medicine practices were
used to estimate the expenses for practices from the subspecialties of
internal medicine, such as nephrology (the medical specialty concerned
with kidney function and disease) or infectious diseases.

supplemental data replace the existing SMS data. 15 To be considered for
changes to the following year's fee schedule, supplemental data must be
submitted by March 1 of the preceding year. The last year that CMS will
accept such submissions is 2005.

CMS's criteria for acceptance of supplemental data govern the data
collection method and the survey respondents (see table 1). To collect the
data, a contractor experienced with the SMS survey (or other national
survey of physicians) must use an instrument based on the SMS survey
instrument and protocols. 16 The surveyed physicians must be randomly
selected from the AMA Masterfile or, for nonphysician specialties, from a
nationally representative listing of practitioners. 17 The names of the
physicians contacted for the survey must be kept confidential so no
interested parties can contact them about the survey.

15

The supplemental data have also replaced the original SMS data for two
physician specialties-oncology and cardiothoracic surgery.

16

For example, the instrument must request expense data for the categories
that CMS uses in establishing Medicare's practice expense payments and
must use SMS definitions of expenses and hours worked.

17

CMS allows specialties to use a stratified sample (that is, a specialty's
practices may be divided into subgroups from which random samples are
drawn) to help ensure that the responding practices are representative.
Stratification allows more follow-up to encourage participation among
subgroups with low response rates.

Table 1: CMS Criteria for Evaluating Specialty Society Supplemental Data
Submissions

                                  CMS criteria

                                Data collection

                   Survey instrument Is based on SMS survey.

Survey administration Is conducted by experienced contractor. Uses SMS     
                         protocols. Keeps sample member identity              
                         confidential.                                        
Sample selection      Is randomly drawn from the AMA Masterfile of         
                         physicians or from a nationally representative       
                         listing of practitioners for nonphysician            
                         specialties.                                         
                         May be a stratified sample with random selection     
                         within each stratum.                                 
Survey respondents    

Representativeness of Must have a high response rate, or respondents must

responses have the same characteristics as all physicians in the specialty
or responses must be weighted to reflect the overall composition of the
specialty.

Precision of responses Estimates must have an error rate of no more than
plus or minus 15 percent of the mean.

Sources: 67 Fed. Reg. 43,555 - 43,557 (2002) (interim final rule with
comment period) and 67 Fed. Reg. 79,971 - 79,972 (2002) (final rule with
comment period).

The supplemental data survey respondents must be representative of the
entire specialty, as demonstrated by a high response rate or by the
respondents' having the same characteristics as all physicians in the
specialty. 18 The number of respondents must be sufficient so that the
estimated expenses comply with a precision criterion. Specifically, the
estimates must have an error rate of no more than plus or minus

A specialty may show that the physicians who did not respond were not
different from those who responded with regard to factors affecting
practice expenses. Alternatively, the estimates could be adjusted to
reflect the differences between the respondents and all practitioners in
that specialty. For example, if solo practitioners represent 20 percent of
all physicians within a specialty but represent 40 percent of the
physicians responding to the survey, responses from the solo practitioners
would be weighted according to their representation in the specialty.

15 percent. 19 The supplemental data from a typical specialty need about
140 usable responses for the estimates to meet the precision criterion. 20

Six specialties have submitted supplemental data, and CMS accepted three
of these submissions (see table 2). 21 The data from vascular surgery met
the criteria and were accepted for use in establishing the practice
expense payments. The data from physical therapy were initially rejected
because they did not meet the precision criterion. That criterion was
relaxed, however, in June 2002, and the physical therapy submission was
accepted because the data met the new requirements. CMS deferred
acceptance of data submitted by oncology in 2002. After the agency
resolved its concerns about the accuracy of the data, it accepted the
submission.

19

The estimated average practice expenses from the supplemental surveys must
have a margin of error not greater than 15 percent of the estimated
average, at a 90 percent confidence level. A 90 percent confidence level
means that there is a 90 percent probability that the actual average falls
within plus or minus 15 percent of the estimated average. The precision
criterion had originally required a margin of error of no more than plus
or minus 10 percent of the estimated average, but this was relaxed in June
2002. As a result, the number of responses needed to meet this criterion
was reduced by about half.

20

This estimate is based on the amount of total practice expense variation
exhibited across all the practices included in the SMS survey. Small,
homogeneous specialties with less variation across their practices will
require fewer survey responses, whereas specialties with wide variation in
their practice expenses will require more.

21

Since we sent this report to CMS for comment on June 15, 2004, CMS has
posted information on its Web site about four additional supplemental data
submissions. Three specialties' data met the criteria: CMS indicated that
it would accept the data from pathology for use in the 2005 practice
expense methodology and stated that it would wait to accept the data from
cardiology and radiology, at the specialties' request, until technical
issues about the practice expense methodology have been resolved. CMS
rejected data from the fourth specialty, radiation oncology, because they
did not meet the precision criterion.

    Expert Panels Establish and Refine Resource Estimates for Individual
    Services

Table 2: Supplemental Data Submissions by Specialty, CMS Decision, and
Reasons for Rejection, 2000 through 2002

                  Specialty CMS decision Reason for rejection

                                2000 submissions

Physical therapy             Rejected         Precision criterion not met. 
Vascular surgery             Accepted      
2001 submissions                           
Physical therapy             Rejected         Precision criterion not met. 

Optometry                 Rejected        Precision criterion not met.     
Pediatrics                Rejected      SMS protocols and survey not used; 
                                            sample was not representative.    
2002 submissions a                     
Physical therapy b        Accepted     
Oncology                  Accepted     
Cardiology                Rejected      SMS protocols and survey not used. 

c

Pediatrics Rejected SMS protocols and survey not used; sample was not
representative.

Sources: GAO analysis of the annual reports prepared by CMS's contractor:
The Lewin Group, Recommendations Regarding Supplemental Practice Expense
Data Submitted for 2001 (Falls Church, Va.: 2000); The Lewin Group,
Recommendations Regarding Supplemental Practice Expense Data Submitted for
2002 (Falls Church, Va.: 2001); and The Lewin Group, Recommendations
Regarding Supplemental Practice Expense Data Submitted for 2003 (Falls
Church, Va.: 2002).

a

The precision criterion was relaxed in June 2002.

b

The American Physical Therapy Association resubmitted the data it had
submitted in 2001. These data met the relaxed precision criterion.

cPediatrics resubmitted the data it had submitted in 2001.

To develop the original estimates of the resources required for individual
services, HCFA convened 15 specialty panels composed of physicians,
nurses, and practice administrators. These clinical practice expert panels
(CPEP) estimated the amount of direct expenses, such as clinical labor,
medical equipment, and medical supplies, associated with providing each
service to the typical patient. 22 In general, the panel for a particular
specialty included clinicians from that specialty who reviewed the
services that its physicians typically provided. AMA, some specialty
societies, and some researchers who specialize in physician reimbursement
issues

22

Indirect expenses, or overhead-administrative labor, office expenses, and
other expenses-are allocated to specific services in proportion to the
direct expenses and physician work involved in providing that service.

Page 11 GAO-05-60 Medicare Physician Practice Expenses

supported using the panels' estimates of service-specific resources to
establish the practice expense payments, but other specialty societies
noted some concerns. 23 They stated that panel members did not represent a
cross section of physician practices (by size or urban and rural location)
or all types of physicians who provided a particular service. They also
stated that the panels used differing assumptions about and definitions of
the resources required for providing similar services, resulting in
inconsistent estimates across panels.

In 1999, AMA convened the PEAC as an expert panel to refine the resource
estimates for individual services. The PEAC had representation from all
major medical specialties and rotating membership for smaller
subspecialties. CMS representatives also participated, as observers, in
the PEAC meetings. The PEAC reviewed the resource estimates for
approximately 6,500 services from 1999 through March 2004, which account
for close to 90 percent of total Medicare physician payments. It initially
focused on high-volume services for each specialty, "families" of similar
services (for example, an endoscopy procedure without biopsy, with biopsy,
with removal of a single tumor, or with removal of multiple tumors are
considered a family of endoscopy services), and services that specialty
societies believed had inaccurate estimates. After completing its review,
the PEAC made recommendations to CMS, through AMA's ongoing physician
payment review committee, about modifications to service resource
estimates. 24

The PEAC review relied on data from specialties on the resources required
to provide the specialties' services. Once a service or family of related
services was identified for refinement by the PEAC, specialties that
normally provide these services gathered data on the resources needed to
furnish each service to a typical patient, such as the time a nurse spends
with a patient and the supplies and equipment used. 25 AMA provided the
specialty societies with background materials, such as the current

23GAO, Medicare: HCFA Can Improve Methods for Revising Physician Practice
Expense Payments, GAO/HEHS-98-79 (Washington, D.C.: Feb. 27, 1998).

24

This committee is known as the RVS Update Committee (RUC).

25

A specialty society can gather these data using a panel of experts or a
survey of the specialty's practitioners. If data are collected through a
survey, the survey sample size, response rate, and distribution of
respondents by geographic setting and type of practice (single-specialty,
multispecialty, independent, or hospital-based) have to be submitted with
the proposed resource estimates.

resource estimates for the service and any estimates the PEAC had
previously approved for individual tasks or supplies involved in
performing the service. 26 The specialty society then presented the PEAC
with its proposed resource estimate for a service, a description of how
the estimate was developed, and a list of the tasks included in the
estimate. 27

The PEAC reviewed the resource estimate in a two-step process. First, a
subgroup of the PEAC examined the data gathered by the specialty, assessed
whether the resource estimate for a service was reasonable and comparable
to those for similar services, and voted on whether to endorse the
resource estimate. The subgroup recommended that the full PEAC approve the
estimate, consider modifying it, or request additional data. Second, the
full PEAC made its decision, either approving the specialty's estimate or
a modified version of it or delaying its decision until it received
additional data. Official recommendations to CMS required the approval of
two-thirds of the PEAC members.

CMS made all final decisions about changes to the resource estimates that
were used in calculating physician fees, including its own changes to
original or existing resource estimates and those recommended by the PEAC.
Its approach to reviewing PEAC recommendations varied: CMS staff made site
visits to observe services being performed or consulted the medical
directors of insurance companies to learn how other payers established
payments for a service. CMS modified estimates for different reasons,
including to make them consistent with estimates for other services and to
remove expenses that were accounted for in other Medicare payments. For
example, CMS changed the PEAC-recommended time spent by a nurse providing
patient education and counseling for one service to be consistent with the
time for this task already assigned to a comparable service. In the
earlier years of the process, HCFA rejected or modified certain
recommendations. In 2003, CMS accepted all of the PEAC's recommendations.
AMA stated that the PEAC process was concluded in March 2004 because the
PEAC had completed its work of reviewing most services. In May 2004, a
representative from AMA told us

26

For example, the PEAC established 3 minutes as the standard time for
clinical staff to obtain between one and three patient vital signs before
the physician sees the patient for an office visit.

27

The tasks included might be completing paperwork, explaining the procedure
to the patient, obtaining the patient's consent, calling in prescriptions
to a pharmacy, and arranging follow-up visits.

Page 13 GAO-05-60 Medicare Physician Practice Expenses

  Certain Aspects of CMS's Review Are Problematic

that although the PEAC had been officially discontinued, a committee would
be appointed to refine the resource estimates for the approximately 200
services that had not been reviewed by the PEAC.

Although a review of specialty-provided supplemental data from surveys on
total practice expenses is necessary to protect against the risk of bias
inherent in a voluntary submission process, because of certain aspects of
its review, CMS may not be accepting the best available supplemental
practice expense data. In assessing whether the respondents to the survey
for supplemental data are representative of all physician practices within
a specialty, CMS may not be examining practice characteristics that
adequately reflect the range of practice expenses within a specialty, such
as whether a practice is single- or multispecialty or hospital-based. In
addition, CMS's precision requirement for estimates based on the submitted
data has led the agency to reject some supplemental submissions that could
improve upon the information it currently uses to establish estimates. CMS
also elected to assess the accuracy, or reasonableness, of a recent
submission by comparing it with data from other sources but has not
indicated whether it will consistently assess the accuracy of all
supplemental data submissions. Moreover, CMS ultimately accepted practice
expense data in this submission that were much higher than comparable
benchmark data, which is problematic. The data were deemed representative,
yet were influenced by high-cost practices, raising concerns about CMS's
test for representativeness.

    Review of Supplemental Data Is Necessary

A review of supplemental data submissions is necessary because medical
specialty societies voluntarily gather and submit these data, and the data
are not audited or verified before being used to establish fees. In
addition, because the specialty societies have an incentive to engage in
this endeavor only if they believe the practice expense estimates used to
establish their Medicare fees are too low, the supplemental submission
could be biased if a disproportionate share of those who complete the
survey represent high-cost practices. CMS has established review criteria
regarding the data collection method and the respondents to help guard
against any perceived or actual bias in the estimates based on these data.

CMS's review of the data collection method-the survey instrument, survey
administration, and sample selection-helps ensure that supplemental data
can be used to update practice expense estimates. For example, by
requiring that the survey instrument be based on the SMS survey
instrument, CMS ensures that the definitions of the various

                           Certain Aspects of Review
                            Process Are Problematic

categories of expenses between supplemental and previously used data are
consistent. 28 CMS's requirement that the supplemental data submissions be
based on the same survey administration protocols as the SMS survey
increases the comparability of the supplemental data to the SMS data.

CMS's review of respondent characteristics is necessary to ensure that the
data are representative of the average practice expenses within a
specialty and are not distorted by a disproportionate share of respondents
of one type or another. If the response rate is high, and the sample is
randomly drawn from a nationwide listing of the physician specialty, the
submissions are assumed to be representative of the entire specialty. If
the response rate is low, CMS evaluates whether the respondents are
representative of the specialty by comparing respondent characteristics
with characteristics of the entire specialty. 29 In 2002, CMS also
reviewed a data submission to determine whether the reported values were
reasonable, as a test for accuracy. Assessing the accuracy of the data, by
comparing them with other benchmarks or norms, is important because
establishing the representativeness of the respondents and the precision
of the data do not guarantee that the responses themselves are accurate.

In evaluating whether supplemental data submissions are representative of
the entire specialty, CMS examines practice characteristics of the
respondents that do not necessarily reflect the variation in the
specialty's practice expenses. CMS compares its survey respondents with
all physician practices within a specialty using characteristics that AMA
used, such as physician gender, years in practice, and membership in a
medical specialty organization, to adjust responses to produce published
reports on the nation's physicians. CMS uses these characteristics to
ensure that supplemental data submissions are consistent with SMS data
already collected, but other characteristics may better reflect the
potential range and distribution of practice expenses for the specialty.
For example,

28

Supplemental data surveys may include questions not included in the SMS
that are designed to provide previously unavailable information needed for
the practice expense estimates. For example, the supplemental data survey
might ask for information on the cost of separately reimbursed supplies,
such as drugs for oncology and optical materials and supplies for
optometry, which should be excluded from the practice expense estimates.
CMS must approve these additions.

29

Most of the specialty societies' supplemental data submissions have been
based on surveys with response rates below 20 percent.

hospital-based practices may have lower practice expenses than independent
practices because hospitals may pay for clinical staff, supplies, and
equipment needed to provide a service, while in an independent practice
the physician bears these expenses. 30 For some specialties, expenses for
practices that are independent can be as much as 50 percent higher than
those for practices that are hospital-based. If a supplemental data
submission includes a disproportionate share of hospital-based practices
compared to the specialty as a whole, then the total practice expense
estimates for the specialty may be too low; if the submission includes a
disproportionate share of independent practices, the total practice
expense estimates for the specialty may be too high. Thus, practice
expense payments, which are based in part on these total practice expense
estimates, may also be correspondingly either too low or too high. 31

In addition, CMS may be rejecting data that could improve estimates. In
rejecting data that do not meet the agency's precision criterion, even
though they are deemed representative, CMS ignores data that could provide
a better estimate of the specialty's practice expense data than the data
it currently uses, particularly the proxy data used for nonphysician
specialties. For example, in 2001, the American Optometric Association
(AOA) collected supplemental practice expense information from
optometrists. CMS rejected the data because they did not meet the
precision criterion, although its contractor recommended that the data be
accepted because they were valid and the best available information on
practice expenses of optometry practices. 32 Optometrists' practice
expenses were originally established with the practice expenses of the
average physician because optometrists were not included in the SMS
survey. Supplemental data submitted by the specialty would be likely to

30

In a 2000 report, CMS's contractor acknowledged that the characteristics
used to make the data representative of all physicians in a specialty did
not necessarily relate to practice expenses because the SMS survey was not
designed to calculate practice expense payments. The contractor suggested
that characteristics such as the size of a practice and whether it is a
single- or multispecialty practice would be more relevant to consider. The
Lewin Group, An Evaluation of the Health Care Financing Administration's
Resource Based Practice Expense Methodology (Falls Church, Va.: 2000).

31

CMS examined whether practices were independent or hospital-based to
determine representativeness in one of the four recent submissions, and
used other characteristics, such as the type of services provided, for
another two of the four submissions.

32

The Lewin Group, Recommendations Regarding Supplemental Practice Expense
Data Submitted for 2002 (Falls Church, Va.: 2002).

improve the estimates because they are specific to the specialty, whereas
the practice expenses of the average physician would be less likely to
closely match optometrists' practice expenses. Supplemental data also
could improve the estimates for those specialties with few respondents in
the SMS survey, as long as the data were from a representative sample of
practices.

In addition to assessing representativeness and precision, CMS assessed
the accuracy of a 2002 submission, although it has not indicated whether
it will consistently assess the accuracy of all submissions. 33 CMS
delayed accepting the 2002 submission from the American Society of
Clinical Oncology (ASCO) because ASCO's estimates appeared to be too high.
CMS assessed the accuracy of this submission by comparing the supplemental
data with data for similar specialties and from other sources to see
whether the submitted data appeared reasonable. The comparison with
benchmark data enabled CMS to evaluate aberrant data that had passed the
representativeness and precision tests. Salaries in the supplemental data
were more than four times higher for clerical staff than salaries reported
in Bureau of Labor Statistics data; and salaries for clerical staff in the
oncology submission were even higher than some of the salaries for
clinical staff that ASCO reported. These comparisons indicated that the
supplemental data might not accurately represent oncologists' practice
expenses. CMS later accepted the submission for use in setting 2004
payments without revisions after ASCO explained that the differences were
due to certain high-cost practices among the respondents in the sample.

CMS's acceptance of the ASCO data raises concerns about the review
process. First, the respondents in the ASCO survey were deemed
representative, yet the reported costs were much higher than benchmark
data, underscoring the concern that CMS's assessment of representativeness
is problematic. Second, the basis on which CMS accepted the ASCO data
after assessing its accuracy is problematic because the explanation that
the estimates were influenced by high-cost practices should have
increased, not alleviated, CMS's concerns about the representativeness of
the data. Our replication of the hourly practice expense calculations and
discussions with CMS's contractor led us to conclude that the average
hourly practice expense estimates were higher when the few practices with
high costs were included.

CMS also assessed the accuracy of three of the four recent submissions.

  Updating Process Improved Resource Estimates for Individual Services, Although
  Certain CMS Changes Were Made without Adequate Justification

Stakeholders agree that the PEAC improved resource estimates for
individual services, and although CMS used almost all of the
PEACrecommended estimates, it at times used estimates that differed from
PEAC recommendations and made other changes to estimates without adequate
justification. CMS relied on the PEAC's recommendations to update the
estimates. The PEAC's process for developing estimates became increasingly
systematic from its inception in 1999, and its recommendations were widely
accepted by specialty societies and AMA as leading to improved resource
estimates for individual services. This acceptance stemmed in part from
the broad representation on the PEAC of multiple specialties and a cross
section of physicians and from the PEAC's standardization of estimates for
tasks that are common to many services. CMS implemented almost all of the
PEAC-recommended estimates, but it has modified certain original estimates
and PEACrecommended estimates. However, CMS did not always use adequate
supporting data or explain the rationale for its changes, which has
reduced some physician specialties' confidence in the PEAC process and the
resulting estimates.

    Stakeholders Agree that PEAC Improved Estimates

AMA and CMS officials, as well as representatives from specialties told us
that they believe the PEAC improved the estimates of the resources
required to furnish individual services. These stakeholders said the PEAC
process for developing estimates became more systematic from its inception
in 1999. The PEAC established standard estimates for the clinical staff
time, equipment, and supplies needed to perform certain activities or
tasks common to many services, such as taking vital signs, whereas
previously estimates for the same task may have varied by type of service
or specialty. The PEAC's multispecialty representation further
standardized estimates because many of the tasks, such as administration
of an injection, are performed by multiple specialties. A specialty could
receive PEAC approval to deviate from an estimate for a service only if
the specialty satisfied the PEAC that the existing estimate was not
appropriate for that service because the service the specialty provided
was different from other services that appeared comparable. In addition,
the PEAC adopted rules about how estimates were to be established. For
example, the PEAC provided guidance to specialty societies on how to
gather data, such as through expert panels or a survey, and on the
information that had to accompany any recommendation to change a resource
estimate, such as a detailed listing of tasks performed by nurses in
providing a service. As a result of these changes in the PEAC process, CMS
accepted most of the PEAC's recommended estimates without modification in
recent years.

    CMS Changed Certain Estimates without Adequate Justification

Although CMS implemented almost all of the PEAC's recommended resource
estimates for individual services, it at times made changes to
PEAC-recommended estimates and to the original physician panel estimates.
Some of these changes were to estimates that conflicted with Medicare
coverage rules or to make estimates consistent across services. For other
changes, however, CMS did not always use adequate supporting evidence. For
example, CMS removed from the original resource estimates the cost of
clinical staff time associated with certain procedures performed by
specific surgical specialties, basing its decision to do so on inadequate
data. Certain surgical specialties, primarily thoracic surgeons, provided
CMS data showing that they routinely bring their own clinical staff to the
hospital to help in the operating room and provide other assistance on
patient floors and stated that these expenses should be reflected in their
resource estimates for individual services. 34 CMS rejected these claims
and removed the expense of clinical staff time from these surgical
specialties' resource estimates for all services provided in the hospital.
CMS officials claimed that Medicare paid for these expenses through other
payment mechanisms. CMS also stated that it removed this expense on the
basis of evidence that most physicians across all specialties combined did
not bring staff with them to the hospital. Although CMS later asked the
HHS OIG to assess whether specific specialties typically brought clinical
staff to the hospital, it did not reverse its decision in the meantime.
The OIG subsequently issued a report indicating that it was a typical
practice for certain surgical specialties to bring clinical staff to the
hospital. 35 However, the OIG did not analyze whether other Medicare
payments account for the expenses associated with clinical staff
accompanying physicians in the hospital setting.

In addition, CMS did not always make public its reasons for making changes
to PEAC recommendations. In our meetings with specialty representatives,
some noted that CMS did not provide adequate explanations for some of its
changes to PEAC recommendations. For example, in reducing the time
established by the PEAC for radiation therapists to deliver a specific
radiation therapy, CMS stated that the

34

PEAC representatives told us that the thoracic surgeons did not formally
present to the PEAC their resource estimates for services that include the
costs of clinical staff they bring to the hospital because CMS officials
said the agency would not accept resource estimates that included these
expenses.

35

Medicare Payment for Nonphysician Clinical Staff in Cardiothoracic
Surgery, April 2002.

Page 19 GAO-05-60 Medicare Physician Practice Expenses

  CMS Has Not Specified a Plan for Developing Appropriate Data to Update the Fee
  Schedule

service commonly takes less than the recommended time and requires fewer
therapists to perform. CMS officials told us that they based their
conclusion on interviews with practicing physicians and a site visit to
witness the procedure being performed, neither of which was mentioned in
the public notice. 36 Physicians told us that they did not understand why
CMS did not explain these decisions, since CMS representatives
participated in all of the PEAC meetings and had the opportunity to raise
concerns there. Moreover, they said that CMS's inadequate explanation for
certain decisions lessened their confidence in the process used to develop
the estimates.

CMS has not outlined a plan for obtaining and using the necessary data to
update practice expense resource estimates for all specialties. Such a
plan would include data collection, evaluation, and incorporation. CMS
officials told us they are in the process of obtaining a contract to
collect total practice expense data from the major physician and
nonphysician specialties, although it has not provided specifics. CMS has
indicated that the ongoing AMA committee-the RUC-will develop resource
estimates for new and revised services. Although CMS officials told us
that they believe they can complete data collection and review by 2007 as
required, they did not identify nor outline a plan to implement the
actions needed to ensure that CMS will be able to comply with the mandate
to update the fee schedule at least every 5 years.

CMS cannot rely on its previous approaches to complete this review. Data
sources CMS used to refine the fee schedule no longer exist or are
insufficient. The SMS survey, which was the source of total practice
expense data for all major specialties, was last conducted in 1999, and a
modified version of that survey fielded in 2001, called the Patient Care
Physician Survey, did not collect data detailed enough for this purpose.
Data submissions from specialty societies are voluntary and therefore
unlikely to be comprehensive. In March 2004, AMA discontinued its
sponsorship of PEAC after it had concluded its review of over 6,500
physician services. AMA told us that the RUC would review resource
estimates for new and revised services and that there would be no need for
a detailed review of the services that had been reviewed by the PEAC.

36See 66 Fed. Reg. 55,310 (2001).

Updating estimates of total practice expenses and resource estimates for
individual services is increasingly important given the ongoing
introduction of new medical services and technologies, and changes in
wages. The attendant resource requirements for individual services can
change significantly when, for example, a new procedure augments or
replaces a traditional procedure, resulting in changes to the staff or
equipment needed to provide the service. Similarly, a new pharmaceutical
can change the treatment for a condition, resulting in different resource
requirements for caring for the typical patient.

CMS's collaboration with physician specialty societies to update total
practice expense estimates and resource estimates for individual services
has helped ensure the appropriateness of fees and physician acceptance of
Medicare's payment approach. However, CMS's updates to estimates of total
practice expenses using supplemental survey data that do not always
represent the range of practices within a specialty may result in Medicare
payments that either overcompensate practices for their costs or
undercompensate practices, which could discourage physician participation.
In addition, CMS's deviation from its own process in evaluating resource
estimates for individual services has caused some physician and specialty
societies to question the soundness of the process and CMS's decision
making.

Congress recognized the importance of continually updating the fee
schedule by mandating that CMS review the fee schedule at least every 5
years. The processes CMS had in place to update total practice expense
estimates and estimates of the resources required for individual services
were not suitable for the comprehensive update required for this review.
While CMS has taken a first step at collecting data for this review,
without a detailed plan, CMS may not be able to gather and refine
representative data necessary to update the fee schedule in a timely
manner and ensure its integrity over time.

                                  Conclusions

Recommendations for Executive Action

o

To improve and update the physician fee schedule, we recommend that the
CMS Administrator take the following three actions:

Consistently assess the accuracy of all supplemental data submissions on
total practice expenses, modify the assessment of representativeness such
that the data submitted by specialties better reflect the variation in
practice expenses within a specialty, and adjust the precision requirement

Page 21 GAO-05-60 Medicare Physician Practice Expenses

so that supplemental data submissions that would improve the
information currently used to set fees are accepted.

     o Base any revisions to the resource estimates for individual services
       on sufficient data analysis and a documented and transparent
       rationale.
     o Develop and implement a plan to update the fee schedule in a timely
       manner with representative data on total practice expenses and the
       resources for individual services so that the fees appropriately
       reflect changes in medical services and the costs of their delivery.

  Agency and Industry Comments and Our Evaluation

We received comments on a draft of our report from CMS and AMA. CMS
indicated that it routinely conducted, or was in the process of
conducting, most of the actions we recommended. However, it stated that it
had substantial concerns with our report. AMA agreed in general with our
findings but took issue with some of our conclusions. AMA also conveyed
comments from ASCO, which disagreed with our conclusion regarding CMS's
acceptance of ASCO's supplemental survey data. CMS and AMA also provided
technical comments, which we incorporated as appropriate. (We have
reprinted CMS's comments in app. III but have not included the attachment
pages reprinting statements from specialty societies and detailing
technical comments, nor have we reprinted the technical comments submitted
by AMA.)

To address our first recommendation, that CMS make revisions to its
assessment of supplemental data submissions, CMS responded that its
contractor consistently assessed the representativeness of supplemental
data submissions. CMS noted that its contractor's assessments of surveys
submitted in 2004 from three specialties included as "a fundamental
feature" a review of whether a physician practice was hospital- or
officebased. The contractor's report was made available on CMS's Web site
after our report went to CMS for comment. While we applaud CMS's use of
the practice location characteristic in its assessment of recent surveys,
we believe that CMS should conduct an analysis to determine whether there
are other characteristics that could be used to better describe the
potential variation in practice expenses within a specialty.

CMS said it rejected AOA's data on the basis of the precision requirement,
noting that (1) the data's representativeness was questionable because the
data did not include responses from non-AOA members and (2) the inclusion
of the data would have made little difference to the final practice
expenses because the AOA per hour data were very similar to the data
currently used. We note that CMS's contractor had recommended that CMS
accept the AOA data because they were "valid and the best available
information on practice expenses for optometry practices," and we have
added this information to the report. We believe that including the data
from the specialty, rather than relying on the use of proxy data, would
improve the estimates. Our concern with the precision requirement is that
in applying it CMS may reject data that are more representative than data
it currently uses. If data were deemed representative on the basis of
characteristics that describe the variation in practice expenses across
practices, a precision requirement might not be needed.

In assessing ASCO's 2002 submission for accuracy, CMS stated that its
acceptance of the data complied with requirements in the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003 that CMS use
supplemental survey data meeting certain requirements, which CMS says
these data met. CMS added that it was satisfied with ASCO's explanation
that the anomalous results were caused by a few extreme survey responses
and that elimination of these extreme responses had little effect on the
hourly practice expense estimates. We were able to obtain the ASCO survey
data only after our draft report went to CMS and AMA for comment. Our own
analysis of the ASCO data and discussions with CMS's contractor led us to
conclude that elimination of the extreme values would have had a
significant effect on the hourly practice expense calculations, and we
have revised the report to reflect this. Although CMS considered the data
"anomalous," CMS accepted them because they met the representativeness
criterion as required by law. CMS's acceptance of these data raises issues
about the review process. We are concerned that the practice
characteristics CMS uses to assess representativeness may not describe the
range and distribution of practice expenses. CMS was silent regarding our
recommendation that it consistently assess supplemental data submissions
for accuracy.

In response to our second recommendation, that CMS base revisions to
resource estimates for individual services on sufficient data analysis and
a documented and transparent rationale, CMS stated that the vast majority
of these revisions had been based on PEAC recommendations and that on the
rare occasions when it disagreed with the PEAC, CMS documented its
rationale in the proposed or final rules. As we noted in the draft report,
CMS implemented almost all of the PEAC-recommended estimates without
change and it generally documented its rationale in instances in which it
did make changes to PEAC-recommended or original estimates. Also as noted
in the draft report, however, CMS did not always use adequate
justification when it made changes. For example, CMS based its decision to
remove from the original estimates the cost of clinical staff for all
services provided in the hospital on data from the American Hospital
Association survey pertaining to all specialties, rather than on evidence
pertaining to certain surgical specialties that claim that they routinely
bring their own staff to the hospital. CMS took issue with our statement
that its lack of supporting data or rationale in these cases has reduced
physician confidence in the PEAC process and in the resulting estimates,
and provided comments from six specialty organizations as evidence of
support for CMS's decision making regarding PEAC data revisions. As we
noted in the draft report, specialty societies and AMA told us they
supported the PEAC process. Nevertheless, other specialties conveyed their
concerns to us regarding the PEAC process.

CMS agreed with our recommendation that it needs to develop and implement
a plan to acquire representative data on an ongoing basis to update the
fee schedule. CMS indicated that it was in the process of obtaining a
contract to collect data for future updates to the practice expense
portion of the physician fee schedule and that the RUC would continue to
be involved in developing practice expense resource estimates for new or
revised individual services. We are encouraged by this new information
from CMS and have revised our finding and recommendation accordingly.
However, contracting for data collection, collecting and reviewing the
data, using the data in developing the fees, and addressing public
comments take time, making it imperative that CMS expedite these actions.
CMS needs to develop a plan to ensure that it can comply with the
congressional mandate to update the physician fee schedule at least every
5 years.

In its other comments, CMS took issue with our draft report's reference to
updating estimates of total practice expenses with data that are not
representative of the range of practices within a specialty, which, as we
stated in the draft report, either "overcompensate practices for their
costs and waste taxpayer dollars or undercompensate practices and
discourage physician participation." CMS stated that because the system is
budget neutral, any alternative would reduce payments to the
overcompensated specialty and raise payments to all other specialties.
Even within a budget neutral system it is wasteful to overcompensate for
some services. However, it was not our intention to imply that the system
was not budget neutral, and we have revised the report to avoid
misinterpretation.

AMA's comments covered the method for establishing total practice expense
estimates and resource estimates for individual services and included
specific comments it had received from ASCO. AMA commented that it had
advised CMS in the past that CMS's criteria for supplemental practice
expense data appeared to be appropriate. AMA also stated that it would be
inappropriate to use supplemental data that were significantly less
reliable and valid than the original SMS data. We concur with this
statement. AMA agreed with our conclusion that the PEAC process has
improved resource estimates for individual services. It objected to the
draft report's statement that AMA had discontinued sponsoring the PEAC as
a result of resource constraints and stated rather that the PEAC process
had concluded in March 2004 because it had successfully completed its
work. It also reported that it would continue to review, through the RUC,
the resource estimates for new or revised codes. Although AMA
representatives of the PEAC had told us that resource constraints had
contributed to their decision to discontinue the PEAC, we have modified
the report to indicate that the PEAC concluded its initial review of the
codes as of March 2004 and that the RUC will continue this review for new
or revised codes. AMA also objected to our conclusion that certain CMS
revisions to the PEAC recommendations were made without adequate
information, stating that this was unfair criticism of the process. As we
noted in the draft report, CMS accepted the majority of PEAC
recommendations, although there were instances in which it modified
earlier resource recommendations without using adequate information or
providing adequate explanation. Finally, AMA noted that CMS's
collaboration with physician specialty societies to update the practice
expense estimates does not help ensure the appropriateness of the fees
because the level of Medicare payments largely depends on other components
of the payment methodology. While it is true that other parts of the
payment method affect the final payment amounts, the practice expense
estimates remain an important determinant.

ASCO disagreed with our concerns about its supplemental survey data. It
reiterated that it had discussions with CMS regarding the few practices
with high costs for certain items that had no significant effect on the
average hourly practice expense estimates used in CMS's methodology. As
noted earlier, our replication of the hourly practice expense calculations
and discussions with CMS's contractor led us to conclude that including
the few practices with high costs did in fact raise the average hourly
practice expense estimates. We have revised the report to include this
information.

We are sending copies of this report to the Administrator of CMS and other
interested parties. We will make copies available to others upon request.
This report also is available at no charge on GAO's Web site at
http://www.gao.gov.

Please call me at (202) 512-7119 if you or your staffs have any questions.
Major contributors to this report are listed in appendix IV.

Laura A. Dummit Director, Health Care-Medicare Payment Issues

List of Committees

The Honorable Charles E. Grassley Chairman The Honorable Max Baucus
Ranking Minority Member Committee on Finance United States Senate

The Honorable Joe Barton Chairman The Honorable John D. Dingell Ranking
Minority Member Committee on Energy and Commerce House of Representatives

The Honorable Bill Thomas Chairman The Honorable Charles B. Rangel Ranking
Minority Member Committee on Ways and Means House of Representatives

Appendix I: Medical Specialty Societies Interviewed for This Report

We interviewed representatives from the following 32 medical specialty
societies:

American Academy of Dermatology American Academy of Family Physicians
American Academy of Neurology American Academy of Ophthalmology American
Academy of Otolaryngology - Head and Neck Surgery American Association of
Neurological Surgeons & The Congress of

Neurological Surgeons American Association of Vascular Surgery American
College of Cardiology American College of Emergency Physicians American
College of Obstetricians and Gynecologists American College of
Physicians-American Society of Internal Medicine American College of
Radiation Oncology American College of Radiology American College of
Rheumatology American College of Surgeons American Optometric Association
American Osteopathic Association American Physical Therapy Association
American Podiatric Medical Association American Psychiatric Association
American Society for Gastroenterology American Society for General Surgery
American Society of Anesthesiologists American Society of Clinical
Oncology American Society of Plastic Surgeons American Thyroid Association
American Urology Association College of American Pathologists Joint
College of Asthma, Allergy and Immunology Renal Physicians Association
Society of Thoracic Surgeons The Endocrine Society

                       Appendix II: Scope and Methodology

To evaluate the process that CMS uses to review specialty-submitted
supplemental practice expense data, we interviewed representatives from
medical specialty societies. We identified 50 medical specialty societies
by searching the Internet using AMA's categories of major specialties. We
contacted each group and met with representatives from the 32 specialty
societies that responded (listed in app. I). Using structured interviews,
we asked the specialty society representatives whether they were satisfied
that AMA Socioeconomic Monitoring System (SMS) survey data used to
estimate their specialty's total practice expenses were representative. We
obtained their views about whether the supplemental data submissions
improved the practice expense estimates and about CMS's process for
evaluating the data. We reviewed written materials provided by specialty
societies and followed up by telephone when necessary. We reviewed
relevant Federal Register documents to determine how CMS evaluated the
supplemental data submissions and reviewed CMS's decisions about whether
to accept the data. We interviewed CMS staff about the supplemental data
submission process and interviewed the contractor that CMS hired to
provide technical assistance to the specialty societies. We also reviewed
the contractor's report on the oncology data submitted by the American
Society of Clinical Oncology. 1

To evaluate the process that CMS uses to update resource estimates for
individual services, we asked the specialty society representatives about
the resource estimates developed by the clinical practice expert panels
(CPEP) and the refinement process used by the Practice Expense Advisory
Committee (PEAC). We asked for their views about the role CMS played in
the PEAC and any changes CMS made to the estimates. We also met with
representatives of AMA to determine AMA's views on the PEAC process. We
attended PEAC meetings and reviewed supporting materials provided by
specialties. To better understand the issue of physicians' use of clinical
staff in the inpatient hospital setting, we reviewed survey data and other
materials provided by the Society of Thoracic Surgeons. To determine
whether clinical staff time was included in the physician work component,
we analyzed detailed estimates from AMA's RVS Update Committee (RUC). We
reviewed the Department of Health and Human Services Office of Inspector
General (OIG) report, Medicare Payment for Nonphysician Clinical Staff in
Cardiothoracic Surgery, including

1

The Lewin Group, Recommendations Regarding Supplemental Practice Expense
Data Submitted for 2002 (Falls Church, Va.: 2001), and The Lewin Group,
Recommendations Regarding Supplemental Practice Expense Data Submitted for
2003 (Falls Church, Va.: 2002).

Page 29 GAO-05-60 Medicare Physician Practice Expenses Appendix II: Scope
and Methodology

analyzing the raw survey data upon which the report was based, and
discussed it with OIG staff. OIG indicated that its data reliability
checks were performed in accordance with generally accepted government
auditing standards. We interviewed CMS staff about the bases for their
decisions relating to changes to PEAC resource estimates. We attended
CMS's "Open Door Forum Meetings," during which physicians and other
clinicians discussed their concerns about fees and other issues related to
services provided to Medicare beneficiaries. We conducted a review of
relevant Federal Register documents to identify any decisions CMS had made
with regard to resource estimates.

To determine whether CMS will have the data needed for the mandated review
of the physician fee schedule at least every 5 years, we held discussions
with CMS staff.

We performed our work from November 2001 through December 2004 in
accordance with generally accepted government auditing standards.

Appendix III: Comments from the Centers for Medicare & Medicaid Services

    Appendix III: Comments from the Centers for Medicare & Medicaid Services
    Appendix III: Comments from the Centers for Medicare & Medicaid Services

                                  Now on p. 4.

    Appendix III: Comments from the Centers for Medicare & Medicaid Services
    Appendix III: Comments from the Centers for Medicare & Medicaid Services

                                 Now on p. 16.

                                 Now on p. 17.

    Appendix III: Comments from the Centers for Medicare & Medicaid Services

Now on p. 19.

Now on pp. 20-21.

                             Now on p. 21 and p. 5.

    Appendix III: Comments from the Centers for Medicare & Medicaid Services

Appendix IV: GAO Contact and Staff Acknowledgments

Laura A. Dummit, (202) 512-7119

  GAO Contact

Major contributors were Iola D'Souza, Elizabeth T. Morrison, and Gerardine
Brennan.

(290066)

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