Medicare:

Geographic Areas Used to Adjust Physician Payments for Variation in Practice Costs Should Be Revised

GAO-07-466: Published: Jun 29, 2007. Publicly Released: Jul 30, 2007.

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The Centers for Medicare & Medicaid Services (CMS) adjusts Medicare physician fees for geographic differences in the costs of operating a medical practice. CMS uses 89 physician payment localities among which fees are adjusted. Concerns have been raised that the boundaries of some payment localities do not accurately address variations in physicians' costs. GAO was asked to examine how CMS has revised the localities; the extent to which they accurately reflect variations in physicians' costs; and alternative approaches to constructing the localities. To do so, GAO reviewed selected Federal Register documents; compared data on the costs physicians incur in different areas with the Medicare geographic adjustment; and used the physician cost data to construct and evaluate alternative approaches.

The current 89 physician payment localities are primarily consolidations of the 240 localities that Medicare carriers--CMS contractors responsible for processing physician claims--established in 1966. Since then, CMS has revised the payment localities using three different approaches that were not uniformly applied. From 1992 through 1995, CMS permitted state medical associations to petition to consolidate into a statewide locality if the state's physicians demonstrated "overwhelming support" for the change. In 1997, CMS revised the 28 states with multiple payment localities using two approaches: CMS consolidated carrier-defined localities in 25 states and created entirely new localities in 3 states. More than half of the current physician payment localities had counties within them with a large payment difference--that is, a payment difference of 5 percent or more between GAO's measure of physicians' costs and Medicare's geographic adjustment for an area. These 447 counties--representing 14 percent of all counties--were located across the United States, but a disproportionate number were located in California, Georgia, Minnesota, Ohio, and Virginia. Large payment differences occur because certain localities combine counties with different costs, which may be due to several factors. For example, although substantial population growth has occurred in certain areas, potentially leading to increased costs, CMS has not revised the payment localities in accordance with these changes. Many alternative approaches could be used to revise the geographic boundaries of the current payment localities. GAO identified three possible approaches that would improve payment accuracy while generally imposing a minimal amount of additional administrative burden on CMS, Medicare carriers, and physicians. One approach, for example, would improve payment accuracy, the extent to which each approach accurately measures variations in physicians' costs, by 52 percent over the current localities.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To help ensure that Medicare's payments to physicians more accurately reflect geographic differences in physicians' costs of operating a private medical practice, the Administrator of CMS should examine and revise the physician payment localities using an approach that is uniformly applied to all states and based on the most current data.

    Agency Affected: Department of Health and Human Services: Centers for Medicare and Medicaid Services

    Status: Open

    Comments: As of June, 2012, CMS reported that it does not have a timeline for revising the physician fee schedule (PFS) locality structure. The agency noted that it is evaluating recommendations from one of two reports from the Institute of Medicine related to the PFS. One of the IOM's recommendations from this report is to base the PFS payment localities adjustments on the same base as that used for the hospital wage index. According to CMS, the second IOM report (expected Summer, 2012) will address the impact of IOM's recommendations, related to the geographic practice cost index, on the distribution of the healthcare workforce, quality of care, population health, and ability to provide efficient high value care. The agency noted it would be premature to make a proposal to modify the payment localities before evaluating policy implications from this second report.

    Recommendation: To help ensure that Medicare's payments to physicians more accurately reflect geographic differences in physicians' costs of operating a private medical practice, the Administrator of CMS should examine and, if necessary, update the physician payment localities on a periodic basis with no more than 10 years between updates.

    Agency Affected: Department of Health and Human Services: Centers for Medicare and Medicaid Services

    Status: Closed - Not Implemented

    Comments: As of June 2011, CMS had not changed its physician payment localities consistent with GAO's recommendations. CMS non-concurred with the recommendation in the original report and indicated in June 2011 followup that the agency has no further comments. Specifically, CMS noted that the agency considers payment locality issues as concerns are raised by interested parties and otherwise as they determine necessary. CMS believes this approach is more flexible and efficient than conducting a review every 10 years.

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