INTRODUCTION
Mr. Chairman and Members of the Subcommittee, I appreciate the opportunity to be here today
to discuss resource-based practice expenses under the Medicare physician fee schedule.
Research performed by the Physician Payment Review Commission (PPRC) and
recommendations made in their 1993 Annual Report to the Congress documented the need to
change the current practice expense system and the significant redistributions that would occur
under a new system. Following the PPRC recommendations, Congress passed legislation
requiring HCFA to implement a resource based practice expense relative value system beginning
in 1998. The intent of the new system is to create a more equitable system for physician
reimbursement which better reflects the relative practice expense resources involved in
furnishing a service.
As you know, last June 18th, we published a proposed rule. The Balanced Budget Act delayed
the new system for one year and made a number of other changes in resource-based practice
expenses, including a report to Congress from the Secretary and publication of a new proposed
rule by May 1, 1998.
Today, I will review our efforts since the passage of the Balanced Budget Act. We are busily
working on development of the May 1st rule. At this point, we are still analyzing data, input and
comments that we received during the activities I will describe later and considering the
recommendations made in the just released GAO report. Since our new proposed rule is
currently under development, I do not have details and specifics to discuss with you today.
BACKGROUND
Medicare spends about $40 billion annually for physicians' services. We pay for more than
6,000 different procedure codes under the physician fee schedule. These services are provided
by more than 500,000 physicians and practitioners in settings as diverse as physician's offices,
hospitals, ambulatory surgical centers, and nursing homes.
Medicare's physician fee schedule established relative values for three components of each
physician's service: physician work, practice expenses and malpractice insurance. The sum of
these three components represents the total relative value for a service; this total relative value is
used in conjunction with a conversion factor to establish the Medicare fee schedule amount for
the service. The relative size of the three components varies for each service, but on average,
physician work represents 54 percent of the overall relative value, practice expenses 41 percent
and malpractice insurance 5 percent. Practice expenses include resource inputs such as a
physician's staff (both clinical and administrative), rent, equipment and supplies.
The relative values for physician work have been resource-based since the inception of the fee
schedule in 1992. The relative values for physician work are based on physicians' estimates of
the physician time and effort needed to perform a service. Practice expense and malpractice
expense relative value units (RVUs), however, currently are based on allowed charges under the
old reasonable charge system of paying physicians. Relative values for these components thus
largely reflect historical charges, without a direct and explicit relationship to resources used.
One example of the inequity in the current system can be seen by comparing practice expense
RVUs that Medicare currently pays for the most common office visit and for triple by-pass
surgery. Under the existing system, Medicare pays almost 100 times more for the physician's
practice expense (overhead) for a by-pass surgery than for an office visit. In other words, a
physician practicing in an office would have to do almost 100 office visits to receive the same
payment for practice expenses as a surgeon performing one by-pass surgery in a hospital. Most
observers would agree that the "relative" values for practice expense is out of line for both
services.
The Balanced Budget Act requires that malpractice expense relative value units be converted to a
new system beginning in 2000. The Balanced Budget Act also requires that practice expense
RVUs be converted to a resource-based system beginning on January 1, 1999.
Converting the charge-based system to a resource-based system has been quite challenging.
We must establish relative values for the large number of services involved, but practice expense
data are not readily available for both services.
In addition, the law requires that we establish resource-based practice expense relative values in a
budget-neutral manner. In other words, the total Medicare payments for practice expenses prior
to the changeover to resource-based values should be the same as the payments under the new
system. This necessarily involves a redistribution of payments across services; to the extent that
there are increases in values for some services, others will decrease.
I want to emphasize that new resource-based relative values for practice expense reflect the
relative practice expense resources involved with furnishing physicians' services. The new
system is not a cost reimbursement system.
Since we started to develop the new system , we have sought and encouraged the participation of
the medical community in virtually every step along the way. We will continue to actively
encourage the participation of the medical profession and others who have a stake in the
physician fee schedule as we proceed with our proposal. I have attached to my testimony the
Appendix to our Report to Congress which contains a list of the major physician and other
groups with whom we have consulted.
LAST YEAR'S PROPOSED RULE
As you know, on June 18, 1997, we published a proposed rule in the Federal Register
announcing our proposed relative value units for practice expenses. Using the traditional
accounting concepts of direct and indirect costing, we segmented the project into two parts, one
involving direct costs, the other involving indirect costs.
For direct costs, we used a contractor to convene panels of physicians and others knowledgeable
about how services are provided to present information on direct cost inputs, i.e., the time it takes
various clinical and administrative staff to assist the physician in providing the service. The
panels also provided information on the types of supplies and equipment used in providing
services.
The second part of the project involved indirect costs. We needed to allocate the remaining
resources, indirect expenses, to specific procedures in order to arrive at a total practice expense
relative value for the service. This process was initially to be accomplished through a survey of
physician practices. However, due to the very low response rate to this survey, we instead relied
on existing data sources to allocate indirect expenses. The data source we used was the
information gathered by the American Medical Association through surveys of its members.
Needless to say, the publication of the June 18 Notice resulted in strong opinions about our
methodology, assumptions, and approach. Generally speaking, family practitioners, and other
primary care physicians have been supportive of our approach. However, most surgeons and
many medical specialties have challenged many aspects of our proposal. Many of the physicians
and groups which were adversely affected by our proposal criticized our methodology as flawed
and suggested alternatives. Some of the alternatives would have required abandoning the panel
process of gathering data in favor of a brand new data gathering activity.
THE BALANCED BUDGET ACT AND OUR CONSULTATIONS WITH PHYSICIANS
I would like to describe some of the recent key events of this project. As you know, the
Balanced Budget Act (BBA) made several changes in how Medicare will pay for physician
practice expenses. The BBA delayed the implementation of a resource-based relative value
practice expense for one year. The BBA also allowed for a four-year transition to the new
system beginning January 1, 1999. The Balanced Budget Act required that we publish a notice
in the Federal Register by May 1 and provide a 90 day comment period, which is 30 days longer
than our usual comment period for the annual physician fee schedule regulation.
The Balanced Budget Act requires us, to the maximum extent practicable, to use generally
accepted cost accounting principles which recognize all staff, equipment, supplies, and expenses
and to use actual data on equipment utilization, etc. The Balanced Budget Act also requires that
we consult with organizations representing physicians on our methodology and to develop a
refinement process to be used during each year of the transition period.
On October 31, 1997, we published a Notice of Intent to regulate in the Federal Register. We
solicited input from the physician community on a wide variety of key data and methodological
issues including general accepted accounting principles, equipment utilization, physician
employed staff and the refinement process. This was an opportunity for many of the groups to
provide additional information to aid us as we develop this year's proposed rule. We received a
number of constructive and thoughtful comments in response to this Notice.
Since the Balanced Budget Act was enacted, we have met with physician groups in October,
November, and December 1997 to discuss various practice expense issues. In October, we
hosted 17 medical specialty panels charged with validating some of the direct expense data
generated through the original panel process used for our June 18 Notice. The panels reviewed
about 200 of the highest volume Medicare services to validate the data originally collected.
These codes represent about 80 percent of Medicare physician spending. Members of the panels
were nominated by their specialty societies and were given extensive information about the
original panel process prior to the meetings to help them as they validated the data.
On November 21, 1997, we held a forum on indirect practice expenses. Again, all major
specialty societies were invited to send representatives. We asked specialties who had specific
concerns about our indirect cost methodology to present their views to the meeting and, where
applicable, to provide alternatives to the approach in last June's proposed rule. Several
presentations were made offering alternative approaches to the allocation of indirect costs as well
as an approach which used a non traditional accounting approach to determining practice costs.
There was consensus that by definition all approaches to dealing with indirect costs require an
allocation formula. As with our prior meetings and discussions with the physician community,
the comments were both constructive and informative.
On December 15 and 16, we again hosted a single cross-specialty panel to discuss some of the
issues that were believed to have commonality among the various specialties. The objective was
to understand the differences in the way specialties provide common administrative functions,
such as billing and scheduling. Although there was no agreement among the specialties about
many of the issues, the discussions were helpful in framing the debate and in shaping alternatives
to some of the original assumptions that were made in the June 18 proposal.
Since the December panel, we have been meeting with groups proposing alternative approaches
to the practice expense project. Some of these groups are advocating extensive data surveys of
individual physician practices. We do not believe it is practicable at this time to do any new
surveys and still meet the January 1, 1999 implementation date established in the Balanced
Budget Act. Although we have not completed our internal deliberations on the refinement
process we will be proposing in May, we are considering additional data gathering as part of a
longer term refinement of the practice expense values.
GAO REPORT TO CONGRESS
The Balanced Budget Act requested an independent review and evaluation by the General
Accounting Office (GAO) of the practice expense methodology contained in last June's proposed
rule.
We are pleased that GAO supports the key elements of the methodology we used to develop
practice expense relative values. GAO found that our use of expert panels is an acceptable
method to develop direct cost estimates. GAO also found that assigning indirect expenses to
individual procedures, such as the method we used, is an acceptable approach. As the GAO
Report indicates: "There is no need for HCFA to start over and utilize different methodologies
for creating new practice expense RVUs; doing so would needlessly increase costs and further
delay implementation of the fee schedule revisions."
GAO also made recommendations about a number of technical issues. As we develop our
May 1, 1998 proposed rule, we will carefully review and consider each of GAO's specific
recommendations.
GAO recommended that we use sensitivity analyses to test the effects of two items, (1) the limits
we placed on direct cost panel's estimates of clinical and administrative labor, and (2) our
assumptions and still meet the January 1, 1999 implementation date established in the Balanced
Budget Act. Although we have not completed our internal deliberations on the refinement
process we will be proposing in May, we are considering additional data gathering as part of a
longer term refinement of the practice expense values.
GAO recommends that we evaluate three interrelated issues: (1) classifying administrative labor
associated with billing and other administrative expenses as indirect expense, (2) alternative
methods for assigning indirect expenses, and (3) alternative specifications of the regression
model used to link the panels' estimates. We are currently analyzing these issues.
GAO recommends that we "determine whether changes in hospital staffing patterns and
physicians' use of their clinical staff in hospital settings warrants adjustments between Medicare
reimbursements to hospitals and physicians". On a related note, GAO recommends that we
"determine whether physicians have shifted tasks to non-physician clinical staff in a way that
warrants re-examining the physician work RVUs". We are currently analyzing these issues.
The GAO Report recommends that we "work with physician groups and the AMA to develop a
process for collecting data from physician practices as a cross-check on the calculated practice
expense RVUs, and to periodically refine and update the RVUs". I also note that the Balanced
Budget Act also requires that we develop a refinement process to be used during each of the four
years of the transition. We are currently developing our plans for refinement.
The GAO Report recommends that we "monitor indicators of beneficiary access to care, focusing
on those services with the greatest cumulative reductions in Medicare physician fee schedule
allowances, and consider any access problems when making refinements to the practice expense
RVUs". We have comprehensively monitored access to care and utilization of services since the
inception of the physician fee schedule and we will continue to do so.
CONCLUSION
I appreciate the opportunity to discuss with you today the status of our efforts on resource-based
practice expenses under the Medicare physician fee schedule. We are working very hard
analyzing data, input and comments that we received and considering the recommendations
made in the GAO Report. We look forward to working with you, Mr. Chairman and Members of
the Subcommittee, as we develop our May 1st proposed rule.
From HHS Report To Congress on Practice Expenses
APPENDIX A
Organizations Participating in HCFA Practice Expense Meetings
Validation Panels - October 6-8, 1997
American Academy of Audiology
American Academy of Dermatology
American Academy of Family Physicians
American Academy of Neurology
American Academy of Pediatrics
American Academy of Physical Medicine and Rehabilitation
American Academy of Ophthalmology
American Academy of Orthopaedic Surgeons
American Academy of Otolaryngology-HNS
American Association of Neurological Surgeons
American Chiropractic Association
American College of Cardiology
American College of Chest Physicians
American College of Emergency Physicians
American College of Obstetricians and Gynecologists
American College of Physicians
American College of Radiology
American College of Surgeons
American Nurses Association
American Occupational Therapy Association
American Optometric Association
American Osteopathic Association
American Physical Therapy Association
American Podiatric Medical Association
American Psychiatric Association
American Psychological Association
American Sleep Disorders Association
American Speech-Language-Hearing Association
American Society for Gastrointestinal Endoscopy
American Society of Anesthesiologists
American Society of Clinical Oncology
American Society of Colon and Rectal Surgeons
American Society of Hematology
American Society of Internal Medicine
American Society of Plastic and Reconstructive Surgery
American Urological Association
Association of Freestanding Radiation Oncology
Clinical Social Work Federation
College of American Pathologists
Joint Council of Allergy, Asthma and Immunology
Medical Group Management Association
National Association of Portable X-ray Providers
National Association of Social Workers
Renal Physicians Association
Society for Vascular Surgery
Society of Cardiovascular and Interventional Radiology
Society of Nuclear Medicine
Society of Thoracic Surgeons
Indirect Cost Symposium Presenters - November 14, 1997
American Academy of Family Physicians
American Academy of Orthopaedic Surgeons
American Association of Neurological Surgeons
American College of Physicians
American College of Surgeons
American Medical Association
American Society of Internal Medicine
Medical Group Management Association
Practice Expense Coalition
Cross-Specialty Panel - December 14-15, 1997
American Academy of Dermatology
American Academy of Family Physicians
American Academy of Neurology
American Academy of Pediatrics
American Academy of Ophthalmology
American Academy of Orthopaedic Surgeons
American Academy of Otolaryngology-HNS
American Association of Neurological Surgeons
American Chiropractic Association
American College of Cardiology
American College of Chest Physicians
American College of Emergency Physicians
American College of Obstetricians and Gynecologists
American College of Physicians
American College of Radiology
American College of Surgeons
American Nurses Association
American Optometric Association
American Osteopathic Association
American Physical Therapy Association
American Podiatric Medical Association
American Psychiatric Association
American Society of Anesthesiologists
American Society of Clinical Oncology
American Society for Gastrointestinal Endoscopy
American Society of Internal Medicine
American Society of Plastic and Reconstructive Surgery
American Urological Association
College of American Pathologists
Joint Council of Allergy, Asthma and Immunology
Medical Group Management Association
Renal Physicians Association
Society for Vascular Surgery
Society of Thoracic Surgeons
