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Highlights

Medicare's physician fee schedule establishes payments for more than 7,000 different services, such as office visits, surgical procedures, and treatments. Before 1992, fees were based on charges physicians billed for these services. Since then, the Health Care Financing Administration (HCFA), which runs Medicare, has been phasing in a new fee schedule on the basis of the amount of resources used to provide that service relative to other services. The development of the resource-based practice expense component was a substantial undertaking. The implementation of the resource-based methodology has been the subject of considerable controversy, partly because of HCFA's adjustments to the underlying data and basic method and partly because payment changes were required to be budget-neutral--which means that total Medicare spending for physician services was to be the same under the new payment method as it was under the old one. As a result, Medicare payments to some specialties have increased while payments to other specialties have decreased. Oncologists claim that their practice expense payments are particularly inadequate for some office-based services, such as chemotherapy. Oncology practice expense payments in 2001 are eight percent higher than they would have been had charged-based payments continued. Oncology practice expense payments compared to their estimated practice expenses are about the same as the average for all physicians.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Centers for Medicare and Medicaid Services 1. To ensure that practice expense payments for all services under the fee schedule better reflect the costs of providing services, the Administrator of the Centers for Medicare and Medicaid Services (CMS) should examine the effects of adjustments made to the basic methodology across specialties and types of services and validate the appropriateness of these adjustments, including the adjustment made to oncologists' reported medical supply expenses, giving priority to those having larger impacts on payment levels.
Closed - Implemented
Consistent with our recommendation and with the Medicare, Medicaid and SCHIP Balanced Budget Refinement Act (BBRA)of 1999, CMS established a process to accept and use supplemental practice expense data from physician specialties. Several specialties submitted supplemental surveys which CMS accepted and used to update the underlying practice expense estimates. In 2003, oncologists provided CMS their supplemental survey data, which estimated their hourly medical expenses to be $16.90 instead of the estimate of $7.20 CMS had used. CMS accepted this estimate and used it to calculate practice expense payments in 2004.
Centers for Medicare and Medicaid Services 2. To ensure that practice expense payments for all services under the fee schedule better reflect the costs of providing services, the Administrator of CMS should change the allocation of indirect expenses so that all services are allocated the appropriate share of indirect expenses.
Closed - Implemented
Consistent with our recommendation and as required by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, CMS improved its estimates of indirect expenses for drug administration services. CMS' method for allocating indirect expenses, which relied partly on physician work as the basis for the allocation, did not adequately account for the indirect expenses of services that did not have physican work. In 2004, CMS added proxy physician work estimates to drug administration services thus increasing the allocation of indirect expenses to these services. In 2006, CMS proposed changing the indirect allocation methodology to recognize the variation in indirect expenses across different specialties. This method will allocate indirect expenses more appropriately across all services.
Centers for Medicare and Medicaid Services 3. To ensure that practice expense payments for all services under the fee schedule better reflect the costs of providing services, the Administrator of CMS should calculate payments for all services without direct physician involvement under the basic method, using information on the resources required for each service, and, if deemed necessary, validate the underlying resource-based estimates of direct practice expenses required to provide each service.
Closed - Implemented
Consistent with our recommendation and as required by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, CMS implemented this recommendation for non-physician services provided by oncologists in 2004. It calculated payments for these services using the same 'basic' or 'standard' method used to calculate payments for physican serivces. In June 2006, CMS has proposed using this standard method for the remaining non-physician services. CMS has also completed refinements to the underlying estimates of direct expenses through ongoing collaboration with the Practice Expense Advisory Committee (PEAC) from 1999 to March 2004.

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