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Continuing reforms initiated in the 1999 fee schedule, the 2000 Medicare physician fee schedule relates payment for physician practice expenses to the actual resources used to provide medical services rather than physicians' historical charges. A fully resource-based fee schedule reflects the relative resources involved in delivering a service, breaking the link with the physician's historical charges.

"The 2000 fee schedule represents a further refinement in the way Medicare pays physicians by making the payments more equitable. A fair reimbursement system is one way Medicare ensures that its beneficiaries have access to physicians when they need treatment," HCFA Deputy Administrator Michael Hash said. "HCFA will continue to work with the American Medical Association, physician specialty groups and others to make further refinements over the next two years."

HCFA, the agency that runs Medicare, published the final regulation in the November 2 Federal Register.

The fee schedule specifies payments to physicians for more than 7,000 services and procedures ranging from routine office visits to cardiac bypass surgery. In 2000, Medicare is expected to spend nearly $37 billion on physician services.

In 2000, Medicare physician fees will reflect the relative costs each specialty incurs for malpractice insurance. With the full implementation of resource-based practice expenses in 2002, the Medicare fee schedule will be entirely resource-based.

The inclusion of malpractice insurance costs will have a modest effect on the fees. Of the 35 major medical specialties, HCFA estimates that 15 will experience payment increases and 19 will experience payment decreases, and one specialty will experience no change.

The 5.5 percent update is determined by a formula established by law. The law requires that the update in the annual physician fee schedule be equal to the Medicare Economic Index (MEI) , increased or decreased based on expenditures compared to the Sustainable Growth Rate (SGR), a target for physician service expenditure growth. The MEI is an index of inflation in the cost of medical practice. If expenditures are less than the SGR, the update is increased. If the expenditures are more than the SGR, the update is decreased.

The final regulation also adjusts the physician practice expense relative value units by excluding costs associated with clinical staff accompanying physicians to a facility setting such as a hospital. Medicare pays for clinical staff through other payment systems. This change will decrease payments for some services that are performed primarily in hospitals and increase payments for many office-based services.

The final regulation also includes a discussion of the mandated five-year review of relative value units for physician work and a request for comments from the public on this process.

The resource-based practice expense component of the Medicare fee schedule is being phased in during a four-year transition that began Jan. 1, 1999. Payments under the 2000 fee schedule will be based on a blend of 50 percent of the resource-based practice expense system and 50 percent of the old, charge-based practice expense system. When the resource-based practice expense is fully effective in 2002, all components of the fee schedule, malpractice insurance expense and practice expense, will be resource-based, creating a more equitable system.

The resource-based practice expense payment system was prompted by studies that showed the old charge based system did not fairly compensate physicians for practice expenses. For example, under the old system, coronary bypass surgery would receive practice expense payments more than 100 times greater than those for an office visit although the costs for bypass surgery are only about 40 times higher.

Practice expenses are composed of direct and indirect expenses. Direct expenses include non-physician labor, medical equipment and medical supplies needed for each procedure. Indirect expenses such as the cost of general office supplies and utilities cannot be tied to individual procedures so HCFA used accepted accounting techniques to allocate expenses to each medical procedure. Working with all the major medical specialties, HCFA convened expert panels and conducted extensive research to estimate the direct expenses for different medical procedures and services. HCFA also used information gathered from the American Medical Association Socioeconomic Monitoring Survey.

Before implementing the old fee schedule in 1992, Medicare based payments on each physician's charges. The fee schedule was created to relate payments to resources physicians use to provide a service rather than what physicians charged for the services.

The relative values for physician work--the physician's own time and effort and the intensity of the procedure--have been established since the Medicare fee schedule was implemented. In 1994, Congress instructed HCFA to design a similar resource-based value system for physician practice expenses. The law required that the new payment system would be budget neutral, meaning total physician payments cannot exceed what they would have been without the changes.

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