Medicare Physician Fees:

Geographic Adjustment Indices Are Valid in Design, but Data and Methods Need Refinement

GAO-05-119: Published: Mar 11, 2005. Publicly Released: Mar 11, 2005.

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The Medicare physician fee schedule adjusts physician fees for area differences in physicians' costs of operating a private medical practice. Three separate indices, known as geographic practice cost indices (GPCI), raise or lower Medicare fees in an area, depending on whether the area's physician practice costs are above or below the national average. The three GPCIs correspond to the three components of a Medicare fee: physician work, practice expense, and malpractice expense. Advocates for rural physicians have criticized the GPCIs, which lower fees in areas where costs are below the national average. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 directed GAO to evaluate Medicare's method of geographic adjustment. This report examines the extent to which Medicare's GPCIs are valid in their design and appropriate in the data and methods used in their construction, and affect physician incomes, location, recruitment, and retention.

The physician work GPCI, the practice expense GPCI, and the malpractice expense GPCI are valid in their fundamental design as tools to account for geographic cost differences. The three GPCIs as implemented appropriately reflect broad patterns of geographic differences in the costs of running a medical practice. For example, nurses' wages, which constitute a substantial share of physicians' practice expenses, vary across the nation and contribute to differences in practice expenses. In addition to adjusting for cost differences, the work GPCI is valid in that it also reflects a goal of protecting physician fees in low-cost areas from dropping to levels that could be considered unfair relative to fees in high-cost areas. The work GPCI does so by limiting downward cost adjustments. Despite the GPCIs' validity, however, data and methodology problems may detract from the GPCIs as measures of cost differences. For example, the wage data used in the work and practice expense GPCIs are not current, and the data used in the malpractice GPCI are incomplete. The Centers for Medicare & Medicaid Services (CMS) in the Department of Health and Human Services (HHS) has options to remedy some of these flaws. GPCIs appear to have a negligible bearing on physicians' decisions to locate in rural areas. Because Medicare revenue constitutes only part of a physician's income--typically 25 percent--the secondary impact of the GPCIs on a physician's income is generally modest, raising or lowering income by no more than 2 to 3 percent in most localities. GAO's interviews with physician recruitment experts and GAO's review of the literature indicate that income is only one of several factors--such as a spouse's employment opportunities, the quality of local schools, and the availability of other physicians to share night and weekend calls--that drive physicians' decisions to locate in rural areas.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Our recommendation asked CMS to switch from using census data to using the American Community Survey data for various inputs, including the earnings and wage data, in calculating the GPCIs. In 2012, CMS began using the Bureau of Labor Statistics Occupational Employment Statistics for the earnings and wage data. This is consistent with the intent of our recommendation that CMS improve the data sources for calculating the GPCIs. This recommendation is therefore closed as implemented.

    Recommendation: The Secretary of Health and Human Services should seek to improve the GPCI's data and methods by developing a plan for transitioning from the Census Bureau's decennial census to the annual ACS for earnings and wage data, pending resolution by the Census Bureau of key outstanding issues regarding the implementation of the ACS.

    Agency Affected: Department of Health and Human Services

  2. Status: Closed - Not Implemented

    Comments: CMS disagreed with this recommendation, stating that it would be inappropriate to add physician assistants' wages to the practice expense GPCI because physician assistants perform physician services and are a practice expense to the physician only in very unusual circumstances.

    Recommendation: The Secretary of Health and Human Services should seek to improve the GPCI's data and methods by adding data on physician assistants' wages to improve the measurement of the practice expense GPCI.

    Agency Affected: Department of Health and Human Services

  3. Status: Closed - Implemented

    Comments: CMS explored numerous alternative rental data sources, including commercial rental data sources as recommended by GAO. The agency found that the commercial rental data it reviewed were not reflective of the average commercial space in an area, but rather of the particular type of space most relevant to the needs of the source's clients. In addition, none of these data sources contained sufficient sample sizes at the county level. Consistent with GAO's recommendation, CMS intends to analyze ACS data as a possible source when these data become available.

    Recommendation: The Secretary of Health and Human Services should seek to improve the GPCI's data and methods by considering the feasibility of replacing the practice expense GPCI's current rent index with a commercial rent index; if using a commercial rent index is not feasible, consider a residential rent index directly based on ACS data.

    Agency Affected: Department of Health and Human Services

  4. Status: Closed - Implemented

    Comments: For the most recent malpractice Geographic Practice Cost Indices (GPCI) update, CMS's contractor collected and analyzed data from all states and territories as recommended by GAO.

    Recommendation: The Secretary of Health and Human Services should seek to improve the GPCI's data and methods by collecting malpractice premium data from all states.

    Agency Affected: Department of Health and Human Services

  5. Status: Closed - Implemented

    Comments: CMS stated that the malpractice data used in its Geographic Practice Cost Indices (GPCI) updates have met the 51 percent market share criterion recommended by GAO in every year except 2004.

    Recommendation: The Secretary of Health and Human Services should seek to improve the GPCI's data and methods by collecting data from insurers that account for at least half of malpractice business in a state.

    Agency Affected: Department of Health and Human Services

  6. Status: Closed - Implemented

    Comments: CMS stated that its goal is to have accurate malpractice data from all states and territories for its Geographic Practice Cost Indices (GPCI) updates. For the most recent update, CMS's contractor met this goal.

    Recommendation: The Secretary of Health and Human Services should seek to improve the GPCI's data and methods by standardizing collection of malpractice premium data.

    Agency Affected: Department of Health and Human Services

 

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