Order Code RL31199
CRS Report for Congress
Received through the CRS Web
Medicare: Payments to Physicians
Updated May 13, 2005
Jennifer O’Sullivan
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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Medicare: Payments to Physicians
Summary
Medicare law specifies a formula for calculating the annual update in payments
for physicians’ services. The formula resulted in an actual negative update in
payments per service for 2002. Additional reductions were slated to go into effect
in 2003, 2004, and 2005, but were prevented by congressional action. Many
Members were concerned about the potential impact of payment reductions on
patients’ access to services.
Medicare payments for services of physicians and certain nonphysician
practitioners are made on the basis of a fee schedule. The fee schedule, in place since
1992, is intended to relate payments for a given service to the actual resources used
in providing that service. Payments under the fee schedule are estimated at $58.1
billion in FY2006 (over one-sixth of total benefit payments). The fee schedule
assigns relative values to services that reflect physician work (i.e., the time, skill, and
intensity it takes to provide the service), practice expenses, and malpractice costs.
The relative values are adjusted for geographic variations in costs. The adjusted
relative values are then converted into a dollar payment amount by a conversion
factor. The conversion factor for 2005 is $37.8975, a 1.5% increase over the 2004
level, but, 0.9% less than the 2001 level ($38.2581).
The fee schedule places a limit on payment per service but not on overall
volume of services. The formula for calculating the annual update to the conversion
factor responds to changes in volume. If the overall volume of services increases, the
update is lower; if the overall volume is reduced, the update is higher. The intent of
the formula is to place a restraint on overall increases in Medicare spending for
physicians’ services. Several factors enter into the calculation. These include (1) the
Medicare economic index (MEI), which measures inflation in the inputs needed to
produce physicians’ services; (2) the sustainable growth rate (SGR), which is
essentially a target for Medicare spending growth for physicians’ services; and (3) an
adjustment that modifies the update, which would otherwise be allowed by the MEI,
to bring spending in line with the SGR target. The SGR target is not a limit on
expenditures. Rather, the fee schedule update reflects the success or failure in
meeting the target. If expenditures exceed the target, the update for a future year is
reduced. This is what occurred for 2002. It was also slated to occur in 2003 and
2004; however, legislation prevents this from occurring through 2005. Congress has
not, however, addressed the underlying issues related to application of the formula
for the annual payment update. As a result, in the absence of congressional action,
a negative update is expected in 2006.
On December 8, 2003, the President signed into law the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003 (MMA, P.L. 108-173). In
addition to including a new prescription drug benefit, the law contains numerous
changes to the existing Medicare program. It makes a variety of modifications to
payment rules for fee-for-service providers, including physicians. The law
specifically provides that the updates for 2004 and 2005 can not be less than 1.5%.
Further, it contains other provisions designed to increase physician payments. This
report will be updated as events warrant.

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Contents
Introduction: Medicare Fee Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Why the Fee Schedule Was Enacted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Calculation of Fee Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Relative Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Geographic Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Conversion Factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Bonus Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Publication of Fee Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Beneficiary Protections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Participation Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Submission of Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Refinements in Relative Value Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Calculation of Annual Update to the Fee Schedule . . . . . . . . . . . . . . . . . . . . . . . . 8
General Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Sustainable Growth Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Performance Adjustment Factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Recent Updates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Calculation for 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Calculation For 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Calculation for 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Calculation for 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Calculation for 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Changes Made by MMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Fee Schedule Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Drug Administration Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Studies and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Calculation of the Update to the Conversion Factor . . . . . . . . . . . . . . . . . . 12
Background on SGR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Current Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Access to Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Physician Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Physicians’ Willingness to See New Beneficiaries . . . . . . . . . . . . . . . 18
Pending Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Geographic Variation in Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Medicare Versus Private Payment Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

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Payments for Oncology Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
MMA Changes; 2004 Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2005 Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Documentation for Evaluation and Management Services . . . . . . . . . . . . . 23
Concierge Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Appendix A. MMA Provisions Relating to Physicians . . . . . . . . . . . . . . . . . . . 26
Fee Schedule Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Drug Administration Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Studies and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Appendix B. Geographic Adjustments to the Physician Fee Schedule . . . . . . . 30
Legislative Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Calculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Work Component . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Practice Expense Component . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Malpractice component . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Appendix C. Development of Practice Expense Payment Methodology . . . . . . 34
Practice Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
BBA 97 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
New Practice Expense Relative Value Units . . . . . . . . . . . . . . . . . . . . 34
Refinements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Appendix D. Private Contracting Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Private Contracting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
How Private Contracting Works . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
List of Tables
Table 1. Medicare and Physicians . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Table 2. Billing Provisions Applicable to Claims Denied by Medicare . . . . . . . . 7
Table 3. Changes in Direct Spending Attributable to Selected Physician-
Related Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

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Medicare: Payments to Physicians
Introduction: Medicare Fee Schedule
Medicare is a nationwide program which offers health insurance protection for
42 million aged and disabled persons. Currently, 87% of beneficiaries obtain
covered services through the “original Medicare” program (also referred to as “fee-
for-service Medicare”). Under this program, beneficiaries obtain services through
providers of their choice, and Medicare makes payments for each service rendered
(i.e., fee-for-service) or for each episode of care. Approximately 13% of
beneficiaries are enrolled in managed care organizations, under the Medicare
Advantage program (formerly known as the Medicare+Choice program). These
entities assume the risk for providing all covered services in return for a fixed
monthly per capita payment.
Medicare law and regulations contain very detailed rules governing payments
to physicians and other providers under the fee-for-service system. Payments for
physicians’ services under fee-for-service Medicare are made on the basis of a fee
schedule. The fee schedule also applies to services provided by certain nonphysician
practitioners such as physician assistants and nurse practitioners as well as the limited
number of Medicare-covered services provided by limited licensed practitioners
(chiropractors, podiatrists, and optometrists). Payments under the fee schedule are
estimated at $56.5 billion in FY2005 and $58.1 billion in FY2006 (over one-sixth of
total Medicare benefit payments).1
The law specifies a formula for the annual update to the physician fee schedule.
Part of this update is based on whether spending in a prior year has exceeded or fallen
below a spending target. The target (known as the sustainable growth rate (SGR))
is essentially a cumulative target for Medicare spending growth over time. If
spending is in excess of the target, the update for a future year is reduced; the goal
is to bring spending back in line with the target. Application of the update formula
would have led to a negative update for each year beginning in 2002. The update for
2002 was a negative 5.4%. However, Congress overrode the application of the
formula for 2003, 2004, and 2005. Absent additional congressional action, the
update for 2006 is estimated to be a negative 4.3%. Updates for subsequent years are
also expected to be negative.
1 Excludes payments for prescription drugs under the new Medicare Part D program.
Congressional Budget Office, March 2005 baseline.

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CRS-2
Why the Fee Schedule Was Enacted
The fee schedule, established by the Omnibus Budget Reconciliation Act of
1989 (OBRA 1989, P.L. 101-239), went into effect January 1, 1992. The physician
fee schedule replaced the reasonable charge payment method which, with minor
changes, had been in place since the implementation of Medicare in 1966. Observers
of the reasonable charge system cited a number of concerns including the rapid rise
in program payments and the fact that payments frequently did not reflect the
resources used. They noted the wide variations in fees by geographic region; they
also noted that physicians in different specialties could receive different payments for
the same service. The reasonable charge system was also criticized for the fact that
while a high price might initially be justified for a new procedure, prices did not
decline over time even when the procedure became part of the usual pattern of care.
Further, it was suggested that differentials between recognized charges for physicians
visits and other primary care services versus those for procedural and other technical
services were in excess of those justified by the overall resources used.
The fee schedule was intended to respond to these concerns by beginning to
relate payments for a given service to the actual resources used in providing that
service. The design of the fee schedule reflected many of the recommendations made
by the Physician Payment Review Commission (PPRC), a congressionally
established advisory body. The PPRC was replaced by the Medicare Payment
Advisory Commission (MedPAC) on September 30, 1997; it is responsible for
advising the Congress on the full range of Medicare payment issues.
Calculation of Fee Schedule
The fee schedule has three components: the relative value for the service; a
geographic adjustment, and a national dollar conversion factor.
Relative Value. The relative value for a service compares the relative
physician work involved in performing one service with the work involved in
providing other physicians’ services. It also reflects average practice expenses and
malpractice expenses associated with the particular service. Each of the
approximately 7,500 physician service codes is assigned its own relative value. The
scale used to compare the value of one service with another is known as a resource-
based relative value scale (RBRVS).
The relative value for each service is the sum of three components:
! Physician work component, which measures physician time, skill,
and intensity in providing a service;
! Practice expense component, which measures average practice
expenses such as office rents and employee wages (which, for
certain services can vary depending on whether the service is
performed in a facility, such as an ambulatory surgical facility, or in
a non-facility setting); and
! Malpractice expense component, which reflects average insurance
costs.

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CRS-3
Geographic Adjustment. The geographic adjustment is designed to account
for variations in the costs of practicing medicine. A separate geographic adjustment
is made for each of the three components of the relative value unit, namely a work
adjustment, a practice expense adjustment, and a malpractice adjustment.2 These are
added together to produce an indexed relative value unit for the service for the
locality.3 There are 89 service localities nationwide.
Conversion Factor. The conversion factor is a dollar figure that converts the
geographically adjusted relative value for a service into a dollar payment amount.
The conversion factor is updated each year.4
The 2005 conversion factor is $37.8975. Thus, the payment for a service with
an adjusted relative value of 2.3 is $87.16.5 Anesthesiologists are paid under a
separate fee schedule which uses base and time units; a separate conversion factor
($17.7594 in 2005) applies.
Bonus Payments. The law specifies that physicians who provide covered
services in any rural or urban health professional shortage area (HPSA) are entitled
to an incentive payment. This is a 10% bonus over the amount which would
otherwise be paid under the fee schedule. The bonus is paid only if the services are
actually provided in the HPSA, as designated under the Public Health Service Act.
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA) requires the Secretary to pay automatically the bonus for services furnished
in full county primary care geographic area HPSAs rather than having the physician
identify that the services were furnished in such area.
2 The geographic adjustments are indexes that reflect cost differences among areas compared
to the national average in a “market basket” of goods. The work adjustment is based on a
sample of median hourly earnings of workers in six professional specialty occupation
categories. The practice expense adjustment is based on employee wages, office rents,
medical equipment and supplies, and other miscellaneous expenses. The malpractice
adjustment reflects malpractice insurance costs. The law specifies that the practice expense
and malpractice indices reflect the full relative differences. However, the work index must
reflect only one-quarter of the difference. Using only one-quarter of the difference
generally means that rural and small urban areas would receive higher payments and large
urban areas lower payments than if the full difference were used. A value of 1.00 represents
an average across all areas. MMA placed a floor of 1.00 on the work adjustment for the
2004-2006 period; areas that would otherwise have a value below 1.0 (primarily rural areas)
will receive higher payments over the period.
3 For a detailed description of how the geographic adjustments are calculated, see Appendix B.
4 Initially there was one conversion factor. By 1997, there were three factors: one for
surgical services; one for primary care services; and one for all other services. The
Balanced Budget Act of 1997 (BBA 97, P.L. 105-33) provided for the use of a single
conversion factor beginning in 1998.
5 The law requires that changes to the relative value units under the fee schedule can not
cause expenditures to increase or decrease by more than $20 million from the amount of
expenditures that would have otherwise been made. This “budget neutrality” requirement
is implemented through an adjustment to the conversion factor.

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CRS-4
MMA also provides for an additional 5% in payments for certain physicians in
scarcity areas for the period January 1, 2005 through December 31, 2007. The
Secretary is required to calculate, separately for practicing primary care physicians
and specialists, the ratios of such physicians to Medicare beneficiaries in the county,
rank each county (or equivalent area) according to its ratio for primary care and
specialists separately, and then identify those scarcity areas with the lowest ratios
which collectively represent 20% of the total Medicare beneficiary population in
those areas. The list of counties will be revised no less often than once every three
years unless there are no new data. There will be no administrative or judicial review
of the designation of the county or area as a scarcity area, the designation of an
individual physician’s specialty, or the assignment of a postal zip code to the county
or other area.
The listing of counties for 2005 appear in Appendix I and Appendix J of the
2005 physician fee schedule update.6
Publication of Fee Schedule. Medicare is administered by the Centers for
Medicare and Medicaid Services (CMS).7 Each fall, CMS publishes in the Federal
Register the relative values and conversion factor that will apply for the following
calendar year. Updates to the geographic adjustment are published at least every
three years.
The fee schedule is generally published by November 1 and is effective January
1. The final fee schedule for 2005 was issued November 15, 2004.
Beneficiary Protections
Medicare pays 80% of the fee schedule amount for physicians’ services after
beneficiaries have met the annual Part B deductible ($110 in 2005). Beneficiaries are
responsible for the remaining 20%, known as coinsurance. A physician may choose
whether to accept assignment on a claim.8 In the case of an assigned claim,
Medicare pays the physician 80% of the approved amount. The physician can only
bill the beneficiary the 20% coinsurance plus any unmet deductible.
When a physician agrees to accept assignment on all Medicare claims in a given
year, the physician is referred to as a participating physician. Physicians who do
not agree to accept assignment on all Medicare claims in a given year are referred to
as nonparticipating physicians. It should be noted that the term “nonparticipating
6 U.S. Department of Health and Human Services, Centers for Medicare and Medicaid
Services. Medicare Program; Revision to Payment Policies Under the Physician Fee
Schedule Update for Calendar Year 2005; Final Rule, 69 Federal Register 66235, Nov. 15,
2004.
7 Prior to June 14, 2001, this agency was known as the Health Care Financing
Administration (HCFA).
8 Nonphysician practitioners (such as nurse practitioners and physician assistants) paid
under the fee schedule are required to accept assignment on all claims. These practitioners
are different from limited licensed practitioners (such as podiatrists and chiropractors), who
have the option of whether to accept assignment.

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CRS-5
physician” does not mean that the physician doesn’t deal with Medicare.
Nonparticipating physicians can still treat Medicare patients and receive Medicare
payments for providing covered services.
There are a number of incentives for physicians to participate, chief of which
is that the fee schedule payment amount for nonparticipating physicians is only 95%
of the recognized amount for participating physicians, regardless of whether they
accept assignment for the particular service or not.
Nonparticipating physicians may charge beneficiaries more than the fee
schedule amount on nonassigned claims; these balance billing charges are subject
to certain limits. The limit is 115% of the fee schedule amount for nonparticipating
physicians (which is only 9.25% higher than the amount recognized for participating
physicians i.e., 115% x .95 = 1.0925). (See Table 1)
In 2004, 92% of physicians (and limited licensed practitioners) billing Medicare
were participating physicians. Approximately 99% of Medicare claims were
assigned in 2003.9
Table 1. Medicare and Physicians
Type of physician
Balance billing
and claim
Medicare pays
Beneficiary pays
charges
Participating
80% of fee
20% of fee schedule
None permitted
physician — Must
schedule amount
amount (plus any
take ALL claims on
unmet deductible)
assignment during the
calendar year. (Signs
a participation
agreement)
Nonparticipating
physician — May
take or not take
assignment on a
claim-by-claim basis
(A) Takes
80% of fee
20% of fee schedule
None permitted
assignment on a
schedule amount
amount recognized
claim
(recognized fee
for nonparticipating
schedule amount =
physicians (plus any
95% of recognized
unmet deductible)
amount for
participating
physicians)
9 MedPAC, Medicare Payment Policy, Report to the Congress, Mar. 2005. (Hereafter cited
as MedPAC, Mar. 2005.)

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CRS-6
Type of physician
Balance billing
and claim
Medicare pays
Beneficiary pays
charges
(B) Does not take
80% of fee
(a) 20% of fee
Total bill cannot
assignment on a
schedule amount
schedule amount
exceed 115% of
claim
(recognized fee
recognized for
recognized fee
schedule amount =
nonparticipating
schedule amount
95% of recognized
physicians (plus any
(actually 109.25%
amount for
unmet deductible);
of amount
participating
plus (b) any balance
recognized for
physicians)
billing charges.
participating
physicians, i.e.,
115% x 95%)
Participation Agreements
Physicians who wish to become participating physicians are generally required
to sign a participation agreement prior to January 1 of the year involved. The
agreement is automatically renewed each year unless the physician notifies the
Medicare carrier (i.e., the entity processing claims) that he or she wishes to terminate
the agreement for the forthcoming year.
Submission of Claims
Physicians and practitioners are required to submit all claims for covered
services to Medicare carriers. These claims must be submitted within one year of the
service date. An exception is permitted if a beneficiary requests that the claim not
be submitted. This situation is most likely to occur when a beneficiary does not want
to disclose sensitive information (for example, treatment for mental illness or AIDS).
In these cases, the physician may not bill more than the limiting charge. The
beneficiary is fully liable for the bill. If the beneficiary subsequently requests that the
claim be submitted to Medicare, the physician must comply. Such exceptions should
occur in only a very limited number of cases.
A physician or practitioner may furnish a service that Medicare may cover under
some circumstances but which the physician or practitioner anticipates would not be
covered in the particular case (for example, multiple nursing home visits). In this
case, the physician or practitioner should give the beneficiary an “Advance
Beneficiary Notice” (ABN) that the service may not be covered. If the claim is
subsequently denied by Medicare, there are no limits on what may be charged for the
service. If, however, the physician or practitioner does not give the beneficiary an
ABN, and the claim is denied because the service does not meet coverage criteria, the
physician cannot bill the patient. (See Table 2)

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Table 2. Billing Provisions Applicable to Claims Denied by
Medicare
Claim submission to
Billing limits on denied
Medicare
Claim denied
claim
Claim submitted without
(A) Denied because the
No limits on amounts
advance beneficiary notice
service is categorically
physician can charge.
(ABN) Physician submits
not covered (e.g., hearing
claim according to billing
aids)
rules for assigned or
unassigned claims, as
appropriate.
(B) Denied because
Physician cannot bill
service does not meet
beneficiary and must refund
coverage criteria.
any amounts beneficiary
may have paid.a
Claim submitted with
(A) Denied because the
No limits on amounts
advance beneficiary notice
service is categorically
physician can charge.
(ABN) Physician submits
not covered. (e.g., hearing
claim according to billing
aids)
rules for assigned or
unassigned claims, as
appropriate.
(B) Denied because
No limits on amounts
service does not meet
physician can charge.
coverage criteria.
a. If Medicare pays under a “waiver of liability” because the physician had no reason to know claim
would not be paid, regular billing rules apply.
There is another condition under which physicians and practitioners do not
submit claims for services which would otherwise be covered by Medicare. This
occurs if the physician or practitioner is under a private contacting arrangement (see
discussion under Appendix D). In this case, physicians are precluded from billing
Medicare or receiving any payment from Medicare for two years.
Refinements in Relative Value Units
On average, the work component represents 52.5% of a service’s relative value,
the practice expense component represents 43.6%, and the malpractice component
represents 3.9%.10 The law provides for refinements in relative value units.
The work relative value units incorporated in the initial fee schedule were
developed after extensive input from the physician community. Refinements in
existing values and establishment of values for new services have been included in
10 Ibid.

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CRS-8
the annual fee schedule updates. This refinement and update process is based in part
on recommendations made by the American Medical Association’s Specialty Society
Relative Value Update Committee (RUC) which receives input from 100 specialty
societies. The law requires a review every five years. The 1997 fee schedule update
reflected the results of the first five-year review. The 2002 fee schedule reflected the
results of the second five-year review.
While the calculation of work relative value units has always been based on
resources used in providing a service, the values for the practice expense components
and malpractice expense components were initially based on historical charges. The
Social Security Amendments of 1994 (P.L. 103-432) required the Secretary to
develop a methodology for a resource-based system for practice expenses which
would be implemented in 1998. Subsequently, the Secretary developed a system.
The Balanced Budget Act of 1997 (BBA 97, P.L. 105-33) delayed its
implementation. It provided for a limited adjustment in practice expense values for
certain services in 1998. It further provided for implementation of a new resource-
based methodology to be phased-in beginning in 1999. The system was fully phased
in by 2002. (See Appendix C)
BBA 97 also directed HCFA (now CMS) to develop and implement a resource-
based methodology for the malpractice expense component. HCFA developed the
methodology based on malpractice premium data. Malpractice premiums were used
because they represent actual expenses to physicians and are widely available. The
system was incorporated into the fee schedule beginning in 2000.
Calculation of Annual Update to the Fee Schedule
As noted, the conversion factor is a dollar figure that converts the
geographically adjusted relative value for a service into a dollar payment amount.
The conversion factor is the same for all services. It is updated each year according
to a complicated formula specified in law. The intent of the formula is to place a
restraint on overall spending for physicians’ services. Several factors enter into the
calculation of the formula. These include (1) the sustainable growth rate (SGR)
which is essentially a cumulative target for Medicare spending growth over time
(with 1996 serving as the base period); (2) the Medicare economic index (MEI)
which measures inflation in the inputs needed to produce physicians’ services; and
(3) the performance adjustment factor which modifies the update, which would
otherwise be allowed by the MEI, to bring spending in line with the SGR target.
The SGR system was established because of the concern that the fee schedule
itself would not adequately constrain increases in spending for physicians’ services.
While the fee schedule specifies a limit on payments per service, it does not place a
limit on the volume or mix of services. The use of the SGR is intended to serve as
a restraint on aggregate spending. The SGR targets are not limits on expenditures.
Rather the SGR represents a glidepath for desired cumulative spending from April
1996 forward. The fee schedule update reflects the success or failure in meeting the
goal. If spending over the period is above the cumulative spending target for the
period, the update for a future year is reduced. If expenditures are less than the

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CRS-9
target, the update is increased. If expenditures equal the target, the update would
equal the change in the MEI.
General Rules
The annual percentage update to the conversion factor, equals the MEI, subject
to an adjustment (known as the performance adjustment) to match target spending
for physicians’ services established under the SGR system.11
Sustainable Growth Rate. The law specifies a formula for calculating the
SGR. It is based on changes in four factors: (1) estimated changes in fees; (2)
estimated change in the average number of Part B enrollees (excluding Medicare
Advantage beneficiaries); (3) estimated projected growth in real gross domestic
product (GDP) growth per capita; and (4) estimated change in expenditures due to
changes in law or regulations. In order to even out large fluctuations, MMA changed
the GDP calculation from an annual change to an annual average change over the
preceding 10 years (a “10-year rolling average”).
Performance Adjustment Factor. The performance adjustment sets the
conversion factor at a level so that projected spending for the year will meet allowed
spending by the end of the year. Allowed spending for the year is calculated using
the SGR.

The technical calculation of the adjustment factor has changed several times.
Since 2001, the adjustment factor has been the sum of: (1) the prior year adjustment
component, and (2) the cumulative adjustment component.12 Use of both the prior
year adjustment component and the cumulative adjustment component allows any
deviation between cumulative actual expenditures and cumulative allowed
expenditures to be corrected over several years rather than a single year.
In no case can the adjustment factor be less than minus 7% or more than plus
3%. Thus, despite calculations which would have led to larger reductions, the
formula adjustment has been minus 7% for the last several years. However,
Congress has overridden the formula calculation for 2003-2005.
11 During a transition period (2001-2005), an additional adjustment is made to achieve
budget neutrality. The adjustment is: -0.2% for the first four years and + 0.8% in the last
year.
12 The prior year adjustment component is determined by: (1) computing the difference
between allowed expenditures for physicians’ services for the prior year and the amount of
actual expenditures for that year; (2) dividing this amount by the actual expenditures for that
year; and (3) multiplying that amount by 0.75. The cumulative adjustment component is
determined by: (1) computing the difference between allowed expenditures for physicians’
services from Apr. 1, 1996 through the end of the prior year and the amount of actual
expenditures during such period; (2) dividing that difference by actual expenditures for the
prior year as increased by the SGR for the year for which the performance adjustment factor
is to be determined; and (3) multiplying that amount by 0.33.

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CRS-10
Recent Updates
Calculation for 2002. On November 1, 2001, CMS announced the
conversion factor update for 2002. The update was actually negative: -5.4%
(compared to a 4.5% increase in 2001). Thus, the conversion factor for 2002
($36.1992) was 5.4% less than the conversion factor for 2001 ($38.2581).
As noted above, the update reflects the MEI plus an adjustment to reflect the
success or failure in meeting the SGR target. The update derived from these
calculations resulted in an update of: -4.8%. In addition, certain required budget
neutrality adjustments were made through adjustments to the conversion factor.
Thus, the final update to the conversion factor was: -5.4%.
Calculation For 2003. The law requires the fee schedule for the following
year to be issued by November 1. However, due to technical complications,
publication of the 2003 fee schedule was first delayed until December 31, 2002 and
revised on February 28, 2003 in response to the enactment of the Consolidated
Appropriations Resolution of 2003 (CAR). As a result of the delays, the 2003 fee
schedule was effective March 1, 2003. The December regulation would have set the
2003 update at a negative 4.4%. As a result of the CAR provision, the update for
2003 was 1.6%.
Calculation for 2004. In March 2003, CMS estimated that the 2004 update
to the conversion factor would be a negative 4.2%. The primary factor contributing
to the negative update was that spending for physicians’ services in 2002 increased
faster than the target and was expected to stay above the target through 2003.
Therefore the update for 2004 would need to be lowered to place cumulative
spending in line with the target. In November 2003, CMS issued its final fee
schedule regulation13 which set the update at a negative 4.5%, an even larger
reduction than had been contemplated earlier in the year.
Enactment of MMA superceded the update specified in the November 2003
regulation. It specified that the update for 2004 and 2005 could not be less than
1.5%. On January 7, 2004, CMS issued revised regulations which reflected a number
of MMA provisions. It set the update at 1.5%. Thus, the conversion factor for 2004
was set at $37.3374.
Calculation for 2005. On November 15, 2004, CMS announced that the fee
schedule update would be 1.5%, the minimum allowed by the MMA provision. In
the absence of the MMA provision, the update would have been a negative 3.3%.
Calculation for 2006. Absent further statutory changes, it is estimated that
the updates will be negative beginning in 2006. CMS has provided a preliminary
estimate of minus 4.3%. (This is based on an estimated 2.9% MEI increase and a
minus 7% performance adjustment.)
13 U.S. Department of Health and Human Services, Centers for Medicare and Medicaid
Services. Medicare Program; Revisions to Payment Policies Under the Physician Fee
Schedule for Calendar Year 2004; Final Rule, 68 Federal Register 63245, Nov. 7, 2003.

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CRS-11
Changes Made by MMA
MMA included a number of provisions relating to physicians’ services. It
included changes in the calculations of the fee schedule, increased payments for the
administration of covered drugs, and included requirements for a number of reports
on physician payment issues. (For a detailed summary of these MMA provisions,
See Appendix A.)
Fee Schedule Modifications
MMA made several changes in the calculation of the fee schedule. Of particular
importance is the provision that the annual update in 2004 and 2005 can be no less
than 1.5%. Over the short term, generally 2004-2005, the fee schedule provisions
are designed to increase program payments to physicians. They do not however,
address the underlying problems with the formula used to calculate program
payments under the fee schedule. (See Issues section, below.)
Drug Administration Services
Provisions. One of the main physician-related issues under discussion during
the development of MMA was the appropriate amount to be paid for those drugs
currently covered under Part B and the amounts to be paid to physicians in
connection with the administration of such drugs. It was generally agreed that
payments for the actual drugs were too high while the payments for drug
administration were too low.
MMA revises the way covered Part B drugs are paid under the program; this has
the effect of lowering program payments for the actual drugs.14 At the same time,
MMA increases the payments associated with drug administration services. These
provisions affect selected specialties, primarily oncologists. The level of payments
continues to be of concern to some oncologists. (See Issues section, below).
Studies and Reports
MMA also requires a number of studies and reports relating to physicians’
services. These are designed to provide Congress with additional information as it
considers revisions in the current payment formula.
14 CRS Report RL31419, Medicare: Payments for Covered Part B Drugs, by Jennifer
O’Sullivan.

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CRS-12
Issues
Calculation of the Update to the Conversion Factor
The negative update for 2002, the possibility that the 2003, 2004, and 2005
updates would also have been negative, as well as the current estimate of negative
updates beginning in 2006 have raised concerns for many observers. There is
increasing concern that some physicians may be unwilling to accept new Medicare
patients (see Access discussion). As noted, the negative update is a direct result of
the application of the SGR system. Some observers have suggested that this system
should be replaced.
Background on SGR. As noted earlier, the fee schedule was included in the
Omnibus Budget Reconciliation Act of 1989 (OBRA 89, P.L. 101-239) in order to
respond to two major concerns with the then existing reasonable charge payment
methodology. First, observers noted that payments for individual services under the
reasonable charge methodology were not related to the actual resources used.
Second, they noted that overall Medicare payments for physicians’ services were
rising at a rapid pace. The fee schedule itself responded to the first concern by
beginning to relate payments for individual services to actual resources used.
However, a number of observers suggested that physicians could potentially respond
to the cuts in payments for individual services by increasing the overall volume of
services. As a result, enactment of the fee schedule itself might not slow the overall
growth rate in expenditures.
The Congress responded to this concern by establishing, in OBRA 89, an
expenditure target mechanism known as the Medicare Volume Performance Standard
(MVPS). Under the MVPS, an annual expenditure target for physicians’ services
was established. The use of the target was intended to serve as a restraint on
aggregate Medicare spending for physicians’ services. If expenditures fell below the
target in a year, the increase to the conversion factor in a future year would be larger
than the MEI. Conversely, if expenditures were above the target in a year, the
increase to the conversion factor in a future year would be less than the MEI.
Several statutory changes to the MVPS and conversion factor calculation rules
were included in subsequent Medicare bills. Subsequently, the PPRC, among others,
identified several methodological flaws with the revised MVPS system. The MVPS
was replaced in 1999 by the SGR, in part based on PPRC recommendations. The
SGR system is quite different from the MVPS. Under the MVPS system, a new
MVPS was calculated each year, and a conversion factor update in a year was based
on the success in meeting the target in a prior period. The key difference between the
MVPS and the SGR system is that the SGR system looks at cumulative spending
since April 1, 1996; this was intended to eliminate some of the year to year
fluctuations.
Current Concerns. The SGR system worked well for physicians for the first
years it was in effect. For the period 1998-2001, the cumulative increase in the

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CRS-13
update was 15.9 % compared to a medical inflation increase of 9.3%.15 However,
beginning in 2002, the formula would have resulted in a negative update. The
negative update was allowed to go into effect in that year. However, Congress
overrode the negative updates that would have otherwise occurred in 2003, 2004, and
2005. Under current law, a negative update will apply in 2006, unless Congress
again overrides application of the SGR rules.
SGR Issues. Many observers contend that the SGR system is flawed and
should therefore not be used in making the annual update calculation. In 2001,
MedPAC , which replaced the PPRC, recommended that:
... the Congress replace the SGR system with an annual update based on factors
influencing the unit costs of efficiently providing physician services. MedPac’s
recommendation would correct three problems. First, although the SGR system
accounts for changes in input prices, it fails to account for other factors affecting
the cost of providing physician services, such as scientific and technological
advances and new federal regulations. Second, it is difficult to set an appropriate
expenditure target with the SGR system because spending for physician services
is influenced by many factors not explicitly addressed, including shifts of
services among settings and the diffusion of technology. The SGR system
attempts to sidestep this problem with an expenditure target based on growth in
real GDP, but such a target helps ensure that spending is affordable without
necessarily accounting for changes in beneficiaries’ needs for care. Third,
enforcing the expenditure target is problematic. An individual physician
reducing volume in response to incentives provided by the SGR system would
not receive a proportional increase in payments. Instead the increase would be
distributed among all physicians providing services to Medicare beneficiaries.
These problems with the SGR system can have serious consequences. Updates
under the SGR system will nearly always lead to payments that diverge from
costs because actual spending is unlikely to be the same as the target. When this
occurs, payments will either be too low, potentially jeopardizing beneficiary
access to care, or too high, making spending higher than necessary.16
MedPAC’s March 2002 report specifically recommended repeal of the SGR
system. It recommended requiring the Secretary to update payments for physicians’
services based on the estimated change in input prices for the coming year less an
adjustment for savings attributable to increased productivity. (A so-called
“multifactor productivity” factor would be used.)17
15 Centers for Medicare and Medicaid Services (CMS), CMS Announces Physician Pay
Changes for 2002, press release, Oct. 31, 2001.
16 Medicare Payment Advisory Commission, Medicare in Rural America, Report to
Congress, June 2001.
17 There was a further problem with the SGR system. When CMS issued its December 2002
regulation for 2003, it stated that is was unable, under the then existing law, to go back and
revise previous estimates which were used in calculating the SGR for previous years. Errors
in previous estimates meant that payment updates in some earlier years were higher than
they should have been; in turn, this meant that spending was higher in those years than it
would otherwise have been. Higher spending meant that updates in future periods were less
(continued...)

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CRS-14
Subsequent MedPAC reports have continued to recommend an update based on
changes in input prices minus an adjustment for productivity growth. The March
2005 report recommends a 2006 update reflecting changes in input prices (currently
estimated at 3.5%) minus a 0.8% adjustment for productivity growth.18
It should be noted that a negative update to the conversion factor does not mean
an overall reduction in physician spending. CBO estimates that spending under the
fee schedule will climb from $52.0 billion in FY2004 to $60.8 billion in 2010.19
While part of the increase is attributable to increasing numbers of beneficiaries, part
reflects the increased volume of services per beneficiary. Volume increased by more
than 30% between 1993 and 1998 and nearly 22% from 1999 to 2003.20 Part of the
increases in volume may be attributable to beneficial uses of new technology;
however, not all increases may be appropriate.
Spending Trends. Recent increases in Medicare spending under the fee
schedule mean that the difference between actual spending and the cumulative target
continues to grow larger, therefore making continued negative updates more likely.
The increase from 2003 to 2004 was significant. Despite the relatively modest
increase in the conversion factor, Medicare payments for physicians’ services
increased an estimated 15%. CMS attributed the vast majority (over 95%) of the
spending growth to five areas: office visits, with a shift toward longer and more
intensive visits (29%of increase) more use of minor procedures including therapy
procedures (26%); more frequent and complex imaging services such as MRI scans
and echocardiograms (18%); more laboratory and other tests (11%); and more
utilization of prescription drugs in doctors’ offices (11%).
Impact of Spending Increases on Part B Premiums.21 Payments for
physicians’ services account for close to 40% of Part B costs. Increased spending on
physicians’ services therefore has a considerable impact on overall Part B costs, and
by extension on the amount beneficiaries are required to pay in monthly Part B
premiums.
By law, beneficiary premiums equal 25% of Part B program costs. The 2005
premium ($78.20) represented a 17.4% increase over the 2004 premium ($66.60).
The 2005 annual Medicare Trustees’ report estimated that the 2006 premium would
17 (...continued)
in order to keep spending in line with the SGR target. The Consolidated Appropriations
Resolution of 2003 (CAR, P.L. 108-7), enacted February 20, 2003, enabled CMS to revise
FY1998 and FY1999 numbers; thereby resulting in a positive, rather than a negative, update
for 2003. However, this legislation did not address the underlying issues related to
application of the formula for the annual payment update.
18 MedPAC, Mar. 2005.
19 CBO, Mar. 2005 baseline.
20 MedPAC, Mar. 2005.
21 For a discussion of Part B premiums, see CRS Report RL32582, Medicare: Part B
Premiums, by Jennifer O’Sullivan.

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CRS-15
be $87.70, a 12.1% increase over 2005.22 However, shortly after issuance of the
Trustees’ report, CMS modified the estimate based on more recent spending data.
The 15% increase for physicians’ services in 2004 was expected to result in an
additional $1.50 over the amount projected in the Trustees’ report;23 this would mean
an estimated premium of $89.20. The final premium amount will not be announced
until the fall.
It should be noted that these premium estimates are based on the assumption
that the negative update to the conversion factor will occur. If Congress overrides
the negative update, this could result in an even higher premium amount. Some
observers have suggested that this consideration may make it more difficult to enact
an override this year.
Recommendations for Change. While there is general agreement that the
SGR system needs to be replaced or modified, a consensus has not developed on a
long tem solution. Part of the problem is that any permanent change is very costly.
This reflects the fact that the current CBO baseline (based on current law
requirements) assumes a reduction in the conversion factor for the next several years.
Most observers suggest that it is unlikely that Congress would permit that to happen.
However, budget considerations may lead to a shorter-term solution. Several
alternative approaches have been suggested.
Replace Formula; Link Updates to Payment Adequacy. MedPAC states
that the annual update should not be automatic, but should be linked to a number of
factors including beneficiary access to services, the quality of services provided, and
appropriateness of cost increases. MedPac noted that it used this approach in making
its recommendations for 2006. It noted that beneficiaries access to care, supply of
physicians and the ratio of private payment rates to Medicare has remained stable.
(See discussions, below). It concluded that current payment rates are adequate and
should be updated by the projected change in physicians’ costs less an adjustment for
productivity growth.
Make Administrative Changes to Current Formula Calculation. While a
change in the formula would require legislation, some observers have suggested that
there are things CMS could do administratively to ease the impact of the current
formula. Proponents argue that these changes could somewhat moderate the negative
updates that are predicted. One change which has been suggested for several years
is the removal of covered Part B prescription drugs from the SGR baseline (thereby
removing this rapidly escalating cost factor from the calculation).
In the November 2004 final fee schedule rule, CMS decided against removing
drugs from the calculation. It stated that it was reviewing the issues. It noted that
22 Board of Trustees, Federal Hospital Insurance and Federal Supplementary Medical
Insurance Trust Funds, 2005 Annual Report of the Board of Trustees of the Federal Hospital
Insurance and Federal Supplementary Medical Insurance Trust Funds, communication,
Mar. 2005, p. 156.
23 Letter from Herb B. Kuhn, Director, Center for Medicare Management, CMS, to
MedPAC, Mar. 31, 2005.

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CRS-16
administrative changes to the SGR would have significant long-term cost
implications but would not have an impact on the update for 2006 or the subsequent
few years. It also noted that it had taken several actions to improve the payment
system in the past several years including: (1) using multifactor productivity in place
of labor productivity in the MEI calculation, leading to a higher MEI beginning in
2003; (2) increasing the weight of malpractice costs in the MEI from 3.2% to 3.9%,
beginning in 2004; and (3) incorporating increases in malpractice premiums
beginning in 2004.
Modify Current Formula. Some persons have recommended modifying the
current formula to more closely target the incentives. MedPAC has identified, but
not specifically recommended, some possible alternatives to the current nationwide
volume target. The intent would be to create smaller groups thereby increasing the
likelihood that actions of individual physicians would be influenced by the
incentives. Targets could be defined for groups such as multispecialty groups,
regions, hospital medical staffs; or specific service categories.
GAO also identified possible modifications to the current system including
using actual spending from a new, more recent base year (instead of 1996) for
making the SGR calculation; eliminating the cumulative target mechanism and
returning to a system of annual targets; and modifying the allowance for volume and
intensity growth to more closely reflect technological innovation and changes in
medical practice. It further noted that some of these options could be combined.24
Incorporate Evidence-Based Medicine; Pay for Performance. A number
of observers have expressed concerns about the increases in the volume of services.
Some of the increase can be linked to improvements in care, and Medicare’s
increased emphasis on preventive services. However, some increased service use
may be more questionable. Further, there are wide geographic variations in the
number and intensity of services provided, even among physicians in the same
specialty. Analyses of these geographic variations shows that increased service use
does not necessarily translate into increased quality or improved health outcomes.
Some observers have recommended incorporating quality measurements into
the payment calculation. Quality measurements would be based on evidence based
medicine. Physicians with higher quality performance would be paid more while
those with lower quality performance would be paid less. Some have labeled this
“pay for performance” (or “P4P”).
CMS reports that it is collaborating with a range of public and private
stakeholders who have a common goal of improving quality and avoiding
unnecessary health care costs.25 As part of this effort, it is implementing a pay for
performance demonstration project (as required by Section 649 of MMA). The
legislation requires the project to adopt and use health information technology and
evidence-based outcomes measures for: promoting continuity of care; helping
24 General Accountability Office, Medicare Physician Payments: Concerns About Spending
Target System Prompt Interest in Considering Reforms, Oct. 2004.
25 CMS, Medicare “Pay for Performance (P4P)” Initiatives, press release, Jan. 31, 2005.

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CRS-17
stabilize medical conditions; preventing or minimizing acute exacerbations of
chronic conditions; and reducing adverse health outcomes, such as adverse drug
interactions relating to polypharmacy.
MedPAC also recommends approaches that would allow Medicare to
differentiate among providers when making payments as a way to reduce
inappropriate volume of services and improve quality. It suggests that as a first step,
Congress should adopt budget neutral pay for performance programs, starting with
a small share of payments. For physicians, the first step would be a set of measures
related to the use and functions of information technology.
MedPAC is concerned that the issue of increased volume, particularly for
imaging services needs to be addressed. It recommends that Medicare measure
resource use and share the results with physicians on a confidential basis; physicians
would be able to compare their resource use with that of their peers. It further
recommends that providers who perform imaging services and physicians who
interpret them be required to meet quality standards as a condition of Medicare
payment.26
Cost of Reform Options. As noted earlier, any change in the current
payment formula which would avert the scheduled negative update would involve
considerable costs. A permanent fix would be more costly than a temporary one-year
fix. On March 24, 2005, CBO issued its preliminary estimates of various
alternatives.27 For example, providing for a 1.5% increase again in 2006 would
increase outlays by $9.7 billion over the 2005-2010 period; freezing rates at the 2005
level (overriding the negative updates each year) would cost $27.1 billion over the
period, and providing for an automatic MEI update (and eliminating the SGR) would
cost $49.7 billion.
Access to Care
Questions have been raised about beneficiaries continued access to care. In
2002, the year the conversion factor was cut, press reports in many part of the country
documented many cases where beneficiaries were unable to find a physician because
physicians in their area were refusing to accept new Medicare patients. Despite slight
increases in the updates for 2003, 2004, and 2005, some physicians claim that
program payments continue to fall significantly short of expenses. They suggest that
problems will be magnified if the cuts, anticipated after 2006, are allowed to go into
effect. Access to care can be measured by reviewing beneficiary ability to get an
appointment with a new physician, the supply of physicians seeing Medicare patients,
and physicians’ willingness to see new patients.
26 Testimony of Glenn Hackbarth, Chairman of MedPAC, before House Ways and Means
Committee, Feb. 10, 2005.
27 [http://www.cbo.gov/ftpdocs/62xx/doc6296/SGRoptions.pdf]

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CRS-18
Access. Periodic analyses by PPRC, and subsequently MedPAC, as well as
CMS showed that access to physicians’ services generally remained good after
implementation of the fee schedule.28
MedPAC’s 2005 report updates the available information.29 The report
reviewed several surveys conducted between 2003 and 2004. Its analysis suggests
that overall, beneficiary access to physicians’ services tends to be good. A 2004
telephone survey conducted by MedPAC compared access for Medicare beneficiaries
with that for privately insured persons age 50 to 64. It noted that for both groups
access to physicians was good and for some indicators was slightly better for the
Medicare population. The large majority of Medicare beneficiaries (89%)had no
problem or only a small problem in getting an appointment with a new primary care
physician; 9% reported a big problem and 2% did not respond. Among those with an
appointment, 95% never or rarely had to wait longer than they wanted to get an
appointment for routine care and 96% never or rarely had to wait for care to treat an
illness or injury.
Similar results were obtained from the CMS-sponsored Consumer Assessment
of Health Plans Survey for Medicare fee-for-service (CAHPS-FFS). In that survey,
almost all (95%) beneficiaries in 2003 reported having small or no problems
receiving care they or their doctor thought necessary and 90% were able to schedule
an appointment for regular or routine care as soon as they wanted.
The Center for Studying Health Systems Change (HSC) reported that after a
significant decline from 1997 to 2001, access to physicians’ services had stabilized
between 2001 and 2003. About 9.9% of Medicare beneficiaries reported delaying or
not getting need care in 2003, compared to 11.0% in 2001. For the privately insured
near-elderly population, the rates were 17.4% in 2003 and 18.4% in 2001.
Physician Supply. MedPAC reports that the growth in the number of
physicians regularly billing Medicare fee-for-service patients has kept pace with the
recent growth in the Medicare population. MedPAC reports that in 2003, 470,213
physicians regularly billed Medicare, accounting for 12.3 physicians per 1,000 Part
B Medicare beneficiaries. This represents an increase from the physician population
ratio of 11.7 recorded in 1999.
Physicians’ Willingness to See New Beneficiaries. A related concern
is the possible decline in the percentage of physicians accepting new Medicare
patients.30 However, results from a 2003 survey by the National Ambulatory Medical
28 (1) MedPAC, Medicare Beneficiaries Access to Quality Health Care. Report to Congress:
Medicare Payment Policy, Mar. 2000; and (2) Julie A. Schoenman, Kevin Hayes, and C.
Michael Cheng, “Medicare Physician Payment Changes: Impact on Physicians and
Beneficiaries,” Health Affairs, vol. 20, no.2, Mar./Apr. 2001.
29 MedPAC, Mar. 2005.
30 For example, a survey by the HSC reported that the percentage dropped from 72% to 68%
from 1997 to 2001. The sharpest decline occurred for surgical specialists, while there was
a modest increase for medical specialists. The declines were also sharpest for physicians
(continued...)

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CRS-19
Care Survey (NAMCS) indicate that most physicians with at least 10% of their
practice revenue coming from Medicare are willing to see new patients. It reported
that 94% accepted some or all new Medicare patients, an increase of one percentage
point over 2002.
Pending Study. As noted above, MMA requires GAO to study and report to
Congress by June 8, 2005, on beneficiary access to physicians’ services. The study
is to include (1) an assessment of the use of such services through an analysis of
claims data; (2) an examination of changes in the use of physicians’ services over
time; and (3) an examination of the extent to which physicians are not accepting new
Medicare beneficiaries as patients. The report is to include a determination, based
on claims data, of potential access problems in certain geographic areas. It is also to
include a determination as to whether access has improved, remained constant, or
deteriorated over time.
Geographic Variation in Payments
Geographic Practice Cost Indices. Medicare makes a geographic
adjustment to each component of the physician fee schedule.31 This adjustment is
intended to reflect the actual differences in the costs of providing services in various
parts of the country. Recently some observers, particularly those in states with lower
than average payment levels, have objected to the payment variation. In part, this
may reflect the concern with the overall reduction in payment rates in 2002, the small
updates in 2003-2005, and the prospects of further reductions in future years.
As noted earlier, MMA made two changes to the geographic adjusters. It raised
the geographic adjustment for the work component of the fee schedule to 1.000 in
any area where the multiplier would otherwise be less. This provision applies from
2004 through 2006. MMA also raised all three geographic adjusters for Alaska to
1.67. This provision is effective for 2004 and 2005.
Additionally, MMA requires the Secretary to review and consider alternative
data sources other than those currently used to establish the geographic index for the
practice expense component under the physician fee schedule. The review is to be
conducted in two physician payment localities, one of which includes rural areas and
one of which is statewide. The Secretary is required to collaborate with state and
other organizations representing physicians as well as other persons. The report is
due to Congress by January 1, 2006.
State-by-State Variation. Some have also suggested that states with lower
than average per capita payments (excluding managed care payments) for all
Medicare services are being shortchanged. It should be noted that the variations
reflect a variety of factors, few of which can be easily quantified. These include
variations in practice patterns, size and age distribution of the beneficiary population,
30 (...continued)
with low Medicare revenues. (Testimony of Paul Ginsburg before the House Committee on
Ways and Means, Subcommittee on Health, Feb. 28,2002.)
31 See the Appendix A for a discussion of how these adjustments are calculated.

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CRS-20
variations in managed care penetration, the extent to which populations obtain
services in other states, and the extent to which other federal programs (such as those
operated by the Department of Defense or Veterans Affairs) are paying for
beneficiaries care. For these reasons, CMS considers state-by-state Medicare
spending data misleading and is therefore no longer publishing this data.
Payment Localities. Geographic adjustments are applied by payment
locality. There are currently 89 localities; some are statewide, while others are
substate areas. Some observers have recommended that changes be made to the
composition of some of the current localities; for example, they state that costs in a
particular community significantly exceed those in other parts of the same locality.
CMS states that it is looking at the alternatives but has been unable to come up
with a policy and criteria that would satisfactorily apply to all areas. In the
November final fee schedule rule, CMS reiterated its policy that it would consider
requests for locality changes when there is demonstrated consensus within the state
medical association for the change. It should be noted that any changes must be
made in a budget-neutral fashion for the state. Thus, if higher geographic practice
cost indices (and thus payments) are applied in one part of the state, they must be
offset by lower indices (and payments) in other parts of the state.
Medicare Versus Private Payment Rates
Some persons contend that Medicare payments lag behind those in the private
sector. MedPAC’s 2005 report notes that a contractor to MedPAC found that the
difference between Medicare and private rates decreased from the mid-1990s through
2001. In 1994, Medicare’s rates were about 66% of private plan rates; the percentage
rose to 83% in 2001. Medicare’s improved position was largely attributable to shifts
in private plan enrollment from higher-paying indemnity plans to lower-paying
managed care plans.
The contractor’s analysis of 2003 data showed that the gap widened from 2001
to 2002 but showed no change in 2003. Medicare rates reflected the 2002 cut of
5.4% in the conversion factor. On the other hand, from 2002 to 2003 there was a
slight shift in private plan enrollment mix to plan types with higher physician fees.
The net impact was that the Medicare’s rates were about 81% of private plan rates
in 2002 and 2003.32
Payments for Oncology Services
Background. The level of payments for practice expenses became a major
issue for oncologists who frequently administer chemotherapy drugs in their offices.
In general, Medicare does not cover outpatient prescription drugs. However, certain
categories of outpatient drugs are covered. Included are drugs which cannot be self-
administered and which are provided as incident to a physician’s service, such as
chemotherapy. Medicare also covers certain oral cancer drugs. Covered drugs are
32 Medicare Payment Advisory Commission, Medicare Payment Policy, Report to Congress,
Mar. 2005

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CRS-21
those that have the same active ingredients and are used for the same indications as
chemotherapy drugs which would be covered if they were not self-administered and
were administered as incident to a physician’s professional service.
A number of reports, including those by the HHS Office of Inspector General
the Department of Justice (DOJ), and GAO found that Medicare’s payments for some
of these drugs were substantially in excess of physicians’ and other providers’ costs
of acquiring them. However, oncologists stated that the overpayments on the drug
side were being used to offset underpayments for practice expenses associated with
administration of the chemotherapy drugs.
MMA Changes; 2004 Modifications. As noted in the section outlining
MMA provisions, MMA specifically addressed this issue. It provided for an increase
in practice expense payments, based on a survey of costs conducted by the American
Society of Clinical Oncologists (ASCO). It also established a work relative value for
drug administration services. At the same time, the law revised the methodology
used to calculate payments for covered drugs. A modified version of the average
wholesale price (AWP) methodology was used in 2004. Beginning in 2005, drugs
are paid using the average sales price (ASP) methodology. Drug payments are less
under the new system. A transitional payment was authorized in 2004 and 2005 to
ease the adjustment to the new system. CMS estimates that for 2004 the increases
on the practice expense side balanced the reductions on the drug side.
2005 Modifications. Many observers suggested that changes to the drug
payment methodology were long overdue and that reductions were in order given the
previous overpayments. However, many oncologists have stated that the revised
payment methodologies, particularly the changes for drug payments that were
implemented in 2005, will lead to a net loss in Medicare payments.
CMS took a number of actions designed to respond to the oncologists’ concerns.
On November 1, 2004, it announced a national oncology one-year demonstration
project focusing on three areas of concern for cancer patients: pain, nausea and
vomiting, and fatigue. Practitioners participating in the demonstration must provide
information (using new temporary billing codes) to describe a chemotherapy patient’s
status with respect to these three areas. Any oncologist can participate in the
demonstration; those that do will receive $130 per patient per day. CMS estimated
that this demonstration will increase payments in 2005 by about $300 million.
Also on November 1, 2004, CMS also announced coverage for certain colorectal
cancer drugs being used “off label” in nine clinical trials sponsored in part by the
National Cancer Institute. In addition, it announced expanded coverage for positron
emission tomography (PET) scans for cervical cancer and for studies of PET for
diagnosis and staging involving a broad range of additional types of cancer.

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CRS-22
On November 15, 2004, CMS issued the 2005 physician fee schedule.33 This
regulation contained a number of modifications in coding and payment for drug
administration services that allow for higher payments for a number of these services.
The AMA’s Current Procedural Terminology Editorial Panel developed 18 new
codes; and the AMA’s RUC recommended the associated relative values to be used
for billing purposes. CMS adopted these codes and values for use beginning in
2005.34 The new codes include payments for associated staff time to prepare
pharmaceuticals and physician work for supervising pharmaceutical preparation. In
addition, physicians will now be allowed to receive additional payments when a
second drug is infused.
CMS estimated that drug administration payments represent about 28% of
oncologist revenues. It estimated that all changes taken together will increase
payments for these services by roughly 10% from 2004 to 2005. This includes an
increase of 5% for coding and relative value changes, a 12% reduction for the
reduction in the transition adjustment (from a 32% to a 3% add-on), a 3% increase
attributable to increased payments for injections, the 1.5% mandatory increase in the
2005 update, and a 15% increase for the one-year demonstration project.
The 10% increase for drug administration services will be offset by a reduction
of 13% in drug revenues (which account for 69% of oncologists’ total revenues).
The net impact is a reduction of 6% from 2004 to 2005, assuming constant
utilization. However, CMS, using historical trends in volume, assumed an increase
in utilization, thereby increasing revenues by 8%.
On December 1, 2004, the Government Accountability Office (GAO) issued a
report on Medicare payments to oncologists.35 This report estimated that payments
for drug administration services would be 130% higher in 2005 than they were in
2003, assuming no changes in utilization. Payments for drugs would decline over the
period; however, the GAO expected these payments to exceed acquisition costs by
22% in 2004 and by 6% in 2005. It should be noted that the estimates for
administration services did not include the impact of coding changes announced in
the final fee schedule or the one-year demonstration project, both of which will
further increase payments.
Some oncologists continue to express concerns about payment levels and, by
extension, access. CMS, in the preamble to the 2005 fee schedule regulations, noted
that it planed to continue to monitor any shifts or changes in utilization patterns. It
should also be noted that MMA required MedPAC to review payment changes made
by Section 303 of MMA with an emphasis on quality, beneficiary satisfaction,
33 Centers for Medicare and Medicaid Services, “Medicare Program; Revisions to Payment
Policies Under the Physician Fee Schedule for Calendar Year 2005; Final Rule,” 69 Federal
Register 66235, Nov. 15, 2004.
34 Because permanent codes will not be includes in the CPT book until 2006, CMS is
allowing the use of temporary (“G codes”) for use in 2005.
35 U.S. Government Accountability Office, Medicare Chemotherapy Payments: New Drug
and Administration Fees Are Closer to Provider’s Costs, letter to Hon. Joe Barton,
Chairman of the House Committee on Energy and Commerce, GAO-05-142R, Dec. 1, 2004.

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CRS-23
adequacy of reimbursement, and impact on physician practices. The study is due
January 1, 2006.
For a further discussion of this issue, see CRS Report RL31419, Medicare:
Payments for Covered Part B Prescription Drugs.
Documentation for Evaluation and Management Services
Approximately 40% of Medicare payments for physicians’ services are for
services which are classified as evaluation and management services (i.e., physician
visits). There are several levels of evaluation and management codes. There is a
concern that physicians have not been coding services uniformly nationwide. Efforts
to verify that the correct level of care is billed are frequently hampered by the absence
of appropriate documentation. This was highlighted in a July 1997 financial audit
report from the Office of the Inspector General. That report stated that in FY1996,
there were $23 billion in questionable Medicare payments for all service categories
(14% of total fee-for-service payments); 47% of these were attributed to
documentation problems. Improper payments have declined. The 2003 report
estimated that there were $13.3 billion in improper payments in FY2002 (6.3% of
total fee-for-service spending); of this amount 28.6% was attributed to
documentation problems.36
Initial evaluation and management documentation guidelines were issued in
1995. Subsequently, HCFA worked with the AMA to develop a new set of
guidelines. These guidelines were first released in May 1997 and subsequently
revised in November 1997. The guidelines detailed for the first time specific medical
documentation requirements for single-organ system examinations and included
slightly stricter clinical standards for multisystem exams. Proponents of increased
medical record documentation considered it an important element contributing to
high quality patient care. They contended that an appropriately documented record
would assist Medicare in validating the site of service, medical necessity and
appropriateness of the service, and that services were accurately reported. Use of
medical documentation guidelines was expected to assist physicians who are audited
by carriers and could serve, if necessary, as a legal document to verify the care
provided.
Many physicians have viewed the guidelines as cumbersome and an interference
to patient care. In an effort to respond to these concerns, HCFA released new draft
documentation guidelines in June 2000 and updated them in December 2000. HCFA
described this version as simpler than the previous versions. The agency stated that
it intended to pilot test the guidelines after it developed, in conjunction with a
contractor clinical examples illustrating the guidelines. This process continued to
prove controversial with many physicians arguing that the guidelines continued to be
36 U.S. Department of Health and Human Services, Office of the Inspector General,
Improper Fiscal Year 2002 Medicare Fee-for-Service Payments, Report A-17-02-02202,
Jan. 8, 2003.

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CRS-24
unworkable. In response to the continuing concerns, on July 19, 2001, Secretary
Thompson announced that HHS would step back and reexamine the whole issue.37
MMA prohibits the Secretary from implementing any new documentation
guidelines for, or clinical examples of, E&M services unless the Secretary has: (1)
developed the guidelines in collaboration with practicing physicians (both generalists
and specialists) and provided for an assessment by the physician community; (2)
established a plan containing specific goals for improving the use of guidelines; (3)
conducted representative pilot projects to test the guidelines; (4) found the guidelines
meet established objectives; and (5) established and implemented an education
program on the use of the guidelines with appropriate outreach. MMA further
specifies that the goals of the guidelines are to identify clinically relevant
documentation needed for coding purposes; decrease the level of non-clinically
pertinent and burdensome documentation time and content in the physician’s medical
records, increase accuracy by reviewers, and educate both physicians and reviewers.
The Secretary is also required to study the development of a simpler alternative
system of documentation for physician claims.
Concierge Care
In the past couple of years, some physicians have altered their relationship with
their patients. Some doctors, in return for additional charges, offer their patients
additional services such as round the clock access to physicians, same-day
appointments, comprehensive care, additional preventive services, and more time
spent with individual patients. In return, patients are required to pay a fee or retainer
which can range from $500 to $1,500 per year. This practice has been labeled
“concierge care.” Patients who do not pay the additional charges typically have to
find another doctor.
Some physicians see concierge care as a way of permitting them to spend more
time with individual patients as well as a way to increase their income. However,
questions have been raised regarding the implications of concierge care for patients,
particularly Medicare beneficiaries. One concern is that while wealthier patients
might be able to afford the additional costs, other patients might find it more difficult
to gain access to needed services.
The Office of Inspector General (OIG) issued an OIG Alert on March 31, 2004.
The Alert reminded Medicare participating physicians about the potential liabilities
posed by billing for services already covered by Medicare. Participating physicians
can bill their patients for the requisite coinsurance and deductibles as well as for
uncovered services. However, the Alert noted that it had been brought to the OIG’s
attention that some concierge contract services, while described as uncovered
services, were actually services covered by Medicare. This would be in violation of
the physician’s assignment agreement and could subject the physician to civil
monetary penalties.
37 Testimony of Secretary of Health and Human Services Tommy G. Thompson, in U.S.
Congress, House Committee on Ways and Means, Administration’s Principles to Strengthen
and Modernize Medicare, July 19, 2001.

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Prospects
Under current law, the application of the SGR system will result in negative
annual updates in physician payments beginning in 2006. Many expect that
Congress will address this issue in 2005. As of this writing, it is not clear what
approach Congress will take. MMA left the SGR system in place but overrode its
application for 2004 and 2005. Congress could take this approach again.
Alternatively, it could choose to make longer-term changes by modifying or replacing
the SGR system.

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CRS-26
Appendix A. MMA Provisions Relating to
Physicians
Fee Schedule Modifications
MMA made several changes in the calculation of the fee schedule. Over the
short term, generally 2004-2005, these are designed to increase program payments
to physicians. They do not however, address the underlying problems with the
formula used to calculate program payments under the fee schedule.
! The update to the conversion factor can be no less than 1.5% in 2004
and 2005 (Section 601(a) of MMA).
! The formula for calculating the sustainable growth rate (SGR) is
modified by replacing the existing GDP factor (which measured a
one year change from the preceding year) to a 10-year rolling
average (Section 601(b) of MMA).
! The geographic index adjustments in Alaska for the work
component, practice expense component and malpractice component
are each raised to 1.67 for 2004 and 2005. This results in an increase
in payments to Alaska physicians in these years. (Section 602 of
MMA).
! There is a floor of 1.00 on the work adjustment for the 2004-2006
period. (Section 412 of MMA).
! An additional 5% in payments is provided for certain physicians in
scarcity areas for the period January 1, 2005 through December 31,
2007. The Secretary is required to identify those areas with the
lowest ratios of physicians to beneficiaries, which collectively
represent 20% of the total Medicare beneficiary population in those
areas. The list of counties will be revised no less often than once
every three years unless there are no new data. (Section 413 of
MMA).
The following table summarizes CBO’s estimates of the impact of these
provisions, excluding those with no costs or costs below the threshold.
Table 3. Changes in Direct Spending Attributable to Selected
Physician-Related Provisions
(in billions)
Provision
Spending increases
Topic
Section
FY2004-FY2008
FY2004-FY2013
Update revisions
601
$2.4
$0.2
Alaska
602
$0.1
$0.1
Floor on work component
412
$1.0
$1.0
Bonus payments
413
$0.7
$0.7

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Drug Administration Services
MMA revises the way covered Part B drugs are paid under the program; this has
the effect of lowering program payments for the actual drugs. At the same time,
MMA increases the payments associated with drug administration services. These
provisions affect selected specialties, primarily oncologists.
The following highlight the MMA changes made in payments for drug
administration services. Many of the provisions are very technical; in general they
result in higher payments. The net impact is an overall increase in payments.
(Section 303(a) of MMA). The MMA changes in the payment methodology for
covered Part B drugs is contained in a companion CRS report.38
! Beginning in 2004, the practice expense relative value units for
oncology services are to be adjusted using survey data that was
submitted to the Secretary by January 1, 2003. (This data which was
submitted by the American Society of Clinical Oncologists (ASCO)
showed higher costs than previously assumed by CMS in its
calculations.) The additional expenditures are exempt from the
budget neutrality adjustment for 2004.
! Beginning in 2004, the work relative value units for drug
administration services are equal to the work relative value units for
a level one office medical visit for an established patient. Drug
administration services are defined as those classified as of October
1, 2003, within the following groups of procedures but for which no
work relative value unit had been assigned: therapeutic or diagnostic
infusions (excluding chemotherapy); chemotherapy administration
services; and therapeutic, prophylactic, or diagnostic injections.
This results in an increase in payments, since these services
previously had no work relative value units assigned.
! In 2005 and 2006, the practice relative value units for other drug
administration services will be increased using appropriate
supplemental survey data submitted by March 1, 2004 for 2005 and
March 1, 2005, for 2006. Data is to be accepted only for those
specialties that received 40% or more of their Medicare payments
from drugs and biologicals in 2002, and would not apply to the
ASCO survey submitted by January 1, 2003. The additional
expenditures are exempt from the budget neutrality adjustment for
2005 and 2006.
! The Secretary is required to promptly evaluate drug administration
codes to ensure accurate reporting and billing. The codes will be
evaluated under existing processes and in consultation with
interested parties. The additional expenditures are exempt from the
budget neutrality adjustment for 2005 and 2006.
38 CRS Report RL31419, Medicare: Payments for Covered Part B Drugs, by Jennifer
O’Sullivan.

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CRS-28
! Other services paid under the nonphysician work pool methodology
(applicable to services for which no work relative values have been
assigned) will be unchanged by the MMA changes.
! Medicare’s payment policy, in effect on October 1, 2003, for the
administration of more than one drug or biological through the push
technique is to be reviewed. Any resulting modification is exempt
from the budget neutrality requirement in 2004.39
! The drug administration payments otherwise calculated are to be
increased by 32% in 2004 and 3% in 2005. This is labeled a
transitional adjustment and is intended to offset the effects of the
reduction in payments for covered Part B drugs.
! The Secretary is prohibited from making payment adjustments for
drugs in 2004, unless a concurrent adjustment is made in the
calculation of practice expenses as required by Section 303(a).
(Section 303(f) of MMA).
It should be noted that Section 303(j) of MMA limits the application of Section
303 to the specialties of hematology, hematology/oncology and medical oncology.
Section 304 of MMA specifies that the provisions of Section 303 apply to other
specialties. As noted in the conference report on the bill, this allowed CBO to
provide one estimate for the impact of the provisions on oncologists and another
estimate for the impact on other specialties.
CBO estimated that for oncologists under Section 303, the net impact of the
revisions in the payment for drugs coupled with the increases in payments for the
administration of drugs was a savings of $0.9 billion over the 2004-2008 period and
$4.2 billion over the 2004-2013 period. For other specialties, the savings under
Section 304 totaled $2.2 billion over the 2004-2008 period and $7.3 billion over the
2004-2013 period.
Studies and Reports
MMA requires the following studies and reports relating to physicians’ services.
! MedPAC is required to review the payment changes made under
Section 303 (drug administration and payment) and report to
Congress by January 1, 2006, on: the quality of care furnished to
individuals; their satisfaction with care; the adequacy of
reimbursement taking into account geographic variation and practice
size; and the impact on physician practices. MedPAC is required to
conduct a similar study for drug administration services furnished by
other specialties; the report is due January 1, 2007. (Section 303(a)
of MMA).
! GAO is required to study and submit a report to Congress by June
8, 2005, on beneficiary access to physicians’ services, including
changes in such access over time (Section 604 of MMA).
39 CMS modified the policy, effective January 1, 2004, to allow for the billing for drug
administration through the push technique once per day for each drug administered.

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! The Secretary is required to review and consider alternative data
sources other than those currently used to establish the geographic
index for the practice expense component under the physician fee
schedule. The report is due to Congress by January 1, 2006.
(Section 605 of MMA)
! MedPAC is required to submit a report to Congress by December 8,
2004, on the effects of the refinements to the practice expense
component after transition to the full resource-based system in 2002.
Also by December 8, 2004, MedPAC is required to submit a report
to Congress on the extent to which increases in the volume of
services under Part B are the result of care that improves the health
and well-being of beneficiaries. (Section 606 of MMA)
! MedPac is required to study and report to Congress by January 1,
2005 on the feasibility and advisability of paying for surgical first
assisting services furnished by a certified registered first nurse
assistant under Part B. (Section 643 of MMA)
! MedPAC is required to study and report to Congress by January 1,
2005, on the practice expense relative values for cardio-thoracic
surgeons to determine if the values adequately take into account the
attendant costs such physicians incur in providing clinical staff for
patient care in hospitals. (Section 644 of MMA)
! The GAO is required to study and report to Congress by December
8, 2004, on the propagation of concierge care and its impact on
beneficiaries. (See Issues section.) (Section 650 of MMA)
Other
MMA includes a number of additional provisions relating to physicians’
services including:
! Podiatrists, dentists, and optometrists are permitted to enter into
private contracting arrangements. (Section 603 of MMA)
! Medicare payments may be made to an entity which has a
contractual relationship with the physician or other entity (namely a
staffing entity). The entity and the contractual arrangement will
have to meet program integrity and other standards specified by the
Secretary. (Section 952 of MMA)
! The Secretary is required to use a consultative process prior to
implementing any new documentation guidelines for evaluation and
management (i.e., visit) services. (See Issues section) (Section 941
of MMA)
! MMA contains a number of additional provisions designed to
address physicians’ concerns with regulatory burdens. (Title IX of
MMA)

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CRS-30
Appendix B. Geographic Adjustments
to the Physician Fee Schedule
Section 1848(e) of the Social Security Act requires the Secretary of the
Department of Health and Human Services (HHS) to develop indices to measure
relative cost differences among fee schedule areas compared to the national average.
Three separate indices are required — one for physician work, one for practice
expenses and one for malpractice costs. The law specifies that the practice expense
and malpractice indices reflect the full relative differences. However, the work index
must reflect only one-quarter of the difference. Using only one-quarter of the
difference generally means that rural and small urban areas would receive higher
payments and large urban areas lower payments than if the full difference were used.
The indices are updated every three years and phased-in over two years.
Legislative Background
The physician fee schedule represented the culmination of several years of
examination by the Congress, HHS, and other interested parties on alternatives to the
then existing charge-based reimbursement system. In 1986, Congress enacted
legislation providing for the establishment of the Physician Payment Review
Commission (PPRC) to provide it with independent analytic advice on physician
payment issues. A key element of the Commission’s charge was to make
recommendations to the Secretary of HHS respecting the design of a relative value
scale for paying for physicians’ services. The Commission’s March 1989 report
presented the Commission’s proposal for a fee schedule based primarily on resource
costs. It recommended that the initial basis for the physician work component should
be the work done by William Hsiao and his colleagues at Harvard University.
The 1989 PPRC report examined issues related to geographic variations. It
noted that adjustments could be made to reflect nonphysician inputs (overhead costs
such as office space, medical equipment, salaries of nonphysician employees, and
malpractice insurance) and physician inputs of their own time and effort (which is
generally measured by comparing earnings data of nonphysicians). It concluded that:
Payments under the fee schedule should vary from one geographic locality to
another to reflect variation in physician costs of practice. The cost-of-living
practice index underlying the geographic multiplier should reflect variation only
in the prices of nonphysician inputs.40
PPRC stated that the fee schedule should only reflect variation in overhead costs.
Other observers, however, suggested that since physicians, as well as other
professionals, compete in local markets, local market conditions should be reflected
in the payments.
Three congressional committees have jurisdiction over Medicare Part B (which
includes physicians’ services). These are the House Energy and Commerce, House
Ways and Means, and Senate Finance. Each of these committees considered
40 Physician Payment Review Commission, Annual Report to Congress, 1989.

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CRS-31
differing versions of the physician fee schedule as part of the budget reconciliation
process in 1989. Both the Ways and Means Committee measure and the Senate
Finance Committee measure included a geographic adjustment for the overhead and
malpractice components of the fee schedule, but not for the physician work
component. However, the Energy and Commerce Committee version provided for
an adjustment. The Committee noted:
The PPRC, in its annual report for 1989, recommended that the physician work
effort component of the fee schedule not be adjusted at all for geographic
variations, on the grounds that the physician’s time and effort should be given the
same valuation everywhere in the country. The Committee does not agree with
this recommendation. The Committee recognizes that the cost-of-living varies
around the country and that other professionals are compensated differently,
based on where they perform their services. The Committee is concerned that,
if no adjustment is made in the physician work effort component, fees in high
cost areas may be reduced to such an extent that physician services in such areas
would become inaccessible. The Committee is also concerned, however, that a
full adjustment of this component, in accord with the index developed by the
Urban Institute, would be disadvantageous to the low valuation areas and would
not serve the Committee’s policy goal of fostering a better distribution of
physician personnel. Fees in those areas might be too low to attract physicians
and to resolve problems of access that have occurred.
The index chosen by the Committee tries to balance these concerns. It makes the
adjustment in the physician work effort component, but cuts the impact of the
original Urban Institute index in half.... 41
The 1989 budget reconciliation bill passed by the House included both the Ways
and Means Committee and Energy and Commerce Committee versions of reform.
The Senate Finance Committee version was not in the Senate-passed version because
all Medicare and non-Medicare provisions which did not have specific impact on
outlays (and therefore could not withstand a point of order based on the “Byrd rule”)
were struck from the Senate bill. Since the physician payment reform provisions
were designed to be budget neutral they were not included. Therefore, the Senate
physician fee schedule provisions were not technically in conference.
After considerable deliberation, the conference committee approved a
reconciliation bill which included physician payment reform. The conference
agreement provided that one-quarter of the geographic differences in physician work
would be reflected in the fee schedule. The accompanying report described the
provision but contained no discussion of this issue.
The recently enacted MMA contained several provisions relating to the
geographic calculations. The law sets a floor of 1.0 on the work adjustment for the
2004-2006 period. It also raises the adjustments in Alaska for the work component,
practice expense component, and malpractice component to 1.67 for the 2004-2006
period.
41 U.S. Congress, House Committee on the Budget, Omnibus Budget Reconciliation Act of
1989, report to accompany H.R. 3299, Sept. 20, 1989.

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Calculation42
Work Component. The law defines the physician work component as the
portion of resources used in furnishing the service that reflects physician time and
intensity. The geographic adjustment to the work component is measured by net
income. The data source used for making the geographic adjustment has remained
relatively unchanged since the fee schedule began in 1992. The original
methodology used median hourly earnings, based on a 20% sample of 1980 census
data of workers in six specialty occupation categories with five or more years of
college. (At the time, the 1980 census data were the latest available.) The specialty
categories were: (1) engineers, surveyors, and architects; (2) natural scientists and
mathematicians; (3) teachers, counselors, and librarians; (4) social scientists, social
workers, and lawyers; (5) registered nurses and pharmacists; and (6) writers, artists,
and editors. Adjustments were made to produce a standard occupational mix in each
area. HHS has noted that the actual reported earnings of physicians were not used
to adjust geographical differences in fees, because these fees in large part are the
determinants of earnings. HHS further stated that they believed that the earnings of
physicians will vary among areas to the same degree that the earnings of other
professionals will vary.
Calculations for the 1995 through 1997 indices also used a 20% census sample
of median hourly earnings for the same six categories of professional specialty
occupations. However, the 1990 census no longer used a sample of earnings for
persons with five or more years of college. For 1990, data were available for all —
education and advanced degree samples. HHS selected the all education sample
because it felt the larger sample size made it more stable and accurate in the less
populous areas. The 1995 through 1997 indices also replaced metropolitan-wide
earnings with county-specific earnings for consolidated metropolitan statistical areas
(CMSAs) which are the largest metropolitan statistical areas.
Virtually no changes were made in the 1998 through 2000 work indices from
the indices in effect for 1995 through 1997. Similarly, virtually no changes were
made in the 2001-2003 work indices.43 This was because new census data were not
available. HHS examined using other sources (including the hospital wage index
used for the hospital prospective payment system); however, for a variety of reasons,
it was unable to find one that was acceptable. It felt that making no changes was
preferable to making unacceptable changes based on inaccurate data. It further noted
that updating from the 1980 to 1990 census (for the 1995-1997 indices) had generally
resulted in a small magnitude of changes in payments.
It was expected that the 2004 update would reflect the 2000 census data.
However, CMS stated that the work and practice expense adjustments relied on
42 Much of the discussion in this section is drawn from: (1) “Medicare Program; Revisions
to Payment Polices Under the Physician Fee Schedule for Calendar Year 2001; Proposed
Rule,” 65 Federal Register 44189, July 17, 2000; and (2) “Medicare Program; Revisions to
Payment Polices Under the Physician Fee Schedule for Calendar Year 2001; Final Rule,”
65 Federal Register 65404, Nov. 1, 2000.
43 In both cases very slight, very technical adjustments were made.

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special tabulations which had not been completed in time for use in the 2004 fee
schedule. The 2000 data will be used for 2005 through 2007. The same data sources
and methodology used for the development of the 2001-2003 period were used for
the subsequent period.
Practice Expense Component. The geographic adjustment to the practice
expense component is calculated by measuring variations for three categories:
employee wages, office rents, and miscellaneous.
Employee wages are measured using median hourly wages of clerical workers,
registered nurses, licensed practical nurses, and health technicians. As is the case for
calculating the work indices, the 2000 census is used for 2005 through 2007.
Office rents are measured by using residential fair market rental (FMR) data for
residential rents produced annually by the Department of Housing and Urban
Development (HUD). Commercial rent data has not been used because HHS has
been unable to find data on commercial rents across all fee schedule areas. HUD
publishes the data on a metropolitan area basis. The 2005-2007 indices are based on
FY2004 FMR data.
The costs of medical equipment, supplies, and miscellaneous expenses are
assumed not to vary much throughout the country. Therefore, this category has
always been assigned the national value of 1.000.
MMA requires the Secretary to review and consider alternative data sources,
other than those currently used, to establish the geographic index for the practice
expense component. The report is due to Congress by January 1, 2006.
Malpractice component. Malpractice premiums are used for calculating the
geographic indices. Premiums are for a mature “claims made” policy (a policy that
covers malpractice claims made during the covered period) providing $1 million to
$3 million coverage. Adjustments are made to incorporate costs of mandatory patient
compensation funds. Initially, premium data were collected for three risk classes:
low risk (general practitioners), moderate risk (general surgeons), and high risk
(orthopedic surgeons). Subsequently data was collected on more specialties and from
more insurers. An average of three-years of data is used to smooth out year-to-year
fluctuations. Premiums data for 1996-1998 was used for the 2001-2003 indices.
Only the geographic index for malpractice was adjusted for 2004. Half of the
change was implemented in 2004; the other half is to be implemented in 2005. CMS
indicates that it may make additional changes upon receipt of more recent data.

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Appendix C. Development of Practice Expense
Payment Methodology
Practice Expenses
Background. The relative value for a service is the sum of three components:
physician work, practice expenses, and malpractice expenses. Practice expenses
include both direct costs (such as nurses and other nonphysician personnel time and
medical supplies used to provide a specific service to an individual patient) and
indirect costs (such as rent, utilities, and business costs associated with maintaining
a physician practice). When the fee schedule was first implemented in 1992, the
calculation of work relative value units was based on resource costs. At the time,
there was insufficient information to determine resource costs associated with
practice expenses (and malpractice costs). Therefore payment for these items
continued to be based on historical charges.
A number of observers felt that the use of historical charges provided an
inaccurate measure of actual resources used. The Social Security Act Amendments
of 1994 (P.L. 103-432) required the Secretary of Health and Human Services to
develop a methodology for a resource-based system which would be implemented
in CY1998. HCFA (now CMS) developed a proposed methodology which was
published as proposed rule-making June 18, 1997. Under the proposal, expert panels
would estimate the actual direct costs (such as equipment and supplies) by procedure;
HCFA then assigned indirect expenses (such as office rent and supplies) to each
procedure. This “bottom up” methodology proved quite controversial. A number of
observers suggested that sufficient accurate data had not been collected. They also
cited the potential large scale payment reductions that might result for some
physician specialties, particularly surgical specialties.
BBA 97. BBA 97 delayed implementation of the practice expense
methodology while a new methodology was developed and refined. BBA 97
provided that only interim payment adjustments to existing historical charge-based
practice expenses would be made in 1998. It established a process for the
development of new relative values for practice expenses and provided that the new
resource-based system would be phased-in beginning in CY1999. In 1999, 75% of
the payment would be based on the 1998 charge-based relative value unit and 25%
on the resource-based relative value. In 2000, the percentages would be 50% charge-
based and 50% resource-based. For 2001, the percentages would be 25% charge-
based and 75% resource-based. Beginning in 2002, the values would be totally
resource-based.
New Practice Expense Relative Value Units. During 1998, HCFA
developed a new methodology for determining relative values for practice expenses.
This methodology, in use since the beginning of the phase-in process in 1999, was
labeled the “top down” approach. For each medical specialty, HCFA estimated
aggregate spending for six categories of direct and indirect practice expenses using
the American Medical Association’s (AMA’s) Socioeconomic Monitoring System
(SMS) survey data and Medicare claims data. Each of the direct expense totals (for
clinical labor, medical equipment, and medical supplies) were allocated to individual

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procedures based on estimates from the specialty’s clinical practice expert panels
(CPEPs). Indirect costs (for office expenses, administrative labor, and other
expenses) are allocated to procedures based on a combination of the procedure’s
work relative value units and the direct practice expense estimates. If the procedure
is performed by more than one specialty, a weighted average is computed; this
average is based on the frequency with which each specialty performs the procedure
on Medicare patients. The final step is a budget neutrality adjustment to assure that
aggregate Medicare expenses are no more or less than they would be if the system
had not been implemented.
Refinements. The “top down” approach was less controversial than the
original “bottom up” approach proposed in 1997. However, a number of groups
continued to express concerns, particularly with the perceived limitations in the
survey data. In 1999, the General Accounting Office (GAO) issued a report on
practice expenses; it had reviewed HCFA’s methodology and concluded that it was
acceptable for establishing practice expense relative values. GAO noted that HCFA
used what were generally recognized as the best available data, namely the SMS
annual survey and CPEP data. However, it noted that several data limitations had
been identified and should be overcome.44
Supplemental Data. During the phase-in period, Congress and others
continued to evidence concern regarding the survey data being used. BBRA 99
required the Secretary to establish by regulation a process (including data collection
standards) for determining practice expense relative values. Under this process, the
Secretary would accept for use and would use to the maximum extent practicable and
consistent with sound data practices, data collected or developed outside HHS.
These outside data would supplement data normally developed by HHS for
determining the practice expense component. The Secretary would first promulgate
the regulation on an interim basis in a manner that permitted submission and use of
outside data in the computation of relative value units for 2001. The Secretary issued
an interim final rule on May 3, 2000, for criteria applicable to supplemental survey
data submitted by August 1, 2000; in addition a 60-day comment period was
provided on these criteria. The November 1, 2000 final fee schedule regulation for
2001 incorporated modifications to the criteria.
In the November 1, 1999, final fee schedule regulation for 2000, HCFA
accepted supplemental survey data from thoracic surgeons and in the November 1,
2000, final rule for 2001 accepted supplemental survey data from vascular surgeons.
Three organizations submitted supplemental survey data for consideration for use in
2002. However, in the November 1, 2001, final rule for 2002, CMS decided not to
use the data because none of the surveys met all of its stated criteria.45 The final rule
44 U.S. General Accounting Office, Medicare Physician Payments: Need to Refine Practice
Expenses During Transition and Long Term. Report to Congressional Committees,
GAO/HEHS-99-30, Feb. 1999.
45 U.S. Department of Health and Human Services, Centers for Medicare and Medicaid
Services. Medicare Program; Revisions to Payment Policies and Five-Year Review of and
Adjustments to the Relative Value Units Under the Physician Fee Schedule for Calendar
(continued...)

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issued December 31, 2002 for 2003 accepted supplemental survey data from physical
therapists.
MMA required CMS to use, beginning January 1, 2004, survey data submitted
by January 1, 2003 on practice expenses for oncology drug administration services.
In effect, this required the use of data submitted by the American Society of Clinical
Oncology. The revised 2004 fee schedule regulation, issued January 7, 2004,
provides for the use of this data.
Other Activities. CMS refines practice expense relative value units on an
ongoing basis. Assisting in this process is a multispecialty subcommittee of the
AMA’s RUC. This subcommittee, the Practice Expense Advisory Committee
(PEAC), reviews CPEP clinical staff, equipment, and supply data for physicians’
services. It makes recommendations to CMS based on this review. CMS has
implemented most of the refinements recommended by the RUC and PEAC.
45 (...continued)
Year 2002; Final Rule, 66 Federal Register 55245, Nov. 1, 2001.

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Appendix D. Private Contracting Rules
Private Contracting
Private contracting is the term used to describe situations where a physician and
a patient agree not to submit a claim for a service which would otherwise be covered
and paid for by Medicare. Under private contracting, physicians can bill patients at
their discretion without being subject to upper payment limits specified by Medicare.
HCFA (now CMS) had interpreted Medicare law to preclude such private contracts.
BBA 97 included language permitting a limited opportunity for private contracting,
effective January 1, 1998. However, if and when a physician decides to enter a
private contract with a Medicare patient, that physician must agree to forego any
reimbursement by Medicare for all Medicare beneficiaries for two years. The patient
is not subject to the two-year limit; the patient would continue to be able to see other
physicians who were not private contracting physicians and have Medicare pay for
the services.
How Private Contracting Works. HCFA issued regulations November 2,
1998 (as part of the 1999 physician fee schedule regulations) which clarified private
contracting requirements. The following highlights the major features of private
contracting arrangements.
! Physicians and Practitioners. A private contract may be entered
into by a physician or practitioner. Physicians are doctors of
medicine and osteopathy. (BBA 97 did not include chiropractors,
podiatrists, dentists, and optometrists. MMA includes these limited
license practitioners, except for chiropractors who remain unable to
enter into private contracts) Practitioners are physician assistants,
nurse practitioners, clinical nurse specialists, certified registered
nurse anesthetists, certified nurse midwives, clinical psychologists,
and clinical social workers.
! Beneficiaries. Private contracting rules apply only to persons who
have Medicare Part B.
! Contract Terms. The contract between a physician and a patient
must: (1) be in writing and be signed by the beneficiary or the
beneficiary’s legal representative in advance of the first service
furnished under the arrangement; (2) indicate if the physician or
practitioner has been excluded from participation from Medicare
under the sanctions provisions; (3) indicate that by signing the
contract the beneficiary agrees not to submit a Medicare claim;
acknowledges that Medigap plans do not, and that other
supplemental insurance plans may choose not to, make payment for
services furnished under the contract; agrees to be responsible for
payments for services; acknowledges that no Medicare
reimbursement will be provided; and acknowledges that the
physician or practitioner is not limited in the amount he or she can
bill for services; and (4) state that the beneficiary has the right to
obtain Medicare-covered items and services from physicians and
practitioners who have not opted-out and that the beneficiary is not

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compelled to enter into private contracts that apply to other services
provided by physicians and practitioners who have not opted-out.
A contract cannot be signed when the beneficiary is facing an
emergency or urgent health care situation.
! Affidavit. A physician entering into a private contract with a
beneficiary must file an affidavit with the Medicare carrier within 10
days after the first contract is entered into. The affidavit must: (1)
provide that the physician or practitioner will not submit any claim
to Medicare for two years; (2) provide that the physician or
practitioner will not receive any Medicare payment for any services
provided to Medicare beneficiaries either directly or on a capitated
basis under Medicare Advantage; (3) acknowledge that during the
opt-out period services are not covered under Medicare and no
Medicare payment may be made to any entity for his or her services;
(4) identify the physician or practitioner (so that the carrier will not
make inappropriate payments during the opt out period); (5) be filed
with all carriers who have jurisdiction over claims which would
otherwise be filed with Medicare; (6) acknowledge that the
physician understands that a beneficiary (who has not entered a
private contract) who requires emergency or urgent care services
may not be asked to sign a private contract prior to the furnishing of
those services; and (7) be in writing and be signed by the
practitioner.
! Effect on Non-Covered Services. A private contract is unnecessary
and private contracting rules do not apply for non-covered services.
Examples of non-covered services include cosmetic surgery and
routine physical exams.
! Services Not Covered in Individual Case. A physician or
practitioner may furnish a service that Medicare may cover under
some circumstances but which the physician or practitioner
anticipates would not be considered “reasonable and necessary” in
the particular case (for example, multiple visits to a nursing home).
If the beneficiary receives an Advance Beneficiary Notice” (ABN)
that the service may not be covered, a private contract is not
necessary to bill the patient if the claim is subsequently denied by
Medicare. There are no limits on what may be charged for the non-
covered service.
! Medicare Advantage and Private Contracting. A private contracting
physician may not receive payments from a Medicare Advantage
(formerly Medicare+Choice) organization for Medicare-covered
services provided to plan enrollees under a capitation arrangement.
! Ordering of Services. Medicare will pay for services by one
physician which has been ordered by a physician who has entered a
private contract (unless such physician is excluded under the
sanctions provisions). The physician who has opted out may not be
paid directly or indirectly for the ordered services.
! Timing of Opt-Out. Participating physicians can enter a private
contract, i.e., “opt out,” at the beginning of any calendar quarter,
provided the affidavit is submitted at least 30 days before the

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beginning of the selected calendar quarter. Nonparticipating
physicians can opt out at any time.
! Early Termination of Opt-Out. A physician or practitioner can
terminate an opt-out agreement within 90 days of the effective date
of the first opt out affidavit. To properly terminate an opt-out, the
individual must: (a) notify all carriers with which he or she has filed
an affidavit within 90 days of the effective date of the opt-out
period; (b) refund any amounts collected in excess of the limiting
charge (in the case of physicians) or the deductible and coinsurance
(in the case of practitioners); (c) inform patients of their right to have
their claims filed with Medicare for services furnished during the
period when the opt-out was in effect.
Issues. Prior to passage of the BBA provision, HCFA had interpreted
Medicare law to preclude private contracts. Proponents of private contracting argued
that private contracting is a basic freedom associated with private consumption
decisions. Patients should be allowed to get services from Medicare and not have
Medicare billed for the service. Advocates of private contracting generally object to
Medicare’s payment levels and balance billing limitations. They state that if
Medicare is not paying the bill, physicians who choose to private contract should not
be governed by Medicare’s rules.
Opponents of private contracting contend that the ability to enter into private
contracts benefits the pocketbooks of physicians and creates a “two-tiered system”
— one for the wealthy and one for other Medicare eligibles. The two-tiered system
would allow wealthier beneficiaries to seek care outside of Medicare and could
conceivably create a situation where only wealthier beneficiaries have access to the
Nation’s, or an area’s, leading specialists for a medical condition. A further concern
is that beneficiaries living in areas served by only private contracting specialists
would be unable to afford the bill (which could be any amount) and therefore forgo
needed care.
The BBA 97 provision provided a limited opportunity for private contracting.
However, the two-year exclusion proved very controversial. Proponents of private
contracting viewed the two-year exclusion as a disincentive to enter these
arrangements. They argued that physicians should not be excluded entirely from
Medicare because of their decision to contract in an individual case. Other observers
were concerned that removal of the two-year limit would place beneficiaries at risk.
They contended that more physicians would elect to private contract if they could do
it on a service-by-service basis. Beneficiaries might not know sufficiently in advance
whether a particular service would or would not be paid by Medicare. Following
enactment of the private contracting provision in 1997, some efforts were made to
eliminate the two-year exclusion. However, the provision has not been amended or
repealed, except for the MMA provision allowing podiatrists, dentists, and
optometrists to private contract

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