Order Code RL31199
Medicare: Payments to Physicians
Updated August 17, 2007
Jennifer O’Sullivan
Specialist in Health Care Financing
Domestic Social Policy Division

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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
again beginning in 2003; however, congressional action has prevented these
reductions for 2003-2007. Many Members have been concerned about the impact of
potential 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 $59.5
billion in FY2007 (about 14% of total benefit payments, including those made under
the new prescription drug program). 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 2007 is $37.8975, the same level as in 2005 and 2006.
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 subsequent
years; however, legislation has prevented this from occurring through 2007.
On August 1, 2007, the House passed the Children’s Health and Medicare
Protection Act of 2007 (CHAMP, H.R. 3162). This legislation includes a number of
Medicare provisions, including a number relating to payments under the physician
fee schedule. One provision sets a minimum update of 0.5% for 2008 and 2009 and
establishes separate target growth rates for various categories of physicians services.
On August 2, 2007, the Senate passed a related bill, the State Children’s Insurance
Program Amendment Act (SCHIP Act, H.R. 976); the Senate measure includes no
Medicare provisions. As of this writing, it is unclear how Congress will proceed on
these bills. This report will be updated as events warrant.

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Contents
Introduction: The Medicare Fee Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Why the Fee Schedule Was Enacted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Calculation of the Fee Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Relative Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Geographic Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Conversion Factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Bonus Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Publication of Fee Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2007 Fee Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Beneficiary Protections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Participation Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Submission of Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Refinements in Relative Value Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Sustainable Growth Rate (SGR) System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Conversion Factor Calculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Update Adjustment Factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Recent Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Sustainable Growth Rate (SGR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Major Changes in Update Calculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Recent Updates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Other Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Criticisms of Current System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Suggested Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Medicare Payment Advisory Commission (MedPAC) . . . . . . . . . . . . 14
Government Accountability Office (GAO) . . . . . . . . . . . . . . . . . . . . . 15
Congressional Budget Office (CBO) . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Recent Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Evidence-Based Medicine; TRHCA . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Other Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2007 Fee Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Imaging Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Impact of Spending Increases on Part B Premiums . . . . . . . . . . . . . . . . . . . 18
Access to Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Physician Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Physicians’ Willingness to See New Beneficiaries . . . . . . . . . . . . . . . 20
GAO Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Future Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Geographic Variation in Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Medicare Versus Private Payment Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Payments for Oncology Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Concierge Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Recent Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Changes Made by MMA, DRA, TRHCA . . . . . . . . . . . . . . . . . . . . . . . . . . 24

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Children’s Health and Medicare Protection Act of 2007 (CHAMP,
H.R. 3162), as Passed by the House . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 301. Establishment of Separate Target Growth Rates for
Service Categories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 302. Improving accuracy of relative values under the
Medicare physician fee schedule . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 303. Physician feedback mechanism on practice patterns . . . 26
Section 304. Payments for Efficient Physicians . . . . . . . . . . . . . . . . . 26
Section 305. Recommendations on refining the physician
fee schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 306. Improved and Expanded Medical Home
Demonstration Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 307. Repeal of Physician Assistance and Quality
Initiative Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 308. Adjustment to Medicare Payment Localities . . . . . . . . . 27
Section 309. Payment for Imaging Services . . . . . . . . . . . . . . . . . . . . 27
Section 310. Reducing Frequency of Meetings of the Practicing
Physicians Advisory Council . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 621. 2-Year Extension of Floor on Medicare Work
Geographic Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 624. 2-Year Extension of Medicare Incentive Payment
Program for Physician Scarcity Areas . . . . . . . . . . . . . . . . . . . . . 28
Appendix A: Calculation of the Physician Fee Schedule Update . . . . . . . . . . . . 29
Calculation of the Physician Fee Schedule . . . . . . . . . . . . . . . . . . . . . . . . . 29
Calculation of the Update to the Conversion Factor (CF) . . . . . . . . . . . . . . 29
Calculation of the Update Adjustment Factor (UAF) . . . . . . . . . . . . . . . . . 30
Appendix B. MMA, DRA, and TRCHA Provisions Relating to Physicians . . . 31
MMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
DRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
TRHCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Appendix C. Geographic Adjustments to the Physician Fee Schedule . . . . . . . 34
Legislative Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Calculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Work Component . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Practice Expense Component . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Malpractice component . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Appendix D. Development of Practice Expense Payment Methodology . . . . . . 38
Practice Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
BBA 97 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Subsequent Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
2007 Fee Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Appendix E. Private Contracting Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
How Private Contracting Works . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

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List of Tables
Table 1. Medicare and Physicians . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Table 2. Annual and Cumulative Allowed and Actual Expenditures for
Physicians Services, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Table 3. SGR Calculations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Table 4. Conversion Factors, 2000-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

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Medicare: Payments to Physicians
Introduction: The Medicare Fee Schedule
Medicare is a nationwide program which offers health insurance protection for
43 million aged and disabled persons. Currently, 84% 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 16% 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 $59.5 billion in FY2007 and $57.0 billion in FY2008. (The FY2008
amount represents 14% of total Medicare benefits.)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; each of these years saw a slight increase. The
Deficit Reduction Act of 2005 (DRA, P.L. 109-171, enacted February 8, 2006) froze
the 2006 conversion factor at the 2005 level. The Tax Relief and Health Care Act
of 2006 (TRHCA, P.L.109-432, enacted December 20, 2006) freezes the 2007
conversion factor at the same level for an additional year. Further, beginning July 1,
1 Congressional Budget Office, March 2007 baseline. Note that these figures do not include
spending by managed care plans for physicians’ services; such plans are paid on a capitated
basis for all services provided to Medicare beneficiaries. The reduction from 2007 to 2008
reflects the statutory reduction in the conversion factor in 2008, as discussed in subsequent
sections of this report.

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2007, physicians who voluntarily report certain quality measures can receive bonus
payments of 1.5%. In the absence of additional congressional action, the conversion
factor will be reduced 10% in 2008.
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 the 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

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performed in a facility, such as an ambulatory surgical facility, or in
a non-facility setting2); and
! Malpractice expense component, which reflects average insurance
costs.
Geographic Adjustment. The geographic adjustment is designed to account
for variations in the costs of practicing medicine. A separate geographic practice cost
index (GPCI) adjustment is made to each of the three components of the relative
value unit, namely a work adjustment, a practice expense adjustment, and a
malpractice adjustment.3 These are added together to produce an indexed relative
value unit for the service for the locality.4 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.5
The 2007 conversion factor is $37.8975. Thus, the payment for a service with
an adjusted relative value of 2.3 is $87.16.6 Anesthesiologists are paid under a
2 The lower facility-based payment reflects the fact that the facility itself receives a separate
payment for its costs of providing the service, while the non-facility-based payment to the
physician encompasses all practice costs.
3 The law requires the publication of a Geographic Adjustment Factor (GAF) for each
payment locality. The GAF is not actually used in the payment formula. It does, however,
present the weighted average impact for the locality of the three locality GPCIs (namely
work GPCI, practice expense GPCI, and malpractice expense GPCI).
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 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. The Medicare Prescription Drug, Improvement, and Modernization
Act of 2003 (MMA, P.L. 108-173) placed a floor of 1.00 on the work adjustment for the
2004-2006 period; the Tax Relief and Health Care Act of 2006 (P.L.109-432) extends the
provision through 2007. Areas that would otherwise have a value below 1.0 (primarily rural
areas) receive higher payments over the period.
4 For a detailed description of how the geographic adjustments are calculated, see Appendix
B.
5 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.
6 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
(continued...)

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CRS-4
separate fee schedule, which uses base and time units; a separate conversion factor
($17.7594 in 2007) 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) required 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.
MMA also provided 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 physician scarcity areas (PSAs) with
the lowest ratios which collectively represent 20% of the total Medicare beneficiary
population in those areas. The list of counties is to be revised no less often than
once every three years unless there are no new data. There can 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.7
Publication of Fee Schedule. Medicare is administered by the Centers for
Medicare and Medicaid Services (CMS).8 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.
2007 Fee Schedule. The final fee schedule for 2007 was announced
November 1, 2006, and published in the Federal Register on December 1, 2006.9
With the exception of the conversion factor, other changes incorporated in the
6 (...continued)
expenditures that would have otherwise been made. This “budget neutrality” requirement
has been implemented through an adjustment to the conversion factor; however, in 2007 it
is implemented through adjustment in relative values.
7 For a listing of zip codes covered by the HPSA and PSA bonuses see links at
[http://www.cms.hhs.gov/HPSAPSAPhysicianBonuses/].
8 Prior to June 14, 2001, this agency was known as the Health Care Financing
Administration (HCFA).
9 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, etc; Final Rule, 71 Federal Register 69624, December 1, 2006.

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regulation remain in place for 2007. This includes changes in relative values and the
phase-in of a new methodology for calculating practice expenses.
The published regulation assumed the conversion factor would be cut by 5%,
as required by the statutory formula. However, as noted, TRHCA freezes the 2007
conversion factor at the 2006 level. On December 22, 2006, two days after
enactment, CMS announced that it had already notified the contractors who process
the claims; it anticipated that they would be able to process the 2007 claims on a
timely basis and that no reprocessing of claims would be needed.
TRHCA also provided that, beginning July 1, 2007, physicians who voluntarily
report certain quality measures can receive bonus payments of 1.5%.
Beneficiary Protections
Medicare pays 80% of the fee schedule amount for physicians’ services after
beneficiaries have met the annual Part B deductible ($131 in 2007). Beneficiaries are
responsible for the remaining 20%, known as coinsurance. A physician may choose
whether to accept assignment on a claim.10 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
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.)
10 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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In 2006, 93.3% of physicians (and limited licensed practitioners) billing
Medicare were participating physicians. Approximately 99.3% of Medicare-allowed
charges for physicians’ services were assigned in 2005.11
Table 1. Medicare and Physicians
Type of physician
Balance billing
Medicare pays
Beneficiary pays
and claim
charges
Participating
physician — Must
take ALL claims on
20% of fee schedule
80% of fee
assignment during the
amount (plus any
None permitted
schedule amount
calendar year. (Signs
unmet deductible)
a participation
agreement)
Nonparticipating physician — May take or not take assignment on a claim-by-claim
basis
80% of fee
schedule amount
20% of fee schedule
(recognized fee
(A) Takes
amount recognized
schedule amount =
assignment on a
for nonparticipating
None permitted
95% of recognized
claim
physicians (plus any
amount for
unmet deductible)
participating
physicians)
Total bill cannot
80% of fee
(a) 20% of fee
exceed 115% of
schedule amount
schedule amount
recognized fee
(recognized fee
recognized for
schedule amount
(B) Does not take
schedule amount =
nonparticipating
(actually 109.25%
assignment on a
95% of recognized
physicians (plus any
of amount
claim
amount for
unmet deductible);
recognized for
participating
plus (b) any balance
participating
physicians)
billing charges.
physicians, i.e.,
115% x 95%)
11 MedPAC, Medicare Payment Policy, Report to the Congress, March 2007. (Hereafter
cited as MedPAC, March 2007.)

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CRS-7
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 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.
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 E). 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%.12 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
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
12 MedPAC, March 2007.

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CRS-8
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. The 2007 fee schedule reflects the results of
the third 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. The 2007 fee schedule adopts a new methodology for determining
practice expenses; this change is to be phased-in over four years. (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.
Sustainable Growth Rate (SGR) System
The conversion factor is a dollar figure that is the same for all services. It is
updated each year according to a complicated formula specified in law. (See
Appendix A for details.) The formula is based on the sustainable growth rate (SGR)
system.
The SGR system was established because of the concern that the fee schedule
itself would not adequately constrain overall 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 glide path 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 target, the update is increased.
Conversion Factor Calculation
The annual update to the conversion factor calculation is based on the following
measures:

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CRS-9
! Medicare Economic Index (MEI) — measures the weighted average
annual price changes in the inputs needed to produce services.
! Update Adjustment Factor — used to make actual expenditures and
target (allowed ) expenditures equal.
! Allowed expenditures = actual expenditures updated by the SGR.
Under the formula, if expenditures are in line with the target, the update equals
the MEI. That is, payments would increase for all services at a rate equal to the
changes in input prices. However, in recent years, expenditures have been
significantly above the target; therefore, using the defined statutory update would
have resulted in an update below the MEI. The higher expenditures reflect a number
of factors, chief of which is that volume and intensity of services are growing at a
rate much faster than allowed under the formula.
Update Adjustment Factor
The update 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 adjustment factor is the sum
of (1) the prior year adjustment component and (2) the cumulative adjustment
component. 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 UAF
adjustment has been minus 7% for the last several years.
Recent Experience. Table 2 shows the annual and cumulative allowed
expenditures for calendar year 2006. These are the expenditures used to calculate the
update for 2007 (see Appendix A). As can be seen from the table, there is a
significant difference between the targets and actual spending, both in cumulative
spending and annual spending. Under the formula, the UAF would be minus 25%
for 2007; however, the formula limited the reduction to minus 7%.
The caps on the adjustment limit the annual reduction or increase. This means
that the gap between cumulative actual spending and cumulative allowed spending
grows larger each year. This effect is further magnified by the fact that when
Congress has overridden the reduction, it has not raised the targets.

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CRS-10
Table 2. Annual and Cumulative Allowed and Actual
Expenditures for Physicians Services, 2006
(in billions)
Annual allowed expenditures
$81.7
Annual actual expenditures
94.9
Cumulative allowed expenditures
693.3
Cumulative actual expenditures
735.9
Source: U.S. Department of Health and Human Services, Centers for Medicare and Medicaid Services
(CMS), Medicare Program; Revision to Payment Policies Under the Physician Fee Schedule, etc;
Final Rule, 71 Federal Register 69624, December 1, 2006.
Sustainable Growth Rate (SGR)
The SGR sets both the cumulative and allowed expenditures under the UAF
formula. The SGR is based on the best data available in September of each year. It
is estimated and revised twice, with appropriate changes made to allowable
expenditures. The December 2006 rule included the preliminary 2007 SGR, a
revised 2006 SGR, and the final revision to the 2005 SGR.
The SGR is the product of
! estimated changes in physicians fees,
! estimated changes in the number of fee-for-service beneficiaries,
! estimated growth in real gross domestic product (GDP) per capita
(10-year moving average), and
! estimated changes in laws and regulations.
Table 3 shows the SGR calculations as announced in the December 2006 fee
schedule regulation.

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CRS-11
Table 3. SGR Calculations
Factors
Preliminary 2007
Revised 2006
Final 2005
Fees
2.2% (1.022)
2.2% (1.022)
0.8% (1.008)
Fee-For-Service
Enrollment
-0.9% (0.991)
-2.2% (0.978)
0.3% (1.003)
Real Per Capita
GDP
2.0% (1.020)
2.1% (1.021)
2.1% (1.021)
Law and
Regulations
-1.5% (0.985)
0.0% (1.000)
0.9% (1.009)
Total
1.8% (1.018)
2.1% (1.021)
4.2% (1.042)
Source: 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, etc;
Final Rule, 71 Federal Register 69624, December 1, 2006.
Note: Factors (numbers in parentheses) are multiplied to produce totals; totals may not add due to
rounding.
Table 3 highlights a couple of items. First, the move from fee-for-service
enrollment to managed care enrollment results in a slightly lower SGR. Second, the
GDP is a measure of growth in the overall economy. The GDP measure was
selected, based on budgetary considerations, namely the underlying idea that
sustainable growth should be equivalent to growth in the economy.
Major Changes in Update Calculation
When the fee schedule was first implemented in 1992, the Medicare Volume
Performance Standard (MVPS) served as the expenditure target mechanism. Under
the MVPS, there was no cumulative goal. Rather, an annual target for physicians
services was established. Further, two and then three conversion factors were used
(surgical, primary care, and other nonsurgical). The Balanced Budget Act of 1997
(BBA97, P.L.105-33) replaced the MVPS with the SGR. 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. However, the estimated $735.9 billion in actual spending from April
1, 1996, through December 31, 2006, far exceeds the cumulative $693.3 billion in
allowed expenditures over the period. Under the current system, it would be very
difficult to bring spending in below the cumulative target.
BBA 97 also incorporated the GDP into the SGR calculation and provided for
the use of a single conversion factor instead of three. The Balanced Budget
Refinement Act of 1999 (BBRA 99, P.L.106-113) incorporated an adjustment for the
prior year into the UAF update calculation; it also moved from a fiscal year to a
calendar year system.

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CRS-12
Recent Updates. The following outlines the update calculations, beginning
in 2002.13
! 2002 Update. The formula reduction of 5.4% went into effect.
! 2003 Update. The December 2002 fee schedule regulation would
have set the 2003 update at a negative 4.4%. Subsequently,
Congress enacted the Consolidated Appropriations Resolution of
2003 (CAR), which included provisions allowing some technical
recalculations. As a result of the CAR provision, the update for
2003 was 1.6%. It was effective March 1, 2003.
! 2004 Update. The November fee schedule regulation set the update
at minus 4.5%. However, the Medicare Prescription Drug
Improvement and Modernization Act of 2003 (MMA, P.L.108-173)
set the minimum update at 1.5% for 2004 and 2005.
! 2005 Update. The MMA provision applied with the update set at
1.5%. In the absence of the MMA provision the update would have
been minus 3.3%.
! 2006 Update. The fee schedule regulation set the update at minus
4.4%. However, the Deficit Reduction Act (DRA, P.L. 109-171)
froze the conversion factor at the 2005 level.
! 2007 Update. The 2007 update would have been minus 5%.
However, TRHCA froze the conversion factor for an additional year.
In addition, physicians who voluntarily report on certain quality
measures for the period July 1, 2007-December 31, 2007, are
eligible for bonus payments of 1.5%.
Table 4 shows the recent conversion factors.
Table 4. Conversion Factors, 2000-2007
2000
$36.6137
2001
38.2581
2002
36.1992
2003a
36.7856
2004
37.3374
2005
37.8975
2006
37.8975
2007
37.8975
Sources: CMS, Annual Fee Schedule Updates.
a. Effective March 1, 2003.
13 Note that in certain cases the announced conversion factor reduction reflected both the
negative update as well as some other adjustments.

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CRS-13
TRHCA also extended for an additional year, 2007, the MMA provision setting
the work geographic adjustment level at a minimum of 1.0, thereby slightly
increasing the payment amounts in some areas.
Other Considerations. Several other significant changes incorporated in the
2007 fee schedule regulation will have an impact on individual physician payments
this year. These include the required five-year review of work relative values, the
first year of a four-year phase-in of a revised methodology for calculating practice
expenses, and DRA mandated changes for payments for imaging services. The net
impact of these changes for an individual physician will vary by the types and mix
of services provided.
Criticisms of Current System
Most observers state that the SGR should either be revised or replaced. They
note that in the absence of legislation, negative updates will occur for the foreseeable
future. This reflects the fact that volume and intensity are growing at more than
double the rate allowed under the SGR system.14 Further, while legislation has
averted recent cuts, the targets have not been raised accordingly.
Many observers contend that the current SGR system has additional flaws. They
note that the target is a nationwide aggregate. Thus there is no direct link between
individual physician behavior and the targets. An individual physician who reduces
volume does not see a proportional increase in payments. A related concern is that
there is no distinction between appropriate volume increases and inappropriate
volume increases. Another concern is that the targets may not adequately reflect
scientific and technological innovations or site-of-service shifts.
Some persons state that actual increases in practice costs are in excess of those
allowed under the system. Other observers suggest that the impact of legislative and
regulatory changes may not be fully reflected in the SGR calculation. In addition,
some persons have stated that Part B drug spending should be excluded from the
calculation. However, CMS has consistently stated that it cannot make this change
retrospectively without legislation and that, even if it could, it would not yield a
positive update for the next several years.
A number of observers have expressed concerns regarding the implications of
continuing to use the current system. They state that over time, physicians may be
unable to absorb cuts if their marginal costs exceed the updates. They may respond
by refusing to see all Medicare patients or new Medicare patients. Quality of care
and patient access may be adversely affected. However, some suggest that physicians
might respond by becoming more efficient. There is also the concern that patients
may be forced to seek care in more costly settings.
14 U.S. Government Accountability Office (GAO), Medicare Physician Payments: Trends
in Utilization, Spending and Fees Prompt Consideration of Alternative Payment
Approaches, testimony of Bruce Steinwald before House Energy and Commerce Committee,
July 25, 2006.

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CRS-14
Suggested Modifications
While there is general agreement that the SGR system needs to be replaced or
modified, a consensus has not developed on a long-term solution. Part of the
problem is that any permanent change is very costly. This reflects the fact that the
Congressional Budget Office (CBO) baseline (based on current law requirements)
assumes a reduction in the conversion factor will occur for the next several years.
CBO projects that, in the absence of legislation, payment rates will be reduced by
about 10% in 200815 and around 5% annually for at least several years thereafter.16
In addition to its impact on federal outlays, any change will also have
implications for beneficiaries. Because beneficiary premiums equal 25% of program
costs, an overall increase in spending will result in a proportional increase in
premiums.
Suggested modifications have ranged from modifying the current formula to
replacing the formula and linking updates to payment adequacy and/or quality
measures. 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, such as
removing Part B drugs from the calculation, could somewhat moderate the negative
updates that are predicted.
The following outlines some of the recent alternatives to the current SGR
calculation that have been presented by the Medicare Payment Advisory Commission
(MedPAC), Government Accountability Office (GAO) and CBO.
Medicare Payment Advisory Commission (MedPAC). For several
years, MedPAC has recommended repealing the SGR system. It has recommended
updating 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. Specifically, input prices would be measured using the MEI (without
regard to the CMS adjustment for productivity increases). The recommended
productivity adjustment would be that used across all provider services.17
DRA required MedPAC to submit a report to Congress on mechanisms that
could be used to replace the sustainable growth rate system. The report, issued
March 1, 2007, did not recommend one specific course of action but rather outlined
two broad approaches as follows:
The Congress, then, must decide between two paths. One path would repeal the
SGR and not replace it with a new expenditure target. Instead, the Congress
15 The 2008 estimate reflects the fact that the Tax Relief and Health Care Act (P.L.109-432)
specified that the 2007 override of the statutory formula was to be treated as if it did not
occur. Therefore, the starting base for the calculation is 5% below the actual 2007
conversion factor.
16 CBO, Budget Options, February 2007.
17 MedPAC, Report to the Congress, Medicare Payment Policy, March 2007.

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CRS-15
would accelerate development and adoption of approaches for improving
incentives for physicians and other providers to furnish higher quality care at a
lower cost. If it pursues this path, the Congress would need to make explicit
decisions about how to update physician payments. Alternatively, the Congress
could replace the SGR with a new expenditure target system. A new expenditure
target would not reduce the need, however, for a major investment in payment
reform. Regardless of the path chosen, Medicare should develop measures of
practice styles and report the information to individual physicians. Medicare
should also create opportunities for providers to collaborate to deliver high
quality care while restraining resource use.
If the Congress chooses to use expenditure targets, the Commission has
concluded that such targets should not apply solely to physicians. Rather, they
should ultimately apply to all providers. Medicare has a total cost problem, not
just a physician cost problem. Moreover, producing the optimal mix of services
requires that all types of providers work together, not at cross purposes.18
Government Accountability Office (GAO). In its October 2004 report and
subsequent July 2006 testimony, GAO outlined two main approaches for addressing
current SGR issues. The first approach would retain the targets but modify the
current formula. Formula modifications could include ceasing recoupment from
prior periods, eliminating the cumulative target mechanism and returning to a system
of annual targets, modifying the allowance for volume and intensity growth to more
closely reflect technological innovation and changes in medical practice, and
removing drugs from the calculation.19
The second approach would end targets as an explicit measure for moderating
spending growth. Updates would be based on cost increases with the possibility of
specifically addressing high volume service categories such as medical imaging.
Congressional Budget Office (CBO). In February 2007, CBO released a
report outlining various options for federal spending and revenues across government
programs,20 including a number of options relating to Medicare. One category of
options related to the SGR. CBO presented four alternatives that could be
considered. Three would adjust the SGR mechanism to provide temporary relief
from projected payment cuts, while one would replace the SGR mechanism. In
March 2007, CBO provided testimony on additional options and cost estimates based
on the March 2007 baseline.21 The following outlines some of the options which
were presented:
18 MedPAC. Assessing Alternatives to the Sustainable Growth Rate System, testimony before
Senate Committee on Finance, March 1, 2007.
19 (1) U.S. Government Accountability Office, Medicare Physician Payments: Concerns
About Spending Target System Prompt Interest in Considering Reforms, October 2004; and
(2) GAO, Medicare Physician Payments: Trends in Utilization, Spending and Fees Prompt
Consideration of Alternative Payment Approaches, testimony of Bruce Steinwald before
House Energy and Commerce Committee, July 25, 2006.
20 CBO, Budget Options, February 2007.
21 CBO, Medicare’s Payments to Physicians: Options for Changing the Sustainable Growth
Rate, testimony before the Senate Finance Committee, March 1, 2007.

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CRS-16
! Freeze payment rates in 2008. This would override the reduction,
not be treated as a change in law or regulations, and not increase the
targets. Under current law, the increase would eventually be
recouped by the SGR. (Increases outlays by $2.5 billion in FY2008,
$21.7 billion over the FY2008-FY2012 period, and $34.4 billion
over the FY2008-FY2017 period.)
! Increase payment rates by 1% in 2008. This is essentially the same
as the first alternative, except that it allows a 1% increase in 2008.
(Increases outlays by $2.8 billion in FY2008, $23.9 billion over the
FY2008-FY2012 period, and $39.3 billion over the FY2008-FY2017
period.)
! Increase payment rates by 1% in 2008 and include a hold harmless
provision for premiums. This is essentially the same as the second
alternative, except that beneficiary premiums would not be adjusted
to reflect the increase. (Increases outlays by $3.6 billion in FY2008,
$30.6 billion over the FY2008-FY2012 period, and $50.4 billion
over the FY2008-FY2017 period.)
! Replace the SGR. Updates would be based on changes in the prices
of inputs used to provide physicians services minus a productivity
adjustment (as measured by the MEI). Under this approach,
payments would increase about 2% annually. (Increases outlays by
$3.2 billion in FY2008, $65.0 billion over the FY2008-FY2012
period, and $262.1 billion over the FY2008-FY2017 period.)
Recent Actions
Evidence-Based Medicine; TRHCA. In recent years, increasing attention
has been focused on the rapid increase in volume and intensity of services. Attention
has also been directed toward the 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 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”).22
In January 2006, CMS launched the Physician Voluntary Reporting Program
(PVRP). Under this program, physicians who chose to participate reported on 16
evidence-based quality measures. The list of quality measures was subsequently
22 For a discussion of Medicare P4P initiatives and issues, see CRS Report RL33713,
Pay-for-Performance in Health Care, by Jim Hahn.

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CRS-17
modified and expanded to 66. CMS replaced the PVRP program with the Physician
Quality Reporting Initiative (PQRI), as required by TRHCA.
TRHCA23 provides a bonus payment for physicians who report on quality
measures. Specifically, physicians and practitioners who voluntarily report quality
information will be eligible for a bonus incentive payment. For services furnished
from July 1, 2007 to December 31, 2007, the bonus is 1.5% of allowed charges
(subject to a limit) for services for which consensus-based quality measures have
been established. The quality measures are those identified under the PVRP, as
published on the CMS website on December 20, 2006 (the date of enactment). The
Secretary could modify such measures up until July 1, 2007.
In 2008, the quality measures are those that have been adopted or endorsed by
a consensus organization, that include measures submitted by a physician specialty,
and the Secretary identifies as having used a consensus-based process for developing
the measures. The legislation did not specifically link quality reporting to bonus
payments for 2008.
The law authorized $1.35 billion for 2008 for a Physician Assistance and
Quality Initiative Fund which is to be available to the Secretary for physician
payment and quality improvement initiatives. The initiatives may include
adjustments to the conversion factor. MedPAC recommended that the entire amount
be directed toward increasing the conversion factor.24
Other Issues
2007 Fee Schedule
When the 2007 fee schedule regulation was released in November 2006, it was
assumed that there would be a negative update in the conversion factor. Instead,
TRHCA froze the 2007 factor at the 2006 level. In addition, the law sets the work
geographic adjustment level at a minimum of 1.0, thereby slightly increasing the
payment amounts in some areas.
However, the rest of the 2007 fee schedule regulation continues to apply. It
should be noted that this regulation incorporates several significant changes from
2006. First, it reflects the required five-year review of work relative values. Second,
it incorporates the first year of a four-year phase-in of a revised methodology for
calculating practice expenses. (See Appendix D.) Third, it includes the impact of
the DRA mandated changes for payments for imaging services. (See discussion,
below.)
The net impact of these changes for an individual physician will vary by the
types and mix of services provided. The final rule for 2007 included a table showing,
23 See Appendix B for further detail.
24 MedPAC, Report to the Congress, Medicare Payment Policy, March 2007.

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CRS-18
by specialty, the estimated impact of these changes.25 CMS released this table again
following enactment of TRHCA. Without any change in the conversion factor, CMS
estimated that five specialties would see an increase of 5% or more (emergency
medicine, endocrinology, family practice, infectious diseases, and pulmonary
diseases), while 10 specialties and practitioners would see a reduction of 5% or more
(anesthesiology, interventional radiology, pathology, radiology, vascular surgery,
chiropractors, clinical psychologists, clinical social workers, nurse anesthetists, and
physical and occupational therapists). The largest reduction (13%) was for diagnostic
testing facilities.
Imaging Services
MedPAC and other observers have expressed concerns that sizeable volume
increases, particularly for imaging services, needs to be addressed. Part of the
increases in volume may be attributable to beneficial uses of new technology;
however, not all increases may be appropriate. DRA modified the payment rules for
certain imaging services. Specifically, the law caps the technical component of the
payment for services performed in a doctor’s office at the level paid to hospital
outpatient departments for such services. The limitation does not apply to the
professional component (i.e., the physician’s interpretation). Services subject to the
cap are: X-rays, ultrasound (including echocardiography), nuclear medicine
(including positron emission tomography), magnetic resonance imaging, computed
tomography, and fluoroscopy. Diagnostic and screening mammography are
excluded. The provision was effective January 1, 2007.
A number of groups objected to the payment cuts. On March 1, 2006, a
coalition of 30 medical groups, technology associations, providers and others sent a
letter to House and Senate leaders asking for a reconsideration of the provision. They
contended that the cuts could have unintended consequences, including potentially
diminishing access to imaging services outside of the hospital setting.
Impact of Spending Increases on Part B Premiums
Payments for services paid under the physicians’ fee schedule account for about
one-third of Part B costs.26 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. (About 4%
of enrollees pay higher premiums based on their higher incomes.) The 2007 amount
($93.50) was computed prior to passage of the TRCHA provision preventing a
negative update to the conversion factor. This provision has the effect of increasing
25 [http://www.cms.hhs.gov/physicianfeesched/downloads/1321-fc.pdf?agree=yes&next=
Accept], pp. 728-729.
26 For a discussion of Part B premiums, see CRS Report RL32582, Medicare: Part B
Premiums, by Jennifer O’Sullivan.

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CRS-19
Part B costs and by extension, the Part B premium. The increase will first be
reflected in the 2008 premium amount.
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, (and the freeze in 2006 and 2007),
some physicians claim that program payments continue to fall significantly short of
expenses. They suggest that problems will be magnified if the cuts, scheduled to
begin in 2008, are allowed to go into effect.
Access to care can be measured by reviewing beneficiary ability to get an
appointment with a physician, the supply of physicians seeing Medicare patients, and
physicians’ willingness to see new patients.
Access. Periodic analyses by MedPAC and CMS show that beneficiary access
to physicians’ services is generally good. MedPAC’s 2007 report reviewed several
surveys conducted between 2004 and 2006.27 The surveys 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 (86%) had no problem or only a small problem in getting an
appointment with a new primary care physician, while 14% reported a big problem.
Among those with an appointment, 93% 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. One area of concern was the increase from 2004 to
2006 in the share of beneficiaries reporting big problems finding a new specialist (5%
to 11%).
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 2004 reported having small or no problems
receiving care they or their doctor thought necessary and 91% were able to schedule
an appointment for regular or routine care as soon as they wanted. A second survey
by CMS targeted 11 market areas suspected of access problems. This Targeted
Beneficiary Survey, conducted in 2003 and 2004, found that even in these selected
areas, only a small percentage of patients had access problems attributed to
physicians not taking new patients.28
Physician Supply. MedPAC reports that the growth in the number of
physicians regularly billing Medicare fee-for-service patients has more than kept pace
with the recent growth in the Medicare population. MedPAC reports that from 2000
27 MedPAC, March 2007.
28 MedPAC, March 2006.

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CRS-20
to 2005, the number of physicians with at least 15 Medicare patients grew 10.8%
from 444,187 to 492, 131; over the same period the number of such physicians per
1,000 beneficiaries grew from 11.9 to 12.4. Further, the number of physicians with
200 or more Medicare patients grew17.7%.29
Physicians’ Willingness to See New Beneficiaries. A related concern
is the possible decline in the percentage of physicians accepting new Medicare
patients. However, MedPAC reports that the large majority of physicians in the U.S.
are willing to accept new Medicare patients. It cites results from a 2006 MedPAC-
sponsored survey showing that most (97%) of physicians accept at least some new
Medicare fee-for-service patients, with a smaller share (80%)accepting all or most.
GAO Study. MMA required GAO to study and report to Congress on
beneficiary access to physicians’ services. The study was issued in July 2006.30 It
found that from 2000 through 2004, among beneficiaries who needed access to
physician services, the percentages reporting major difficulties in finding a provider
or being able to schedule an appointment remained relatively constant (about 7%
nationwide). Similar percentages were reported for urban and rural beneficiaries.
Beneficiaries who rated their health as poor, were under 65 and disabled, were not
white, and had no supplemental health insurance or had supplemental insurance from
Medicaid, were more likely to have experienced physician access difficulties. GAO
further noted that the proportion of beneficiaries who received services and the
number of services provided to beneficiaries who were treated suggested an increase
in access from April 2000 to April 2005.
Future Prospects. While access remains good for Medicare beneficiaries,
many observers are concerned that the situation could change if future cuts slated to
occur through application of the SGR methodology are allowed to occur. MedPAC
does not support the consecutive annual cuts called for in the law. It is concerned
that such cuts could threaten beneficiary access to physicians’ services over time,
particularly those provided by primary care physicians.
In June 2007, the AMA announced the results of its recent physician survey. It
stated that if the 2008 cuts were allowed to go into effect, 60% would decrease or
stop seeing new Medicare patients.31
Geographic Variation in Payments
Geographic Cost Indices. Medicare makes a geographic adjustment to each
component of the physician fee schedule.32 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
29 MedPAC, March 2007.
30 GAO, Medicare Physician Services: Use of Services Increasing Nationwide and
Relatively Few Beneficiaries Report Major Access Problems, GAO-06-704, July 21, 2006.
31 [http://www.ama-assn.org/ama/pub/category/print/17649.html]
32 See Appendix A for a discussion of how these adjustments are calculated.

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CRS-21
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, the freeze in 2006 and 2007, and the prospects of further reductions in
future years.
MMA made a temporary 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 applied from 2004
- 2006. TRHCA extended the provision for an additional year - through 2007.
MMA further directed the GAO to conduct a study of the geographic adjusters.
A GAO report issued in March 2005 concluded that all three adjusters were valid in
their fundamental design, and appropriately reflected broad patterns of geographic
differences in running a practice. The report made several recommendations for
improving the data and methods used to construct the data. CMS stated that
implementing many of the recommendations was not feasible at that time.33
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,
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 has stated that it will 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.
In June 2007, the GAO issued a report that stated that more than half of the
current payment localities had counties within them with a payment difference of at
least 5% between GAO’s measure of physicians’ costs and Medicare’s geographic
adjustment for the area. A disproportionate number of these counties were located
in five states. GAO recommended that CMS revise the localities using an approach
33 U.S. GAO, Medicare Physician Fees: Geographic Adjustment Indices are Valid in
Design, but Data and Methods Need Refinement, GAO Report 05-119, March 2005.

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CRS-22
uniformly applies in all states and based on the most current data. It further
recommended that the localities be updated on a periodic basis. CMS stated that it
would consider the first recommendation but would continue its policy of updating
the localities when interested parties raised concerns or on its own initiative.34
California Issues. Two counties in California (Santa Cruz and Sonoma) are
assigned to a larger payment locality (“rest of California”). As a result, they have
geographic payment adjusters that are much lower than would be in place if they had
county-specific adjusters. Their adjusters are also substantially lower than those
applicable in neighboring counties. In the August 8, 2005 proposed physician fee
schedule, CMS offered a proposal to address the problem. However, it failed to win
the support of the majority stakeholders because offsetting reductions would be
required in other areas. The final regulation, therefore, included no change for 2006.
The proposed 2008 fee schedule regulation issued July 12, 2007, identified three
options for possible locality reconfigurations in California. CMS stated that it was
soliciting comments and was considering possibly adopting one of the approaches in
the final rule.
Medicare Versus Private Payment Rates
Some persons contend that Medicare payments lag behind those in the private
sector. MedPAC’s 2007 report notes that the difference between Medicare and
private rates narrowed in the late 1990s and has remained relatively stable in recent
years. Averaged across all services and areas, the 2005 rates were 82.6% of private
fees (compared to 83.4% in 2004). It should be noted that difference in fees can vary
markedly within a market area and for a given service.
Payments for Oncology Services
The level of payments for practice expenses became a major issue for
oncologists who frequently administer chemotherapy drugs in their offices. Prior to
the implementation of the new Medicare drug program under Part D, Medicare did
not cover most outpatient prescription drugs. However, certain categories of these
drugs have been and continue to be covered under Part B. Included are drugs that
cannot be self-administered and which are provided as incident to a physician’s
service, such as chemotherapy. Medicare Part B also covers certain oral cancer
drugs. Covered drugs are 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.
Prior to enactment of MMA, a number of reports, including those by the HHS
Office of Inspector General, the Department of Justice (DOJ), and GAO had 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 had
34 U.S. GAO, Geographic Areas Used to Adjust Physician Payments for Variation in
Practice Costs Should Be Revised, GAO Report 07-466, June 2007.

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CRS-23
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 sought to rationalize program payments. It increased the payments
associated with drug administration services. At the same time, it revised the way
covered Part B drugs are paid.35 Beginning in 2005, drugs are paid using the average
sales price (ASP) methodology; in general drug payments equal 106% of the
manufacturer reported ASP. Drug payments are less under the new system. A
transitional payment was authorized in 2004 and 2005 to ease the adjustment. In
addition, in 2005 and 2006, CMS authorized demonstration projects under which
oncologists who reported certain information received additional payments. These
demonstration projects are no longer in place.
Many observers suggested that changes to the drug payment methodology were
long overdue and that reductions were in order given the previous overpayments.
However, a number of industry groups stated that the revised payments do not
adequately cover the costs associated with administration and purchase of drugs. A
number of oncologists stated that they were unable to purchase drugs at or below the
MMA established rates.
In July 2007, the OIG for HHS issued a report36 examining these concerns. The
report reviewed 12 physician practices in the specialties of hematology,
hematology/oncology, and medical oncology. It noted that because 11 of the 12
practices did not have procedures to track, by procedure code, the costs associated
with administering drugs to cancer patients, it could not determine whether Medicare
reimbursement for each code was sufficient to cover the costs of providing the
services.
The OIG further noted that 9 of the 12 practices reviewed could generally
purchase drugs related to selected payment codes for treatment of cancer patients at
or below the MMA-established rates during the second quarter of 2005 (the report’s
review period). The remaining three practices paid prices above the reimbursement
rates for at least half of the selected codes related to the purchased drugs. The report
did not provide an explanation for the differences, but did state that, based on its
analysis, that there were no significant differences in results due to practice size or
location.
35 See CRS Report RL31419, Medicare: Payments for Covered Part B Drugs, by Jennifer
O’Sullivan.
36 HHS, Office of Inspector General, Review of Selected Physician Practices’ Procedures
for Tracking Drug Administration Costs and Ability to Purchase Cancer Drugs at or Below
Medicare Reimbursement Rates, OIG Report A-09-05-00066, July 2007.
[http://www.oig.hhs.gov/oas/reports/region9/90500066.pdf].

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CRS-24
Concierge Care
In recent 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.
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.
Recent Legislation
Changes Made by MMA, DRA, TRHCA
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. DRA revised the update calculation for 2006 and
modified payments for imaging services. TRHCA modified the calculation for 2007
and established a fund to promote payment stability and physician quality initiatives
in 2008. (For a summary of these provisions, see Appendix B.)
Children’s Health and Medicare Protection Act of 2007
(CHAMP, H.R. 3162), as Passed by the House
On August 1, 2007, the House passed the Children’s Health and Medicare
Protection Act of 2007 (CHAMP). This legislation included a number of Medicare

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CRS-25
provisions including several relating to payments under the physician fee schedule.37
On August 2, 2007, the Senate passed a related bill, the State Children’s Insurance
Program Amendment Act (SCHIP Act, H.R. 976); the Senate measure includes no
Medicare provisions. As of this writing, it is unclear how the Congress will proceed
on these bills.
The following is a brief summary of the physician provisions in CHAMP:
Section 301. Establishment of Separate Target Growth Rates for
Service Categories. The provision creates six new categories of physicians’
services beginning January 1, 2008: (1) evaluation and management services for
primary care and for preventive services; (2) evaluation and management services not
included in (1); (3) imaging services and diagnostic tests (other than clinical
diagnostic laboratory tests); (4) major procedures; (5) anesthesia services; and (6)
minor procedures and any other physicians’ services not described above. The
provision would eliminate the single conversion factor currently applied to all
physician services and establish a separate conversion factor for each of the six newly
created service categories.
The provision would avert, on a temporary basis, the reduction in the conversion
factor that is slated to occur under current law. Beginning with 2008, the conversion
factors would be computed and updated separately for each of the six service
categories, as would be the target growth rate and the allocation of excess spending
(or “overhang”) computed under the update adjustment formula. However, in the
calculation of the target growth rate, the rate would be increased by 2.5% for the
primary and preventive health care category. The provision would establish a floor
for updates equal to 0.5% for 2008 and 2009. The restriction on the update
adjustment factor for 2010 and 2011 would be changed from -7% to -14%. There
would be no update to the conversion factors beginning in 2013.
Section 302. Improving accuracy of relative values under the
Medicare physician fee schedule. Traditionally, the five-year review has led
to more increases in work relative value units (RVUs) than decreases. The provision
would require the Secretary to establish an expert panel to identify misvalued
physicians’ services particularly those which are overvalued, and assess whether
those misvalued services warrant review through existing processes. The Secretary,
in consultation with the panel, would: 1) conduct (as part of the regular five-year
review of RVUs) a five-year review of physicians’ services that have experienced
substantial changes that may indicate changes in physician work; (2) identify new
services to determine if they are likely to experience a reduction in value over time
and identify them for review in the next five-year review cycle; and (3) periodically
review a sample of services for RVUs that are otherwise unreviewed to ensure their
accuracy. The provision would give the Secretary the authority to reduce the work
RVUs for a particular physicians’ service if the annual rate of growth in expenditures
for the service provided under Medicare for 2006 or a subsequent year exceeded the
37 For a summary of CHAMP, see CRS Report RL34122, H.R. 3162: Provisions in the
Children’s Health and Medicare Protection Act of 2007.

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CRS-26
average annual rate of growth in expenditures for all Medicare physicians’ services
by more than 10 percentage points.
Section 303. Physician feedback mechanism on practice patterns.
The provision would require the Secretary to develop and implement a mechanism
to measure resource use on a per capita and an episode basis by June 1, 2008. This
activity is meant to provide feedback to physicians who participate in Medicare on
how their practice patterns compare to physicians generally, both in the same locality
as well as nationally. This feedback would not be subject to disclosure under the
Freedom of Information Act.
Section 304. Payments for Efficient Physicians. This provision would
create incentive payments under the Medicare program for physicians practicing in
areas identified as an efficient area. From January 1, 2009 through December 31,
2010, physicians practicing in counties or equivalent areas that are in the lowest fifth
percentile based on per capita spending for Medicare Part A and Part B (standardized
to eliminate the effect of geographic adjustments in payment rates) would receive an
amount equal to 5% of the Medicare payment amount.
Section 305. Recommendations on refining the physician fee
schedule. The Secretary would be required to analyze and recommend ways to
consolidate coding for procedures and to increase use of bundled payments under the
fee schedule.
Section 306. Improved and Expanded Medical Home Demonstration
Project. TRHCA mandated a Medicare medical home demonstration project. The
demonstration is to be conducted in up to 8 states to provide targeted, accessible,
continuous and coordinated family-centered care to Medicare beneficiaries who are
deemed to be high need (with multiple chronic or prolonged illnesses that require
regular medical monitoring, advising or treatment). Implementation is expected by
late September, 2008.
The provision would require the Secretary to establish an expanded medical
home Medicare demonstration project (“expanded project”), which would supersede
the project initiated under TRHCA. The purposes of the expanded project would be
to (1) guide the redesign of the health care delivery system to provide accessible,
continuous, comprehensive, and coordinated care to Medicare beneficiaries; and (2)
provide care management fees to personal physicians delivering continuous and
comprehensive care in qualified medical homes. The project would begin no later
than October 1, 2009 and would include a nationally representative sample of
physicians serving urban, rural, and underserved areas. Up to 500 medical homes
would be selected with priority given to (1) selection of up to 100 health information
technology-(HIT) enhanced medical homes and (2) other homes serving communities
whose populations are at a higher risk for health disparities.
Under the expanded project, the Secretary would provide a monthly medical
home care management fee payment to the personal physician of each participating
beneficiary. In determining the amount of the fee, the Secretary would consider the
operating expenses, the added value services, a risk adjustment, a HIT adjustment,
and a performance-based payment. The expanded project would be funded through

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CRS-27
monies for the original demonstration as well as $500 million of additional funds
from the Part B Trust Fund. This would include the payments of the monthly
medical home care management fees, reductions in coinsurance for participating
beneficiaries, and funds for the design, implementation, and evaluation of the
expanded project. The homes would be required to meet certain standards. The
Secretary would be required to conduct evaluations and provide both interim reports
and a final report to Congress.
Section 307. Repeal of Physician Assistance and Quality Initiative
Fund. As noted earlier, TRHCA authorized $1.35 billion for 2008 for a Physician
Assistance and Quality Initiative Fund which is to be available to the Secretary for
physician payment and quality improvement initiatives. The provision would repeal
the Fund established by TRHCA.
Section 308. Adjustment to Medicare Payment Localities. As noted
previously, costs in a particular community may significantly exceed those in other
parts of the same payment locality. Of particular concern are certain payment
localities in California. The proposed 2008 fee schedule regulation identified three
options for possible locality reconfigurations in the state. CMS stated that it was
considering possibly adopting one of the approaches in the final rule. The provision
would require CMS to adopt the county-based geographic adjustment factor specified
Option #3 in the proposed rule for California counties for 2008-2010. This approach
would group counties within a state into localities based on similarity of geographic
adjustment factors (GAFs) even if the counties were not geographically contiguous
and would reduce the number of payment localities in California from 9 to 6, each
based on counties or aggregates of counties, with the resulting localities reflecting
similar geographic adjustment factors (GAFs). In the transition from the existing
payment localities to the new payment localities, for services provided January 1,
2008, through December 31, 2010, the new GAF would apply unless there is a loss,
in which case the old GAF would apply.
No later than January 1, 2011, the Secretary would review and make revisions
to fee schedule areas in all states where there is more than one Medicare physician
payment fee schedule area. Any such revisions would be made effective concurrently
with the required three-year review of GAFs.
Section 309. Payment for Imaging Services. The provision would
establish an accreditation process for facilities that provide diagnostic imaging
services; the process would be modeled on that used for mammography facilities
under Section 354 of the Public Health Service Act. Effective January 1. 2010,
imaging services could only be paid for if provided in accredited facilities, except
that this limitation would not apply with respect to the technical component if the
imaging equipment meets certification standards and the professional component of
a diagnostic imaging service that is furnished by a physician. (The provision would
apply to ultrasound services on January 1, 2012.) Effective January 1, 2008, the
provision would require separate billing for the technical component and professional
component of imaging services. It would require CMS to increase the assumption
regarding the time equipment is in use from 50% to 75%. It would also require CMS
to assume the interest rate for capital purchases reflects the prevailing rate, but in no
case higher than 11%.

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CRS-28
Section 310. Reducing Frequency of Meetings of the Practicing
Physicians Advisory Council. The provision would modify the frequency of
meetings of the Practicing Physicians Advisory Council, as established under law,
from quarterly to once each year (“and at such other times as the Secretary may
specify”).
Section 621. 2-Year Extension of Floor on Medicare Work
Geographic Adjustment. Current law includes a temporary provision under
which the value of any work geographic index under the physician fee schedule that
is below 1.00 is increased to 1.00 for services furnished on or after January 1, 2004
and before January 1, 2008. The provision would extend the floor through December
31, 2009.
Section 624. 2-Year Extension of Medicare Incentive Payment
Program for Physician Scarcity Areas. Current law provides a 5% bonus
payment for certain physicians in scarcity areas for the period January 1, 2005
through December 31, 2007. The provision would extend the add-on payments
through December 31, 2009. During 2008 and 2009, the Secretary would be required
to use the primary care scarcity areas and specialty care scarcity areas that the
Secretary was using on December 31, 2007.

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CRS-29
Appendix A: Calculation of the Physician Fee
Schedule Update
Calculation of the Physician Fee Schedule
The following is the payment formula for a service under the physician fee
schedule:
Payment = [(RVU x GPCI ) + (RVU x GPCI ) + (RVU
x GPCI )] x CF
w
w
pe
pe
mal
mal
Where: RVU = relative value unit for work
w
RVU = relative value unit for practice expenses
pe
RVU = relative value unit for malpractice expenses
mal
GPCI = geographic practice cost index for work
w
GPCI = geographic practice cost index for practice expenses
pe
GPCI = geographic practice cost index for malpractice expenses
mal
CV = conversion factor
Calculation of the Update to the Conversion Factor (CF)
The conversion factor is a dollar figure that converts the geographically adjusted
relative value for a service into a dollar payment amount. The following is the
formula for the annual update to the conversion factor:
CF
= CF
x CF update
current year
prior year
CF update = (1 + MEI increase/100) x (1+ UAF)
Where:
Medicare Economic Index (MEI) - measures the weighted average annual price
changes in the inputs needed to produce services
Update Adjustment Factor (UAF) - makes actual expenditures and target (allowed)
expenditures equal
The following is the calculation of the conversion factor for 2007 that would
have applied in the absence of the tax bill:
CF
= (1 + 2.1/100) x (1 + (-0.7) = 1.021 x .930 = -5.0% (0.94953)
2007
Where:
MEI = 2.1%
UAF = -7.0%

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CRS-30
Calculation of the Update Adjustment Factor (UAF)
The SGR system is used to determine allowable expenses; these are compared
with actual expenditures to determine the UAF. The formula includes both a prior
year adjustment and a cumulative adjustment.
UAF = Prior Year Adjustment Component + Cumulative Adjustment Component
The formula for 2007 is calculated as follows:
UAF = [(Target - Actual ) /Actual ] x 0.75 +
07
06
06
06
[(Target
- Actual
) /(Actual x SGR )] x 0.33
4/96-12/06
4/96 - 12/06
06
07
Where:
Target = $81.7B
06
Actual = $94.9 B
06
Target
= $693.3 B
4/96 - 1206
Actual
= $735.9 B
4/96-12/06
SGR = 1.8%
07
UAF = [($81.7B - $94.9B)/$94.9B x .75] + [($693.3B - $735.9B/ ($94.9 x 1.018)
07
x 0.33]
= (-0.139 x .75) + (-.440 x .33) = -0.25
However: UAF cannot be less than - 0.07 or greater than + 0.3; therefore:
UAF = - 0.07
07

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CRS-31
Appendix B. MMA, DRA, and TRCHA Provisions
Relating to Physicians
MMA
MMA made several changes in the calculation of the fee schedule. Over the
short term, generally 2004-2005, they were designed to increase program payments
to physicians. The following were the key changes:
! The update to the conversion factor could be no less than 1.5% in
2004 and 2005. (Section 601(a) of MMA.)
! The formula for calculating the sustainable growth rate (SGR) was
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
were each raised to 1.67 for 2004 and 2005. This resulted in an
increase in payments to Alaska physicians in these years. (Section
602 of MMA.)
! A floor of 1.00 was set on the geographic work adjustment for the
2004-2006 period. (Section 412 of MMA.)
! An additional 5% in payments was provided for certain physicians
in scarcity areas for the period January 1, 2005-December 31, 2007.
The Secretary was 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 would be revised no less often than once every
three years unless there was no new data. (Section 413 of MMA.)
MMA also revised the way covered Part B drugs were paid under the program;
this had the effect of lowering program payments for the actual drugs.38 At the same
time, MMA increased the payments associated with drug administration services.
These provisions affected selected specialties, primarily oncologists.
MMA also required a number of studies and reports relating to physicians’
services. These were intended to provide Congress with additional information as
it considered revisions in the current payment formula.
MMA included a number of additional provisions relating to physicians’
services, including:
! Podiatrists, dentists, and optometrists were permitted to enter into
private contracting arrangements. (Section 603 of MMA.)
38 CRS Report RL31419, Medicare: Payments for Covered Part B Drugs, by Jennifer
O’Sullivan.

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CRS-32
! Medicare payments could 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 would
have to meet program integrity and other standards specified by the
Secretary. (Section 952 of MMA.)
! The Secretary was required to use a consultative process prior to
implementing any new documentation guidelines for evaluation and
management (i.e., visit) services. (Section 941 of MMA)
! MMA contained a number of additional provisions designed to
address physicians’ concerns with regulatory burdens. (Title IX of
MMA.)
DRA
DRA froze the 2006 fee schedule at the 2005 level. It required MedPAC to
submit a report to Congress by March 1, 2007 on mechanisms that could be used to
replace the sustainable growth rate system.
DRA also modified payments for imaging services. It capped the technical
component of the payment for services performed in a doctor’s office. The cap is set
at the outpatient department (OPD) fee schedule amount (without regard to the
geographic wage adjustment factor) under the prospective payment system for
hospital outpatient departments. The law also included a technical provision
specifying that an earlier regulation change made by CMS for multiple imaging
procedures was not to be taken into account in making the budget neutrality
calculation for 2006 and 2007.
TRHCA
TRHCA froze the 2007 fee schedule at the 2006 level. It also provided a bonus
payment for physicians who report on quality measures. Specifically, physicians and
practitioners who voluntarily report quality information will be eligible for a bonus
incentive payment. For services furnished from July 1, 2007 - December 31, 2007,
the bonus is 1.5% of allowed charges for services for which consensus-based quality
measures have been established. The quality measures are those identified under the
Physician Voluntary Reporting Program (PVRP), as published on the CMS website
on December 20, 2006 (the date of enactment). The Secretary could modify these
quality measures if changes were based on the results of a consensus process meeting
in January 2007 and if such changes were published on the website by April 1, 2007.
The Secretary could refine such measures up until July 1, 2007.
If there are no more than 3 quality measures applicable to the services furnished,
the provider must report each measure for at least 80% of the cases. If there are 4 or
more quality measures, the provider must report at least 3 for at least 80% of the
cases. The Secretary would presume that if an eligible professional submits data for
a measure, then the measure is applicable to the professional. The Secretary may
validate this presumption by sampling or other means.

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CRS-33
The Secretary is to estimate, based on submitted claims, an amount equal to
1.5% of allowed charges for services for which reports have been made. A single
consolidated bonus payment is to be made to the physician for the July 1, 2007 -
December 31, 2007 reporting period. No provider could receive payments in excess
of the product of the total number of quality measures for which data are submitted
and three times the average per measure payment amount. The average per measure
payment amount (as estimated by the Secretary) is the total amount of allowed
charges under Part B for all covered services furnished during the reporting period
on claims for which quality measures are reported divided by the total number of
quality measures for which data are reported during the reporting period.
In 2008, the quality measures are those that have been adopted or endorsed by
a consensus organization, that include measures submitted by a physician specialty,
and the Secretary identifies as having used a consensus-based process for developing
the measures. The measures are to include structural measures such as the use of
electronic health records and electronic prescribing technology. The proposed
measures for 2008 are to be published by August 15, 2007, with final measures
published by November 15, 2007.
The law authorized $1.35 billion for 2008 for a Physician Assistance and
Quality Initiative Fund which is to be available to the Secretary for physician
payment and quality improvement initiatives. The initiatives may include
adjustments to the conversion factor. The provision also required transfer of $60
million from the Part B trust fund to the CMS program management account for use
in implementing the fee schedule and reporting provisions for FY2007 - FY2009.
The law also extended for an additional year the MMA provision setting a floor
of 1.00 on the geographic component of the work adjustment.

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Appendix C. 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.39
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
39 Physician Payment Review Commission, Annual Report to Congress, 1989.

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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 .... 40
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.
MMA contained several provisions relating to the geographic calculations. The
law set a floor of 1.0 on the work adjustment for the 2004-2006 period. The Tax
Relief and Health Care Act of 2006 (P.L.109-432) extends the provision through
2007. MMA also raised the adjustments in Alaska for the work component, practice
expense component, and malpractice component to 1.67 for the 2004-2005 period;
this provision was not extended.
40 U.S. Congress, House Committee on the Budget, Omnibus Budget Reconciliation Act of
1989, report to accompany H.R. 3299, September 20, 1989.

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Calculation41
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 1995-1997 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 1995-1997 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 1998-2000 work indices from the indices
in effect for 1995-1997. Similarly, virtually no changes were made in the 2001-2003
work indices.42 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
41 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, November 1, 2000.
42 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 is being used for 2005-2008. The same data sources and
methodology used for the development of the 2001-2003 period were used for the
subsequent periods.
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 2005-2008.
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 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.
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. CMS updates the geographic adjuster based on the most recent
premiums information.

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Appendix D. 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.
HCFA developed the required new methodology which 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 procedures
based on estimates from the specialty’s clinical practice expert panels (CPEPs).
Indirect costs (for office expenses, administrative labor, and other expenses) were
allocated to procedures based on a combination of the procedure’s work relative

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value units and the direct practice expense estimates. If the procedure was performed
by more than one specialty, a weighted average was computed; this average was
based on the frequency with which each specialty performed the procedure on
Medicare patients. The final step was a budget neutrality adjustment to assure that
aggregate Medicare expenses were no more or less than they would be if the system
had not been implemented.
Subsequent Modifications. 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 a process under which data collected or
developed outside HHS would be accepted and used to the maximum extent
practicable and consistent with sound data practices. These outside data would
supplement data normally developed by HHS for determining the practice expense
component. Under this authority, CMS has accepted supplemental data from seven
specialties.
CMS continued to refine practice expense relative value units on an ongoing
basis. Assisting in this process was a multispecialty subcommittee of the AMA’s
RUC. This subcommittee, the Practice Expense Advisory Committee (PEAC),
reviewed CPEP clinical staff, equipment, and supply data for physicians’ services.
It made recommendations to CMS based on this review. CMS implemented most of
the refinements recommended by the RUC and PEAC. Recently, the PEAC was
replaced by the Practice Expense Review Committee (PERC).
In its proposed rule-making for the 2006 fee schedule, CMS proposed to revise
the calculation used to determine practice expenses. This proposal was withdrawn
in the final rule, primarily because incorrect calculations were published in the
proposed fee schedule. A modified version is incorporated in the 2007 fee schedule.
2007 Fee Schedule. The 2007 fee schedule incorporated a major revision
in the way practice expenses are calculated. CMS stated that the revisions should
make the process more transparent and easier to understand. The following are the
major changes:
! Use of a “bottom-up” method to calculate direct practice expenses.
CMS states that data refinements by the PEAC/PERC/RUC process
has enabled it to use this approach. The direct costs are to be
determined by adding the costs of the resources (clinical staff,
equipment and supplies) typically required to provide the service.
! Use of practice expense survey data from eight specialties:
allergy/immunology, cardiology, dermatology, gastroenterology,
radiology, radiation oncology, urology and independent diagnostic
testing facilities.
! Elimination of an exception to the previous methodology, the
“nonphysician work pool” which was used to calculate practice
expenses for service codes without a physician work component (i.e.
technical component codes and codes for services furnished by

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nonphysicians). These services will now be priced using the standard
practice expense methodology.
! Incorporate technical modifications in the calculation of indirect
practice expenses.
The changes are to be phased-in over four years, 2007-2010.

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Appendix E. Private Contracting Rules
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
compelled to enter into private contracts that apply to other services

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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
beginning of the selected calendar quarter. Nonparticipating
physicians can opt out at any time.

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! 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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