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Date: Friday, June 5, 1998                                
FOR IMMEDIATE RELEASE 
Contact:  HCFA Press Office  (202) 690-6145

Medicare today proposed a fairer system to pay physicians' overhead costs that will increase payments to primary care doctors.

HCFA, the agency that runs Medicare, published a Federal Register notice of its proposal to pay physicians' practice expenses based on their relative value, not on historical charges as does the current system.

Studies show that the old system results in too much money being paid to specialists like surgeons and not enough being paid to primary care doctors like family physicians. That is, in part, because surgeons' overhead costs are largely covered by the hospitals in which they operate, while primary care doctors work mostly in their own offices.

To establish the new system, Medicare conducted extensive studies in cooperation with virtually all major medical specialty societies to estimate the true cost of physician practice expenses.

To correct differences in fee schedule payments between surgery and primary care, the relative value of the overhead, or practice expenses, has been recalibrated to reflect more accurately the resources a physician uses in performing services.

The Medicare fee schedule for physicians, when originally implemented in 1992, was based partly on historical charges, which tended to overpay surgeries and certain other procedures and underpay primary care services. The fee schedule established "relative values" for three components of each physician's service: physician work, practice expense and malpractice insurance. The relative values for physician work -- the physician's own time and effort, the intensity of a procedure--have been established since the inception of the Medicare fee schedule.

In 1994, Congress asked HCFA to design a similar relative value system for physician "practice expenses." This proposed resource-based practice expense relative value system will pay physicians based on the relative costs of overhead, or resources, not on physician charges. The proposed method considers the cost of staff, equipment and supplies used in providing various medical and surgical services in various settings.

"We have made solid progress in carrying out our congressional mandate to reform Medicare payments to physicians for their costs in operating their practices," said Nancy-Ann DeParle, Administrator of the Health Care Financing Administration. "These practice expense reforms have been carefully developed to reflect the relative cost of overhead involved in providing physician services."

Under the old system, for example, coronary bypass surgery would receive practice expense payments more than 100 times greater than those paid for an office visit, although costs for bypass surgery are only about 18 times higher. Because the statute requires the new payment system to be budget-neutral, some specialties will see increases in their overhead allowances, and others will see slight decreases.

To assure equitable treatment for Medicare enrollees, HCFA will monitor access to care, including those services with the greatest cumulative reductions in the Medicare fee schedule.

HCFA met with panels representing 17 different medical specialties. They reviewed about 200 of the highest volume Medicare services to confirm that cost data collected by HCFA were correct. These services represent about 80 percent of Medicare physician spending.

HCFA published a proposed rule in June 1997 of its intent to reform the practice expense component of the Medicare fee schedule, which was set to take effect in 1998. However, in the Balanced Budget Act of 1997, Congress made several changes in how Medicare will pay for physician practice expenses and delayed implementation of the resource-based relative value practice expense for a year. The BBA also authorized a four-year transition to the new system beginning January 1, 1999. Today's Federal Register notice includes the proposed changes in the relative value of practice expenses by specialty. The notice includes a 90-day public comment period, 30 days longer than the standard comment period.