Medicare Physician Payments: Need To Refine Practice Expense Values
During Transition and Long Term (Letter Report, 02/24/99,
GAO/HEHS-99-30).

Pursuant to a congressional request, GAO reviewed the Health Care
Financing Administration's (HCFA) ongoing efforts to develop
resource-based practice expense relative value units (RVUs), focusing
on: (1) whether the new methodology is an acceptable approach for
revising Medicare's fee schedule; (2) questions about the data,
assumptions, and adjustments underlying the new methodology that need to
be addressed during the 3-year phase-in period; and (3) the need for
future updates to the practice expense RVUs to reflect changes in health
care delivery and for ongoing assessments of the fee schedule's effect
on Medicare beneficiaries' access to physicians' care.

GAO noted that: (1) HCFA's new methodology represents an acceptable
approach for calculating RVUs; (2) HCFA relied on the best data
available for creating the new values: (a) a nationally representative
survey of physicians' practice costs; and (b) data developed by panels
of experts that identify the specific resources associated with
individual procedures; (3) HCFA's original and new proposals use these
data in similar ways to create the new RVUs; (4) a critical difference
is that the new methodology more directly recognizes the variation in
practice expenses among physicians' specialities in computing the RVUs;
(5) additionally, this methodology responds to several concerns GAO had
with the original one; (6) while HCFA's new methodology is acceptable
overall, certain questions about the data and underlying methodology
need to be addressed before the new RVUs are completely phased in; (7)
for example, the national practice expense survey database contains
limited data for some specialties and may lead to imprecise estimates of
their practice expenses; (8) for other specialities not included in the
survey database, HCFA had to use proxy information, the appropriateness
of which needs to be verified; (9) also, HCFA made certain assumptions
and adjustments without confirming their reasonableness; (10) for
example, HCFA adjusted the supply cost estimates for oncologists to
avoid paying them twice for chemotherapy drugs but HCFA has not yet
collected data to determine the appropriate size of the adjustment; (11)
to address these issues, HCFA needs a strategy for refining the practice
expense RVUs during the 3-year phase-in period that focuses on the data
and methodology weaknesses that have the greatest effect on the RVUs;
(12) however, HCFA has done little in the way of sensitivity analysis to
effectively target its refinement efforts; (13) additionally, HCFA has
not developed permanent processes for future updates and revisions to
the practice expense RVUs as new procedures are developed or methods of
performing existing procedures shift; and (14) finally, HCFA needs to
continue monitoring beneficiaries' access to physicians' care to ensure
that access is not compromised by past and ongoing changes to Medicare's
payments to physicians.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-99-30
     TITLE:  Medicare Physician Payments: Need To Refine Practice 
             Expense Values During Transition and Long Term
      DATE:  02/24/99
   SUBJECT:  Medical fees
             Health care programs
             Medical services rates
             Health care costs
             Medical economic analysis
             Data integrity
             Physicians
             Overhead costs
             Statistical methods
IDENTIFIER:  Medicare Program
             
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Cover
================================================================ COVER


Report to Congressional Committees

February 1999

MEDICARE PHYSICIAN PAYMENTS - NEED
TO REFINE PRACTICE EXPENSE VALUES
DURING TRANSITION AND LONG TERM

GAO/HEHS-99-30

Medicare Physician Fee Schedule

(101749)


Abbreviations
=============================================================== ABBREV

  AMA - American Medical Association
  BBA - Balanced Budget Act of 1997
  CPEP - clinical practice expert panel
  CPT - Current Procedural Terminology
  GPCI - geographic practice cost index
  HCFA - Health Care Financing Administration
  HHS - Department of Health and Human Services
  MedPAC - Medicare Payment Advisory Commission
  MGMA - Medical Group Management Association
  MVPS - Medicare Volume Performance Standard
  PPRC - Physician Payment Review Commission
  RUC - Relative Value Scale Update Committee
  RVU - relative value unit
  SMS - Socioeconomic Monitoring System
  SGR - sustainable growth rate

Letter
=============================================================== LETTER


B-280550

February 24, 1999

The Honorable William V.  Roth, Jr.
Chairman
The Honorable Daniel Patrick Moynihan
Ranking Minority Member
Committee on Finance
United States Senate

The Honorable Tom Bliley
Chairman
The Honorable John D.  Dingell
Ranking Minority Member
Committee on Commerce
House of Representatives

The Honorable Bill Thomas
Chairman
The Honorable Fortney H.  (Pete) Stark
Ranking Minority Member
Subcommittee on Health
Committee on Ways and Means
House of Representatives

In 1992, Medicare began using a fee schedule to pay physicians for
more than 7,000 procedures, ranging from a routine office visit to
surgical removal of a brain tumor.  The intent of this new payment
system was to base physicians' payments on the relative resources
used to provide a procedure rather than on the physicians' charges. 
In 1997, Medicare's physician fee schedule payments totaled about $43
billion.\1

To develop the fee schedule, each medical procedure is ranked on a
scale according to the amounts of three categories of resources used
to perform the procedure--physician work, practice expenses, and
malpractice expenses.\2 A fee schedule amount for each procedure is
computed by multiplying the sum of the procedure's three rankings,
known as relative value units (RVU), by a conversion factor that
translates RVUs into dollars.\3 Before January 1, 1999, only the
physician work RVUs, which account for about 55 percent of the total
RVUs for each procedure, were based on the estimated resources used. 
Beginning this January, the practice expense RVUs, but not the
malpractice expense RVUs, are now resource based.  Before January,
the practice expense and malpractice expense RVUs, which account for
about 42 and 3 percent, respectively, of the fee schedule allowances,
were still based on charges physicians submitted before the fee
schedule's development.  A method for calculating resource-based RVUs
for practice expenses and malpractice expenses had not yet been
developed at the time the Health Care Financing Administration (HCFA)
implemented the fee schedule in 1992. 

The Social Security Amendments of 1994 required the Secretary of
Health and Human Services (HHS) to revise the Medicare fee schedule
by 1998 so that the practice expense RVUs would reflect the resources
used rather than historical charges.\4 While the revisions were
required to be "budget neutral" so that total Medicare payments to
physicians for practice expenses would not change, Medicare payments
could increase for some procedures and decrease for others. 
Furthermore, depending upon their mix of procedures, members of
different physician specialties could receive more or less in total
Medicare payments. 

On June 18, 1997, HCFA published a proposed rule in the Federal
Register describing proposed fee schedule revisions to incorporate
resource-based practice expense RVUs.  A number of physicians' groups
and other medical organizations questioned the data and methodology
HCFA used and argued that the reallocations of Medicare payments
would be too severe.  Subsequently, the Congress included provisions
in the Balanced Budget Act of 1997 (BBA) that delayed the
resource-based practice expense revisions until 1999, provided for a
3-year phase-in of the revisions, and required HCFA to publish a
revised proposal by May 1, 1998.  The act also required us to
evaluate HCFA's June 1997 proposed rule and report to the Congress
within 6 months.\5 In response to this mandate, we issued a report in
February 1998 in which we concluded that HCFA's proposed methodology
was generally acceptable but needed some modifications.\6 On June 5,
1998, HCFA published its revised proposal, which included a new
methodology for developing resource-based practice expense RVUs.  On
November 2, 1998, HCFA published its final rule, which contains minor
changes to its June 5, 1998, methodology. 

This report responds to your request that we continue to monitor and
report on HCFA's ongoing efforts to develop resource-based practice
expense RVUs.  Specifically, we focus on (1) our evaluation of
whether the new methodology is an acceptable approach for revising
Medicare's fee schedule; (2) questions raised about the data,
assumptions, and adjustments underlying the new methodology that need
to be addressed during the 3-year phase-in period; and (3) the need
for future updates to the practice expense RVUs to reflect changes in
health care delivery and for ongoing assessments of the fee
schedule's effect on Medicare beneficiaries' access to physicians'
care. 

To address these issues, we reviewed HCFA's new methodology, comments
from physicians' groups, and selected documentation on the data and
methodology.  We held several meetings with HCFA staff to understand
their new methodology and the rationale behind some of their key
decisions.  We did not gather new data on physicians' practice
expenses, test the reliability of HCFA's data, or independently
verify HCFA's data sources or calculations.  We also met with
researchers, representatives of physicians' organizations, and others
to obtain their views on HCFA's new proposal.  We performed our
evaluation from May through November 1998 in accordance with
generally accepted government auditing standards.  The physicians'
groups and others that we met with are listed in appendix IV. 


--------------------
\1 For each procedure, Medicare pays 80 percent of the fee schedule
amount and Medicare patients are responsible for the remaining 20
percent.  In this report, we refer to the total Medicare fee schedule
amount as the "Medicare payment." See appendix I for an overview of
Medicare's fee schedule. 

\2 Physician work resources are measured in terms of a physician's
time, intensity of effort, level of skill required, and stress from
risk of harm to the patient.  Practice expenses include the costs of
resources such as nonphysician personnel, equipment, supplies, and
office space required to deliver a procedure. 

\3 The fee schedule allowances are also adjusted for differences in
local costs using geographic practice cost indexes. 

\4 Sec.  121, P.L.  103-432, 108 Stat.  4398, 4408, Oct.  31, 1994. 

\5 Sec.  4505, P.L.  105-33, 111 Stat.  251, 435, Aug.  5, 1997. 

\6 See Medicare:  HCFA Can Improve Methods for Revising Physician
Practice Expense Payments (GAO/HEHS-98-79, Feb.  27, 1998). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

HCFA's new methodology represents an acceptable approach for
calculating resource-based practice expense RVUs.  HCFA relied on the
best data available for creating the new values:  (1) a nationally
representative survey of physicians' practice costs and (2) data
developed by panels of experts that identify the specific resources
associated with individual procedures.  HCFA's original and new
proposals use these data in similar ways to create the new RVUs.  A
critical difference is that the new methodology more directly
recognizes the variation in practice expenses among physicians'
specialties in computing the RVUs.  Additionally, this methodology
responds to several concerns we had with the original one. 

While HCFA's new methodology is acceptable overall, certain questions
about the data and underlying methodology need to be addressed before
the new RVUs are completely phased in.  For example, the national
practice expense survey database contains limited data for some
specialties and may lead to imprecise estimates of their practice
expenses.  For other specialties not included in the survey database,
HCFA had to use proxy information, the appropriateness of which needs
to be verified.  Also, HCFA made certain assumptions and adjustments
without confirming their reasonableness.  For example, HCFA adjusted
the supply cost estimates for oncologists to avoid paying them twice
for chemotherapy drugs but HCFA has not yet collected data to
determine the appropriate size of the adjustment. 

To address these issues, HCFA needs a strategy for refining the
practice expense RVUs during the 3-year phase-in period that focuses
on the data and methodology weaknesses that have the greatest effect
on the RVUs.  However, HCFA has done little in the way of sensitivity
analysis to effectively target its refinement efforts.  Additionally,
HCFA has not developed permanent processes for future updates and
revisions to the practice expense RVUs as new procedures are
developed or methods of performing existing procedures shift. 
Finally, HCFA needs to continue monitoring beneficiaries' access to
physicians' care to ensure that access is not compromised by past and
ongoing changes to Medicare's payments to physicians.  Our
recommendations to HCFA focus on these issues. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Physicians incur a variety of expenses in operating their practices
that contribute to the costs of performing procedures.  These include
salary costs for nurses, technicians, and administrative staff plus
spending for medical equipment, medical supplies, rent, utilities,
and general office equipment and supplies.  Expenses vary among
practices, depending on such factors as the size of a practice, mix
of specialties involved, geographic location, health care needs of
the patients, and types of procedures provided. 

A resource-based, relative-value payment system ranks procedures on a
common scale, according to the resources used for each procedure. 
The need to estimate and rank practice expenses for thousands of
medical procedures presents HCFA with several enormous challenges. 
Most physicians' practices have readily available data on their
costs, such as wages for receptionists and clinical staff and the
costs associated with rent, electricity, and heat.  However, Medicare
pays physicians by procedure, such as for a skin biopsy, so HCFA
needs to estimate the portion of total practice expenses associated
with each procedure--data that are not readily available.  The task
is made more difficult because of the significant variations in
practice expenses among individual physicians and across practice
settings.  For example, a physician in a solo practice is likely to
have practice costs different from those of a physician in a group
practice. 

The effect of both problems--the difficulty in allocating practice
expenses to procedures and the variation in expenses among
practices--is mitigated somewhat because Medicare's fee schedule
allowance for each procedure is based on the procedure's ranking
relative to all other procedures.  Even though the actual expenses
associated with a procedure cannot be precisely measured and vary
among physicians' practices, the expense of one procedure relative to
another is easier to estimate and is likely to vary less across
practices. 

The resource-based practice expense RVUs that HCFA first proposed in
1997 and then implemented in 1999 have been the subject of widespread
debate among physicians' groups.  This controversy is not unexpected,
since the legislative requirement that fee schedule changes be budget
neutral means that some physicians' specialty groups would be likely
to benefit from the changes at the expense of other groups.  In other
words, total Medicare practice expense payments to physicians will
not change, but payments for particular procedures, and consequently
for certain specialties, could change. 

To moderate the effects of the expected redistributions, the BBA
required that the new RVUs be phased in over a 3-year period.  In
1999, the RVUs used to determine Medicare's practice expense fee
schedule payments consist of 25 percent of the new resource-based
RVUs and 75 percent of the charge-based RVUs.  The share based on
resource-based RVUs will increase to 50 percent in 2000, 75 percent
in 2001, and 100 percent in 2002.  Additionally, the BBA required
HCFA to develop a refinement process for each year of the 3-year
transition period. 


      OVERVIEW OF HCFA'S ORIGINAL
      METHODOLOGY
---------------------------------------------------------- Letter :2.1

HCFA's original methodology was described in a June 1997 proposed
rule.  An initial step was to develop estimates of the costs of the
direct practice expenses associated with each procedure.\7 HCFA
convened 15 clinical practice expert panels (CPEP) organized by
specialty and composed of physicians, practice administrators, and
nonphysician clinicians, such as nurses.\8 The CPEPs estimated the
type and quantity of nonphysician labor, medical equipment, and
medical supplies required to perform each of more than 6,000
procedures.  A HCFA contractor subsequently estimated the dollar
costs of these direct expenses for each procedure. 

HCFA applied a series of adjustments to these direct expense
estimates.  First, HCFA reviewed the data to ensure that the
identified costs were allowable under Medicare policy and revised
them as necessary.  Next, HCFA used a statistical "linking"
methodology that adjusted the estimates from different CPEPs to put
them on a common scale and make them directly comparable.  HCFA then
adjusted the CPEP estimates so that the proportions of aggregate
practice expense dollars devoted to nonphysician labor, medical
equipment, and medical supplies across all specialties were
consistent with national practice expense data that the American
Medical Association (AMA) collects through its Socioeconomic
Monitoring System (SMS) survey.  The survey is administered annually
to a random sample of physicians.\9 Lastly, HCFA adjusted the CPEP
clinical and administrative labor estimates that appeared to be
unreasonable. 

In the final step in the methodology, HCFA developed a formula to
allocate to individual procedures the indirect expenses associated
with running a practice.  Indirect expenses such as rent and
utilities are difficult to associate with individual procedures;
therefore, the CPEPs did not estimate these expenses for each
procedure.  Instead, HCFA allocated indirect expenses to procedures
based on the physician work, direct practice expense, and malpractice
expense RVUs associated with a procedure.  Thus, procedures that
ranked high in each of these three categories were assigned
proportionately more indirect expenses.  Additional details of HCFA's
original proposal are contained in appendix II as well as in our
February 27, 1998, report. 


--------------------
\7 Direct expenses involved resources that can be more readily
assigned to individual procedures, such as nursing staff, medical
equipment, and medical supplies.  Indirect expenses, like office
rent, are much more difficult to assign to procedures. 

\8 For example, one panel reviewed general surgery codes, while
another reviewed orthopedic codes. 

\9 This annual telephone survey is designed to provide representative
information on all nonfederal physicians on a number of
characteristics, including practice expenses. 


      OVERVIEW OF HCFA'S NOVEMBER
      1998 METHODOLOGY
---------------------------------------------------------- Letter :2.2

HCFA's new methodology was contained in its June 1998 proposed rule
and revised slightly in its November 1998 final rule.  For each
medical specialty, HCFA estimated the aggregate spending for
categories of direct and indirect practice expenses for treating
Medicare patients, using the SMS survey data and Medicare claims
data.  Then, using the specialty's CPEP estimates, HCFA allocated
each of the direct expense totals for clinical labor, medical
equipment, and medical supplies to individual procedures.  To
allocate the indirect costs to procedures, HCFA used a combination of
a procedure's physician work RVUs and direct practice expense
estimates for clinical labor, medical equipment, and medical
supplies. 

For procedures performed by multiple specialties, HCFA computed a
weighted average of the allocated expenses based on the frequency
with which each specialty performed the procedure on Medicare
patients.  This step was necessary because HCFA's new approach
created separate practice expense estimates by specialty for
procedures performed by more than one specialty.  However, Medicare
pays the same amount for a procedure to all physicians, regardless of
specialty.\10 See appendix II for a more detailed description of
HCFA's revised methodology. 


--------------------
\10 The outcome of this weight averaging is a single dollar amount
for each procedure that is used to rank procedures.  HCFA converted
the rankings into practice expense RVUs, which it then converted to
the Medicare fee paid for a procedure. 


   HCFA'S NEW METHODOLOGY IS
   ACCEPTABLE FOR ESTABLISHING
   PRACTICE EXPENSE RELATIVE
   VALUES
------------------------------------------------------------ Letter :3

HCFA's new methodology is an acceptable approach for revising
Medicare's practice expense payments.  The new methodology has much
in common with HCFA's original methodology.  For example, both
approaches use the SMS data to establish aggregate practice expense
spending estimates, or cost pools, for different types of costs, and
both approaches use the CPEP data to identify the specific resources
associated with individual procedures and to allocate costs to them. 
Further, the new methodology explicitly recognizes differences in
practice expenses among specialties.  Although several physicians'
groups have criticized the new methodology for not being
resource-based, their view is not shared by others. 


      THE NEW METHODOLOGY USES
      BEST AVAILABLE DATA IN WAYS
      SIMILAR TO HCFA'S FIRST
      METHODOLOGY
---------------------------------------------------------- Letter :3.1

HCFA's revised methodology uses what are generally recognized as the
best available data for creating resource-based practice expense
values--the SMS annual survey data and the CPEP data.  The annual SMS
survey data are responses from a randomly selected, nationwide sample
of several thousand physicians.  Although other practice expense
surveys are conducted by different organizations, they are not
nationally representative and thus are inappropriate for developing
resource-based practice expense values.  To obtain more accurate
information, a practice expense summary form is mailed to physicians
in advance of the SMS survey so that physicians are better prepared
to answer the practice expense questions.  The CPEP data are the only
data available that identify the specific resources used to deliver
individual procedures. 

HCFA's new and original methodologies used these two data sources for
similar purposes.  Both used the CPEP data to identify the specific
resources associated with individual procedures.  Further, both
methodologies used the SMS data to determine the distribution of
total practice expense dollars among different types of costs. 
However, there were some key differences, in particular the
recognition of differences among specialties, in how the two
methodologies used the data.  Under the original method, HCFA used
the SMS data to create an aggregate cost pool for each type of direct
expense.  Under the new method, HCFA created a separate pool for each
type of direct and indirect expense for each medical specialty. 


      THE REVISED METHODOLOGY
      INCORPORATES SEVERAL
      POSITIVE CHANGES
---------------------------------------------------------- Letter :3.2

There are several other significant differences between the two
methodologies.  By creating separate practice expense cost pools for
each specialty that are based on the SMS data, HCFA's revised
methodology explicitly maintains relative differences among
specialties in their total practice expenses for labor, equipment,
supplies, and other expenses.  For example, SMS data indicate that
ophthalmologists' practice expenses are $132 per hour while those of
general surgeons are $54 per hour.  These figures include $9 per hour
in equipment expenses for ophthalmologists and $2 per hour for
general surgeons.  HCFA's earlier methodology included certain
adjustments that would not have maintained such differences. 

HCFA's revised methodology is also more straightforward and easier to
understand than HCFA's first proposal, a belief shared by many of the
physicians' groups we contacted.  For example, in its original
methodology, HCFA used a complex statistical model to adjust the CPEP
estimates, an adjustment we criticized in our earlier report because
it contained technical weaknesses that may have biased the estimates. 
The new methodology no longer contains this adjustment and eliminates
other controversial steps in HCFA's first proposal that we
criticized.  Further, the new method treats administrative labor as
an indirect expense; this is consistent with our February 1998
recommendation that HCFA consider reclassifying administrative labor
from a direct to an indirect expense. 


      SOME GROUPS QUESTION WHETHER
      HCFA'S NEW APPROACH IS
      RESOURCE-BASED
---------------------------------------------------------- Letter :3.3

The American Academy of Family Physicians, the American College of
Physicians-American Society of Internal Medicine, and the American
Society of Clinical Oncology believe that HCFA's revised approach for
establishing practice expense RVUs is not resource-based.  They note
that specialties whose procedures may have been overvalued under the
charge-based system will continue to benefit under the new
methodology.  Such specialties, they believe, have had greater
revenues and therefore have had more money to spend on their
practices.  They believe, consequently, that specialties that perform
overvalued procedures are likely to have incurred some unnecessary
costs and to have inflated cost pools reflected in the SMS data,
while other specialties will be disadvantaged as their relative costs
will be underestimated.  They also note that HCFA's final rule says
that HCFA believes that this issue of historical differences in
payment should be discussed during the refinement period. 

These physicians' groups believe that HCFA should use its original
method because it resulted in relative values similar to those
previously estimated by the Physician Payment Review Commission and
others.\11 Compared with its original method, the RVUs developed
under HCFA's current method would result in smaller redistributions
among specialties.  For example, HCFA estimates that practice expense
payments to general practitioners under its original methodology
would be 7 percent greater over a 4-year period than under the prior
charge-based methodology, while such payments would be only 4 percent
greater under its revised methodology.  Payments to cardiac surgeons
would be reduced by 30 percent under the original methodology or more
than twice the 12-percent reduction under the revised methodology. 
Of the $18 billion Medicare spent on practice expense payments in
fiscal year 1997, $2 billion would have been distributed differently
across specialties if the original approach had been in effect--$500
million more than under the new methodology.\12

Some economists and physicians' groups, however, note that physicians
work in a competitive environment that is subject to market
pressures, such as managed care contracting, and contend that
physicians seek to maximize their income by minimizing costs.  This
argument would lead to the conclusion that if Medicare has
historically overpaid some specialties, the overpayments would be
reflected in higher net incomes for those specialties rather than
higher expenses. 

While neither position can be conclusively verified, we believe that
the use of incurred costs, as reported on the SMS survey, is
consistent with traditional cost accounting practices.  Traditional
cost accounting does not normally involve determining the efficiency
of the costs to produce a service.  Making such a determination with
accuracy would be very difficult. 


--------------------
\11 The Physician Payment Review Commission advised the Congress on
health care policy issues and was replaced by the Medicare Payment
Advisory Commission in October 1997. 

\12 This $18 billion figure includes beneficiary copayments for
procedures performed by physicians. 


   CONCERNS ABOUT DATA AND
   METHODOLOGICAL ISSUES CAN BE
   ADDRESSED DURING THE PHASE-IN
   PERIOD
------------------------------------------------------------ Letter :4

Even though HCFA used the best available data and developed a
generally acceptable methodology for establishing practice expense
RVUs, specific questions about both the data and methodology need to
be reviewed and addressed, a position supported by virtually all the
physicians' groups we contacted.  The data contain certain weaknesses
such as small sample sizes.  The methodology includes some
assumptions and adjustments that have not been validated.  Many of
these issues can be addressed during the 3-year implementation period
and will result in modifications to the final RVUs in 2002; others
will require efforts by HCFA over a longer term. 


      DATA SOURCES ARE IMPERFECT
      BUT CAN BE IMPROVED
---------------------------------------------------------- Letter :4.1

Readily available alternatives to the SMS and CPEP data do not exist. 
The SMS survey provides nationally representative data on practice
expenses, while the CPEP data are the only data available on practice
expenses that identify the specific resources associated with
individual procedures.  Nevertheless, limitations with both data
sources for creating resource-based practice expense RVUs need to be
overcome.  As described below, workable options are available for
many of these issues. 


      LIMITATIONS AND REFINEMENT
      OF THE SMS DATA
---------------------------------------------------------- Letter :4.2

The AMA, many physicians' groups, and the Medicare Payment Advisory
Commission (MedPAC) identified three basic limitations with the SMS
data.  First, response rates to the practice expense questions on the
SMS survey tend to be low--about 40 percent--compared with the
overall survey response rate of about 60 percent.  This reduces the
sample sizes and can bias the data if the expenses of physicians who
failed to respond to the survey are not comparable to the expenses of
those who did.  Second, the sample sizes for some specialties either
are too small to permit separate calculations of practice expense
cost pools or result in relatively imprecise estimates.\13 Third, the
SMS data represent a physician's portion of a group's practice
expenses.  Because HCFA's methodology is based on calculating
practice expenses per hour for each physician respondent's practice,
HCFA had to make a number of assumptions about the data.  For
example, HCFA assumed that all physician owners in a group practice
had the same practice expenses as the physician respondent.  To the
extent that these assumptions are not true, the practice expense cost
pools are inaccurate.  This assumption may be particularly
problematic for multispecialty practices in which physicians within
the same practice but from different specialties may have different
practice expenses.\14

Some of these limitations with the SMS data can be addressed during
the 3-year phase-in period.  To determine whether the SMS data are
subject to nonresponse bias, for example, HCFA could (1) compare the
characteristics of respondents and nonrespondents to the SMS survey
or (2) compare the characteristics of respondents to a comparable
external data source.\15 HCFA could then evaluate the need for
corrections.  HCFA has not yet conducted analyses to determine if
nonresponse bias is an issue with the SMS survey, but its new rule
indicates the agency's willingness to review and refine the data. 

Increasing the SMS sample and redesigning some of the questions would
help address other known limitations but would most likely not result
in improvements during the phase-in period.  The limitations
associated with small sample sizes can be addressed in future SMS
surveys of physicians' practice expenses.  In fact, HCFA identified
working with the AMA to improve the SMS survey as one of its most
important tasks during the 3-year phase-in period.  In future SMS
surveys, for example, more physicians could be contacted, thereby
providing HCFA with larger sample sizes for developing specialties'
practice expense cost pools.  This approach, however, would involve
decisions as to how many additional physician responses are needed
and who would pay for the additional survey costs. 

It is not clear whether HCFA will use the results from future SMS
surveys to refine and adjust the practice expense RVUs.  HCFA
officials expressed skepticism about doing so because they fear that
physicians might inappropriately inflate their reported practice
expenses.  This could result in some specialties' increasing their
practice expense cost pools, with proportional reductions in cost
pools for other specialties since all adjustments must be budget
neutral.  However, there are ways to test for such bias.  For
example, AMA representatives told us that comparisons with earlier
years' responses could indicate areas for further review where
physicians might be trying to manipulate their responses.  In its
final rule, HCFA suggested that future SMS survey data for a
specialty that showed significant changes from earlier surveys be
selectively audited.  However, AMA representatives were concerned
that auditing future SMS results might discourage physician
participation in the survey; they suggested that less formal types of
validation might be more productive, such as conducting follow-up
telephone calls with physicians to explore their answers and to
ensure that they understood the questions. 

Rather than collecting practice expense data about individual
physicians, which prompted HCFA to make certain assumptions about the
data, future surveys could capture practice expenses about all
physicians in a practice.  The AMA plans to develop a new survey
instrument for this purpose.  AMA representatives said that they may
pilot-test this survey in 2000 and alternate it with a survey of
individual physicians every other year.  Results from the survey of
all physicians in a practice would likely not be available to HCFA
until after the 3-year phase-in period ends. 


--------------------
\13 Estimates are less reliable when the sample size or number of
respondents is small. 

\14 On the basis of the SMS data, the AMA compared the practice
expenses per hour for more than 25 specialties, with and without
including physicians from multispecialty practices included in the
calculations.  For most specialties, the total practice expenses per
hour differed by no more than 2 percent when physicians from
multispecialty practices were excluded.  For a few specialties,
however, excluding these physicians resulted in an increase of up to
8 percent or a decrease of up to 16 percent in their practice
expenses per hour. 

\15 Representatives from the Medical Group Management Association
(MGMA), for example, believe that their member survey could be used
to validate the SMS data.  This 12-page survey instrument asks
members for information on their practice's current assets and
liabilities; operating costs; total number of patients treated in a
year; and percentage of income from Medicare, Medicaid, and managed
care plans. 


      LIMITATIONS AND REFINEMENT
      OF THE CPEP DATA
---------------------------------------------------------- Letter :4.3

HCFA used the CPEP data to allocate the practice expense cost pools
to individual procedures because the CPEP data are the only data that
allow this.  Some physicians' groups, however, have criticized these
data as representing merely the "best guesses" of physicians and
other panel members.  They have also criticized the CPEPs for (1) not
being representative of the different practice settings or types of
physicians who provide particular procedures and (2) using different
assumptions and definitions, leading to differences in the resources
identified by different panels for the same procedures. 

As we noted in our February 1998 report on HCFA's first proposal, the
use of expert panels is an acceptable method of developing
procedure-specific practice expense data.  We explored other primary
data gathering methods and concluded that each has practical
limitations.  However, we reported that it is important for HCFA to
refine and validate these data.  We noted that collecting actual data
on key procedures from a limited number of physicians' practices
through surveys or on-site reviews during the 3-year phase-in period
would enable HCFA to assess the CPEP data and identify needed
refinements. 


      ASSUMPTIONS AND ADJUSTMENTS
      IN HCFA'S METHODOLOGY NEED
      TO BE VALIDATED DURING
      REFINEMENT
---------------------------------------------------------- Letter :4.4

HCFA's revised methodology includes certain assumptions and
adjustments that were prompted by limitations in the available data
relative to the difficult task of estimating and ranking practice
expenses for thousands of medical procedures.  Such assumptions and
adjustments should be reasonable and supported by data as much as
possible.  In some cases HCFA has taken steps to review the
reasonableness of different assumptions and adjustments but in other
cases it has not.  Several examples are presented below to illustrate
the kinds of assumptions and adjustments HCFA will need to review
during the 3-year phase-in period; others are discussed in appendix
III. 

Because Medicare pays separately for chemotherapy drugs provided by
oncologists, HCFA adjusted their medical supply cost pool to prevent
duplicate Medicare payments.\16 Oncologists reported medical supply
costs of $87 per hour in the SMS survey, compared with an average of
$7 for all physicians.  Since the SMS supply data include drug costs,
HCFA officials believed that the $87 per hour figure includes the
cost of chemotherapy drugs paid separately by Medicare.\17 HCFA
therefore used the average for all specialties in computing the
oncologists' medical supply cost pool to avoid duplicate payments for
these drugs.  Oncologists acknowledged that the costs of chemotherapy
drugs are included in the SMS survey but argued that HCFA's
adjustment was too large because oncologists incur higher supply
costs than the average physician. 

In this case, HCFA has conducted a limited analysis to determine the
reasonableness of its adjustment to the SMS data.  First, HCFA
calculated the oncology supply cost pool based on the $87 supply cost
per hour.  HCFA then compared that cost pool with the payments
Medicare made to oncologists for drug reimbursement.  HCFA found that
the drug reimbursement significantly exceeded the supply costs that
oncologists reported on the SMS.  Although this analysis did not
determine what portion of the $87 is attributable to drug costs, it
does indicate that HCFA's adjustment is a reasonable starting point. 
However, more data are needed to determine the appropriate
adjustment.  During the phase-in period, HCFA plans to conduct a more
complete analysis of oncologists' actual drug and supply costs. 

HCFA made other adjustments or assumptions for which it has yet to
gather supporting data.  For example, to estimate the practice
expenses per hour for specialties not included in the SMS survey,
HCFA used the SMS data from proxy specialties.  Since the SMS survey
does not separately identify hand surgeons, HCFA assumed that their
practice expenses are the same as those of orthopedic surgeons, whose
SMS data HCFA used in determining the practice expense cost pools for
hand surgeons.  Whether hand surgeons and orthopedic surgeons have
similar practice expenses is not known. 

Expected Medicare payments for some specialties not included on the
SMS survey differ greatly between HCFA's two proposals but it is not
known which method produces the better estimates.  For example, in
its revised methodology HCFA used the practice expenses of general
internists as a proxy for calculating the practice expenses for
chiropractors.  On the basis of HCFA's estimates, chiropractors could
expect an 8-percent reduction in their Medicare payments under HCFA's
final rule whereas they expected a 14-percent increase under HCFA's
first proposed rule.  Such discrepancies may indicate a problem in
using some specialties as proxies for others.  Additional review and
analysis could help validate HCFA's practice expense per hour
assumptions for specialties not included on the SMS survey.  HCFA
noted in its final rule that it will work with all specialties not
represented in the SMS survey to ensure that appropriate data are
used to calculate their practice expense RVUs. 

Other HCFA assumptions and adjustments warrant reexamination.  For
example, HCFA used physician work RVUs in allocating indirect
expenses to procedures--a method supported by MedPAC staff and some
physician groups.  However, physician work RVUs reflect not only the
level of skill physicians require to deliver a procedure but also
their stress from risking harm to their patients--measures not
generally associated with practice expenses.  The time a physician
requires to perform a procedure may be a better measure of the
indirect expenses associated with that procedure.  For example,
utility expenses should not differ between two office-based
procedures that require the same amount of a physician's time but
have different stress levels.  In its final rule, HCFA acknowledged
that using the physician work RVUs as an indirect expense allocator
has shortcomings. 


--------------------
\16 HCFA made similar adjustments to the SMS data for allergists and
immunologists. 

\17 While Medicare generally does not pay for self-administered
drugs, the Congress has enacted legislation to provide Medicare
coverage of some self-administered drugs, such as certain oral
chemotherapy drugs and antiemetic drugs. 


      THE MOST CRITICAL ISSUES
      NEED TO BE IDENTIFIED AND
      ADDRESSED DURING THE
      PHASE-IN PERIOD
---------------------------------------------------------- Letter :4.5

It is important that HCFA develop a plan for ensuring that the most
critical issues associated with the new methodology and data are
addressed first.  HCFA should base its decisions about which issues
to address first on sensitivity analyses that would allow it to
evaluate the effects of various adjustments to the methodology and
data and focus on those that have the greatest effect on the new
practice expense RVUs.  Using resources to examine fully those that
have very limited effects may be inefficient.  HCFA has done little
in the way of conducting such analyses and therefore does not know
where to most effectively target its refinement efforts. 

Another issue of particular importance concerns whether HCFA will use
supplemental practice expense data provided by individual medical
specialties to revise the practice expense cost pools.  Physicians'
groups believe that there may be circumstances in which alternative
data are more representative and accurate than the SMS data and
therefore should be used to supplement the SMS data.  The Society of
Thoracic Surgeons, for example, recently submitted additional
practice expense data to HCFA that are based on surveying an
additional number of thoracic surgeons during the 1998 SMS survey
than would normally be contacted.  The Society believes that HCFA
should use these new data, along with the prior SMS data, to
recalculate thoracic surgeons' cost pool. 

HCFA officials told us that they will be cautious about using
alternative data sources because of their potential bias. 
Alternative data also may not be compatible with the SMS data, as
HCFA found with data recently submitted by some specialties.  HCFA
officials said that they would be willing to base their refinement of
a specialty's practice expense cost pool on alternative data if there
is compelling evidence that the SMS data are inaccurate or not
representative.  It may be most appropriate, for example, to use
additional or alternative data for specialties with small SMS sample
sizes or for specialties whose cost pools were based on practice
expenses of other specialties. 

In deciding whether to use data from other sources to augment the SMS
data, HCFA will need to carefully review the data.  HCFA must be
assured that the data are reasonable and compatible, are collected
from a representative sample of physicians who work in various
settings, and are not biased.  One way to help ensure data
compatibility is to use a common survey instrument and methodology to
collect the data.  Further, specialties that do not conduct their own
studies could be disadvantaged by studies that result in
redistributing Medicare funds from one specialty to another. 
Consequently, HCFA officials said that before accepting data from
other sources they (1) would like to have the data selectively
audited by an independent entity and (2) need to establish a process
allowing specialty societies to comment on proposed changes to their
practice expense cost pools resulting from using the new data. 

Refinement of the CPEP data is another area where HCFA may be
assisted by outside resources during the phase-in period.  HCFA twice
attempted to refine these data by convening panels of physicians but
neither attempt succeeded.\18

Given this experience, HCFA is considering other options, such as
using AMA's Specialty Society Relative Value Scale Update Committee
(RUC) to refine the CPEP data.\19 The RUC is a panel of physicians
representing multiple specialties and is experienced in reaching
consensus on difficult physician payment issues affecting many
different specialties. 

To help HCFA refine the CPEP data, the RUC has decided to form a
Practice Expense Advisory Committee that will review comments on
code-specific CPEP data received by HCFA.  The advisory committee
will consist of both physicians and nonphysicians, such as nurses and
practice administrators.  As currently conceived, the advisory
committee will submit its recommendations to the RUC for review and
the RUC will make final recommendations to HCFA.  Further, plans call
for the advisory committee to develop recommended CPEP-like data on
the estimated resources for codes that were established between 1996
and 1998 and those that will be established in 1999.  HCFA does not
have CPEP data for these codes because they were not in use when the
CPEPs met. 

In its final rule, HCFA stated that it may use contractors to provide
it with advice on how to deal with the many technical and
methodological refinement issues it faces during the refinement
period.  HCFA still needs to define the process and organizational
structure it will use to seek this advice.  MedPAC staff emphasized
that HCFA needs to create clearly defined, step-by-step refinement
processes that involve public comment and review.  This should result
in a coordinated, defined effort, they said. 


--------------------
\18 HCFA convened validation panels to review, and revise as
necessary, the CPEP estimates for several hundred procedures.  These
panels were able to reach consensus on about 200 procedures. 
Significant disagreement remained on administrative labor estimates,
but these estimates are not used in HCFA's current approach.  HCFA
also convened a cross-specialty panel to standardize CPEP staff time
estimates for some administrative tasks and the clinical staff types
for similar services.  However, the panelists were reluctant to make
any major modifications in the estimates for the services performed
by their specialties. 

\19 The RUC was created in 1991 and makes recommendations to HCFA on
the physician work relative values to be assigned to new or revised
procedure codes.  It is composed of physicians' representatives from
more than 25 medical specialties. 


   PROCESSES NEEDED FOR UPDATING
   PRACTICE EXPENSE RVUS AND
   MONITORING FEE SCHEDULE EFFECTS
------------------------------------------------------------ Letter :5

HCFA also needs a plan for making ongoing updates to the RVUs; new
codes are added to the fee schedule each year, and these codes must
be assigned practice expense RVUs.  Further, the RVUs need to be
revised to reflect changes in how procedures are delivered and
changes in practice patterns.  Finally, it is essential that HCFA
continue monitoring indicators of beneficiaries' access to
physicians' care to determine whether access is compromised by
changes to Medicare's physician fee schedule payments. 

Virtually all the physicians' groups we met with support HCFA's use
of the RUC to address ongoing updates to the practice expense RVUs. 
HCFA has not yet decided upon a permanent process for assigning
practice expense RVUs to new procedures or revising the RVUs for
existing procedures, but its final rule mentions the potential for
the RUC to be involved in these issues in the future. 

The RUC has been proactive on this topic and has proposed to HCFA
that it develop practice expense RVUs for new and revised procedures
implemented in 2000 and beyond.  The RUC said that it would seek
input from nurses, practice managers, and others who have expertise
in physicians' practice expenses.  Physicians' group representatives
and HCFA officials believe that it is important to have these other
experts involved in developing the practice expense RVUs because they
may be more knowledgeable about practice expense than physicians. 

A periodic, comprehensive review and update process is needed because
the Medicare statute requires the Secretary of HHS to review the
relative values for all physician fee schedule procedures at least
once every 5 years.  Since the practice expense RVUs become final in
2002, HCFA will need to review them before 2007.  Even though HCFA
has said that it is hesitant about using future SMS surveys to refine
the practice expense RVUs during the phase-in period and has no plans
to use AMA's survey of practices' total expenses, it may wish to use
such data in the periodic 5-year review.  The RVUs must reflect the
ongoing technological changes in medicine, as well as the changes in
how physicians practice; future surveys would provide HCFA with this
necessary information.  Additionally, HCFA may need to recalculate
the costs of equipment and supplies associated with procedures using
new cost data. 

Finally, it is important for HCFA to continue monitoring
beneficiaries' access to care, given the changes in what Medicare
pays physicians.  Since Medicare began paying physicians on the basis
of a national fee schedule, HCFA has monitored indicators of
beneficiaries' access for adverse consequences.  For example, HCFA
surveys beneficiaries annually and modified its 1998 survey to
further clarify access problems beneficiaries may have been
experiencing.  Based on these analyses, beneficiaries' access to care
has remained good since the fee schedule's implementation. 

However, some medical specialties whose Medicare payments were
reduced as other components of the fee schedule were implemented
could experience further reductions under HCFA's proposed changes in
the practice expense RVUs.  For example, between 1992 and 1996,
cardiologists, gastroenterologists, and pathologists experienced
Medicare payment reductions of 9, 8, and 9 percent, respectively. 
Under the new practice expense payments, these specialties face
additional expected payment reductions of 9, 15, and 13 percent,
respectively.  Such cumulative payment reductions could affect
physicians' willingness to care for Medicare beneficiaries. 
Non-Medicare patients too could experience changes in their access to
physicians' services resulting from changes in Medicare's payments;
many private payors and Medicaid programs base their payments to
physicians on Medicare's fee schedule.  It is important, therefore,
to continue to monitor beneficiaries' access to physicians' services,
paying particular attention to the specialties that are most
adversely affected by changes in the fee schedule.  Recognizing this,
HCFA told us that the next HHS report to the Congress addressing
changes in access to care will examine, to the extent possible,
access indicators for the procedures with the greatest cumulative
reductions in Medicare fees.\20


--------------------
\20 The Secretary of HHS is required by the Social Security Act, as
amended, to monitor and report annually to the Congress on a number
of health care issues, including changes in access to care by
population groups, geographic areas, and types of services. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

The Medicare physician fee schedule replaced a payment system that
was criticized for providing more generous payments for some services
than others relative to the actual resources needed to provide them
and, as a result, for promoting an inappropriate allocation of
medical services.  The new system, based on resource-based RVUs, is
intended to ensure appropriate payment for physicians' services
relative to one another, based on the resources needed to provide the
services. 

However, this payment model has not been easy to implement. 
Estimating and ranking practice expenses for thousands of medical
procedures is inherently difficult and imprecise.  HCFA's new
methodology represents a reasonable starting point for creating
resource-based practice expense RVUs.  It uses the best available
data for this purpose and explicitly recognizes specialty differences
in practice expenses.  It also eliminates certain adjustments to the
CPEP estimates that we questioned in HCFA's original methodology. 

In either methodology, HCFA is faced with using less than perfect
data that need to be refined over the phase-in period.  Although the
SMS and CPEP data provide a solid foundation for creating
resource-based practice expense RVUs, both have their limitations. 
The new practice expense RVUs should be based on the most accurate
and reliable data possible.  It is, therefore, important for HCFA to
use options that improve these data.  It is also important for HCFA
to collect and analyze additional data that would enable it to
validate or, where necessary, alter the assumptions and adjustments
underlying its revised methodology.  Additionally, during the
phase-in period, HCFA has the opportunity to review and possibly
revise some of its policy-related assumptions and adjustments, such
as using physician time rather than physician work RVUs, in its
indirect expense allocation calculations. 

It is important that HCFA make effective use of its resources in the
short term to validate and improve the practice expense RVUs.  HCFA
does not yet have a plan for identifying the issues that have the
greatest effect on the new RVUs.  Sensitivity analyses would provide
HCFA with this critical information so that it can decide where to
target its corrective actions most effectively.  In addition, for the
longer term, HCFA needs to specify processes for updating the
practice expense RVUs.  Processes are needed for assigning practice
expense RVUs to new procedures, revising the RVUs to reflect changes
in how current procedures are performed, and providing for a review
of the resource-based practice expense RVUs at least once every 5
years. 

Beneficiaries' access to care will be a key measure of physicians'
acceptance of the new practice expense payments.  How physicians
respond to changes in their payments is unknown, but HCFA should
continue to monitor indicators of beneficiary access to care.  Such
monitoring is crucial to ensure that Medicare's payments to
physicians are adequate to maintain beneficiaries' access to care. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :7

We recommend that the Administrator of HCFA

  -- Use sensitivity analysis to identify issues with the methodology
     that have the greatest effect on the new practice expense RVUs
     and to target additional data collection and analysis efforts. 
     One clear example of where HCFA should evaluate different policy
     options for revising the methodology is in the use of physician
     time, instead of physician work, to allocate indirect expenses. 

  -- Develop plans for updating the practice expense RVUs that
     address how to (1) assign practice expense RVUs to new codes,
     (2) revise the RVUs for existing codes, and (3) meet the
     legislative requirement for a comprehensive 5-year review of the
     resource-based practice expense RVUs. 

  -- Monitor indicators of beneficiaries' access to care, focusing on
     procedures with the greatest cumulative reductions in Medicare
     payments, and consider access problems when evaluating the
     physicians' payment system. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :8

We provided HCFA with a draft of this report and received written
comments in response.  We also gave copies of the draft to
representatives of physicians' groups, a medical group we contacted
during our work, and MedPAC; they provided us with oral comments. 
The following summarizes the comments and our responses. 


   HCFA
------------------------------------------------------------ Letter :9

HCFA concurred with each recommendation and said that it was pleased
that we found HCFA's revised methodology for creating resource-based
practice expense values to be a reasonable starting point.  HCFA
agreed that it needs to set priorities and target its refinement
efforts on issues having the greatest effect but did not say how it
would select its targets for refinement.  We believe that a
systematic approach to establishing refinement priorities, such as
would be afforded through sensitivity analysis, would be an effective
tool for evaluating refinement options. 

In its comments, HCFA said that it has plans to obtain contractor
support and other independent advice on the broad methodological
issues it faces.  Further, HCFA noted that the Secretary of HHS is
required by legislation to monitor and report annually to the
Congress on a number of health care issues, including access to care. 
HCFA said that the next HHS report will, to the extent possible,
examine access to care indicators for procedures with the greatest
cumulative reduction in Medicare fees.  We included these points in
our report. 

HCFA also provided us with technical comments, which we incorporated
where appropriate.  HCFA's comments appear in appendix V. 


      COMMENTS FROM
      REPRESENTATIVES OF
      PHYSICIANS' ORGANIZATIONS
      AND OTHERS AND OUR RESPONSE
---------------------------------------------------------- Letter :9.1

Regarding HCFA's revised approach for developing resource-based
practice expense payments, representatives from the Practice Expense
Coalition said that they were pleased that we support HCFA's
revisions.  They believe that the new methodology more effectively
recognizes differences in practice expenses among physician
specialties.  Representatives from several other physicians' groups,
including the American College of Physicians-American Society of
Internal Medicine and the American Academy of Family Physicians,
however, said that the new methodology is not resource-based in that
it reflects some unnecessary expenses that have resulted from
historical differences in practice expense payments.  MedPAC staff
too said that there may be historical payment bias in the data. 

We revised our report to better reflect these concerns and now note
that HCFA will accept comments on the issue of historical payment
differences during the 3-year refinement period.  We continue to
believe, however, that HCFA's new methodology is resource-based; it
uses the best available data to rank procedures on a common scale
according to the resources used.  Further, trying to determine and
measure the extent to which certain procedures may have been
overvalued would be very difficult; doing so would also be
inconsistent with traditional cost accounting practices that do not
measure the efficiency with which costs are incurred in providing a
service. 

Representatives from MedPAC, AMA, and many other physicians' groups
further asserted that we understated the differences between HCFA's
original and revised methodologies.  We clarified the report by
adding more information about how the two methodologies differ. 

Representatives from the Practice Expense Coalition said that we
understated HCFA's refinement workload by not discussing all the
refinement issues HCFA discusses in its final rule.  We believe that
our report focuses on the major refinement issues HCFA faces in the
coming 3 years.  While we recognize that the report does not cover
all refinement issues, we do not believe that this is necessary.  We
use certain issues to illustrate the types of refinement tasks facing
HCFA and the need for HCFA to develop processes for addressing these
issues.  Additionally, certain refinement issues that some suggested
we include in our report, such as the base year to be used for
calculating the new practice expense RVUs, the behavioral offset, and
site of service differentials, were outside the scope of our work.\21

AMA and American College of Physicians-American Society of Internal
Medicine representatives suggested that we more clearly explain the
benefits and limitations we identified with the CPEP data in our
first report on physician practice expense payments.  We have added
some material from our earlier report in response to this suggestion. 

Society of Thoracic Surgeons and AMA representatives agreed with us
that it is very important for HCFA to decide what, if any, data HCFA
will accept from medical societies to revise or supplement the SMS
data.  Representatives from the American College of
Physicians-American Society of Internal Medicine suggested that the
RUC develop standards for medical societies to follow when conducting
future practice expense surveys.  They believe that the RUC is the
appropriate body to serve this role and that the RUC can critically
analyze survey results as it now does for development and review of
the physician work RVUs.  As we note in our report, it is important
for HCFA to be assured that any data it uses to augment the SMS data
be reasonable, compatible, and otherwise not biased. 

Representatives from MedPAC, AMA, and two other physicians' groups
questioned our recommendation that HCFA evaluate using physician
time, instead of physician work RVUs, for allocating indirect
expenses to procedures.  MedPAC staff support using physician work
RVUs because they believe that indirect costs should be distributed
in proportion to all inputs to a procedure--physician time as well as
the inputs of nonphysician staff plus the equipment and supplies
used.  Representatives from MedPAC, AMA, and several physicians'
groups said that they are concerned about the accuracy and
reliability of the physician time data.  Further, representatives
said that physicians have a better understanding of, and greater
confidence in, the physician work RVUs. 

We continue to believe that HCFA should evaluate using physician time
as an indirect cost allocator.  As explained earlier in the report,
physician work RVUs include measures not generally associated with
practice expenses, such as the stress on the physician to perform a
procedure.  Conversely, indirect expenses, such as utility costs and
rent, will vary depending upon the amount of physician time
associated with a procedure.  Moreover, physician time is used in
calculating procedures' physician work RVUs. 

Representatives from the American College of Physicians-American
Society of Internal Medicine and the American Academy of Family
Physicians suggested that we expand our recommendation on monitoring
beneficiaries' access to care to include monitoring increases in
beneficiaries' use of services.  We did not modify our recommendation
because we believe that HCFA's current research on beneficiary access
already includes several components that would indicate increases in
access. 

An AMA representative said that our discussion of beneficiary access
to care should note that the effects of the Medicare fee schedule go
beyond Medicare since many private payers and Medicaid programs set
their fees on Medicare's payments.  We noted this in the report. 

The physicians' groups differed on whether HCFA should include the
costs of staff who accompany physicians to the hospital when
calculating the practice expense RVUs.  Representatives from the
American College of Physicians-American Society of Internal Medicine
and the American Academy of Family Physicians believe that these
costs should be excluded and noted that we agreed in our first report
that HCFA appropriately excluded these costs from the CPEP data since
Medicare pays for these expenses through other mechanisms. 
Representatives from the Practice Expense Coalition and American
College of Surgeons said, however, that they do not believe that
these costs represent double payment by Medicare and that these costs
therefore should be included in HCFA's calculations. 

We believe that taking the cost of these staff out of the CPEP
estimates was appropriate under HCFA's original methodology to avoid
double payments by Medicare for these costs.  Also, these costs were
separately identifiable.  Under HCFA's revised methodology, avoiding
double payments for these costs would require taking them out of the
SMS data, which would be difficult since these costs are not
separately identified.  Therefore, as we state in the report, we
believe that the most appropriate initial step is for HCFA to conduct
sensitivity analysis to determine if including these costs
significantly affects the RVUs. 


--------------------
\21 Behavioral offset refers to reductions in payment rates to offset
changes in the volume of services as physicians and other health care
providers respond to a change in fees.  Site of service differential
refers to the reduction in the amount paid when some services are
performed in a hospital outpatient department or setting other than
the physician's office. 


---------------------------------------------------------- Letter :9.2

As agreed with your offices, we are sending copies of this report to
the Secretary of HHS, the Administrator of HCFA, interested
congressional committees, physicians' organizations, and others who
are interested.  We will also make copies available to others upon
request. 

This report was prepared by Robert Dee, Patricia Spellman, and
Michelle St.  Pierre.  Please call me at (202) 512-7114 or William
Reis, Assistant Director, at (617) 565-7488 if you have any
questions. 

William J.  Scanlon
Director, Health Financing
 and Public Health Issues


OVERVIEW OF MEDICARE'S FEE
SCHEDULE
=========================================================== Appendix I

Efforts to reform Medicare's payments to physicians began in the
1980s and were prompted by concerns about increasing program costs
and flaws in the existing methods for reimbursing physicians. 
Medicare's spending for physicians' expenses per beneficiary had been
growing at almost twice the rate of the gross national product.  At
the time, Medicare reimbursed physicians through the "customary,
prevailing, and reasonable charge" system, but this payment system
was criticized because it resulted in widely varying payments for the
same service and contributed to inflation in Medicare's expenditures. 
Concern was also raised that the payment levels favored surgical
services at the expense of primary care services, resulting in
distorted financial incentives.  Limits on actual charges and a
series of freezes and reductions in payment levels for particular
services made the system increasingly complex. 

The Consolidated Omnibus Budget Reconciliation Act of 1985 required
the Secretary of the Department of Health and Human Services (HHS) to
study and report to the Congress on a resource-based relative value
scale system for reimbursing physicians for their services.\22 Such a
system ranks services on a common scale according to the resources
used in providing them.  Payment for a service depends upon its
ranking; services with a high ranking receive greater payment than
those with a low ranking.  In its 1989 report to the Congress, the
Physician Payment Review Commission (PPRC) recommended that a
resource-based, relative-value scale system be adopted. 

The Omnibus Budget Reconciliation Act of 1989 mandated that Medicare
implement an approach based on relative value that accounted for
three components of costs--physician work, practice expense, and
malpractice expense.\23 The system was to be phased in over 5 years
beginning in 1992.  Implementation was to be budget neutral, meaning
that aggregate payments could not be higher than they would have been
if the payment system had not changed.  The legislation also required
the adjustment of each component of the fee schedule to reflect
geographic differences in costs, the elimination of
specialty-specific payment differentials for providing the same
procedure, the implementation of a process for calculating the annual
payment update, and the establishment of volume performance standards
to track changes in the volume or intensity of procedures Medicare
pays for.  Health Care Financing Administration (HCFA) contractors at
the Harvard School of Public Health had developed a resource-based
physician work component for the new system, but methods for
calculating resource-based relative values for practice and
malpractice expenses had not been developed at that time. 


--------------------
\22 Sec.  9305(b), P.L.  99-272, 100 Stat.  82, 192, Apr.  7, 1986. 

\23 Sec.  6102, P.L.  101-239, 103 Stat.  2106, 2171, Dec.  19, 1989. 


   GENERAL COMPONENTS OF FEE
   SCHEDULE PAYMENTS
--------------------------------------------------------- Appendix I:1

Each procedure included on Medicare's physician fee schedule is
assigned a relative value that is the sum of the relative value units
(RVU) for the three cost components--physician work, practice
expense, and malpractice expense.  The RVUs reflect the resources
used to provide that procedure relative to other procedures.  In
other words, a procedure with more RVUs uses more resources than a
procedure with fewer RVUs.  The RVUs are converted to a dollar
payment using a monetary conversion factor.  The product of the RVUs
and the conversion factor is the Medicare physician fee schedule
payment.  Before the Balanced Budget Act of 1997 (BBA), there were
three different conversion factors--one for surgical services, one
for primary care services, and one for other services.  The BBA
created a single conversion factor for all services starting in
1998.\24

Before the BBA, the conversion factors were updated annually on the
basis of expected increases in physicians' incomes and the costs of
operating a medical practice.\25 The update for each conversion
factor was itself adjusted on the basis of a comparison of the actual
growth in Medicare's expenditures with expected growth as estimated
by the Medicare Volume Performance Standard (MVPS).  The MVPS target
was based on such factors as the projected growth in Medicare
payments and the enrollment and aging of Medicare patients, and it
was used to restrain growth for spending on physicians' procedures. 
In other words, if Medicare's expenditures grew more quickly than
expected, the next year's updates for the conversion factors were
reduced accordingly.  The BBA required a new method to adjust the
conversion factor update beginning in 1999, when the MVPS was
replaced with a cumulative sustainable growth rate based on the
growth of the real gross domestic product.\26 The cumulative
sustainable growth rate (SGR) operates in a similar manner as the
MVPS and is used to restrain growth for spending in physicians'
procedures.  The SGR is based on the estimated growth in payments for
all physicians' services, beneficiaries enrolled in the Medicare
fee-for-service program, real gross domestic product per capita, and
expenditures for all physicians' services that result from changes in
statutes and regulations. 

The fee schedule payments also reflect geographic variation in input
prices because the physician work, practice expense, and malpractice
expense RVUs are each adjusted by a geographic practice cost index
(GPCI).  Each of the GPCIs--the cost-of-living, practice expense, and
malpractice GPCI--measures the prices of relevant inputs physicians
face in a geographic area relative to national average prices. 


--------------------
\24 Sec.  4501, P.L.  105-33, 111 Stat.  251, 432, Aug.  5, 1997. 

\25 The Medicare Economic Index was used as a proxy for the annual
growth in physicians' practice expenses. 

\26 Sec.  4503, P.L.  105-33, 111 Stat.  251, 433, Aug.  5, 1997. 


   DEVELOPMENT OF PHYSICIAN WORK
   RVUS
--------------------------------------------------------- Appendix I:2

The development of resource-based RVUs for the physician work
component of the fee schedule began in the 1980s and took about 7
years to complete.  Building on preliminary studies conducted earlier
in that decade, Harvard researchers undertook a complex, multiphased
process with the cooperation of the American Medical Association
(AMA) and the assistance of about 100 physicians organized into
technical consulting groups.  These groups developed vignettes to
describe standard scenarios for delivering procedures listed in AMA's
Physicians' Current Procedural Terminology (CPT).  In a national
survey, physicians were asked to rank procedures on the bases of four
standard elements:  (1) physician time, (2) mental effort and
judgment, (3) technical skill and physical effort, and (4) stress
stemming from the risk of harm to patients.  The researchers reported
a high level of consistency in how physicians in the same specialty
ranked the relative work required for the services they performed. 
Cross-specialty panels drawn from the physicians' consulting groups
chose procedure codes that represented equivalent or similar work
within different specialties.  Those codes then served as the basis
for a statistical process to link all the codes ranked by each
specialty along a common scale. 

Physician work RVUs for about 800 procedure codes were developed
through the survey process.  RVUs for the remaining codes were
extrapolated from these 800 codes.  For extrapolation, codes were
assigned to families of codes, and small groups of physicians who had
participated in the previous development stages developed the
relative work values. 


   PROCESS TO REFINE THE RVUS AND
   CREATE NEW RVUS
--------------------------------------------------------- Appendix I:3

Before the phase-in of the physician work RVUs could begin in 1992,
HCFA had to create a process to both refine the existing values and
create values for new procedure codes in the future.  HCFA's early
refinement process involved using Medicare carrier medical directors
to revise some of the newly created work RVUs and to assign RVUs to
some low-volume codes and other codes not included in the Harvard
study.  Today, a different refinement process is in place that
includes a multispecialty committee known as AMA's Specialty Society
Relative Value Scale Update Committee (RUC).  The RUC, created in
1991, makes recommendations to HCFA on the relative values to be
assigned to new or revised procedure codes.  HCFA then convenes a
meeting of selected medical directors from its claims processing
contractors to review the RUC's recommendations.\27 Currently, HCFA
accepts most of these recommendations.  According to AMA
representatives, the RUC process is supported by most physicians and
has increased the medical community's confidence in the physician
work RVUs. 


--------------------
\27 HCFA contracts with private entities to process and pay claims
that physicians submit.  These contractors are known as carriers. 


   HCFA'S PRIOR FEE SCHEDULE
   PAYMENTS FOR PHYSICIANS'
   PRACTICE EXPENSES
--------------------------------------------------------- Appendix I:4

Until January 1999, the practice expense component of the fee
schedule was still calculated according to a charge-based system set
up in 1989.  Two main data sources were used:  Medicare claims and
allowed charge data from 1991 and information on the percentage of
revenue used on practice expenses from national surveys of
physicians, specialists, and nonphysician practitioners reimbursed
under Medicare's fee schedule.  The RVUs for practice expenses were
computed as follows: 

1.  Using national survey data, determine the average proportion of
revenue devoted to practice expenses for physicians overall, for
various specialties, and for the nonphysician practitioners paid
under Medicare's fee schedule. 

2.  Using 1991 Medicare allowed charges, multiply the allowed charge
for each procedure code by the average percentage of revenue devoted
to practice costs for the specialty that performs that procedure. 

Example:  For a service with a 1991 allowed charge of $100 performed
only by family practitioners (whose practice expense-to-revenue
proportion is 52.2 percent), the calculation would be as follows:\28

$100 x 0.522 = 52 (initial dollar) RVUs

3.  For procedures performed by more than one specialty, multiply the
practice expense proportion by the frequency with which each
specialty performs that service and then add the product and multiply
by the 1991 allowed amount. 

Example:  For a service with a 1991 allowed charge of $100 performed
70 percent of the time by family practitioners and 30 percent of the
time by internists (whose practice expense to revenue proportion is
46.4 percent), the calculation would be as follows: 

((0.522 x .70) + (0.464 x .30)) x 100 = 50.5 (initial dollar) RVUs

Malpractice RVUs are still computed under a similar statutory
formula. 


--------------------
\28 This and the following example are found in AMA's Medicare RBRVS: 
The Physicians' Guide, 1994. 


   FEE SCHEDULE ADJUSTMENTS AND
   THE CONVERSION OF RVUS TO
   DOLLARS
--------------------------------------------------------- Appendix I:5

HCFA adjusts the physician work, practice expense, and malpractice
expense RVUs before they can be converted to dollars.  Specifically,
HCFA computes a geographic adjustment factor for each of the three
types of RVUs; each factor is designed to reflect variation in the
costs of the relevant component from the national average within fee
schedule areas established by HCFA. 

After the three RVU components for each service are multiplied by
their respective geographic adjustment factors and combined, the
uniform national conversion factor is applied.  This factor converts
each total RVU into a dollar amount representing Medicare's total
allowed amount for each service.  Medicare pays 80 percent of this
amount, and the beneficiary copayment is 20 percent (once the annual
deductible is met).  The conversion factor is computed in a manner to
ensure that budget neutrality is maintained and that total Medicare
expenditures for physicians' services will not differ by more than
$20 million from what the expenditures would have been if the current
fee schedule had not been adopted. 


OVERVIEW OF HCFA'S JUNE 1997
PROPOSED RULE AND NOVEMBER 1998
FINAL RULE
========================================================== Appendix II

This appendix details HCFA's original and revised methodologies for
creating resource-based practice expense payments that were contained
in Federal Register notices of June 18, 1997, June 5, 1998, and
November 2, 1998.  Additional details of HCFA's first proposal can be
found in our February 27, 1998, report. 


   OVERVIEW OF HCFA'S JUNE 1997
   PROPOSED RULE
-------------------------------------------------------- Appendix II:1

In response to the Social Security Act Amendments of 1994 that
required HCFA to develop resource-based practice expense payments
that considered the staff, medical equipment, and medical supplies
used to provide services and procedures, HCFA officials and
researchers met in the spring of 1994 to discuss potential
approaches.  From these discussions, HCFA decided to develop separate
estimates of the direct and indirect expenses associated with
individual procedures. 

HCFA convened 15 clinical practice expert panels (CPEP), organized by
specialty, to estimate the direct practice expenses associated with
procedures.  Each panel included 12 to 15 members, about half of whom
were physicians; the remaining members were practice administrators
and nonphysician clinicians, such as nurses.  The CPEPs reviewed more
than 6,000 procedures and developed estimates of the type and
quantity of nonphysician labor, medical equipment, and medical
supplies required to perform each procedure.  A HCFA contractor then
estimated the dollar costs of these inputs for each procedure. 

Next, HCFA applied a series of adjustments to the direct expenses
estimated by the CPEPs.  First, HCFA reviewed the data to ensure that
the costs arrived at were allowable under Medicare policy and revised
the costs as necessary.  Next, HCFA used a statistical "linking"
methodology that adjusted the estimates from different CPEPs to put
them on a common scale and make them directly comparable.  HCFA also
applied a scaling adjustment to the revised CPEP estimates to make
them consistent with national practice expense data collected by AMA
through its Socioeconomic Monitoring System (SMS) survey.  The
aggregate CPEP estimates for labor, equipment, and supplies each
accounted for a different portion of direct expenses than the
estimates from the SMS survey data.  Therefore, HCFA inflated the
CPEP labor expenses for each code by 21 percent, inflated CPEP
medical supply expenses by 6 percent, and deflated CPEP medical
equipment expenses by 61 percent.\29 Lastly, HCFA adjusted estimates
that appeared to be unreasonable. 

HCFA allocated indirect expenses (such as the cost of rent and
utilities) to individual procedures based on the physician work,
direct practice expense, and malpractice expense RVUs associated with
the procedure.  See figure II.1 for a summary of this methodology. 

   Figure II.1:  Summary of HCFA's
   June 1997 Proposed
   Resource-Based Practice Expense
   RVU Methodology

   (See figure in printed
   edition.)


--------------------
\29 These scaling adjustors are the SMS aggregate percentages divided
by CPEP aggregate percentages. 


   OVERVIEW OF HCFA'S NOVEMBER
   1998 FINAL RULE
-------------------------------------------------------- Appendix II:2

The Balanced Budget Act of 1997 provided additional direction to HCFA
for developing the new practice expense RVUs.  It required that HCFA
use, to the maximum extent practicable, generally accepted cost
accounting principles that recognize all staff, medical equipment,
and medical supplies, not just those that could be tied directly to
specific procedures.\30 This requirement, and comments on its first
proposed rule, led HCFA to recommend a revised approach for
establishing practice expense RVUs that it described in a June 5,
1998, Federal Register notice and then in its final rule of November
2, 1998.\31

The new approach begins with the total annual practice expenses
incurred by individual medical specialties, such as cardiology,
family practice, and thoracic surgery, and then allocates these
expenses to individual procedures performed by that specialty.  There
are three basic steps in HCFA's top-down approach:  (1) for each
specialty, estimate the total annual practice expenses for six
different practice expense categories; (2) allocate a specialty's
total practice expenses to individual procedures performed by the
specialty; and (3) compute a weighted average of the expenses for
procedures performed by multiple specialties.  Figure II.  2
summarizes HCFA's revised approach.  Figure II.  3 provides a
detailed example, by step, of how the practice expense component is
calculated. 

   Figure II.2:  Summary of HCFA's
   Revised Resource-Based Practice
   Expense RVU Methodology

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)

   Figure II.3:  Detailed Example
   of HCFA's Revised
   Resource-Based Practice Expense
   RVU Methodology

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)

Step 1.  For each specialty, estimate the average annual practice
expenses for six different practice expense categories.  HCFA
developed estimates for each specialty of the total annual practice
expenses associated with treating Medicare patients for three direct
expense categories--clinical labor, medical equipment, and medical
supplies--and three indirect expense categories--administrative
labor, office expenses, and other expenses.  The incurred costs
reported on the SMS survey for each type of practice expense were
used to determine their proportion of the total for each specialty. 
The following formula summarizes how HCFA developed these estimates
for each expense category: 

Total annual practice expenses for treating Medicare patients (cost
pool) = (average practice expenses/patient care hours) X hours spent
treating Medicare patients for all procedures performed by the
specialty

HCFA developed ratios, for each specialty, of the average practice
expenses incurred per hour of a physician's time spent in patient
care activities for each of the six expense categories.  Estimates of
the total annual physician practice expenses and average hours
physicians worked per year in patient care activities were obtained
from AMA's 1995-97 SMS surveys. 

HCFA estimated the number of hours physicians spent treating Medicare
patients by specialty.  For each procedure, the number of times that
procedure is performed by a specialty is multiplied by the amount of
time physicians require to perform the procedure; HCFA then summed
the results for all procedures performed by the specialty.  HCFA used
its Medicare claims data to determine Medicare volume for procedures
performed by different specialties.  The estimated time a physician
spends in performing each procedure is a component of the physician
work RVUs. 

The SMS does not include as many physician specialties as HCFA
recognizes, nor does it include nonphysician specialties, such as
podiatry and optometry.  As a result, HCFA had to use the SMS data
from similar specialties to estimate the practice expenses per hour
for specialties not included in the SMS, a process it called
"crosswalking." HCFA also had to crosswalk specialties whose SMS
samples were too small to develop their own practice expense per hour
ratios.  HCFA used clinical judgment to determine appropriate
crosswalks for most of these specialties.\32 For example, to
determine the practice expense cost pools for colorectal surgeons,
psychologists, and chiropractors, HCFA used the SMS practice expense
per hour data for general surgeons, psychiatrists, and internal
medicine, respectively. 

An example may help illustrate this first step in HCFA's
methodology.\33

Assume that, on average, all cardiology practices spend $30 in
clinical labor for each hour of direct patient care that a
cardiologist performs in the practice.  Also assume that all
cardiologists nationwide spent a total of 20 million hours treating
Medicare patients.  Multiplying $30 per hour times 20 million hours
results in a clinical labor cost pool for cardiologists of $600
million.  If the cost pools for the five other expense categories add
to $1.4 billion, this creates a total cost pool for cardiologists of
$2 billion. 

Step 2.  Allocate a specialty's total practice expenses to individual
procedures.  Step 2 involves allocating a specialty's total practice
expense cost pool to the procedures that the specialty performs.  In
our example, this would mean allocating the $2 billion cardiology
cost pool to the procedures cardiologists perform, such as
echocardiograms and cardiac stress tests.  HCFA used two allocation
approaches.  HCFA treated the clinical labor, medical equipment, and
medical supply expense categories as direct expenses and allocated
them to procedures using the CPEP data.  HCFA used the CPEP data on
clinical labor by procedure to allocate the clinical labor cost pool
to procedures, the CPEP data on medical equipment by procedure to
allocate the medical equipment cost pool to procedures, and the CPEP
data on medical supplies by procedure to allocate the medical supply
cost pool to procedures.  In cases in which two or more CPEPs
developed estimates for the same procedure, HCFA simply averaged the
different CPEPs' estimates. 

For example, if the CPEP estimated that a cardiac stress test
required five times more clinical labor than an echocardiogram, then
an individual stress test would receive five times the dollars from
the clinical labor cost pool. 

HCFA treated administrative labor, office expenses, and other
expenses as indirect expenses and used a combination of the fee
schedule's physician work RVUs associated with a procedure and the
direct practice expense estimates for clinical labor, medical
equipment, and medical supplies to allocate the three indirect
expense cost pools to the procedures performed by a specialty.  To
continue with our example, assume that the cardiology cost pools for
administrative labor, office expenses, and other expenses add to $1
billion.  If a cardiac stress test has a combination of CPEP
estimates and physician work RVUs that is twice as large as the
combination for an echocardiogram, then the stress test procedure
would receive twice as many dollars from the $1 billion pool as the
echocardiogram. 

By adding the direct expense and indirect expense values assigned to
a procedure, HCFA calculates the total amount of money to be assigned
to a procedure.  In our example, if the cardiac stress test has
direct expenses of $150 and indirect expenses of $350, its total
expenses would be $500.  However, this is not the actual Medicare
reimbursement.  This process simply establishes relative ranks among
procedures, which are later converted to payment levels.\34

Step 3.  Compute a weighted average of the expenses for procedures
performed by multiple specialties.  HCFA's new approach creates
separate practice expense estimates by specialty for procedures
performed by multiple specialties.  However, Medicare pays the same
amount for a procedure to all physicians, regardless of specialty. 
HCFA therefore computed a weighted average practice expense, based on
the frequency with which each specialty performs the procedure on
Medicare patients.  For instance, assume that, using HCFA's
methodology, the total expense for a cardiac stress test performed by
a cardiologist is $500 but $400 when performed by a general surgeon
and that the procedure is performed 60 percent of the time by
cardiologists and 40 percent of the time by general surgeons. 
Medicare's practice expense for this procedure would be $300 (or $500
times 0.6) plus $160 (or $400 times 0.4) for a total of $460. 

When aggregated, the overall effect of weighted averaging is to
redistribute practice expenses between the various specialties.  In
our example, Medicare's payments to cardiologists for a cardiac
stress test are reduced by $40, from $500 to $460, while payments to
general surgeons are increased from $400 to $460, a $60 gain.  For
most specialties, HCFA estimated that weighted averaging in the
aggregate did not have a large effect on a specialty's cost pool;
their cost pool would be no more than 10-percent greater or
10-percent less than it would have been without weighted averaging. 

Once HCFA calculated the weighted average practice expense for each
procedure, it ranked the procedures by total practice expenses and
converted the rankings into practice expense RVUs.  These rankings
are then converted into actual payment amounts. 


--------------------
\30 Sec.  4105(d), P.L.  105-33, 111 Stat.  251, 435, Aug.  5, 1997. 

\31 The June 1998 notice also included a modified version of HCFA's
original methodology.  While stating that its original methodology
continued to be valid, HCFA recommended the implementation of its new
approach. 

\32 A few specialties provided data to guide HCFA in selecting
appropriate crosswalks. 

\33 The example used in this appendix illustrates the basic steps in
HCFA's revised methodology but is not intended to incorporate all
technical aspects of the methodology. 

\34 See appendix I for further details on the conversion. 


EXAMPLES OF ISSUES REGARDING
HCFA'S REVISED METHODOLOGY
========================================================= Appendix III

Physicians' groups have raised issues about virtually every aspect of
HCFA's new approach for developing resource-based practice expense
RVUs.  A number of their issues are discussed here.  As discussed
earlier in this report, we believe that HCFA should conduct
sensitivity analyses to identify the changes to its methodology and
data that would have the greatest effects on the new RVUs and target
its refinement efforts on those areas.  Where possible, data should
be used to support any changes.  It is likely, however, that a few
issues raised cannot be addressed because the necessary data do not
exist.  Other suggested revisions may not be consistent with HCFA's
methodology. 


   ALTERNATIVES TO THE CPEP DATA
   AND TREATMENT OF CERTAIN CPEP
   ESTIMATES
------------------------------------------------------- Appendix III:1

Several physicians' groups questioned HCFA's use of the original CPEP
estimates rather than the adjusted CPEP estimates or other data to
allocate the practice expense cost pools to procedures performed by a
specialty.  Some groups suggested that HCFA use the validation panel
estimates as allocators because they believe these estimates are more
accurate.\35 Urology representatives said that they want to develop
their own data for use in place of the CPEP estimates.  HCFA said
that it used the CPEP estimates for two reasons.  First, commenters
on its first proposed rule objected to the reasonableness edits HCFA
made to the original CPEP data.  Second, HCFA was not convinced that
changes the validation panels made to the CPEP estimates were
appropriate. 

The question of substituting other data for selected specialties as
discussed above is complex.  Specialties would likely argue that HCFA
should use the data--CPEP, validation panel, or their own--that are
most advantageous to them.  This would lead to the use of a
"patchwork" of different data sources as allocators for different
specialties.  Also, data developed by a society to replace the CPEP
estimates could contain biases that would increase that society's
cost pool and decrease other societies' pools.  HCFA officials said
that they are open to adjusting the CPEP estimates or accepting
alternative data from specialties during the refinement period if the
new data do not significantly affect specialties' cost pools. 

Another CPEP-related issue concerns how HCFA calculated expenses for
several hundred redundant codes--codes reviewed by two or more CPEPs. 
In its revised methodology, HCFA simply averaged the original CPEP
estimates that had been developed for these codes.  HCFA did not use
this approach in its original proposal because averaging different
results would have distorted the relative ranks of codes within a
CPEP.  For example, an intermediate procedure might end up having
more RVUs than a complicated procedure.  HCFA's final rule notes that
HCFA will review this issue during the 3-year phase-in period. 
During that time, HCFA could evaluate using the original or adjusted
CPEP estimates for the specialty that most frequently provides a
procedure--the dominant specialty. 


--------------------
\35 In October 1997, HCFA convened validation panels, composed
primarily of physicians, to review the CPEP estimates for several
hundred procedures and revise them as they believed necessary. 


   OUTLIERS IN THE SMS DATA
------------------------------------------------------- Appendix III:2

In addition to the generally recognized limitations with the SMS data
discussed in the report, there is a problem related to
outliers--cases that seem unreasonable or that far exceed the norm. 
After review and analysis, some of these values may need to be
adjusted during the refinement period.  For example, AMA already
excluded three cases in the SMS data in which physicians reported
working in direct patient care 24 hours per day, 7 days a week. 
There are still extreme cases, however, such as physicians working an
average of 16 hours or more per day every day of the week. 

Other outliers can be seen in table III.1, which shows some extremely
high practice expenses per hour compared with the mean and median
practice expenses per hour for a specialty.\36 In one case, a
physician reported practice expenses per hour of $964--14 times the
mean for the specialty and equivalent to paying each nonphysician
staff member an average of $148,000 annually.  An AMA representative
suggested that the respondent may have provided total expenses for
the practice rather than his or her portion of them.  It is important
for HCFA to review and, where necessary, adjust the SMS data, since a
few atypical cases can have a measurable effect on the practice
expense per hour calculations, especially for specialties with small
sample sizes. 



                              Table III.1
                
                Variation in Practice Expenses per Hour
                       for Selected Specialties.

                                                Practice expenses per
                                                         hour
                                                ----------------------
                                                                Maximu
Medical specialty                                 Mean  Median       m
----------------------------------------------  ------  ------  ------
General and family practice                      $68.6   $56.8  $964.4
General internal medicine                         54.2    44.3   650.8
General surgery                                   54.1    42.4   458.3
Ophthalmology                                    131.8   104.4   619.6
----------------------------------------------------------------------
As a result of the outliers, the mean practice expenses per hour for
these and other specialties are considerably higher than the median
values.  In situations such as this, in which the SMS data contain
large extremes, the median is considered a better measure of the
typical value of the population because the influence of the outliers
is reduced.  A HCFA official said that HCFA used the mean because it
accounts for all the expenses physicians reported on the SMS survey,
including the high and low responses.  HCFA's final rule identifies
this as an issue to be reviewed during the 3-year phase-in period. 
In this review, HCFA needs to develop alternatives, analyze the
effect of any changes, and decide how to proceed. 


--------------------
\36 The average or mean is based on the sum of the practice expenses
per hour for each practice divided by the number of practices.  The
median or 50th percentile represents the value where half of the
reported practice expenses per hour are higher and the other half are
lower. 


   MEDICARE POLICY ADJUSTMENTS
------------------------------------------------------- Appendix III:3

As noted above, HCFA adjusted oncologists' SMS supply expenses
because Medicare pays separately for certain drugs.  A similar issue
involves the expenses of staff, primarily nurses, who accompany
physicians to the hospital.  These staff reportedly perform such
duties as assisting physicians at surgery, assessing patients
following surgery, and educating patients.  As we noted in our first
report, HCFA appropriately disallowed nearly all such expenses from
the CPEP data under its original methodology because Medicare pays
for these expenses through other mechanisms.  To include them would
result in Medicare's paying for the same expenses twice. 

To the extent that this practice is occurring, the costs associated
with these staff are included as practice expenses in the SMS survey
data.  HCFA officials said that they believe that this is not a
common practice; in addition, these costs are not easily identifiable
in the SMS data.  They also said that including these expenses in the
CPEP estimates under their revised methodology affects only
specialties that perform the particular procedures.  That is, the
CPEP data affect not the size of a specialty's cost pool but only how
the pool is allocated to the procedures performed by the specialty. 
However, the American Academy of Family Physicians correctly notes
that including these expenses in HCFA's calculations has a ripple
effect across all specialties and could affect the relative values of
office-based and surgical procedures.  However, it is unclear whether
excluding these costs would significantly change the new RVUs. 

Sensitivity analyses would provide HCFA with a sound basis for
including or excluding these expenses as part of its revised
methodology.  HCFA could estimate the expenses associated with this
practice using the CPEP estimates and could decide if it should spend
the time and effort to determine how to remove these costs from the
SMS data.  In other words, HCFA should not spend a lot of time and
effort on this issue if it has little effect on the RVUs.  If HCFA
removes these costs from the SMS data, it should also remove them
from the CPEP data. 


   THE DETERMINATION OF PRACTICE
   EXPENSES PER HOUR AND HOURS
   SERVING MEDICARE PATIENTS
------------------------------------------------------- Appendix III:4

HCFA's calculations of practice expenses per hour are based in part
on the time that physicians spend in patient care activities.  Some
specialties make greater use of nonphysician practitioners, such as
nurse assistants and optometrists, and may benefit from this step in
the methodology.  This is because the salaries and expenses of the
nonphysician practitioners are counted as a practice expense and
because by using these staff, physicians can generate more billable
procedures.  These two factors result in higher practice expenses per
hour for their specialties.  HCFA appropriately acknowledged that
this is an issue for review during the refinement period. 

The American Association of Neurological Surgeons-Congress of
Neurological Surgeons said that the methodology has disadvantages for
medical specialties whose physicians work longer hours in patient
care activities compared with other specialties.  The SMS survey asks
physicians to record the number of hours they spent in patient care
activities, and HCFA uses the average for a specialty in its
calculations.  As the number of hours spent in patient care
activities increases under HCFA's new methodology, the practice
expenses per hour decreases (assuming that total expenses remain
constant), resulting in a smaller practice expense cost pool for a
medical specialty.  Rather than base its calculations on the average
number of hours that physicians in a specialty work, this physicians'
group believes that HCFA should use a constant 40 hours per week for
all specialties.  They argue that most practice expenses are
generated when the office is open and that this would be a better
measure for HCFA to use. 

Using a constant number of hours would increase the practice expense
per hour estimates for physicians working more hours.  However, this
approach would be inconsistent with HCFA's overall methodology, which
assumes that Medicare claims data reflect physicians' hours that are
consistent with those reported on the SMS survey. 

Physicians' groups also commented on the physician time data that
HCFA uses to determine the total number of hours physicians spend
treating Medicare patients.  First, some physicians' groups question
HCFA's adjustments to the physician time data.  These data come from
two sources:  (1) a Harvard University study that developed physician
time estimates for codes in existence when the work RVUs were
originally created and (2) RUC estimates developed for new codes
created subsequent to the Harvard study and for older codes that
required adjustment.  HCFA found that the RUC's time estimates were
systematically greater by an average of about 25 percent than those
developed from the Harvard study for the same codes.  HCFA therefore
increased the Harvard time estimates by this amount on average to
ensure consistency between the two data sources.\37 According to the
RUC, however, this adjustment may not be appropriate.  RUC time
estimates may be higher because procedures are performed differently
now than they were at the time of the Harvard study.  RUC
representatives said that they would like more information on HCFA's
adjustments to ensure that they are appropriate. 

HCFA is also concerned about the accuracy of the physician time data
for high-volume codes that have relatively little physician time
associated with them.  For example, if a high-volume procedure
typically takes 4 minutes to perform but has 5 minutes of physician
time assigned to it in the work RVUs, the procedure's share of the
practice expense pool for the specialty is inflated by 25 percent. 
HCFA has appropriately expressed a willingness to review comments
during the refinement period on potential inaccuracies with these
data and to make adjustments where appropriate. 


--------------------
\37 On the clinical judgment of its staff, HCFA adjusted some of the
RUC time estimates because HCFA believed these estimates were
unreasonable. 


   THE USE OF MEDICARE CLAIMS
   INFORMATION
------------------------------------------------------- Appendix III:5

Several physicians' groups criticized HCFA's use of Medicare claims
data, rather than national claims data for all insurers, to establish
and allocate the practice expense cost pools for specialties.  HCFA
officials acknowledged that it would be preferable to use data more
representative of physicians' entire practices.  The American Academy
of Family Physicians is concerned that specialties that typically do
not treat Medicare patients, such as pediatricians and obstetricians,
will be disadvantaged because most of their procedures are not
provided to Medicare patients and therefore are not included in the
Medicare claims data.  Specialties with smaller values of Medicare
claims, however, may benefit from this aspect of HCFA's method.  Only
having the more complete data would allow HCFA to determine the
effect.  However, such data are not available, and none of the
medical societies identified specific sources of data that HCFA could
use. 

Several physicians' groups suggested that HCFA refine the Medicare
claims data, citing inaccuracies.  For example, in 1996 Medicare paid
almost 32,000 claims for lumbar discectomies (CPT code 63030), a
procedure typically performed by neurosurgeons or orthopedic
surgeons.  However, the data include 835 claims paid to physicians'
assistants and 102 claims paid to general practitioners for this
procedure.  According to the American Association of Neurological
Surgeons-Congress of Neurological Surgeons, nonsurgical specialties
should not be performing lumbar discectomies.  Given the millions of
claims Medicare pays annually, a small percentage of errors with
these data are not unexpected.  Further, there is no reason to
believe that these errors are not evenly distributed among
specialties and therefore would likely have minimal effect on the
final RVUs.  However, if medical specialties demonstrate significant
problems with these data, HCFA said that it will review them during
the phase-in period and make necessary adjustments. 


MEDICAL SOCIETIES, PHYSICIANS'
GROUPS, AND OTHERS WE CONTACTED
========================================================== Appendix IV


   MEDICAL SOCIETIES AND
   PHYSICIANS' GROUPS
-------------------------------------------------------- Appendix IV:1

American Academy of Family Physicians
American College of Emergency Physicians
American College of Physicians-American Society of Internal Medicine
American College of Surgeons
American Medical Association
American Medical Association's Specialty Society Relative Value Scale
Update Committee
American Society of Clinical Oncology
Medical Group Management Association
Practice Expense Coalition, representing 41 medical specialties,
including the American Academy of Ophthalmology, American College of
Cardiology, and American Society of General Surgeons
Practice Expense Fairness Coalition, representing eight medical
specialties, including the American Academy of Pediatricians,
American College of Rheumatology, and American Geriatric Society


   HEALTH SERVICES RESEARCHERS AND
   GOVERNMENT ORGANIZATIONS
-------------------------------------------------------- Appendix IV:2

Compass Health Analytics
Integrated Healthcare Information Systems, Inc.
Medicare Payment Advisory Commission




(See figure in printed edition.)Appendix V
COMMENTS FROM THE HEALTH CARE
FINANCING ADMINISTRATION
========================================================== Appendix IV



(See figure in printed edition.)



(See figure in printed edition.)



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(See figure in printed edition.)


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