Impact of Resource-Based Practice Expenses on the Medicare Physician Volume
Maxwell, Stephanie, Zuckerman, Stephen, Health Care Financing Review
In 1992, Medicare implemented the Medicare physician fee schedule (MPFS) using a resource-based relative value scale (RBRVS), which established physician service payments based on relative costs instead of prevailing charges. The goal of the MPFS was to correct distortions produced by charge-based payments and to encourage medical practice efficiencies (Physician Payment Review Commission, 1989). Under the new system, payments are based on the number of RVUs assigned to each service. Total RVUs reflect three cost components: (1) physician work (or time and effort), (2) practice expenses, and (3) professional liability insurance for a given service. Costs associated with each component are given a weight, or index value, and are adjusted to account for area price differences. The three index values for a service are then summed and multiplied by a standard dollar amount (a conversion factor) to arrive at a payment amount. On average, work represents 52 percent of total physician payments, practice expenses represent 44 percent, and liability insurance represents 4 percent (U.S. General Accounting Office, 2005). Overall, Medicare physician payments totaled over $40 billion in 2003, or almost 17 percent of Medicare spending (Centers for Medicare & Medicaid Services, 2006a). Medicare payments represent roughly 20 percent of revenues to physicians, although the share varies by specialty (Smith et al., 2006).
While resource-based work RVUs were the foundation of the MPFS, practice expense and liability insurance RVUs continued to be based on historical charges until 1999 and 2000, respectively, when resource-based values for these components were phased in (Federal Register, 1998a,b). By 2002, most of the system's relative values were derived from estimates of resources, however the program made substantial refinements to the RBPE values between 2002 and 2004 (Federal Register, 2002; 2003). (1) Like the original
RBRVS created for physician work, the shift to RBPE and liability insurance values was intended to better align payments with resource costs, and was expected to redistribute payments toward evaluative-oriented services.
One aspect of the new practice expense payment system is that CMS substantially increased the number of services for which the practice expense payment is affected by the site of service, and changed the level of the site of service differential for services that already had a differential. In essence, these changes regarding site of service differentials were designed to more accurately compensate physicians when they furnish procedures in their offices versus in other ambulatory settings. For a service with a site of service differential, facility practice expense RVUs are applied when that service is furnished in a setting whose facility costs are reimbursed under other Medicare payment systems (such as hospital outpatient departments or ambulatory surgical centers) (Federal Register, 2002). Non-facility practice expense RVUs (which are higher in value than the facility RVUs) are applied when a service is furnished in a setting where no other Medicare payment system covers the facility-related expenses. By far the most common non-facility setting, in terms of service quantity and Medicare spending, is the physician office. (2) Until 1999, facility practice expense RVUs were calculated simply by applying a 50-percent reduction to a service's non-facility practice expense RVU value (Federal Register, 2002). However, when developing the RBPE RVUs, average practice expenses were estimated in both the facility and non-facility settings, for the services that Medicare determined would have a site of service differential.
Advances in clinical care, anesthesia methods, and medical technologies have allowed many elective procedures that used to be furnished in the hospital inpatient setting to be furnished in ambulatory settings, and it is estimated that at least 60 to 70 percent of all surgeries are done on an ambulatory basis (Owings and Kozak, 1998). …