Medicare: HCFA Can Improve Methods for Revising Physician Practice
Expense Payments (Testimony, 03/03/98, GAO/T-HEHS-98-105).

Pursuant to a congressional request, GAO discussed the efforts of the
Health Care Financing Administration (HCFA) to revise the practice
expense component of Medicare's physician fee schedule.

GAO noted that: (1) HCFA's general approach for collecting information
on physicians' practice expenses was reasonable; (2) HCFA convened 15
panels of experts to identify the resources associated with several
thousand services and procedures; (3) HCFA made various adjustments to
the expert panels' data that were intended to: (a) convert the panels'
estimates to a common scale; (b) eliminate expenses reimbursed to
hospitals rather than to physicians; (c) reduce potentially excessive
estimates; and (d) ensure consistency with aggregate survey data on
practice expenses for equipment, supplies, and nonphysician labor; (4)
while GAO agrees with the intent of these adjustments, GAO believes that
some have methodological weaknesses, and other adjustments and
assumptions lack supporting data; (5) HCFA has done little in the way of
performing sensitivity analyses that would enable it to determine the
impact of the various adjustments, methodologies, and assumptions,
either individually or collectively; (6) such sensitivity analyses could
help determine whether the effects of the adjustments and assumptions
warrant additional, focused data gathering to determine their validity;
(7) GAO believes this additional work should not, however, delay
phase-in of the fee schedule revisions; (8) since implementation of the
physician fee schedule in 1992, Medicare beneficiaries have generally
experienced very good access to physician services; (9) the eventual
impact of the new practice expense revisions on Medicare payments to
physicians is unknown at this time, but they should be considered in the
context of other changes in payments to physicians by Medicare and by
other payers; (10) recent successes in health care cost control are
partially the result of purchasers and health plans aggressively seeking
discounts from providers; (11) how Medicare payments to physicians
relate to those of other payers will determine whether the changes in
Medicare payments to physicians reduce Medicare beneficiaries' access to
physician services; and (12) this issue warrants continued monitoring,
and possible Medicare fee schedule adjustments, as the revisions are
phased in.

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

 REPORTNUM:  T-HEHS-98-105
     TITLE:  Medicare: HCFA Can Improve Methods for Revising Physician 
             Practice Expense Payments
      DATE:  03/03/98
   SUBJECT:  Medical services rates
             Medical fees
             Health care costs
             Health care programs
             Physicians
             Statistical methods
             Data collection
             Medical economic analysis
             Overhead costs
             Proposed legislation
IDENTIFIER:  Medicare Program
             Physicians Current Procedural Terminology System
             American Medical Association Socioeconomic Monitoring System
             
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Cover
================================================================ COVER


Before the Subcommittee on Health, Committee on Ways and Means, House
of Representatives

For Release on Delivery
Expected at 12:00 Noon
Tuesday, March 3, 1998

MEDICARE - HCFA CAN IMPROVE
METHODS FOR REVISING PHYSICIAN
PRACTICE EXPENSE PAYMENTS

Statement of William J.  Scanlon, Director
Health Financing and Systems Issues
Health, Education, and Human Services Division

GAO/T-HEHS-98-105

GAO/HEHS-98-105T


(101590)


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

  AMA - American Medical Association
  HCFA - Health Care Financing Administration
  CPEP - clinical practice expense panels
  SMS - Socioeconomic Monitoring System

MEDICARE:  HCFA CAN IMPROVE
METHODS FOR REVISING PHYSICIAN
PRACTICE EXPENSE PAYMENTS
============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss the efforts of the Health
Care Financing Administration (HCFA) to revise the practice expense
component of Medicare's physician fee schedule.  The Medicare program
uses a fee schedule, implemented in 1992, that specifies the payments
to physicians for each of over 7,000 services and procedures.  In
1997, the physician fee schedule payments totaled about $43
billion.\1 The fee schedule system was intended to relate Medicare's
payments to three categories of resources used to provide a
service--physician work,\2 practice expenses, and malpractice
expenses.  Currently, only the physician work component, which
accounts for about half the payment for each procedure, is
resource-based.  The practice expense and malpractice expense
components, which account for about 41 percent and 5 percent,
respectively, of the fee schedule allowances, are still based on
historical charges for physician services. 

In the Balanced Budget Act of 1997,\3 the Congress asked us to
evaluate HCFA's proposed fee schedule revisions published in a June
18, 1997, notice of proposed rulemaking and the impact of those
revisions on access to care.  Our report, Medicare:  HCFA Can Improve
Methods for Revising Physician Practice Expense Payments,\4 provides
a detailed analysis of the methods HCFA used to develop the June 1997
proposed rule.  In my testimony today I will provide an overview of
the challenges involved in revising the fee schedule and some
problems HCFA will have to resolve as it moves toward implementing
the revisions in January 1999. 

In summary, HCFA's general approach for collecting information on
physicians' practice expenses was reasonable.  HCFA convened 15
panels of experts to identify the resources associated with several
thousand services and procedures.  These resources include
physicians' equipment and supplies, and the time of physicians'
staff, such as nurses, technicians, and billing clerks.  Other
approaches for collecting these data, such as mailing out surveys and
gathering data on-site, may be useful supplements to HCFA's use of
expert panels, but they would not be practical approaches for the
primary data gathering. 

HCFA made various adjustments to the expert panels' data that were
intended to (1) convert the panels' estimates to a common scale, (2)
eliminate expenses reimbursed to hospitals rather than to physicians,
(3) reduce potentially excessive estimates, and (4) ensure
consistency with aggregate survey data on practice expenses for
equipment, supplies, and nonphysician labor.  While we agree with the
intent of these adjustments, we believe some have methodological
weaknesses, and other adjustments and assumptions lack supporting
data. 

HCFA has done little in the way of performing sensitivity analyses
that would enable it to determine the impact of the various
adjustments, methodologies, and assumptions, either individually or
collectively.  Such sensitivity analyses could help determine whether
the effects of the adjustments and assumptions warrant additional,
focused data gathering to determine their validity.  We believe this
additional work should not, however, delay phase-in of the fee
schedule revisions. 

Since implementation of the physician fee schedule in 1992, Medicare
beneficiaries have generally experienced very good access to
physician services.  The eventual impact of the new practice expense
revisions on Medicare payments to physicians is unknown at this time,
but they should be considered in the context of other changes in
payments to physicians by Medicare and by other payers.  Recent
successes in health care cost control are partially the result of
purchasers and health plans aggressively seeking discounts from
providers.  How Medicare payments to physicians relate to those of
other payers will determine whether the changes in Medicare payments
to physicians reduce Medicare beneficiaries' access to physician
services.  This issue warrants continued monitoring, and possible
Medicare fee schedule adjustments, as the revisions are phased-in. 


--------------------
\1 For each service or procedure, Medicare pays 80 percent of the
allowed amount set by the fee schedule, and Medicare patients are
responsible for the remaining 20 percent.  In this testimony, we
refer to the Medicare fee schedule allowance as the Medicare payment. 

\2 Physician work is based on the time the physician spends, the
intensity of effort and level of skill required, and stress as a
result of the risk of harm to the patient. 

\3 Sec.  4505, P.L.  105-33, 111 Stat.  251, 435, Aug.  5, 1997. 

\4 GAO/HEHS-98-79, Feb.  27, 1998. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

The Social Security Act Amendments of 1994\5 required the Secretary
of Health and Human Services to revise the fee schedule by 1998 so
the practice expense component would reflect the relative amount of
resources physicians use when they provide a service or perform a
procedure.  The legislation required that the revisions be budget
neutral--in other words, Medicare payments for practice expenses
could increase for some procedures and decrease for others, but the
revisions must not increase or decrease total Medicare payments. 
Physicians could, however, experience increases or decreases in their
payments from Medicare, depending on the services and procedures they
provide. 

HCFA published a notice of proposed rulemaking in the June 18, 1997,
Federal Register describing its proposed revisions to physician
practice expense payments.  HCFA estimated that its revisions, had
they been in effect in fiscal year 1997, would have reallocated $2
billion of the $18 billion of the practice expense component of the
Medicare fee schedule that year.  The revisions would generally
increase Medicare payments to physician specialties that provide more
office-based services while decreasing payments to physician
specialties that provide primarily hospital-based services.  The
revisions could also affect physicians' non-Medicare income, since
many other health insurers use the Medicare fee schedule as the basis
for their payments.  Some physician groups argued that HCFA based its
proposed revisions on invalid data and that the reallocations of
Medicare payments would be too severe.  Subsequently, the Balanced
Budget Act of 1997 delayed implementation of the resource-based
practice expense revisions until 1999 and required HCFA to publish a
revised proposal by May 1, 1998.  The act also required us to
evaluate the June 1997 proposed revisions, including their potential
impact on beneficiary access to care. 


--------------------
\5 Sec.  121, P.L.  103-432, 108 Stat.  4398, 4408, Oct.  31, 1994. 


   HCFA'S METHOD TO ESTIMATE
   DIRECT EXPENSES WAS REASONABLE
---------------------------------------------------------- Chapter 0:2

HCFA faced significant challenges in revising the practice expense
component of the fee schedule--perhaps more challenging than the task
of estimating the physician work associated with each procedure. 
Practice expenses involve multiple items, such as the wages and
salaries of receptionists, nurses, and technicians employed by the
physician; the cost of office equipment such as examining tables,
instruments, and diagnostic equipment; the cost of supplies such as
face masks and wound dressings; and the cost of billing services and
office space.  Practice expenses are also expected to vary
significantly.  For example, a general practice physician in a solo
practice may have different expenses than a physician in a group
practice.  For most physician practices, the total of supply,
equipment, and nonphysician labor expenses is probably readily
available.  However, Medicare pays physicians by procedure, such as a
skin biopsy; therefore, HCFA had to develop a way to estimate the
portion of practice expenses associated with each
procedure--information that is not readily available. 

Ideally, estimates of the relative resources associated with each
medical procedure would be based on resource data obtained from a
broad, representative sample of physician practices.  However, the
feasibility of completing such an enormous data collection task
within reasonable time and cost constraints is doubtful, as evidenced
by HCFA's unsuccessful attempt to survey 5,000 practices.  After
considering this option and the limitations of survey data already
gathered by other organizations, HCFA decided to use expert panels to
estimate the relative resources associated with medical procedures
and convened 15 specialty-specific clinical practice expense panels
(CPEP).\6 Each panel included 12 to 15 members; about half the
members of each panel were physicians, and the remaining members were
practice administrators and nonphysician clinicians such as nurses. 
HCFA provided national medical specialty societies an opportunity to
nominate the panelists, and panel members represented over 60
specialties and subspecialties. 

Each panel was asked to estimate the practice expenses\7 associated
with selected procedure codes.\8 Some codes, called "redundant
codes," were assigned to two or more CPEPs so that HCFA and its
contractor could analyze differences in the estimates developed by
the various panels.  For example, HCFA included the repair of a disk
in the lower back among the procedures reviewed by both the
orthopedic and neurosurgery panels.\9

We believe that HCFA's use of expert panels is a reasonable method
for estimating the direct labor and other direct practice expenses
associated with medical services and procedures.  We explored
alternative primary data-gathering approaches, such as mailing out
surveys, using existing survey data, and gathering data on-site, and
we concluded that each of those approaches has practical limitations
that preclude their use as reasonable alternatives to HCFA's use of
expert panels.  Gathering data directly from a limited number of
physician practices would, however, be a useful external validity
check on HCFA's proposed practice expense revisions and would also
help HCFA identify refinements needed during phase-in of the fee
schedule revisions. 


--------------------
\6 For example, one panel reviewed general surgery codes, while
another reviewed orthopedic codes. 

\7 The CPEP members were instructed to base their estimates on the
typical patient--the patient who most frequently undergoes a
particular procedure--not necessarily a Medicare patient.  For
example, most women receiving hysterectomies are in their 40s and 50s
and are not Medicare patients. 

\8 The Current Procedural Terminology (CPT), compiled by the American
Medical Association, is used by the Medicare program and most other
payers to identify, classify, and bill medical procedures.  It
consists of procedure codes, descriptions, and modifiers to
facilitate billing and payment for medical services and procedures
performed by physicians.  When the terms "code" and "procedure code"
are used in this testimony, they refer to CPT codes. 

\9 This was procedure code 63030. 


   WEAKNESSES AND LIMITATIONS OF
   HCFA'S ADJUSTMENT OF DIRECT
   EXPENSE ESTIMATES
---------------------------------------------------------- Chapter 0:3

HCFA staff believed that each of the CPEPs developed reasonable
relative rankings of their assigned procedure codes.  However, they
also believed that the CPEP estimates needed to be adjusted to
convert them to a common scale, eliminate certain inappropriate
expenses, and align the panels' estimates with data on aggregate
practice expenses.  While we agree with the intent of these
adjustments, we identified methodological weaknesses with some and a
lack of supporting data with others. 

HCFA staff found that labor estimates varied across CPEPs for the
same procedures and therefore used an adjustment process referred to
as "linking" to convert the different labor estimates to a common
scale.  HCFA's linking process used a statistical model to reconcile
significant differences between various panels' estimates for the
same procedure (for example, hernia repair).  HCFA used linking
factors derived from its model to adjust CPEP's estimates.  HCFA's
linking model works best when the estimates from different CPEPs
follow certain patterns; however, we found that, in some cases, the
CPEP data deviated considerably from these patterns and that there
are technical weaknesses in the model that raise questions about the
linking factors HCFA used. 

HCFA applied two sets of edits to the direct expense data in order to
eliminate inappropriate or unreasonable expenses:  one based on
policy considerations, the other to correct for certain estimates
HCFA considered to be unreasonable.  The most controversial policy
edit concerned HCFA's elimination of nearly all expenses related to
physicians' staff, primarily nurses, for work they do in hospitals. 
HCFA excluded these physician practice expenses from the panels'
estimates because, under current Medicare policy, those expenses are
covered by payments to hospitals rather than to physicians.  We
believe that HCFA acted appropriately according to Medicare policy by
excluding these expenses.  However, shifts in medical practices
affecting Medicare's payments may have resulted in physicians
absorbing these expenses. 

In a notice published in the October 1997 Federal Register, HCFA
asked for specific data from physicians, hospitals, and others on
this issue.  After we completed our field work, HCFA received some
limited information, which we have not reviewed.  HCFA officials said
that they will review that information to determine whether a change
in their position is warranted.  If additional data indicate that
this practice occurs frequently, it would be appropriate for HCFA to
determine whether Medicare reimbursements to hospitals and physicians
warrant adjustment. 

HCFA also limited some administrative and clinical labor estimates
that it believes are too high.  Specifically, HCFA believes that (1)
the administrative labor time estimates developed by the CPEPs for
many diagnostic tests and minor procedures seemed excessive compared
with the administrative labor time estimates for a midlevel office
visit; and (2) the clinical labor time estimates for many procedures
appeared to be excessive compared with the time physicians spend in
performing the procedures.  Therefore, HCFA capped the administrative
labor time for several categories of services at the level of a
midlevel office visit.  Furthermore, with certain exceptions, HCFA
capped nonphysician clinical labor at 1-1/2 times the number of
minutes it takes a physician to perform a procedure.  HCFA has not,
however, conducted tests or studies that validate the appropriateness
of these caps and thus cannot be assured that they are necessary or
reasonable. 

Various physician groups have suggested that HCFA reclassify certain
administrative labor activities as indirect expenses.  Such a move
could eliminate the need for limiting some of the expert panels'
administrative labor estimates, which some observers believe are less
reliable than the other estimates they developed.  HCFA officials
said that they are considering this possibility. 

Finally, HCFA adjusted the CPEP data so that it was consistent in the
aggregate with national practice expense data developed from the
American Medical Association's (AMA) Socioeconomic Monitoring System
(SMS) survey--a process that it called "scaling." HCFA found that the
aggregate CPEP estimates for labor, supplies, and equipment each
accounted for a different portion of total direct expenses than the
SMS data did.  For example, labor accounted for 73 percent of total
direct expenses in the SMS survey data but only 60 percent of the
total direct expenses in the CPEP data.  To make the CPEP percentages
mirror the SMS survey percentages, HCFA inflated the CPEPs' labor
expenses for each code by 21 percent and the medical supply expenses
by 6 percent and deflated the CPEPs' medical equipment expenses by 61
percent. 

The need for scaling was due in part to the equipment utilization
rates HCFA used.  HCFA officials told us that actual equipment
utilization rates were not available from the medical community and
therefore they had to make assumptions about the rate at which
equipment is used in order to assign equipment costs to each code. 
For equipment associated with specific procedures, such as a
treadmill used as part of a cardiology stress test, HCFA assumed a
utilization rate of 50 percent, while, for equipment that supports
all or nearly all services provided by a practice, such as an
examination table, HCFA assumed a utilization rate of 100 percent. 
Scaling provided HCFA with a cap on the total amount of practice
expenses devoted to equipment that was not dependent upon the
equipment rate assumptions HCFA used. 

While HCFA officials acknowledge that their equipment utilization
rate assumptions are not based on actual data, they claim that the
assumptions are not significant for most procedures since equipment
typically represents only a small fraction of a procedure's direct
expenses.  The AMA and other physician groups that we contacted have
said, however, that HCFA's estimates greatly overstate the
utilization of most equipment, which results in underestimating
equipment expenses used in developing new practice expense fees. 
HCFA agrees that the equipment utilization rates will affect each
medical specialty differently, especially those with high equipment
expenses, but HCFA staff have not tested the effects of different
utilization rates on the various specialties. 

In a notice in the October 1997 Federal Register, HCFA asked for
copies of any studies or other data showing actual utilization rates
of equipment, by procedure code.  This is consistent with the
Balanced Budget Act of 1997 requirement that HCFA use actual data in
setting equipment utilization rates. 


   IMPACT ON ACCESS TO CARE NEEDS
   CONTINUED MONITORING
---------------------------------------------------------- Chapter 0:4

It is not clear whether beneficiary access to care will be adversely
affected by Medicare's new fee schedule payments for physician
practice expenses.  This will depend upon such factors as the
magnitude of the Medicare payment reductions experienced by different
medical specialties, other health insurers' use of the fee schedule,
and fees paid by other purchasers of physician services. 

While beneficiary access to care has remained very good since
implementation of the fee schedule began in 1992, the cumulative
effects of the transition to the fee schedule, recent adjustments to
the fee schedule that were mandated by the Balanced Budget Act, and
the upcoming practice expense revisions could alter physicians'
willingness to accept Medicare's fee schedule payments for some
procedures.  For example, between 1992 and 1996, cardiologists
experienced a 9 percent reduction in their Medicare fee schedule
payments; gastroenterologists, an 8-percent reduction, and
ophthalmologists, a 12-percent reduction.  HCFA's June 1997 proposed
rule would result in further reductions of 17 percent, 20 percent,
and 11 percent, respectively, for these specialties once the new
practice expense component of the fee schedule is fully implemented
in 2002.  Additionally, Medicare payments for surgical services were
reduced by 10.4 percent beginning in 1998 as a result of provisions
contained in the Balanced Budget Act.  The combined impact of the
proposed and prior changes on physicians' incomes will affect some
medical specialties more than others.  Therefore, there is a
continuing need to monitor indicators of beneficiary access to care,
focusing on services and procedures with the greatest reductions in
Medicare payments. 


   OBSERVATIONS
---------------------------------------------------------- Chapter 0:5

Even though HCFA has made considerable progress developing new
practice expense fees, much remains to be done before the new fee
schedule payments are implemented starting in 1999.  For example,
HCFA has not collected actual data that would serve as a check on the
panels' data and as a test of its assumptions and adjustments. 
Furthermore, HCFA has done little in the way of conducting
sensitivity analyses to determine which of its adjustments and
assumptions have the greatest effects on the proposed fee schedule
revisions.  There is no need, however, for HCFA to abandon the work
of the expert panels and start over using a different methodology;
doing so would needlessly increase costs and further delay
implementation of the fee schedule revisions. 

The budget neutrality requirement imposed by the Congress means that
some physician groups would benefit from changes in Medicare's
payments for physician practice expenses to the detriment of other
groups.  As a result, considerable controversy has arisen within the
medical community regarding HCFA's proposed fee schedule revisions,
and such controversy can be expected to continue following issuance
of HCFA's next notice of proposed rulemaking, which is due May 1,
1998.  Similar controversy occurred when Medicare initially adopted a
resource-based payment system for physician work in 1992.  Since that
time, however, medical community confidence in the physician work
component of the fee schedule has increased. 

In our recently issued report, we recommended several actions HCFA
should take to improve its methods for revising Medicare's payments
for physician practice expenses.  These recommendations, if adopted,
would

give physicians greater assurance that the revisions HCFA proposes
are appropriate and sound.  HCFA officials said that they would
carefully review and consider each of our recommendations as they
develop their rule. 


-------------------------------------------------------- Chapter 0:5.1

Mr.  Chairman, this concludes my statement.  I will be happy to
answer your questions. 


*** End of document. ***