<DOC>
[Federal Register: November 2, 1998 (Volume 63, Number 211)]
[Rules and Regulations]               
[Page 58813-58862]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02no98-16]
 

[[Page 58813]]

_______________________________________________________________________

Part II





Department of Health and Human Services





_______________________________________________________________________



Health Care Financing Administration



_______________________________________________________________________



42 CFR Part 405, et al.



Medicare Program; Revisions to Payment Policies and Adjustments to the 
Relative Value Units Under the Physician Fee Schedule for Calendar Year 
1999; Final Rule and Notice


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 405, 410, 413, 414, 415, 424, and 485

[HCFA-1006-FC]
RIN 0938-AI52

 
Medicare Program; Revisions to Payment Policies and Adjustments 
to the Relative Value Units Under the Physician Fee Schedule for 
Calendar Year 1999

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Final rule with comment period.

-----------------------------------------------------------------------

SUMMARY: This final rule makes several policy changes affecting 
Medicare Part B payment. The changes that relate to physicians' 
services include: resource-based practice expense relative value units 
(RVUs), medical direction rules for anesthesia services, and payment 
for abnormal Pap smears. Also, we are rebasing the Medicare Economic 
Index from a 1989 base year to a 1996 base year. Under the law, we are 
required to develop a resource-based system for determining practice 
expense RVUs. The Balanced Budget Act of 1997 (BBA) delayed, for 1 
year, implementation of the resource-based practice expense RVUs until 
January 1, 1999. Also, BBA revised our payment policy for nonphysician 
practitioners, for outpatient rehabilitation services, and for drugs 
and biologicals not paid on a cost or prospective payment basis. In 
addition, BBA permits certain physicians and practitioners to opt out 
of Medicare and furnish covered services to Medicare beneficiaries 
through private contracts and permits payment for professional 
consultations via interactive telecommunication systems. Furthermore, 
we are finalizing the 1998 interim RVUs and are issuing interim RVUs 
for new and revised codes for 1999. This final rule also announces the 
calendar year 1999 Medicare physician fee schedule conversion factor 
under the Medicare Supplementary Medical Insurance (Part B) program as 
required by section 1848(d) of the Social Security Act. The 1999 
Medicare physician fee schedule conversion factor is $34.7315.

DATES: Effective date: This rule this rule is effective January 1, 
1999.
    Applicability date: Part 405 subpart D is applicable for private 
contract affidavits signed and private contracts entered into on or 
after January 1, 1999.
    This rule is a major rule as defined in Title 5, United States 
Code, section 804(2). Pursuant to 5 U.S.C. section 801(a)(1)(A), we are 
submitting a report to the Congress on this rule on October 30, 1998.
    Comment date: We will accept comments on interim RVUs for selected 
procedure codes identified in Addendum C and on interim practice 
expense RVUs for all codes as shown in Addendum B. Comments will be 
considered if we receive them at the appropriate address, as provided 
below, no later than 5 p.m. on January 4, 1999.

ADDRESSES: Mail written comments (1 original and 3 copies) to the 
following address: Health Care Financing Administration, Department of 
Health and Human Services, Attention: HCFA-1006-FC, P.O. Box 26688, 
Baltimore, MD 21207-0488.
    If you prefer, you may deliver your written comments (1 original 
and 3 copies) to one of the following addresses:

Room 443-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, DC 20201, or
Room C5-14-03, 7500 Security Boulevard, Baltimore, MD 21244-1850.

    Because of staffing and resource limitations, we cannot accept 
comments by facsimile (FAX) transmission. In commenting, please refer 
to file code HCFA-1006-FC. Comments received timely will be available 
for public inspection as they are received, generally beginning 
approximately 3 weeks after publication of a document, in Room 443-G of 
the Department's offices at 200 Independence Avenue, SW., Washington, 
DC, on Monday through Friday of each week from 8:30 a.m. to 5 p.m. 
(phone: (202) 690-7890).

FOR FURTHER INFORMATION CONTACT:

Roberta Epps, (410) 786-4503 (for issues related to outpatient 
rehabilitation services).
Stephen Heffler, (410) 786-1211 (for issues related to the Medicare 
Economic Index).
Anita Heygster, (410) 786-4486 (for issues related to private 
contracts).
Jim Menas, (410) 786-4507 (for issues related to Pap smears and medical 
direction for anesthesia services).
Robert Niemann, (410) 786-4569 (for issues related to the drugs and 
biologicals policy).
Regina Walker-Wren, (410) 786-9160 (for issues related to physician 
assistants, nurse practitioners, clinical nurse specialists, and 
certified nurse-midwives).
Craig Dobyski, (410) 786-4584 (for issues related to 
teleconsultations).
Stanley Weintraub, (410) 786-4498 (for issues related to practice 
expense relative value units and all other issues).

SUPPLEMENTARY INFORMATION:
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    This Federal Register document is also available from the Federal 
Register online database through GPO Access, a service of the U.S. 
Government Printing Office. Free public access is available on a Wide 
Area Information Server (WAIS) through the Internet and via 
asynchronous dial-in. Internet users can access the database by using 
the World Wide Web; the Superintendent of Documents home page address 
is http://www.access.gpo.gov/nara/index.html, by using local WAIS 
client software, or by telnet to swais.access.gpo.gov, then login as 
guest (no password required). Dial-in users should use communications 
software and modem to call 202-512-1661; type swais, then login as 
guest (no password required).
    To assist readers in referencing sections contained in this 
preamble, we are providing the following table of contents. Some of the 
issues discussed in this preamble affect the payment policies but do 
not require changes to the regulations in the Code of Federal 
Regulations. Information on the regulation's impact appears throughout 
the preamble and not exclusively in part IX.

Table of Contents

I. Background
    A. Legislative History
    B. Published Changes to the Fee Schedule
II. Specific Proposals for Calendar Year 1998; Response to Comments
    A. Resource-Based Practice Expense Relative Value Units
    1. Resource-Based Practice Expense Legislation
    2. Proposed Methodology for Computing Practice Expense Relative 
Value Units
    3. Other Practice Expense Policies

[[Page 58815]]

    4. Refinement of Practice Expense Relative Value Units
    5. Reductions in Practice Expense Relative Value Units for 
Multiple Procedures
    6. Transition
    B. Medical Direction for Anesthesia Services
    C. Separate Payment for a Physician's Interpretation of an 
Abnormal Papanicolaou Smear
    D. Rebasing and Revising the Medicare Economic Index
III. Implementation of the Balanced Budget Act
    A. Payment for Drugs and Biologicals
    B. Private Contracting with Medicare Beneficiaries
    C. Payment for Outpatient Rehabilitation Services
    1. BBA 1997 Provisions Affecting Payment for Outpatient 
Rehabilitation Services
    a. Reasonable Cost-Based Payments
    b. Prospective Payment System for Outpatient Rehabilitation 
Services
    (1) Overview
    (2) Services Furnished by Skilled Nursing Facilities
    (3) Services Furnished by Home Health Agencies
    (4) Services Furnished by Comprehensive Outpatient 
Rehabilitation Facilities
    (5) Site-of-Service Differential
    (6) Mandatory Assignment
    2. Uniform Procedure Codes for Outpatient Rehabilitation 
Services
    3. Financial Limitation
    a. Overview
    b. Use of Modifiers to Track the Financial Limitation
    c. Treatment of Services Exceeding the Financial Limitation
    4. Qualified Therapists
    5. Plan of Treatment
    D. Payment for Services of Certain Nonphysician Practitioners 
and Services Furnished Incident to their Professional Services
    E. Payment for Teleconsultations in Rural Health Professional 
Shortage Areas
IV. Refinement of Relative Value Units for Calendar Year 1999 and 
Responses to Public Comments on Interim Relative Value Units for 
1998
    A. Summary of Issues Discussed Related to the Adjustment of 
Relative Value Units
    B. Process for Establishing Work Relative Value Units for the 
1999 Fee Schedule
V. Physician Fee Schedule Update and Conversion Factor for Calendar 
Year 1999
VI. Provisions of the Final Rule
VII. Collection of Information Requirements
VIII. Regulatory Impact Analysis
    A. Regulatory Flexibility Act
    B. Resource-Based Practice Expense Relative Value Units
    C. Medical Direction for Anesthesia Services
    D. Separate Payment for a Physician's Interpretation of an 
Abnormal Papanicolaou Smear
    E. Rebasing and Revising the Medicare Economic Index
    F. Payment for Nurse Midwives' Services
    G. BBA Provisions Included in This Proposed Rule
    H. Impact on Beneficiaries
Addendum A--Explanation and Use of Addenda B and C
Addendum B--Relative Value Units (RVUs) and Related Information
Addendum C--Codes with Interim RVUs

    In addition, because of the many organizations and terms to which 
we refer by acronym in this final rule, we are listing these acronyms 
and their corresponding terms in alphabetical order below:

AANA: American Association of Nurse Anesthetists
ABC: Activity based costing
ABN: Advance Beneficiary Notice
AHE: Average hourly earnings
AMA: American Medical Association
ANCC: American Nurses Credentialing Center
ASA: American Society of Anesthesiologists
ASOPA: American Society of Orthopedic Physician Assistants
AWP: Average wholesale price
BBA: Balanced Budget Act of 1997
BLS: Bureau of Labor Statistics
CAAHEP: Commission on Accreditation of Allied Health Education 
Programs
CF: Conversion factor
CFR: Code of Federal Regulations
CMSAs: Consolidated Metropolitan Statistical Areas
CORF: Comprehensive outpatient rehabilitation facility
CPEPs: Clinical Practice Expert Panels
CPI: Consumer Price Index
CPI-U: Consumer Price Index for All Urban Consumers
CPS: Current Population Survey
CPT: [Physicians'] Current Procedural Terminology
CRNA: Certified Registered Nurse Anesthetist
DME: Durable medical equipment
DMEPOS: Durable medical equipment, prosthetics, orthotics, and 
supplies
DRG: Diagnosis-related group
EAC: Estimated acquisition cost
ECI: Employment Cost Index
ES-202 Data: Bureau of Labor Statistics from State unemployment 
insurance agencies
ESRD: End-stage renal disease
FDA: Food and Drug Administration
FMR: Fair market rental
FQHC: Federally qualified health center
GAAP: Generally accepted accounting principles
GAF: Geographic adjustment factor
GPCI: Geographic practice cost index
HCFA: Health Care Financing Administration
HCPAC: Health Care Professionals Advisory Committee
HCPCS: HCFA Common Procedure Coding System
HHA: Home health agency
HHS: [Department of] Health and Human Services
HMO: Health maintenance organization
HPSA: Health professional shortage area
HRSA: Health Resources and Services Administration
HUD: [Department of] Housing and Urban Development
IPLs: Independent Physiologic Laboratories
MedPAC: Medicare Payment Advisory Commission
MEI: Medicare Economic Index
MGMA: Medical Group Management Association
MSA: Metropolitan Statistical Area
MSA: Medicare Supplemental Insurance
MVPS: Medicare volume performance standard
NAIC: National Association of Insurance Commissioners
NBCOPA: National Board on Certification for Orthopedic Physician 
Assistants
NCCPA: National Council on Certification of Physician Assistants
NPI: National provider identifier
OBRA: Omnibus Budget Reconciliation Act
OTIP: Occupational therapist in independent practice
PC: Professional component
PHS: Public Health Service
PMSA: Primary Metropolitan Statistical Area
PPI: Producer price index
PPS: Prospective payment system
PTIP: Physical therapist in independent practice
RBRVS: Resource Based Relative Value Scale
RHC: Rural health clinic
RUC: [AMA's Specialty Society] Relative [Value] Update Committee
RN: Registered nurse
RVU: Relative value unit
SMS: Socioeconomic Monitoring System
SNF: Skilled nursing facility
TC: Technical component
TEFRA: Tax Equity and Fiscal Responsibility Act
UPIN: Uniform provider identifier number

I. Background

A. Legislative History

    Since January 1, 1992, Medicare has paid for physicians' services 
under section 1848 of the Social Security Act (the Act), ``Payment for 
Physicians' Services.'' This section contains three major elements: (1) 
A fee schedule for the payment of physicians' services; (2) a 
sustainable growth rate for the rates of increase in Medicare 
expenditures for physicians' services; and (3) limits on the amounts 
that nonparticipating physicians can charge beneficiaries. The Act 
requires that payments under the fee schedule be based on national 
uniform relative value units (RVUs) based on the resources used in 
furnishing a service. Section 1848(c) of the Act requires that national 
RVUs be established for physician work, practice expense, and 
malpractice expense.
    Section 1848(c)(2)(B)(ii)(II) of the Act provides that adjustments 
in RVUs because of changes resulting from a review of those RVUs may 
not cause total physician fee schedule payments to differ by more than 
$20 million from what they would have been had the adjustments not been 
made. If this tolerance is exceeded, we must make adjustments to the 
conversion factors (CFs) to preserve budget neutrality.

[[Page 58816]]

B. Published Changes to the Fee Schedule

    In the June 5, 1998, proposed rule (63 FR 30820), we listed all of 
the final rules published through October 31, 1997 relating to the 
updates to the RVUs and revisions to payment policies under the 
physician fee schedule. In the June 5, 1998 proposed rule (63 FR 
30818), we discussed several policy options affecting Medicare payment 
for physicians' services including resource-based practice expense 
RVUs, medical direction rules for anesthesia services, and payment for 
abnormal Pap smears. Also, we discussed the rebasing of the Medicare 
Economic Index from a 1989 base year to a 1996 base year. Further, 
based on BBA, we proposed revising our payment policy for nonphysician 
practitioners, for outpatient rehabilitation services, and for drugs 
and biologicals not paid on a cost or prospective payment basis. In 
addition, based on BBA, we discussed implementing new payment policies 
for certain physicians and practitioners who opt out of Medicare and 
furnish covered services to Medicare beneficiaries through private 
contracts. And finally, based on BBA, we discussed teleconsultation 
services.
    This final rule affects the regulations set forth at 42 CFR part 
405, which consists of regulations on Federal health insurance for the 
aged and disabled; part 410, which consists of regulations on 
supplementary medical insurance benefits; part 414, which consists of 
regulations on the payment for Part B medical and other health 
services; part 415, which pertains to services furnished by physicians 
in providers, supervising physicians in teaching settings, and 
residents in certain settings; part 424, which pertains to the 
conditions for Medicare payment; and part 485, which pertains to 
conditions of participation: specialized providers.

II. Specific Proposals for Calendar Year 1998; Response to Comments

    In response to the publication of the June 5, 1998 proposed rule, 
we received approximately 14,000 comments. We received comments from 
individual physicians, health care workers, and professional 
associations and societies. The majority of the comments addressed the 
proposal related to the resource-based practice expense policy.
    The proposed rule discussed policies that affect the number of RVUs 
on which payment for certain services would be based. Certain changes 
implemented through this final rule are subject to the $20 million 
limitation on annual adjustments contained in section 
1848(c)(2)(B)(ii)(II) of the Act.
    After reviewing the comments and determining the policies we will 
implement, we have estimated the costs and savings of these policies 
and added those costs and savings to the estimated costs associated 
with any other changes in RVUs for 1999. We discuss in detail the 
effects of these changes in the Regulatory Impact Analysis (section 
IX).
    For the convenience of the reader, the headings for the policy 
issues in this section correspond to the headings used in the June 5, 
1998 proposed rule. More detailed background information for each issue 
can be found in the June 5, 1998 proposed rule.

A. Resource-Based Practice Expense Relative Value Units

1. Resource-Based Practice Expense Legislation
    Section 121 of the Social Security Act Amendments of 1994 (Public 
Law 103-432), enacted on October 31, 1994, required us to develop a 
methodology for determining resource-based practice expense RVUs for 
each physician's service that would be effective for services furnished 
in 1998. In developing the methodology, we were required to consider 
the staff, equipment, and supplies used in providing medical and 
surgical services in various settings.
    The legislation specifically required that, in implementing the new 
system of practice expense RVUs, we apply the same budget-neutrality 
provisions that we apply to other adjustments under the physician fee 
schedule.
    On August 5, 1997, the President signed the BBA into law. Section 
4505(a) of BBA delayed the effective date of the resource-based 
practice expense RVU system until January 1, 1999. In addition, BBA 
provided for the following revisions in the requirements to change from 
a charge-based practice expense RVU system to a resource-based method.
    Instead of paying for all services entirely under a resource-based 
system in 1999, section 4505(b) of BBA provided for a 4-year transition 
period. The practice expense RVUs for the year 1999 will be the product 
of 75 percent of charge-based RVUs (1998) and 25 percent of the 
resource-based RVUs. For the year 2000, the percentages will be 50 
percent charge-based and 50 percent resource-based. For the year 2001, 
the percentages will be 25 percent charge-based and 75 percent 
resource-based. For subsequent years, the RVUs will be totally 
resource-based.
    Section 4505(e) of BBA provided that, for 1998, the practice 
expense RVUs be adjusted for certain services in anticipation of the 
implementation of resource-based practice expenses beginning in 1999. 
Practice expense RVUs for office visits were increased.
    For other services whose practice expense RVUs (determined for 
1998) exceeded 110 percent of the work RVUs and were provided less than 
75 percent of the time in an office setting, the 1998 practice expense 
RVUs were reduced to a number equal to 110 percent of the work RVUs. 
This limitation did not apply to services that had a proposed resource-
based practice expense RVU in the June 5, 1998 proposed rule that was 
an increase from its 1997 practice expense RVU.
    The total of the reductions under this provision was less than the 
statutory maximum of $390 million. The procedure codes affected and the 
final RVUs for 1998 were published in the October 31, 1997 final rule 
(62 FR 59103).
    Section 4505(d)(2) of BBA required that the Secretary transmit a 
report to the Congress by March 1, 1998, including a presentation of 
data to be used in developing the practice expense RVUs and an 
explanation of the methodology. A report was submitted to the Congress 
in early March 1998. Section 4505(d)(3) required that a proposed rule 
be published by May 1, 1998, with a 90-day comment period. For the 
transition to begin on January 1, 1999, a final rule must be published 
by October 30, 1998.
    BBA also required that we develop new resource-based practice 
expense RVUs. In developing these new practice expense RVUs, section 
4505(d)(1) required us to--
    <bullet> Utilize, to the maximum extent practicable, generally 
accepted accounting principles that recognize all staff, equipment, 
supplies, and expenses, not just those that can be tied to specific 
procedures, and use actual data on equipment utilization and other key 
assumptions;
    <bullet> Consult with organizations representing physicians 
regarding the methodology and data to be used; and
    <bullet> Develop a refinement process to be used during each of the 
four years of the transition period.
2. Proposed Methodology for Computing Practice Expense Relative Value 
Units
(See Addendum B in the June 5, 1998 proposed rule (63 FR 30888) for a 
detailed technical description of the proposed methodology.)
    In the June 5, 1998 proposed rule (63 FR 30827), we proposed a 
methodology

[[Page 58817]]

for computing resource-based practice expense RVUs that uses the two 
significant sources of actual practice expense data we have available: 
the Clinical Practice Expert Panel (CPEP) data and the American Medical 
Association's (AMA's) Socioeconomic Monitoring System (SMS) data. This 
methodology is based on an assumption that current aggregate specialty 
practice costs are a reasonable way to establish initial estimates of 
relative resource costs of physicians' services across specialties. It 
then allocates these aggregate specialty practice costs to specific 
procedures and, thus, can be seen as a ``top-down'' approach.

Practice Expense Cost Pools

    We used actual practice expense data by specialty, derived from the 
1995 through 1997 SMS survey data, to create six cost pools: 
administrative labor, clinical labor, medical supplies, medical 
equipment, office supplies, and all other expenses. There were three 
steps in the creation of the cost pools.
    Step 1: We used the AMA's SMS survey of actual cost data to 
determine practice expenses per hour by cost category. The practice 
expenses per hour for each physician respondent's practice was 
calculated as the practice expenses for the practice divided by the 
total number of hours spent in patient care activities by the 
physicians in the practice. The practice expenses per hour for the 
specialty are an average of the practice expenses per hour for the 
respondent physicians in that specialty.
    Step 2: We determined the total number of physician hours, by 
specialty, spent treating Medicare patients. This was calculated from 
physician time data for each procedure code and the Medicare claims 
data. The primary sources for the physician time data were surveys 
submitted to the AMA's Specialty Society Relative Value Update 
Committee (RUC) and surveys done by Harvard for the initial 
establishment of the work RVUs.
    Step 3: We then calculated the practice expense pools by specialty 
and by cost category by multiplying the practice expenses per hour for 
each category by the total physician hours.

Cost Allocation Methodology

    For each specialty, we separated the six practice expense pools 
into two groups and used a different allocation basis for each group.
    <bullet> For group one, which includes clinical labor, medical 
supplies, and medical equipment, we used the CPEP data as the 
allocation basis. The CPEP data for clinical labor, medical supplies, 
and medical equipment were used to allocate the clinical labor, medical 
supplies, and medical equipment cost pools, respectively.
    <bullet> For group two, which includes administrative labor, office 
expenses, and all other expenses, a combination of the group one cost 
allocations and the physician fee schedule work RVUs were used to 
allocate the cost pools.
    <bullet> For procedures performed by more than one specialty, the 
final procedure code allocation was a weighted average of allocations 
for the specialties that perform the procedure, with the weights being 
the frequency with which each specialty performs the procedure on 
Medicare patients.

Other Methodological Issues

Professional and Technical Component Services
    Using the methodology described above, the professional and 
technical components of the resource-based practice expense RVUs do not 
necessarily sum to the global resource-based practice expense RVUs 
since specialties with different practice expenses per hour provide the 
components of these services in different proportions. We made two 
adjustments to the methodology, depending on the specific HCFA Common 
Procedure Coding System (HCPCS) code, so that the professional and 
technical component practice expense RVUs for a service sum to the 
global practice expense RVUs.
Practice Expenses per Hour Adjustments and Specialty Crosswalks
    Since many specialties identified in our claims data did not 
correspond exactly to the specialties included in the practice expenses 
tables from the SMS survey data, it was necessary to crosswalk these 
specialties to the most appropriate SMS specialty category. (See Table 
3 in the June 5, 1998 proposed rule (63 FR 30833) for a listing of all 
proposed crosswalks.)
    We also made the following adjustments to the practice expense per 
hour data:
    <bullet> We set the medical materials and supplies practice 
expenses per hour for the specialties of ``Oncology'' and ``Allergy and 
Immunology'' equal to the medical materials and supplies practice 
expenses per hour for ``All Physicians,'' stating that we make separate 
payment for the drugs furnished by these specialties.
    <bullet> We based the administrative payroll, office, and other 
practice expenses per hour for the specialties of ``Physical Therapy'' 
and ``Occupational Therapy'' on data used to develop the salary 
equivalency guidelines for these specialties. We set the remaining 
practice expense per hour categories equal to the ``All Physicians'' 
practice expenses per hour from the SMS survey data.
    <bullet> Due to uncertainty concerning the appropriate crosswalk 
and time data for the nonphysician specialty ``Audiologist,'' we 
derived the resource-based practice expense RVUs for codes performed by 
audiologists from the practice expenses per hour of the other 
specialties that perform these codes.
    <bullet> Because we believed that the use of the average practice 
expenses per hour should create the appropriate practice expense pool 
for radiology, we did not attempt to differentiate the practice 
expenses per hour for radiologists according to who owned the 
equipment.
Time Associated With the Work Relative Value Units
    The time data resulting from the refinement of the work RVUs have 
been, on the average, 25 percent greater than the time data obtained by 
the Harvard study for the same services. We increased the Harvard time 
data in order to ensure consistency between these data sources.
    For services such as radiology, dialysis, and physical therapy, and 
for many procedures performed by independent physiological laboratories 
and the nonphysician specialties of clinical psychologist and 
psychologist (independent billing), we calculated estimated total 
physician times for these services based on work RVUs, maximum clinical 
staff time for each service as shown in the CPEP data, or the judgment 
of our clinical staff.
    We calculated the time for Current Procedural Terminology (CPT) 
codes 00100 through 01996 using the base and time units from the 
anesthesia fee schedule and the Medicare allowed claims data.
    We received the following comments on our proposed methodology to 
calculate resource-based practice expense RVUs:
Top-Down Methodology
    Comment: Most of the physician specialty societies commenting on 
our proposed general methodology supported the use of the top-down 
approach as the most reasonable methodology for developing resource-
based practice expense RVUs, and the most responsive approach to the 
requirements of BBA. This was echoed by comments from several 
nonphysician organizations, the Association of American Medical 
Colleges, and the Medical Group Management

[[Page 58818]]

Association, as well as several hundred individual commenters.
    These commenters supported the top-down method for a variety of 
reasons:
    <bullet> It reflects the relative values of physicians' actual 
practice expenses.
    <bullet> It uses the best available sources of aggregate practice 
expense data.
    <bullet> It recognizes specialty-specific indirect costs.
    <bullet> It does not rely upon arbitrary, distorting data 
adjustments such as ``linking'' and ``scaling.''
    <bullet> It is conducive to refinement.
    MedPAC also agreed that this approach is necessary, because of 
limitations in the CPEP process and because the top-down approach 
assures that all practice costs are reflected in the RVUs.
    However, several organizations, mainly representing primary care 
physicians and supported by comments from individual physicians, 
opposed the use of a top-down methodology to develop practice expense 
RVUs. They argued that the top-down approach is not resource-based but, 
rather, rewards higher paid physicians who have spent more in the past, 
regardless of the extent to which these expenditures contributed to 
patient care. Thus, the commenters claimed that the top-down approach 
perpetuates the inequities in the current charge-based practice expense 
RVUs that the implementation of a resource-based practice expense 
system was supposed to correct.
    One commenter also claimed that the top-down approach is not 
responsive to the requirements of BBA, as the methodology is not based 
on generally accepted accounting principles. Further, the commenter 
argued that this new proposal is not more responsive to the concerns of 
the medical community in general but, rather, only benefits those 
specialties whose income was projected to decline under the bottom-up 
approach.
    A specialty society representing clinical oncology opposed the top-
down methodology because--
    <bullet> It does not actually measure appropriate input resource 
costs and thus pays for inefficiencies;
    <bullet> It overpays hospital-based and underpays office-based 
services; and
    <bullet> The RVUs for individual codes cannot be refined because of 
the use of macro-specialty per hour costs.
    There were several comments that expressed concern about the more 
specific impacts of the methodology. A major primary care organization 
pointed out that, under the 1997 proposed rule, an internist would have 
had to provide only 15 midlevel established patient office visits to 
obtain the practice expense reimbursement of a single coronary triple-
bypass graft, compared to 40 visits under our current proposal. One 
organization opposed the use of the top-down approach because of the 
estimated reduction in payments to radiology and radiation oncology. 
Another commenter, representing pathologists, expressed concern that 
because pathology received small gains under the bottom-up method, but 
a 10 percent reduction under the top-down, there are possible flaws in 
the top-down methodology.
    A few of the above comments specifically recommended that we adopt 
a new bottom-up approach that is responsive to the BBA, the General 
Accounting Office (GAO), and the concerns of the medical community. 
Another organization commented that both top-down and bottom-up 
methodologies are inherently flawed, and that we should consider an 
entirely new payment algorithm using type of practice. One of the major 
primary care organizations concluded that the top-down methodology is 
only a reasonable starting point that will need to be improved during 
refinement in order to meet the original intent of improving practice-
expense payments for undervalued primary care and other office-based 
services.
    Response: As we stated in our proposed rule, BBA requires us to 
``utilize, to the maximum extent practicable, generally accepted cost 
accounting principles which recognize all staff, equipment, supplies, 
and expenses, not just those which can be tied to specific 
procedures****'' We still believe that the top-down methodology is more 
responsive to this BBA requirement. By using aggregate specialty 
practice costs as the basis for establishing the practice expense 
pools, the top-down method recognizes all of a specialty's costs, not 
just those linked to specific procedures.
    We also believe that the other reasons outlined in the proposed 
rule for preferring the top-down method are still valid. It answers 
many of the criticisms and questions from the medical community and the 
GAO regarding the bottom-up method's indirect practice expense 
allocation method, treatment of administrative costs, and use of caps 
and linking.
    However, we agree that a possible weakness of the top-down approach 
is that it may perpetuate historical inequities in the current charge-
based practice expense RVUs. More highly paid physicians would 
presumably have more revenues that could subsequently be spent on their 
practices. We believe this issue should be discussed during the 
refinement process.
    Comment: One major organization commented that we will need to 
develop an alternative method for new and revised codes that are not 
included in the SMS data because having multiple methods would lead to 
questionable validity.
    Response: It will not be necessary to develop an alternate 
methodology for refinement of new and revised codes. Once direct inputs 
are assigned to the new and revised codes, allocation to these codes 
will follow the same methodology used for all other services. (See 
Section II.A.4, Refinement of Practice Expense RVUs.)
    Comment: Two major primary care organizations expressed concern 
that we did not consult with the physician community about our 
intention to abandon, rather than refine, our originally proposed 
bottom-up approach, since they had assumed we would only be modifying 
our original methodology. They commented that this is of greater 
concern in light of BBA's requirement that we consult with physicians 
regarding our methodology and of GAO's recommendation that we refine, 
with no mention of replacing, the bottom-up method. One of the comments 
stated, that as the GAO found the bottom-up method acceptable, their 
society would like the GAO's assurance that the new method is sound.
    Response: We believe we carried out the BBA requirement to consult 
with physician organizations. There were extensive consultations with 
physicians, including the validation panels, the cross specialty panel, 
and the indirect cost symposium. During the course of each of these 
meetings, physicians and others pointed out serious problems with the 
bottom-up methodology. We have had two multispecialty meetings this 
year to explain our proposed methodology and have also had numerous 
meetings and discussions with many specialty societies. During all 
these meetings we carefully listened to all points of view and to 
suggestions for developing the new proposal. Following this lengthy 
consultation process, we published our new proposal with a 90-day 
comment period. This provided further opportunities for all interested 
groups to review and comment on this proposal.
    It is true that the GAO did not recommend that we totally replace 
our bottom-up approach. It is our understanding that the GAO was not 
asked to review alternative methods. In any case, their report did not 
recommend against adopting a new methodology. Their report did point 
out

[[Page 58819]]

several significant weaknesses in our original approach that we 
believed were better responded to by adopting a top-down methodology.
    Comment: One organization urged that we publish the practice-
expense RVUs three ways, using a top-down, a bottom-up, and a hybrid 
approach that uses SMS data for indirect costs and CPEP data for direct 
costs. The bottom-up and hybrid approaches should reflect the 
recommendations previously received relating to scaling, linking, and 
the treatment of administrative costs. This could provide a basis for 
developing comments that compare the interim practice expense RVUs with 
those derived from a modified bottom-up approach. The commenter stated 
that we should be open to considering arguments for a change in the 
interim practice expense RVUs based on a group's determination that the 
values under the bottom-up approach were more accurate.
    Response: We believe that we proposed the methodology for 
developing resource-based practice expense RVUs that best responds to 
the requirements of the Social Security Act Amendments of 1994 and BBA. 
From a practical standpoint, it would be very difficult to deal with 
the inconsistencies between RVUs for various services that have been 
derived from totally different methodologies.

SMS Data

    Comment: Almost all specialty society commenters, and many 
individual commenters, raised questions concerning shortcomings in the 
SMS data, though several commented that SMS is the most appropriate 
data source to use in developing specialty-specific practice expense 
RVUs. As we noted in the proposed rule, the AMA itself pointed out that 
the survey had not been designed to support the development of practice 
expense RVUs. The AMA also stated that the sample size, the response 
rate, and the fact that data was collected on the physician level, 
rather than the practice level, raised methodological issues. Many 
commenters echoed these concerns, and many raised what they saw as 
further general methodological problems:
    <bullet> MedPAC expressed concern about three types of potential 
errors in the SMS data: the sampling error and nonresponse error 
originally identified in our proposed rule and measurement error. Some 
of this measurement error could occur because the survey measures 
physician-level rather than practice-level costs, as noted above. In 
addition, there could be measurement error by using a self-reported 
survey if no mechanism exists to verify the information provided.
    MedPAC suggested that we could reduce these errors through 
additional data collection, perhaps implementing a subsample of SMS 
survey participants, through an analysis of nonresponse error that 
compares respondents with nonrespondents, through AMA's plans to do a 
practice-level survey every other year, and through considering 
methods, other than actual audits, to verify survey responses.
    <bullet> Several of the smaller specialties, such as maxillofacial, 
pediatric, vascular and thoracic surgeons, cardiology and gynecology 
subspecialties, geriatricians, and pulmonologists expressed concern 
with the validity and reliability of SMS data for those specialty and 
subspecialty groups not adequately represented in the SMS survey. A 
commenter also stated that academic and hospital-based specialties, 
such as critical care and neonatology, were not appropriately 
represented. Many specialty societies requested that we consider 
practice expense data obtained by under-represented specialty and 
subspecialty groups.
    <bullet> Several nonphysician specialties, though supporting the 
use of SMS data, raised the need to modify the survey to include 
nonphysicians in the future. A commenter stated that, because 
nonphysicians were not represented in the SMS survey, we have been 
forced to make an educated guess about which specialties they most 
resemble. Another commenter pointed out that the SMS data contains no 
information about osteopathic physicians.
    <bullet> Several specialties, regardless of their overall sample 
size, expressed concerns about the combining together of subspecialties 
with differing practice costs. For example, organizations representing 
cardiologists commented that it is not known how many in their sample 
were providing evaluation and management services, as opposed to 
performing equipment intensive procedures that have much higher costs. 
Two specialty societies representing nuclear physicians, along with 
several hundred individual commenters, objected to the small sample of 
this subspecialty, with its high costs related to the use of 
radiopharmaceuticals, being combined with radiologists into a single 
practice expense pool. The comments recommended that we increase 
nuclear medicine's practice expense RVUs by 20 percent.
    Similarly, a vascular surgery organization objected to being 
combined with cardiothoracic surgeons, who made up 75 percent of the 
sample and whose practice style differs substantially from vascular 
surgeons. An organization representing pediatrics expressed concern 
that pediatric subspecialties were grouped together with their adult 
counterparts, such as gastroenterology. The AMA commented on this point 
that it plans refinements for future surveys to enhance the utility of 
the data.
    <bullet> Several commenters noted that the survey consisted of 
physician-owned practices, despite the trend toward more physicians 
working as employees, resulting in a possible bias toward solo or small 
group practices. For example, one commenter stated that the majority of 
emergency room physicians now work as employees or under contract. 
Another commenter asserted that the majority of pediatricians list 
their status as ``employed.'' The AMA commented, in this regard, that a 
key refinement to the SMS survey will be the development of a practice-
level survey to complement the current process.
    <bullet> One commenter questioned our assumption that physician 
respondents to SMS share practice expenses equally with all other 
physician owners in the practice, since there is no data to show that 
this is the prevalent method.
    <bullet> An organization representing nurses commented that issues 
related to changes in acuity and case mix in ambulatory care are not 
being addressed, particularly as they pertain to the increased 
professionalization of clinical staff types. The organization argued 
that there is a need to incorporate into the survey process a clearer 
distinction between the types of clinical staff that are employed based 
on specialty practice.
    <bullet> Concerns were raised by some commenters that the SMS data 
did not always include the actual costs of a given specialty. Several 
organizations representing radiologists, radiation oncologists, and 
cardiologists commented that the methodology employed by the SMS survey 
consistently underestimated the actual costs of equipment. 
Organizations representing emergency room physicians, supported by the 
comment from the AMA, argued that the significant costs of both stand-
by time and uncompensated care are not reflected in the SMS data and 
that these costs need to be recognized.
    A gastroenterology specialty society asserted that the SMS data 
grossly understated actual expenses when compared to its own study. Two 
commenters stated that costs for home visits, such as travel expenses 
and insurance, are not adequately represented in the data. One 
organization commented that the SMS

[[Page 58820]]

data fails to adequately incorporate resources, including billing, 
nursing time, and transportation costs for audiologists utilized in 
settings such as skilled nursing facilities.
    One commenter stated that the added costs for compliance with 
federal initiatives, such as anti-fraud and abuse efforts and the new 
evaluation and management documentation guidelines, are not yet 
reflected in the SMS data. These costs should be recognized during the 
refinement process and included in future surveys.
    <bullet> On the other hand, several commenters argued that costs 
were included in the SMS data that should be excluded because they are 
paid for separately from the physician fee schedule. One commenter 
pointed to separately reimbursable supplies and drugs, and another to 
the costs of taking physician staff into the hospital, as examples of 
costs included in SMS that could lead to a double payment by Medicare. 
A society representing vascular surgeons commented that the technical 
component of noninvasive vascular laboratory testing falls into this 
``gray zone.''
    <bullet> A national specialty society commented that the AMA 
analysis of the ``zero'' responses by specialty by cost categories 
(that is, those cost categories where respondents indicated there were 
no costs) shows that a significant percentage of pathologists' 
responses for direct cost categories are zero as compared to the 
``zero'' response rates for all physicians. The comment requested that 
the SMS pathology data be cleared of all ``zero'' responses for all 
cost categories, not just for the total cost category, prior to the 
calculation of mean costs. For the purpose of calculating practice 
expense per hour for pathology, the society said, we should only use 
data from pathologists who incur a particular cost.
    <bullet> There were a number of comments concerning the SMS data on 
the specialty-specific physician patient care hours, which is one of 
the variables used to compute the practice expense per hour for each 
specialty:
    <bullet> Many specialty societies stated their concern that in the 
calculation of the specialty-specific practice expense per hour, 
specialties working the longest hours are disadvantaged. One commenter 
pointed out that practice expense is not uniformly distributed over the 
course of a given day; there are less costs when patient care takes 
place after, rather than during, office hours.
    Another commenter argued that our approach assumes that all of the 
patient care hours in the SMS survey are reflected in our claims data. 
However, the commenter stated, much time spent in patient care 
activities is not billable, such as the involvement of transplant 
surgeons in patient care after the initial assessments but prior to the 
actual transplants.
    One specialty society stated that hospital-based physicians' hours 
of work are probably overstated, as they will include total time spent 
in the facility and not just hours of providing patient services. One 
commenter questioned both the accuracy of the SMS data on hours worked 
per week, as well as our assumption that the level of practice expense 
incurred increases proportionally with the hours spent in patient care. 
An organization stated that physician reports of number of hours are 
less reliable than the reports of costs and are prone to overstatement. 
For these reasons, five specialty societies recommended using a 
standardized work week, usually a 40-hour week, for all specialties.
    <bullet> Many other specialty groups argued equally vehemently 
against any standardization of the patient care hours. One group 
commented that subjective adjustments to the SMS data, especially those 
which reallocate practice expenses among specialties, should be 
avoided. The comment added that suggestions that a standardized 40-hour 
work week be imposed on the data should be rejected because the 
proposal is driven by an arbitrary, subjective presumption that cross-
specialty practice expense variations are ``too large.''
    Another group argued that, as many physicians work more than a 40-
hour week, such an adjustment would introduce additional error into the 
data and distort the relationship between different specialties' 
practice expenses per hour.
    <bullet> Three organizations were concerned about the advantage 
given to specialties that use nonphysician practitioners who are not 
reimbursable. In such cases, the physician would incur practice expense 
costs, but the time of practitioners would not be included in the 
physician patient care hours in the denominator of the practice expense 
per hour calculation.
    On the other hand, another commenter stated that we should not 
adjust the SMS data for midlevel practitioners, such as optometrists or 
audiologists, as physician practices employing midlevel practitioners 
are likely to be more complex than a physician-only operation.
    <bullet> One specialty society commented that the demographics of 
the SMS survey are not clear, as there are no assurances that the 
sample is not biased towards one particular area of the country and 
does not exclude some areas.
    Response: We believe that most of the above comments identified 
important areas for needed future improvement in our data collection 
efforts on aggregate specialty-specific practice expense. However, 
although the SMS survey was not initially intended to be used to 
develop practice expense RVUs, we believe it is the best available 
source of data on actual multispecialty practice costs that allows us 
to recognize all staff, equipment, supplies, and expenses, not just 
those that can be tied to specific procedures. Many specialties 
supported this.
    For example, a specialty society commented, ``As with any complex 
database, the AMA SMS database is not perfect. It is, however, the best 
available source of data for aggregate practice expenses.'' The Medical 
Group Management Association (MGMA) stated in its comment that, ``The 
SMS survey data is the most appropriate and only primary data set in 
existence to determine specialty specific costs pools.''
    We also need to point out that many of the weaknesses in the SMS 
data could well be found in any other survey, whether undertaken by us, 
some other national group, or a medical specialty society. Problems 
with sample size and response rate have plagued other previous attempts 
to gather reliable data on practice expenses. Problems with measurement 
error may be a serious impediment for survey data that is collected 
with the purpose of influencing the level of a given specialty's 
practice expense pool. In fact, we believe one advantage of the current 
SMS data is that they were collected before the 1997 and 1998 proposed 
rules were published.
    We recognize that some specialties are under-represented or not 
appropriately represented in the SMS data and some are not included at 
all. We also acknowledge that additional data may need to be obtained 
and some adjustments made. One of our most important tasks during the 
immediate refinement period will be to work with the AMA and the 
medical community to consider possible ways to improve the 
representativeness of the aggregate specialty-specific data so that 
sampling error is decreased. As part of the refinement, we will also 
need to develop strategies to eliminate as many sources of nonresponse 
and measurement error as possible. (For further information on our 
refinement efforts to improve the accuracy of our

[[Page 58821]]

data, see Section II.A.4, Refinement of Practice Expense RVUs.)
    As indicated earlier, we believe an advantage of the SMS data we 
used is that it was collected prior to the proposed rule. In fact, it 
was collected prior to the original proposal in 1997 that was delayed 
by BBA and that would have resulted in large redistributions among 
specialties.
    We are very concerned, though, about the potential biases that may 
exist in any subsequent survey data collected by the SMS process or 
other surveys. We especially believe there is a problem in using data 
collected and submitted to us by individual specialties. We believe it 
is more appropriate to use data collected at the same time by an 
independent surveyor for a wide variety of specialties that both gain 
and lose under the proposal.
    Further, now that it is widely known how these survey data are 
being used, every specialty has an incentive to ensure that their data 
are as high as possible in future surveys. We agree with MedPAC that it 
may not be possible for Medicare to audit these data and that it is 
essential that alternatives be established by SMS and others. Perhaps 
specialty data that significantly changes in a future survey should be 
selectively audited by SMS through an independent auditor or other 
appropriate entity before being considered for use by us. We will 
consult with physician groups and others about this during the 
refinement process.
    Comment: One national organization suggested the use of MGMA survey 
data either as a supplement or alternative to SMS in the future.
    Response: We do not believe that the MGMA survey could currently be 
used as an alternative to SMS. As we noted in our proposed rule, due to 
selective sampling and low response rate, this survey is not 
representative of the population of physicians and cannot be used to 
derive code-specific RVUs. This view is based on consultations with 
MGMA representatives. However, we do believe that this survey data can 
be used as one way to validate the general accuracy of the SMS data. We 
have analyzed the MGMA data and have concluded that, in general, it 
supports the relative specialty-specific ranking of the practice 
expense per hour data derived from the SMS survey.
    Comment: One specialty society recommended using median, instead of 
mean, values to calculate each specialty's practice expense per hour. 
This comment argued that the use of medians would eliminate outliers 
and is statistically more appropriate.
    However, three other organizations specifically commented 
supporting our decision to use mean SMS data rather than median data. 
These comments asserted that, particularly with a small sample, use of 
the median would obscure any major differences in practice costs within 
a specialty.
    Response: We will continue to calculate the practice expenses per 
hour by using the mean values for each specialty, at least for the 
purposes of this final rule. This is another issue that can be 
revisited during the refinement period.
    Comment: Organizations representing emergency room physicians, as 
well as several hundred individual commenters, claimed that the SMS 
data seriously under-represented the true practice costs of emergency 
care. The commenters stated that the SMS data, as noted above, did not 
include costs of uncompensated care, much of it mandated under the 
Federal Emergency Medical Treatment and Active Labor Act (Public Law 
99-272), nor stand-by expenses.
    In addition, the comments argued, the SMS data failed to capture a 
representative cross-section of their types of practice arrangements; 
the SMS survey focused on physician owners, but the majority of 
emergency room physicians work as employees or under contract. 
Therefore, one commenter asserted, SMS did not include the largest 
single expense for most emergency physicians: the costs associated with 
employment by practice management firms, which can total between 30-40 
percent of the physician's fee.
    One of the specialty societies included with its comments the 
results of a study it commissioned, which showed that the mean practice 
expense per hour for emergency physicians was $27.33, more than double 
the $13 per hour based on SMS, even without including uncompensated 
care. If we are not willing at this time to substitute this survey data 
for that from the SMS, the organization recommended, with support from 
a comment from the AMA, that we crosswalk emergency medicine to the 
practice expense per hour for ``All Physicians,'' which is $67.50.
    Response: Though many specialties must deal with the issue of 
uncompensated care, we do agree that it may pose a particular problem 
for emergency physicians, who are obligated under law to treat any 
patient regardless of the patient's ability or willingness to pay for 
treatment. Therefore, the amount of patient care hours spent on 
uncompensated care could be significantly higher for emergency medicine 
than for any other specialty. These issues require further examination. 
In the meantime, we will make an adjustment in our calculation of the 
practice expense per hour for emergency medicine by using the ``All 
Physicians'' practice expense per hour to calculate the administrative 
labor and other expenses cost pool. We will continue to calculate the 
clinical labor, supply, equipment, and office cost pools using the SMS-
derived data, as it seems unlikely that, as a hospital-based specialty, 
emergency medicine's costs for these categories would approximate those 
of the average physician.
    Comment: Many commenters argued that the reductions published in 
the June 5, 1998, NPRM for services without work RVUs were 
inappropriate. The commenters represented a wide spectrum of 
specialties including radiology, radiation oncology, cardiology, 
independent physiological and other laboratories, psychology, 
audiology, dermatology, and others. These comments focused on the fact 
that AMA does not survey some of the entities that provide these 
services. They argued that the CPEP data are flawed and the indirect 
allocation methodology is biased.
    Response: Although it is true that the AMA does not survey the 
entities that provide some of these services, this does not necessarily 
mean that these services are inadequately represented in the SMS data. 
If these services (or in the case of technical component services, the 
associated global services) are provided in the practices of physician 
owners surveyed by the SMS in the same proportion as they are reflected 
in our claims data, the practice expense per hour calculations and the 
practice expense pools are reasonable.
    If the CPEP data accurately contain the direct cost inputs for 
these services, then the direct practice expense pool is being 
allocated appropriately. With regard to the indirect allocation 
methodology, we are modifying it to increase the weight of the direct 
costs in the allocation, as discussed elsewhere.
    However, the possibility exists that inaccuracies in the CPEP data 
for these services are causing the substantial reductions seen in the 
NPRM. Therefore, because we are not altering the CPEP at this time, as 
an interim solution until the CPEP data for these services have been 
validated, we have created a practice expense pool for all services 
without work RVUs regardless of the specialty that provides them. We 
allocated this practice expense pool to procedure codes using the 
current practice expense relative value units.

[[Page 58822]]

    While we are not convinced by the comments that were received to 
date regarding a bias in the SMS survey data against these services, we 
acknowledge those concerns and will examine this issue during the 
refinement process.
    Comment: The College of American Pathologists (CAP) requested that 
patient care time included in the SMS data that is spent in autopsies 
and supervision of technicians and paraprofessionals be excluded from 
the patient care hours used to calculate the practice expense per hour 
for pathology services. The commenter stated that these are Part A 
services for which pathologists rarely incur any direct costs. The AMA 
supported these adjustments and estimated the percentage of total 
pathology patient care hours attributable to autopsy and supervision 
services at 6 and 15 percent, respectively.
    CAP also asked that some portion of the patient care hours category 
of ``personally performing nonsurgical laboratory procedures including 
reports'' be eliminated for 1999 when determining pathologists' total 
patient care hours, as the SMS data includes both Part A and Part B 
services. CAP stated that we should work with the CAP and the AMA to 
determine the appropriate adjustment.
    Response: Since pathologists have more Part A reimbursement than 
any other specialty, we will decrease the number of patient care hours 
by 6 percent for autopsies and 15 percent for supervision services. 
However, until we have more information about the appropriate 
adjustment for ``personally performing non-surgical laboratory 
procedures including reports,'' the hours for those services cannot be 
eliminated from our calculations. This point, as well as the general 
issue of nonbillable hours, should be revisited during refinement.
    Comment: Many specialty societies have commented on specific 
problems with the SMS data that affect their own specialty and have 
requested that we supplement or replace the SMS data with data provided 
with their comments.
    Response: There is not sufficient time before publication of the 
final rule to begin to validate either the methodology or findings of 
the submitted data. Since changes in any specialty's practice expense 
per hour would have an impact on other specialties, we do not believe 
it would be equitable to make any sweeping changes without the adequate 
review that the refinement process can achieve. In addition, we stated 
in our proposed rule that, for those larger specialties included in the 
SMS survey, ``we are unlikely to make any changes in the final 
rule****'' Therefore, we will continue to use the SMS-derived practice 
expense per hour for these specialties, but will ensure that all of the 
submitted data will be considered during the refinement process.

CPEP Data

    Comment: Though one major specialty society commented that the CPEP 
data, in general, is relatively sound, many comments pointed out 
problems with the CPEP process and with the data derived from that 
process:
    <bullet> One group commented that the CPEPs did not have adequate 
representation from practice managers; that there was no uniform policy 
dealing with issues such as duplication of time or efficiencies that 
might result from performing more than one task at a time; and that 
there was inadequate time allotted for CPEPs to meet.
    <bullet> Several subspecialties pointed out that they were not 
included in the CPEP process and that this could have led to the 
undervaluing of their services.
    <bullet> Several commenters recommended that we use the CPEP data 
as validated and refined by the validation panels.
    <bullet> One organization commented that the CPEP data are flawed 
since only 200 codes were reviewed by validation panels.
    <bullet> One primary care group argued that we should not abandon 
edits and modifications to raw CPEP data, as many codes are performed 
by more than one specialty, and inaccuracies in the CPEP data can 
affect several specialties.
    <bullet> Two organizations commented that the CPEPs used what is 
now obsolete salary and benefits data, at least for sonographers and 
vascular technologists. One of these comments pointed out that for some 
codes, a different cost was computed for the same equipment. Another 
specialty society recommended that a review of prices and quantities 
for supplies and equipment be included as part of the refinement 
process.
    <bullet> Two commenters were concerned that the CPEP data include 
expenses that can be billed separately. A primary care specialty 
society argued that we should edit out all direct inputs for services 
to hospital patients. The comment mentioned that since these services 
are paid for outside of the practice expense RVUs, failure to exclude 
these inputs can distort relativity across categories of services such 
as surgical services and office visits.
    <bullet> One commenter clarified that the costs of therapy aides 
are a part of practice expense and should be reflected in the CPEP 
data, while the services of therapy assistants are included in the work 
RVUs.
    Response: We are aware that the raw CPEP data we have used in our 
proposed methodology need further review. We also share many of the 
concerns raised by those commenting on the issue. However, we believe 
that the CPEP resource estimates, which were developed by practitioners 
representing all the major specialties, are the best procedure level 
data available at this time.
    Under our top-down methodology, the CPEP inputs are used solely to 
allocate each specialty's practice expense pool to the procedures 
performed by that specialty. We have always believed that the relative 
input estimates within families of codes for each specialty's CPEP data 
were generally appropriate. In addition, the most contentious CPEP 
values were the varying estimates for the administrative staff times, 
and these values are not utilized in our top-down approach.
    We chose not to apply the edits, caps, or linking that had 
originally been proposed in our 1997 proposed rule as part of our 
bottom-up methodology. These edits had met with severe criticism from 
the medical community and were questioned by the GAO. We also did not 
use the revised inputs from the validation panels we held in October 
1997, as these panels only came to consensus on about 200 codes, and we 
were not convinced that all of the revised values were correct. 
However, we know that there is much needed improvement in the CPEP 
data, and the identification and correction of any CPEP errors whether 
in staff times, supplies, equipment, or pricing will be a major focus 
of our refinement process.
    Comment: One specialty society commented that we erred in not 
incorporating increases in staff time recommended by validation panels. 
Partly as a result, the practice expense RVUs for gastroenterologists' 
out-of-office billing, scheduling, and record keeping are inadequate.
    Another commenter stated that there were discrepancies in the 
administrative data for skilled nursing facility services, with 
subsequent visit codes being assigned only half of the billing time of 
initial visits. A third commenter requested that we standardize the 
administrative staff types according to the validation panels' 
recommendations. Three commenters stated that we do not account for the 
costs of maintaining an office full-time when the physician is 
providing services out of the office.

[[Page 58823]]

    Response: As stated above, under our proposed methodology, CPEP 
administrative staff times have no effect on the practice expense RVUs 
calculated for any code. The costs of maintaining an office while the 
physician is providing services in a facility should be captured in the 
SMS cost data and, thus, are a part of each specialty's practice 
expense pool. As these would be indirect costs, they would be included 
in the practice expense for each service by use of our allocation 
methodology, which utilizes both directs costs and the physician work 
RVUs.
    Comment: Almost 30 specialty societies submitted specific CPT code-
level changes for the CPEP input data for clinical and administrative 
labor time, supplies, and equipment for just under 3000 CPT codes. In 
addition, many commenters included lists of codes with practice expense 
RVUs that were considered anomalous, either within a code family, or in 
relation to comparable codes. We also received comments from several 
organizations with recommendations for revised crosswalks for those 
codes not valued by the CPEPs, as well as recommended in-office inputs 
for some codes that are now being done in the office, but were only 
given practice expense RVUs for the facility setting.
    Response: We had intended to make the CPEP revisions requested by a 
given specialty as part of the final rule if the recommendations 
appeared reasonable and if there would be no significant impact on any 
other specialty. However, given the huge volume of recommended 
revisions--over a third of the codes in the fee schedule would be 
affected--acceptance of the recommended changes across the board would 
almost certainly have a spill-over impact on many subspecialties and 
between sites-of-service.
    We believe it would be more responsible and fair to allow the 
medical specialties to participate collectively in the needed revisions 
as part of the refinement process. The deferral of the CPEP revisions 
is in no way a reflection on the effort and thought that the commenters 
obviously expended in arriving at their recommendations. All the code-
specific comments referred to above will be considered at the start of 
the refinement period. (See Section II.A.4, Refinement of Practice 
Expense RVUs)
    Comment: Many organizations, representing both surgical and primary 
care specialties, expressed concern that we averaged CPEP data for the 
same procedures valued by more than one CPEP. Different rationales were 
offered for this concern:
    <bullet> Averaging could have disturbed the relative rankings of 
codes within CPEPs.
    <bullet> Straight averaging significantly overstated the costs of 
evaluation and management services.
    <bullet> Averaging CPEP costs altered practice expense 
relationships within the evaluation and management family of services, 
particularly with respect to emergency department evaluation and 
management codes.
    <bullet> The inclusion of estimates from those not performing the 
procedures, including nonphysicians, could have distorted the values 
for those services.
    Likewise, different solutions were offered to answer the concerns:
    <bullet> One specialty society recommended that we link the CPEP 
data rather than relying on straight averages.
    <bullet> Two organizations recommended using frequency-weighted 
averages.
    <bullet> Five groups recommended that the CPEP costs for redundant 
codes be based on the inputs from the dominant specialty's CPEP panel.
    Response: As we are making no other changes in the CPEP data for 
this final rule, we will continue to use straight averaging for the 
redundant CPEP codes for the purposes of this final rule. This issue 
will be considered further during refinement.
    Comment: Two commenters requested the inclusion in practice expense 
of the procedure-related supplies which are brought into a skilled 
nursing facility (SNF). One of these commenters made the same request 
for home visits.
    Response: Home visits are to be paid using the non-facility RVUs. 
Therefore, any supplies that would be used are already included in the 
payment. As for the SNF setting, this is an issue for refinement. We 
would need more information about the supplies and why the SNF is not 
responsible for providing them.
    Comment: The American College of Surgeons sent a list of new 
crosswalked codes where CPEP data had inadvertently been duplicated in 
our database.
    Response: We thank the commenter for pointing out this discrepancy, 
and these duplications have been deleted.

Physician Time

    Comment: One major specialty society recommended that efforts be 
undertaken to move toward greater consistency in physician time data. 
The commenter was concerned that since these data are derived from 
eight different sources using different methodologies, our inflation of 
the Harvard time data raises even more concern about consistency.
    Three major organizations, two representing primary care and the 
other a surgical specialty, recommended that we use the unadjusted 
Harvard and RUC survey data. One reason given was the implication for 
the work RVUs of any proposed revisions to the time data. The RUC 
commented that, while the RUC physician time data may be greater than 
Harvard time data for the same codes, it may be incorrect to assume 
that all Harvard time data should be increased. The RUC and several 
other organizations requested that we provide a description of the 
methodology we used to make adjustments to the data in both the RUC and 
Harvard physician time databases so they can comment on the validity of 
the changes.
    Response: The physician time data used for the development of the 
practice expense pools are based on the Harvard resource-based RVUs 
study and RUC survey data that were developed as part of the refinement 
of the work RVUs. Both sets of data were based on physician surveys. 
However, the RUC data, gathered in the process of refining the work 
values of many CPT codes, are more current and, on average, exceeded 
the original Harvard values by 25 percent. As a matter of consistency 
and fairness to those services not yet refined by the RUC, we increased 
the Harvard time data in proportion to the increases for related 
services. A detailed description of the methodology we employed to make 
all adjustments in physician time will be placed on the HCFA Homepage.
    We still believe this adjustment is appropriate and we will 
continue to use the adjusted values in our calculations for this final 
rule. However, as the time values attributed to each procedure play an 
important role in the determination of each specialty's practice 
expense pool, we believe that ensuring the increased accuracy and 
consistency of physician time data should be addressed as part of the 
refinement of the practice expense RVUs.
    Comment: Three surgical specialty societies commented that 
evaluation and management times have been artificially inflated due to 
rounding. A small increase in time would disproportionately inflate 
high volume procedures that take little time.
    Response: In our proposed rule, we expressed concern that 
imprecision in the time estimates for any high volume services that 
have relatively little time associated with them may potentially bias 
the practice expense methodology in favor of the specialties that 
perform these services. We stated at that time that this issue should 
be examined as

[[Page 58824]]

part of the refinement of the resource-based practice expense RVUs.
    Comment: There were several other comments regarding the accuracy 
of the physician time data:
    <bullet> The RUC acknowledged that some of the RUC physician time 
data may not be absolutely precise.
    <bullet> One specialty society, as well as the AMA, pointed out 
that there are some problems with the accuracy of the physician time 
data for psychotherapy services. For example, the times assigned to 
psychotherapy codes that include evaluation and management services are 
equal to and, in some cases, less than the psychotherapy codes that do 
not include these services.
    <bullet> One commenter stated that the physician time data, as 
computed in the Harvard studies, are not current and are likely to be 
inappropriate for use in computing practice expense RVUs.
    <bullet> The American College of Surgeons commented that physician 
time for pediatric surgery codes is based on erroneously low physician 
time data from the original Harvard study, rather than the time data 
from the special study of pediatric services performed by the same 
Harvard study team for the American Pediatric Surgical Association in 
1992. The latter data were used as the basis for the work RVUs assigned 
to 48 pediatric surgical services.
    <bullet> A surgical specialty society commented that the physician 
time does not compensate its members for longer hours and cited 
examples of nonbillable time, such as standby time for cardiac 
catheterization and supervision of residents and interns. The society 
suggested that this be considered during refinement.
    <bullet> One commenter stated that travel time for home visits is 
not included in either the work or practice expense RVUs. The commenter 
suggested that travel time for house calls should be equal to the work 
equivalent of the lowest office service times 3, for an average of 15 
minutes. Further, a modifier should be used to cover instances where 
travel exceeds the average.
    <bullet> The American Society of Transplant Surgeons identified 
physician times for several services that it believes are inaccurate 
and recommended adjusted times for these services.
    Response: As stated above, we will ensure that all identified 
anomalies and inaccuracies in the physician time data are considered as 
part of the refinement process.
    Comment: The American College of Radiology commented that for our 
top-down approach we had used a level three office visit (99213) as a 
benchmark for estimating physician time for radiology codes. They 
suggested that it would be more appropriate to use the intravenous 
pyelography procedure (CPT 74400) instead of the office visit used in 
our methodology.
    Response: Although we agree that 99213 may be an inappropriate 
benchmark since it is not often performed by radiologists, we are not 
convinced that the average work per unit time of codes on the radiology 
fee schedule is equivalent to CPT 74400. Instead, we are using the 
weighted average work per unit time for CPT 71010 and 71020 as the 
benchmark. These two services represent over approximately one-third of 
the total allowed services in the radiology fee schedule, while CPT 
74400 represents less than two-tenths of one percent. We will work with 
the medical community to develop time estimates for radiology 
procedures that will make the imputation of time from the work 
estimates unnecessary.
    Comments: The American Occupational Therapy Association commented 
that the practice expense pool for occupational therapy codes was 
understated because the time values of 15 minutes that we arbitrarily 
assigned were too low. They included a list of time values we should 
use for each code.
    The American Hospital Association also objected to the reductions 
in times for outpatient rehabilitation codes and urged the use of the 
actual surveyed times for all procedure codes in the range 97001 
through 97770.
    Response: We believe that the time of 15 minutes we assigned to 
these codes is appropriate and does not lead to an underestimation of 
the practice expense pool for outpatient rehabilitation services. The 
outpatient rehabilitation codes in this range are timed codes and are 
billed in 15 minute increments. Also, we have been told by some 
physical therapy associations that at times, some of the 15 minute 
period time may be performed by therapy aides or assistants. (Note: We 
plan to review this issue during a future five-year review of work 
RVUs.) Finally, it is common for these timed codes to be billed in 
multiple units during one therapy session. Thus, any therapist's work 
prior to or after the visit is spread across more than one unit, rather 
than applied to each unit.

Crosswalk Issues

    Comment: The American Academy of Maxillofacial Prosthetics (AAMP) 
and the American College of Prosthodontists commented that crosswalking 
is not valid for maxillofacial prosthetic codes since this specialty 
does not correspond to any other medical specialty included in the SMS 
data and its practice expense values are much higher than other medical 
specialties in the SMS survey. AAMP submitted several studies from its 
own organization and from the American Dental Association, as well as 
two studies published in professional journals that report the results 
of polls of prosthodontic practitioners, including information on 
overhead expenses. The AAMP recommended that this data be used to 
calculate its practice expense per hour.
    Response: We agree that maxillofacial prosthetics does not 
correspond closely with any other medical specialty. It also is not a 
separately-identified specialty in either the SMS survey or the 
Medicare claims database.
    Though the AAMP submitted survey data compiled by both its own 
organization and the American Dental Association, the format, 
definitions, and methodology of these surveys were not consistent with 
those of the SMS survey. For example, the 1993 AAMP survey did not 
survey practice expense, but rather the ``percent overhead of gross 
collections for 1992.'' The American Dental Association surveys counted 
dentist shareholder and employee dentist income as practice expense in 
many tabulations.
    Because of these methodological differences from the SMS data, we 
are not able at this time to use the information in the submitted 
surveys to calculate a comparable practice expense per hour for 
maxillofacial prosthetics.
    For this final rule we will create a practice expense pool for the 
maxillofacial prosthetic codes (CPT 21076 through 21087) and crosswalk 
this pool to the practice expense per hour for ``All Physicians.'' We 
had imputed physician times for these services in our proposed rule. 
However, we are now using the physician times utilized in calculating 
the work RVUs for the same services. In addition, until the CPEP data 
for these codes can be validated, we will allocate the practice expense 
pool to the specific services using the current RVUs. We hope to work 
with the specialty society as part of the refinement process in order 
to develop a reliable method of deriving accurate practice expense RVUs 
for maxillofacial prosthetics.
    Comment: The American Optometric Association (AOA) disagreed with 
our crosswalk of optometry to the average practice expense per hour for 
``All Physicians,'' that results in a practice expense per hour of 
$67.50. The commenter stated that AOA understands that the crosswalk 
decision

[[Page 58825]]

was based, at least in part, on the 1997 survey conducted by AOA which 
had been provided to us. This survey has been conducted regularly since 
1990 and was included with the comment, along with a study commissioned 
by the AOA entitled ``Results of the First National Census of 
Optometrists.'' Using data from this survey and study, AOA computed an 
$89.53 practice expense per hour for optometry, significantly higher 
than the average for ``All Physicians.''
    Response: As in the above request, the data submitted by AOA are 
not easily comparable to the SMS data. For example, the AOA calculation 
used medians rather than means, and retirement and fringe benefits were 
not counted as median net income, but rather as practice expense. It is 
therefore not possible, without further information, consultation, and 
analysis, for us to calculate a practice expense per hour that would be 
comparable with that of other specialties. During the refinement period 
we will be working with specialties not represented in the SMS survey 
to identify the data needed to enable us to determine accurate practice 
expense RVUs for their services.
    Comment: Although generally supporting the crosswalk to General 
Internal Medicine, the American Chiropractic Association (ACA) 
submitted data from the 1997 survey results of ACA's biannual survey of 
the chiropractic profession. This survey shows considerably lower 
direct patient care hours than SMS shows for General Internists. 
Therefore, the ACA requested that we use its data to calculate the 
practice expense per hour for Doctors of Chiropractic, stating that we 
should accept specialty societies' data over SMS data if they were 
collected in a comparable manner.
    Response: The survey submitted by the commenter indicated that the 
patient care hours worked by chiropractors are significantly lower than 
those of general internists to whom chiropractors' practice expense per 
hour is crosswalked. However, the hours of direct patient care a week 
shown in the survey were defined more narrowly than in the SMS data. 
For example, the 29 hours of patient care a week calculated in the 
submitted survey did not include the hours spent for documentation, 
administration, and billing, activities that we have considered to be 
included in the direct patient care hours for other specialties. In 
addition, there are insufficient details in the survey for us to 
determine its comparability to the SMS data and we will maintain the 
crosswalk for chiropractors for this final rule. We do intend, however, 
to revisit this issue during the refinement process.
    Comment: The American Podiatric Medical Association, Inc. (APMA) 
objected to its crosswalk to general surgery because it believes that 
there is little similarity between the two specialties based on site-
of-service and types of services provided. General surgery services are 
typically performed in the facility setting, while the high volume 
podiatry services are almost entirely done in the office. In addition, 
the comment stated that podiatrists work fewer hours than general 
surgeons.
    The comment also included the results from APMA's 1996 and 1998 
surveys of podiatric practice, as well copies of the surveys 
themselves. According to the comment, these surveys show that the 
actual practice expense per hour for podiatry is $91.50 and APMA 
recommends that we use this data in place of our proposed crosswalk.
    The American Academy of Orthopaedic Surgeons also disagreed with 
the crosswalk for podiatry, but recommended that podiatry be 
crosswalked to orthopaedic surgery in the short run, as 70 percent of 
the codes billed by podiatrists are those that are shared with 
orthopaedic surgery.
    Response: Because of significant methodological differences between 
the submitted surveys and the SMS data (for example, only gross and net 
incomes are surveyed) we are not able at this time to calculate a 
practice expense per hour in total, let alone for each of the different 
cost pools.
    However, we are persuaded that the crosswalk to general surgery is 
not appropriate for the reasons cited in the comment, and we are 
changing the crosswalk to ``All Physicians.'' We will be working with 
all specialties not represented in the SMS data to ensure that we 
obtain comparable information to calculate their practice expenses per 
hour.
    Comment: The Joint Council of Allergy, Asthma, and Immunology 
stated that, in calculating the allergists' practice expense per hour, 
we reduced the supply category practice expense per hour to that of 
``All Physicians,'' because we believed that we made a separate payment 
for the drugs used. However, this is not true for immunotherapy drugs 
provided by allergists, as the cost of these drugs is included in the 
practice expense RVUs. Therefore an adjustment needs to be made.
    Response: The commenter is correct and the adjustment has been made 
to the medical supplies practice expense per hour.
    Comment: The American Society of Clinical Oncology commented that 
since the SMS supply cost data for chemotherapy codes included the 
costs of expensive chemotherapy drugs, which are paid for separately, 
we used the lower supply costs for ``All Physicians'' for their supply 
cost pool. The commenter argued that this fails to recognize that, in 
addition to the cost of the drugs, chemotherapy administration has 
extra supply costs in excess of that for ``All Physicians.'' Also, 
although chemotherapy drugs are generally among the costliest drugs, 
the cost of drugs was probably included in other specialties' supply 
costs as well, and all specialties should be treated in the same 
manner.
    The Association of Community Cancer Centers, the Society of 
Gynecologic Oncologists, and the American Society of Hematology also 
disagreed with our adjustment for drug costs, as did the AMA, which 
called our method of correcting for the double counting of drugs 
inequitable and imprecise. The American Society of Hematology 
recommended increasing the supply per hour costs to 125 percent of the 
``All Physicians'' level.
    Response: It is true that other specialties may have some drug 
costs included in their SMS supply cost data, but we believe that the 
total costs for chemotherapy drugs are far greater than are the drug 
costs included for any other specialty. Failure to make an adjustment 
for these high drug costs would lead to a gross distortion in the 
supply cost pool for oncology.
    We also are not convinced that the other supply costs for 
oncologists would necessarily exceed that of ``All Physicians,'' and we 
will continue to crosswalk oncology's supply costs to that category's 
practice expense per hour. We do agree that during refinement we need 
to consider development of a methodology for removing separately 
billable supplies and services from the SMS data so that the Medicare 
program avoids making duplicate payments. We also will work with the 
oncology specialty to ensure that their practice expense per hour for 
the supply category adequately reflects the actual costs of other 
oncology supplies.
    Comment: The American Association of Oral and Maxillofacial 
Surgeons objected to the crosswalk of oral surgery and maxillofacial 
surgery to the practice expense per hour of ``All Physicians.'' They 
recommended a crosswalk to either otolaryngology or plastic surgery, as 
most of the medical procedures billed

[[Page 58826]]

by oral and maxillofacial surgeons can be crosswalked to these two 
specialties. The commenter argued that because of their significantly 
higher practice expenses, oral and maxillofacial surgery should not be 
in the same practice expense pool as manipulative therapists and 
optometrists, as this dilutes the practice expenses for these surgical 
services. In addition, the 1996 Harvard Study grouped oral and 
maxillofacial surgery under otolaryngology and plastic surgery.
    Response: We do not currently have sufficient data to make such a 
change in our crosswalk. This is an issue that can be addressed during 
the refinement period.
    Comment: The American College of Cardiology and the American 
Society of Echocardiography disagreed with the crosswalk of Independent 
Physiologic Laboratories (IPLs) to ``All Physicians.'' The comment 
recommended that IPLs' practice expense per hour be crosswalked to 
cardiologists, as 60 percent of IPL billings are in the 93000 series 
and for the 13 highest volume IPL codes, cardiologists account for 40 
percent of claims. The Society of Vascular Technology/Society of 
Diagnostic Medical Sonographers also expressed concern that our 
crosswalk of IPLs did not adequately recognize their costs and 
recommended that we use the figure of $176 per hour based on the 
studies cited in the comment.
    Response: As discussed above, we will be creating a separate 
practice expense pool for all services without physician work, which 
will include those technical component services done by IPLs and by 
cardiologists.
    Comment: The Society of Gynecologic Oncologists requested that we 
consider using multiple crosswalks to determine practice expense per 
hour for specialties that provide interdisciplinary care. The comment 
stated that the true reflection of practice expense per hour for a 
gynecologic oncologist is a hybrid of the practice expense per hour for 
the specialties of obstetrics and gynecology and oncology.
    Response: It is not clear whether this is desirable or what data 
would be used to weight such a split between more than one specialty. 
Many physicians belong to more than one specialty or subspecialty. This 
is another issue that can be discussed during the refinement period.
    Comment: The American Geriatrics Society disagreed with our 
crosswalk of geriatrics to the General Internal Medicine practice 
expense per hour. The comment stated that geriatricians typically have 
higher costs than internists because of the need for more office space 
and more health care professionals on staff. Since many geriatricians 
are family physicians, geriatrics should be cross-walked to family 
practice.
    Response: We believe that geriatricians are typically more like 
internists than family practitioners, so for the final rule we will not 
change the crosswalk. However, we are open to receiving data that would 
demonstrate that a crosswalk to family practice would be more 
appropriate.
    However, we would note that geriatrics is a relatively small 
specialty and the services performed by them are frequently done by 
other specialties. Thus, changes in the practice expense per hour data 
for geriatricians would not likely have a significant impact on the 
RVUs for services they perform.
    Comment: One commenter made recommendations for revisions or 
additions to our proposed crosswalks for several nursing 
subspecialties. Another specialty society commented that under the 
physician fee schedule we have chosen to pay nonphysician practitioners 
a percentage of the physician reimbursement, and crosswalking to 
specialties with higher practice expense per hour rates than general 
internal medicine or general surgery is not logical or reasonable. 
Another organization also recommended that data from nurse 
practitioners and physician assistants be excluded from the practice 
expense pool calculations.
    Response: We will further consider appropriate crosswalks for 
nursing subspecialties during the refinement period.
    Comment: The American Hospital Association and the American 
Occupational Therapy Association recommended that we crosswalk all of 
the practice expense pools for outpatient rehabilitation services to 
the ``All Physicians'' practice expense category, rather than using the 
salary equivalency guidelines for the administrative, office, and other 
pool.
    Response: We believe that using the ``All Physicians'' practice 
expense per hour for the administrative, office, and other pool would 
considerably overstate the actual practice expense for occupational 
therapy. We have carefully examined outpatient therapy practice costs 
for the development of the salary equivalency guidelines, and believe 
that these better approximate the actual expenses for this cost pool. 
We will continue to use the salary equivalency guidelines to calculate 
this portion of the practice expense pool for occupational therapy for 
this final rule.
    Comment: The American Speech-Language Hearing Association commented 
that it is not appropriate to use the practice expense per hour data 
from physicians that perform audiology tests and it submitted a 1993 
survey, ``Audiology Services--Scale of Relative Work,'' as part of its 
comments.
    Response: As we stated above, we are creating a single practice 
expense pool for all services, such as audiology, that have no work 
RVUs. This practice expense pool, created by using the average clinical 
staff time per procedure from the CPEP data and the ``All Physicians'' 
practice expense per hour, raises practice expense RVUs for audiology 
services relative to those previously proposed. However, during the 
refinement process we will be considering all data submitted on any of 
these services, including the study submitted with the above comment.

Calculation of Practice Expense Pools--Other Issues

    Comment: Several organizations commented on potential problems with 
the Medicare claims data, which are used as one component of the 
specialty-specific practice expense pool calculation.
    <bullet> Many commenters were concerned about reliance on Medicare 
claims data to determine the size of each specialty's practice expense 
pool. The comments claimed that to the extent that the Medicare 
population is not representative of the general population, there is a 
bias against specialties whose patient population does not match 
Medicare's. Several organizations, representing the gamut of medical 
specialties, urged us to work during the refinement period with 
organizations for whom we have no, or inadequate, historical claims 
utilization information and to acquire nationally representative claims 
data that include Medicare, Medicaid, and private payer data.
    One of these commenters recommended that, if this is not feasible, 
we should conduct sensitivity analyses to explore the influence 
Medicare service utilization patterns may have on private payers. The 
specialty-specific utilization data are crucial for the final step of 
volume-weighted averaging that brings the individual specialty scales 
onto one scale, particularly when involving services performed very 
frequently by specialties that see relatively few Medicare patients.
    For example, the comment argued, to the extent that the cost 
estimates for evaluation and management (E&M) services provided by 
obstetricians and gynecologists and pediatricians differ

[[Page 58827]]

significantly from those of specialties that account for the bulk of 
E&M services provided to Medicare patients, the use of an all-payer 
claims database would probably yield different RVUs for E&M services.
    <bullet> Several surgical specialties urged that we clean the 
Medicare claims data to eliminate obvious errors, such as data showing 
a sometimes significant number of nonsurgeons or physician assistants 
performing complex surgeries that can only be performed by surgical 
specialties. This misreporting can decrease a specialty's practice 
expense pool and should either be reassigned or excluded during 
refinement.
    One of the commenters recommended that Medicare claims data be 
reviewed for the existence of a second listed surgical specialty 
identifier. In addition, physician assistants' claims should use the -
AS modifier, and calculations should use only the time that is assigned 
to the intraoperative period.
    <bullet> Three specialty organizations commented that many 
physicians' self-designated specialties are incorrectly classified in 
our claims data. For example, many cardiologists and geriatricians may 
bill as internists, which may affect the respective practice expense 
pools. Until these data become more accurate, one of the commenters 
recommended that the specialty practice expense pools be recalculated 
on an annual basis.
    <bullet> An organization representing transplant surgeons commented 
that, as transplant surgery is not a designated specialty in the 
Medicare claims database, many transplant surgeons designate themselves 
as general surgeons, who have the lowest practice expense per hour of 
any surgical specialty. The comment argued that this has led to a 
significant underestimation of the costs associated with transplant 
surgery.
    Response: We would be interested in receiving any reliable national 
utilization data on the procedure code level though, to date, we are 
not aware of the existence of such a data source. We plan during the 
refinement period to work with the medical community in order to 
pinpoint problems in the Medicare claims data, to develop strategies to 
improve their accuracy, and, if possible, to find reliable supplemental 
data for those specialties not appropriately represented in the 
Medicare database.
    Comment: One organization commented that the Medicare frequency 
numbers for occupational therapy codes will be understated because BBA 
requires that all outpatient therapy services be paid under the 
Medicare Physician Fee Schedule beginning January 1, 1999.
    Response: We disagree. We have not included estimates for 
frequencies of expected services of outpatient therapy services in 
computing the practice expense RVUs. BBA specified that we pay for 
these services using the physician fee schedule. BBA did not 
incorporate these services into the fee schedule.
    Comment: Many organizations representing radiation oncology, as 
well as numerous individual commenters, argued that we erroneously 
combined the SMS radiation oncology survey data with that of radiology. 
The commenters argued that these two specialties should be dealt with 
separately, as radiation oncology utilizes different codes and has 
considerably higher costs than radiology.
    Response: We had combined radiation oncology and radiology together 
into one practice expense pool because of the small sample of radiation 
oncologists in the SMS data. However, we now agree with the commenters 
that these are two different specialties with differing practice costs. 
Therefore, we have separated them into two separate practice expense 
cost pools in order to calculate the practice expense per hour for each 
of the specialties. For radiology, excluding radiation oncology, the 
total practice expense per hour is $55.90. This is comprised of $17.90 
for nonphysician payroll per hour ($9.70 for clerical payroll), $12.80 
for office expense, $4.50 for supply expenses, $7.70 for equipment 
expense, and $12.90 for other expenses. For radiation oncology, the 
total practice expense per hour is $68.30. This is comprised of $23.70 
for nonphysician payroll per hour ($9.20 for clerical payroll), $11.30 
for office expense, $6.20 for supplies expense, $11.00 for equipment 
expense, and $16.20 for other expenses.

Allocation of Practice Expense Pools to Codes

    Comment: Several organizations commented on our use of work RVUs as 
part of the allocation formula for indirect practice expense costs:
    <bullet> A primary care specialty group stated that we should not 
allocate the indirect practice expenses using the work RVUs, since 
there is no reason to believe that the costs of providing the service, 
such as the cost of utilities, would vary by the intensity, where the 
costs would vary by time. We should, therefore, use time rather than 
work in our indirect allocation.
    Another primary care organization commented that using work as one 
allocator for indirect expenses inappropriately gives surgical 
procedures with higher work RVUs substantially higher administrative 
costs for billing activities than is given to evaluation and management 
services. We should develop a standardized method to address 
administrative staff costs.
    <bullet> Five other organizations argued that allocating indirect 
costs based on a combination of direct costs and physician work RVUs is 
inappropriate and treats unfairly chemotherapy and radiation oncology 
services as well as other technical component services, since they 
typically are assigned no work RVUs. Various recommendations were made 
by these commenters to rectify what they see as discrimination against 
these technical component services:
    + Indirect costs should be based on direct costs.
    + Physician time or clinical staff time should be used instead of 
work.
    + We could allocate 50 percent of the indirect costs based on 
direct costs and 50 percent based on physician work or time.
    + As an alternative for chemotherapy services, work could be 
imputed by using the work to time ratio for other hematology or 
evaluation and management services.
    One commenter recommended that we vary the indirect cost allocation 
methodology in recognition of the practice patterns of particular 
specialties.
    <bullet> One accounting organization commented that the use of work 
REUS is arbitrary and argued for the use of total dollars actually 
spent to perform the procedures, not indirect splits, suggesting the 
use of Activity Based Costing as a preferable methodology.
    Response: In this final rule, we will use an allocation method for 
the final rule that is basically similar to our proposed allocation 
method. It is widely recognized by accountants and others that there is 
no single best method of allocating indirect expenses to individual 
services. If we used physician time as an allocator of indirect 
expenses, we would be using the same values, whose accuracy have 
already been questioned by some commenters, both to create the practice 
expense pools and to allocate these pools to individual services. If we 
used only direct costs, we would be giving full weight to CPEP values 
that have not yet been refined. We agree that the use of physician work 
as an allocator is not preferable in the long term. It likely provides 
maximum advantage to hospital-based services in which the

[[Page 58828]]

physician incurs relatively few direct costs.
    For this final rule, we are making a technical change to the 
allocation method for indirect costs by using direct costs and the work 
REUS scaled using the Medicare conversion factor instead of a factor 
calculated using the physician time data. Because of questions raised 
by commenters concerning the time data adjustments, we believe that it 
is more appropriate to convert the work REUS into dollars using the 
Medicare conversion factor (expressed in 1995 dollars, consistent with 
the AMA SMS survey data). This will give somewhat less weight to work 
while, at the same time, avoiding a major methodological change until 
it has been examined further. We intend to work with the medical 
community during refinement so that we ensure that our allocation 
methodology is both appropriate and equitable.
    Comment: Many major specialty societies, both primary care and 
surgical, commented that we should not apply a different methodology 
for allocating the practice expense pools to the radiology codes than 
we do to all other codes. One commenter argued that multiplying the 
current charge-based practice expense RVUs for radiology codes by some 
percentage cannot yield a resource-based system.
    Organizations representing urologists, pulmonologists, 
cardiologists, and ophthalmologists commented that the uniform 
reductions made in the radiology codes to maintain relative values 
assumed that all radiology services are done only by radiologists, when 
many of these procedures are performed by these other specialties. A 
commenter stated that decisions regarding the practice expense values 
for radiology codes done predominantly by other specialists should not 
be made by one specialty. These organizations recommended that the 
practice expense RVUs for their codes be established using the 
allocation methodology used for all other services.
    One specialty society, representing diagnostic vascular testing, 
commented that the use of the existing radiology relatives to allocate 
practice expense to the code level results in significantly larger 
decreases in the technical component than in the professional component 
of their services. The commenter recommended that if we continue to use 
the radiology relatives, then we should reduce the professional 
components of the codes more than the technical components because 
practice expenses are greater for the technical component than for the 
professional component.
    The AMA supported the use of the radiology relative values for 
actual radiology services, but recommended that this methodology should 
be applied only to services that are performed predominantly by 
radiologists.
    The American College of Radiology endorsed the radiology relativity 
of the radiology RVUs without exception, and they would oppose the 
exclusion of individual radiology procedures since this is inconsistent 
with the concept of radiology relative values. They argued that 
maintaining the relativity of the radiology fee schedule--
    <bullet> Is consistent with generally accepted accounting 
principles because it is based on surveys and physician panels;
    <bullet> Is widely accepted;
    <bullet> Solves rank order anomalies caused by raw CPEP data;
    <bullet> Simplifies the derivation of the professional component, 
technical component, and global practice expense RVUs;
    <bullet> Is mandated by law, as the Omnibus Budget Reconciliation 
Act of 1989 stated that for radiology services ``the Secretary shall 
base the relative values on the relative values developed under section 
1395m(b)(1)(A)****''; and
    <bullet> They also argue that we have recognized and honored the 
statutory obligation to maintain the relationships in the radiology 
relative value scale.
    Another national organization representing diagnostic imaging 
services also suggested keeping the radiology fee schedule as the 
allocator for radiology, rather than the direct costs from the CPEP 
data, as there would be even greater reductions on codes we allocated 
using the CPEP relatives.
    Response: Because the majority of specialties that perform 
radiology services object to the use of the current practice expense 
RVUs for radiology services, we cannot continue to use these RVUs. 
However, since we are not making changes to the CPEP data for this 
final rule and since the American College of Radiology has not had 
sufficient opportunity to comment on the CPEP data because of our 
proposed use of the current radiology RVUs, we are using the current 
radiology RVUs to allocate the direct cost pools of the specialty 
radiology until such time as the CPEP data for radiology services have 
been validated. We will not use the current radiology RVUs for any 
other specialty.
    It should be noted that radiology services or components of 
radiology services that lack work RVUs are handled as described in the 
section on services without work RVUs. This alters the impact of using 
the current radiology RVUs for the specialty radiology since we set the 
global portion of a radiology service equal to the sum of the technical 
and professional components.
    Comment: One specialty society commented that, for one important 
high volume pathology service, the proposed total professional 
component practice expense RVU payment would be $11.37, approximately 
$2 short of the administrative labor costs alone. The commenter wanted 
more information on how our method splits administrative costs between 
the professional and technical components. The commenter requested that 
we provide a data set of the RVUs for administrative labor, office 
expenses, and other expenses that result from our allocation method, 
with a break-out of the professional and technical component RVUs for 
services that have both components, so that the appropriateness of the 
allocation method can be evaluated.
    Response: Our methodology was described in the proposal, and we 
also provided additional detailed data files that we used to develop 
the proposed values. We will try to make additional data available if 
the request is further specified.
    Comment: The American College of Cardiology expressed concern that, 
though it might be necessary to weight average the allocation to codes 
according to the practice expense per hour of the different specialties 
performing the service, this defeats the intent of Congress to 
recognize actual costs and could also lead to negative incentives. The 
commenter suggested that this is an issue that we and the specialties 
should pursue.
    The American Society of Echocardiography more specifically 
commented that we should not include in the calculations for 
cardiovascular diagnostic tests the even more unrepresentative data for 
internists coding for these procedures. The society maintained that 
because of the low equipment costs for internists, this blend dilutes 
the RVUs allocated to these codes.
    Response: The statute is very specific that Medicare is not to pay 
specialty differentials. Therefore, weight averaging of the CPEP inputs 
among specialties that do a service seems appropriate.

Other Issues

    Comment: Many commenters, representing a broad spectrum of 
specialties, expressed concern that reductions in payment for specific 
services could have a negative impact on access to care. Many of these

[[Page 58829]]

commenters recommended that we monitor access and quality of care 
issues that may arise as a result of the implementation of a resource-
based practice expense system.
    Response: Maintaining access to high quality health care for 
Medicare beneficiaries is, and will continue to be, a high priority, 
and we will monitor available relevant data. However, we do not 
anticipate that the implementation of resource-based practice expense 
RVUs should lead to any major impediments to access to care. Any 
impacts of this new system are being transitioned in over a 4-year 
period, during which we will be refining both the practice expense per 
hour data and the direct cost inputs. We will be working closely with 
the medical community during this refinement period, and we are 
confident that we will achieve a resource-based practice expense system 
that will maintain our beneficiaries' access to the best possible 
medical care.
    Comment: One commenter was concerned about how the monthly 
capitated payment for end-stage renal disease (ESRD) services was 
handled under the top-down approach. The commenter argued that, though 
the ``building block'' process used for the work RVUs for these 
services does not translate perfectly for practice expense values, this 
approach should still be utilized to calculate the practice expense 
RVUs. In addition, the commenter questioned our choice of CPT 99213, a 
mid-level office visit, to calculate physician time for ESRD services.
    Response: We allocated the practice expense pool to ESRD services 
using the CPEP inputs, as we did for almost all other services. We also 
believe that the intensity of an average evaluation and management 
service provides a reasonable estimate of physician time. These issues 
can be further analyzed during refinement.
    Comment: Two commenters noted that costs associated with the 
supervision of diagnostic tests were not included in the technical 
component amounts.
    Response: In separate carrier manual instructions, we are revising 
the level of physician supervision required for many diagnostic 
services. For example, we are changing the requirements for most 
ultrasound procedures from personal or direct supervision to general 
supervision. We believe the required supervision for any remaining 
services that are at the personal supervision level are generally 
already reflected in the work RVUs. Therefore, we do not believe that 
there are additional costs for physician supervision.
    Comment: One commenter indicated that there will be a marked 
increase in the volume of services paid under the physician fee 
schedule as a result of BBA changes in payment for outpatient therapy 
services. The commenter maintained that this increase should not 
adversely affect future budget neutrality adjustments.
    Response: Although payment for these outpatient therapy services 
are based on payment amounts contained in the physician fee schedule, 
these services are not included as part of the fee schedule pool for 
budget neutrality calculations.
    Comment: One commenter argued that the budget neutrality adjustment 
is inappropriately applied because it does not recognize the savings 
provided by the elimination of the facility payments for endoscopic 
procedures that will move to the office setting.
    Response: The statute specifies that there shall be budget 
neutrality for physician fee schedule services. The budget neutrality 
adjustment does not take into account payments to facilities.
    Comment: Two commenters suggested that any fiscal adjustments made 
to comply with BBA should be reflected in the conversion factor, or 
other ratio, rather than be included in the calculation of the practice 
expense RVUs, so that other payer reimbursement would not be affected.
    Response: We do not completely understand these comments, but we 
believe the request is consistent with our practice of making budget-
neutrality adjustments on the conversion factor.
    Comment: Several commenters requested additional impact analyses 
such as--
    <bullet> Comparison of actual practice expense by specialty with 
expected practice expense payments, both by amount and by percent, for 
both our proposed practice expense payments and the current fee 
schedule practice expense RVUs;
    <bullet> Comparison of impacts by geographic area, including rural 
and urban impacts;
    <bullet> Analysis of impacts on hospital, academic, and community-
based physicians;
    <bullet> Analysis of total Medicare and non-Medicare impact using 
national claims case mix data; and
    <bullet> An analysis that would demonstrate to other payers the 
degree to which our proposed payment rates are less than actual 
practice costs.
    Response: We lack the data to provide some of the requested 
analyses. For example, we do not have national claims case mix data and 
are unaware of the existence of such data. With regard to rural and 
urban impacts, in the June 5, 1998 proposed rule we discussed the 
limitations of such analyses given the structure of the Medicare 
payment localities. We are unsure what the commenters are specifically 
requesting on the issue of actual costs since we have based the 
resource-based practice expense RVUs on the best available source of 
multi-specialty actual cost data: the SMS survey. Cost analyses at the 
individual practice level are problematic since, for example, we do not 
have physician cost reports, but we are open to concrete suggestions on 
how to perform such analyses. We also note that the Medicare public use 
files are an excellent source of data for commenters who wish to 
perform additional analyses that they believe are possible with the 
data sources available to us.
    Comment: One commenter requested that we make clear to Medicare 
contractors that hospital-based pathologists who incur technical 
component costs for nonhospital patients can be paid for both the 
technical and professional components.
    Response: This is a long-standing policy, and we are not aware of 
any general problems in this regard. However, we would be willing to 
discuss the issue with individual carriers if the commenter provides 
more specific information.
    Comment: One commenter recommended that we recalibrate the 
allocation of RVUs to the pools for physician work, practice expense 
and malpractice, as this allocation has remained constant since the 
resource-based relative value scale was implemented in 1992.
    Response: We are recalibrating the allocation this year to match 
the Medicare Economic Index (MEI) weights. For example, work goes from 
54.2 percent of the total to 54.5 percent, the practice expense portion 
goes from 41.0 percent to 42.3 percent, and the malpractice portion 
goes from 4.8 percent to 3.2 percent. (See Section II.D, ``Rebasing and 
Revising the Medicare Economic Index.'') In order to prevent the work 
RVUs from changing as a result of this, we are altering only the 
practice expense and malpractice RVUs. The changes to the practice 
expense and malpractice RVUs due to this are offset by an adjustment to 
the conversion factor.
    Comment: One commenter recommended that we should limit the 
magnitude of the changes in physician payments resulting from the shift 
to resource-based payment for practice

[[Page 58830]]

expenses by imposing some reasonable limit on payment increases and 
decreases for individual services. The commenter maintains that section 
1848(c)(4) of the Act, which authorizes the Secretary of Health and 
Human Services to, ``establish ancillary policies, as may be necessary 
to implement this section,'' provides statutory authority on which to 
base such a policy. The comment pointed out that we invoked this 
section in 1991 with reference to the transition to resource-based 
payment for physician work.
    Response: We believe that Congress intended the transition period 
to be the mechanism by which we would mitigate the impacts of any 
changes in payment brought about by the shift to resource-based 
practice expense. Therefore, we believe it would be inappropriate for 
us to impose further limits on payment increases or decreases.
    Comment: One commenter maintained that the proposal violates both 
the Regulatory Flexibility Act and the Paperwork Reduction Act of 1980 
because the adequate filings required in both of these Acts did not 
accompany the proposal. Additionally, the commenter stated that we did 
not cite any evidence to support its contention that a Regulatory 
Impact Statement is not required.
    Response: We had included a Paperwork Reduction Act (PRA) section 
in HCFA-1006-P that meets the requirements of the PRA of 1980.
    One commenter stated that we do not cite any evidence in either of 
our proposals to support our contention that no regulatory impact 
statement is required. There may be some confusion about the purpose of 
an impact statement and the difference between a regulatory impact 
statement and a regulatory impact analysis (RIA). A regulatory impact 
statement is a brief rational on why an analysis was not conducted. An 
RIA is a complete analysis based on recent available data and is more 
extensive.
    An RIA was conducted in the proposed rule of June 5, 1998 (63 FR 
30866). Absent this analysis, we would be required to furnish an impact 
statement. Therefore, there is no violation of either the RIA or 
Regulatory Flexibility Act requirements.
3. Other Practice Expense Policies

Site-of-Service Payment Differential

    As part of the resource-based practice expense initiative, we are 
replacing the current policy that systematically reduces the practice 
expense RVU by 50 percent for certain procedures performed in 
facilities with a policy that would generally identify two different 
levels (facility and nonfacility) of practice expense RVUs for each 
procedure code depending on the site-of-service.
    Some services, by the nature of their codes, are performed only in 
certain settings and will have only one level of practice expense RVU 
per code. Many of these are evaluation and management codes with code 
descriptions specific as to the site of service. Other services, such 
as most major surgical services with a 90-day global period, are 
performed entirely or almost entirely in the hospital, and we are 
generally providing a practice expense RVU only for the out-of-office 
or facility setting.
    In the majority of cases, however, we will provide both facility 
and nonfacility practice expense RVUs. The higher nonfacility practice 
expense RVUs are generally used to calculate payments for services 
performed in a physician's office and for services furnished to a 
patient in the patient's home, or facility or institution other than a 
hospital, skilled nursing facility (SNF), or ambulatory surgical center 
(ASC). For these services, the physician typically bears the cost of 
resources, such as labor, medical supplies, and medical equipment 
associated with the physician's service.
    The lower facility practice expense RVUs generally are used to 
calculate payments for physicians' services furnished to hospital, SNF, 
and ASC patients. The costs for nonphysicians' services and other 
items, including medical equipment and supplies, are typically borne by 
the hospital, by the SNF, or the ASC.
    We received the following comments on our site-of-service payment 
differential proposal.
    Comment: We received several comments concerning the 
appropriateness of our site-of-service proposal:
    <bullet> Several specialty groups commented that they agreed with 
eliminating the site-of-service differential and replacing it with two 
levels of payment.
    <bullet> A national specialty society representing 
gastroenterologists, as well as several hundred individual commenters, 
strongly opposed the elimination of the current site-of-service 
differential and replacement of it with the facility and nonfacility 
resource-based practice expense RVUs. The comments argued that we 
should not have established different practice expense RVUs for 
facility and nonfacility settings for gastrointestinal endoscopy codes 
43234 through 45385 because:
    <bullet> It is unsafe to do these procedures in the office and will 
thus jeopardize patient safety;
    <bullet> It creates an incentive to provide care in the 
inappropriate office setting; and
    <bullet> It is not authorized by legislation, is against the intent 
of BBA to have different payment levels for different settings, and is 
likely to result in legal challenge.
    The commenter recommended that we drop the office and out-of-office 
differential in practice expense payment.
    <bullet> One organization commented that our site-of-service 
proposal will exacerbate the ability to subsidize uncompensated care 
and suggested exempting teaching physicians from the new site-of-
service provision. It also suggested that HCFA should also monitor the 
effects of the site-of-service policy.
    <bullet> The AMA, the American Hospital Association, and three 
other organizations commented that payment differentials should not 
provide an incentive for physicians and patients to choose one site 
over another. Some physician groups are concerned that the differential 
will accelerate the shift of some services from facility to nonfacility 
settings at the expense of patient safety. They asserted that claims 
data on changes in place of service should be made available and this 
issue should be one focus of refinement efforts.
    Response: We believe that, to the extent that the differing RVUs 
for in-office and out-of-office services reflect the relative 
differences in practice costs for performing those services, we have 
not created incentives to provide services in inappropriate settings. 
We are required by both the Social Security Act Amendments of 1994 and 
BBA to develop resource-based practice expense RVUs, based on 
physicians' actual costs. All of our data indicate that physicians' 
practice expenses are higher in the office, where the physician must 
incur all the costs of staff, equipment, and supplies, than in a 
facility that provides and is paid separately for these resources. As 
the facility and nonfacility costs to the physician can vary by a 
considerable amount, we believe that adopting a single average payment 
for both sites would consistently underpay in-office procedures, and 
overpay those performed in a facility and would thus be inherently 
inequitable, not resource-based, and contrary to the intent of the law. 
Furthermore, we are not aware of any studies showing that codes 43234 
through 45385 are being unsafely performed in offices. We have complete

[[Page 58831]]

confidence that physicians will continue to exercise their best 
clinical judgment as to the most appropriate setting for their 
patients.
    Comment: One specialty society stated its support for the proposed 
change in the site-of-service payment, as long as it does not result in 
nonpayment for services actually provided. For example, there are no 
practice expense RVUs for emergency intubation in the nonfacility 
setting, though this service may occasionally have to be performed in 
the office.
    Response: If a service for which there are only facility RVUs is 
performed in the office, the facility rate will be paid.
    Comment: The American Urological Association commented that certain 
codes--50590, 52234, 52235, 52240, 52276, and 52317 were 
inappropriately assigned nonfacility PERVUs, as it is not safe to 
perform these services in the office.
    Response: We would need more data to demonstrate that performing 
these services in the office is not appropriate before we would 
eliminate the nonfacility RVUs. We are willing to review such 
information during the refinement process. Such information should be 
submitted to HCFA, Office of Clinical Standards and Quality.
    Comment: Two societies representing pulmonologists commented that 
critical care is listed with facility and nonfacility practice expense 
RVUs, although it is nearly always performed in an inpatient setting.
    One organization representing psychiatrists noted that CPT codes 
90816 through 90829 are restricted to the inpatient hospital and 
partial hospital and residential care settings, and that CPT code 
90870, electroconvulsive therapy, would not generally be performed in 
an office setting. The commenter recommended that the final rule list 
RVUs for only the facility setting.
    Response: We are not deleting RVUs proposed for the nonfacility 
setting in this final rule, but will be considering this issue during 
refinement. We would note, however, that services performed in the 
residential care setting would be paid by using the nonfacility RVUs.
    Comment: One commenter pointed out that in our proposed rule we 
list the services that, by nature of their codes, would only have one 
level of practice expense; this list includes codes 99321 through 99333 
and 99341 through 99350. However, in Addendum C, both facility and 
nonfacility values are given and the facility values are higher than 
the nonfacility values for most of these codes. These inconsistencies 
should be corrected. Another commenter submitted a list of some codes 
where the facility practice expense RVUs are higher than the in-office 
values.
    Response: We thank the commenters for pointing out these 
discrepancies. The instances of higher facility RVUs are an artifact of 
our indirect methodology and reflect the differing mix of specialties 
performing a service in each setting. We will look at this more closely 
during the refinement process.
    Comment: One specialty society commented that the dual energy x-ray 
absorptiometry codes have the same practice expense RVUs for both the 
in-office and out-of-office setting. The comment recommended that the 
in-office RVUs be adjusted to reflect the high costs of equipment for 
the office-based physician.
    Response: More specific data will be needed on the actual costs of 
the equipment so that we can address any changes to the CPEP data 
during the refinement process.
    Comment: Three organizations representing outpatient therapy 
services commented that, though outpatient rehabilitation providers 
will be paid the nonfacility rate, there are higher costs for providing 
rehabilitation services in an SNF or hospital than in a doctor's 
office. These costs are not reflected in the CPEP data and are grossly 
underestimated in the practice expense RVUs. There should be a special 
higher site-of-service differential to be applied when outpatient 
therapy services are furnished in provider settings.
    Response: The site-of-service differential is intended to ensure 
that the Medicare program avoids making duplicate payments to 
practitioners and facilities for the same services. BBA specified that 
outpatient therapy services, which prior to January 1, 1999 have been 
paid by Medicare using a cost reimbursement system, should be paid 
using the physician fee schedule effective January 1, 1999. As 
discussed more fully in the June 5, 1998 proposed rule, we believe it 
would be inappropriate, and inconsistent with how we pay for other 
services under the fee schedule, to pay a higher rate for these 
outpatient rehabilitation services when they are provided in an SNF or 
hospital.
    Comment: One specialty organization recommended that we confirm 
that facility-based practice expenses exclude only those practice 
expenses that are actually provided and paid for by the facility. We 
should provide a data file summarizing which resources are deemed to be 
provided by facilities, so that physician organizations can identify 
any errors or anomalies in HCFA's assumptions. For example, 
vitreoretinal physicians must often provide clinical staff for out-of-
office procedures, and it is essential that there is a mechanism for 
the physician to be reimbursed.
    Response: The differential between the facility-based and office-
based practice expenses is determined by the CPEP inputs for staff 
labor time, supplies and equipment attributed to each site and the mix 
of specialties providing the services in each site. We will consider 
further adjustments to the CPEP inputs during the refinement period.
    Comment: The American Speech-Language-Hearing Association commented 
that the extra costs for patient acuity and travel should be added to 
the site of service differential.
    Response: This is an issue for which specific data is needed and 
that should be addressed during the refinement period.

Additional Relative Value Units for Additional Office-Based Expenses 
for Certain Procedure Codes

    Usually office medical supplies or surgical services in the 
physician's office are included in the practice expense portion of the 
payment for the medical or surgical service to which they are 
incidental. The November 1991 final rule (56 FR 59522) included a 
policy for 44 procedure codes that allowed a practice expense RVU of 
1.0 to pay for the supplies that are used incident to a physician's 
service but generally are not the type of routine supplies included in 
the practice expense RVUs for specific services. This list of procedure 
codes was expanded in the December 1993 final rule (58 FR 63854). 
Included in this list of procedures for which an additional amount may 
be paid for supplies if the procedure is performed in a physician's 
office are closing a tear duct (CPT code 68761) and billing for a 
permanent lacrimal duct implant (HCPCS A4263), inserting an access port 
(CPT code 36533) and billing for an implantable vascular access portal/
catheter (A4300), and performing cystoscopy procedures and billing for 
a surgical tray (A4550).
    We proposed to revise this policy under the resource-based practice 
expense system. We believe the supply costs that this policy is 
designed to cover were included in the supply inputs identified by the 
CPEPs and the AMA's SMS survey. Thus, they were included in the 
practice expense RVUs for each relevant procedure code. Therefore, we 
proposed to discontinue separate payment for supply codes A4263, A4300, 
A4550, and G0025.

[[Page 58832]]

Below are the comments we have received on this issue:
    Comment: While two primary care organizations agreed with our 
proposal to discontinue separate payment for select supply codes, three 
other specialty societies opposed elimination of the current payment 
for these supplies. One comment argued that incident-to supplies were 
not counted in the CPEP process, and the other that this separate 
payment is a preferred method of recognizing added costs to physicians.
    Response: We believe that the current practice expense RVUs include 
the payment for these supplies. However, we are willing to consider 
evidence that the CPEP inputs do not reflect the appropriate use of 
these supplies for any service during the refinement process.
    Comment: The AMA, as well as four physician specialty 
organizations, recommended phasing out separate payment for supplies 
during the transition instead of implementing it all at once in 1999.
    Response: We agree and we will be phasing out the separate payment 
for these supplies over the transition period.

Anesthesia Services

    Although physician anesthesia services are paid under the physician 
fee schedule, these services do not have practice expense RVUs. Rather, 
payment for physician anesthesia services is determined based on the 
sum of allowable base and time units multiplied by a locality-specific 
anesthesia CF.
    Since the beginning of the physician fee schedule, overall budget 
neutrality and work adjustments have been made to the anesthesia CF and 
not to the base and time units. We are following the same process and 
making an adjustment to the anesthesia CF to move anesthesia services 
under the resource-based practice expense system. The adjustment to the 
anesthesia CF is 3.0 percent (phased in other the transition period).

4. Refinement of Practice Expense Relative Value Units

    Section 4505(d)(1)(C) of BBA requires the Secretary to develop a 
refinement process to be used during each of the 4 years of the 
transition period. In the June 5, 1998 proposed rule, we proposed 
keeping the practice expense RVUs as interim RVUs until at least the 
fall of 1999, and possibly beyond 1999, if we believe more time is 
needed to identify and correct errors. We also solicited 
recommendations for a refinement process in subsequent years.
    In the June 1998 proposed rule, we did not propose a specific 
process for a long-term refinement process. Rather, we set out the 
parameters for an acceptable refinement process for practice expense 
RVUs. Such a refinement process would enable us to do the following:
    <bullet> Review and refine practice expense and hour data.
    We suggested that we would be prepared in the future to refine the 
practice expense and hour data of those specialties well-represented in 
the SMS data if we receive compelling evidence that the SMS data are 
incorrect. We invited comments on potential revisions to the SMS survey 
or alternative sources of data and on the need to confirm, through 
audit or other means, the survey data that would be used for long term 
refinement.
    <bullet> Obtain and review practice expense and hour data for 
specialties or practitioners not included in the SMS survey.
    We invited comments on the appropriateness of our crosswalks and 
suggested that any arguments that the practice expense and hour data 
should be changed would be strengthened by the submission of survey 
data comparable to the SMS data.
    <bullet> Address anomalies, if any, in the code-specific Harvard 
and RUC physician time data.
    We proposed that we would not revisit work RVU issues that have 
been already addressed as part of the 5-year review.
    <bullet> Address anomalies, if any, in the code-specific CPEP data 
on clinical staff types and times, quantity and cost of medical 
supplies, and quantity and cost of medical equipment.
    We proposed that the codes identified by commenters as having 
possible errors during the comment periods of the proposed rule and the 
final rule will constitute the universe of codes whose code-specific 
CPEP data should be reviewed, as it was not our intention to review the 
inputs for all the codes on an annual basis. We also proposed that we 
obtain the advice of practicing physicians on the appropriateness of 
recommended changes to the CPEP inputs. We suggested two principal 
options for obtaining that advice, either HCFA-convened multiple 
specialty panels or the RUC or new organization like the RUC that 
includes broad representation across all specialties and includes 
nonphysician practitioners. The panels would need to meet no later than 
the summer of 1999 to consider the comments we received on both the 
proposed rule and the final rule. We invited comments on these options 
and solicited any other recommendations.
    <bullet> Refine, as needed, our process of developing practice 
expense RVUs for codes not addressed by the CPEP process, for example, 
codes that were new in 1996, 1997, and 1998.
    We developed practice expense RVUs for codes that were new in 1996, 
1997, and 1998 by comparing the new codes to other comparable codes for 
which we had actual CPEP data and we invited comments on the 
appropriateness of our crosswalks. Also, we solicited new code-specific 
data on clinical staff types and times, quantity and cost of medical 
supplies, and quantity and cost of medical equipment.
    <bullet> Develop practice expense RVUs for codes that will be new 
in 1999 and beyond.
    Because of time constraints, we proposed that we develop interim 
practice expense RVUs for new 1999 codes by preparing a crosswalk of 
CPEP data from existing codes. Though the practice expense values for 
these codes will be subject to comment, the interim values will serve 
as the basis of payment during 1999.
    Beyond 1999, we proposed two possible options that could be used to 
develop practice expense RVUs for new codes. First, we could continue 
to crosswalk new codes to existing codes and review comments we receive 
with the assistance of our multiple specialty panels. Second, we could 
request the RUC or a RUC-like organization to provide recommended 
practice expense RVUs or recommended inputs before publication of the 
proposed rule, as we do with work RVUs. We invited comments on these 
options and solicited any other recommendations. Following are the 
comments that we have received on our proposal for refinement of the 
resource based practice expense RVUs:
    Comment: The RUC submitted the following comments on the refinement 
process:
    <bullet> The RUC stated its interest in reviewing any comments that 
we receive on the accuracy of the physician time data for specific 
codes.
    <bullet> The RUC commented that many members of the RUC, the RUC's 
Advisory Committee and the Health Care Professionals Advisory Committee 
(HCPAC) observed or participated in the entire CPEP process. The 
comment stated that, based on that experience and on extensive 
subsequent discussion, it became clear that the RUC, through its 
experience in developing physician work relative value units, should 
also seek involvement in developing

[[Page 58833]]

recommendations on practice expense relative values.
    <bullet> The RUC comment contained the following proposal for 
refinement of the CPEP data:
    The RUC proposed the development of a new Advisory Committee, the 
RUC Practice Expense Advisory Committee (PEAC) to review comments on 
the code-specific CPEP data (that is, clinical staff types and times, 
quantity and cost of medical supplies, and quantity and cost of medical 
equipment) during the refinement period. This committee would report to 
the RUC, which would make final recommendations to HCFA. The committee 
composition would mirror the RUC and include additional representation 
from the American Nurses Association, the American Academy of Physician 
Assistants, the Medical Group Management Association, and four other 
non-MD and DO organizations to encourage input from nurses and practice 
managers in the process.
    The committee would include one representative from the following 
organizations:

    <bullet> Chair (To be selected by the Chair of the RUC);
    <bullet> American Medical Association;
    <bullet> American Osteopathic Association;
    <bullet> CPT Editorial Panel;
    <bullet> Health Care Professionals Advisory Committee;
    <bullet> Two rotating seats for the RUC Advisory Committee 
(currently held by Rheumatology and Child Psychiatry);
    <bullet> American Academy of Dermatology;
    <bullet> American Academy of Family Physicians;
    <bullet> American Academy of Neurology;
    <bullet> American Academy of Ophthalmology;
    <bullet> American Academy of Orthopaedic Surgeons;
    <bullet> American Academy of Otolaryngology--Head and Neck 
Surgery, Inc.;
    <bullet> American Academy of Pediatrics;
    <bullet> American Academy of Physician Assistants;
    <bullet> American Association of Neurological Surgeons;
    <bullet> American College of Cardiology;
    <bullet> American College of Emergency Physicians;
    <bullet> American College of Obstetricians and Gynecologists;
    <bullet> American College of Physicians;
    <bullet> American College of Radiology;
    <bullet> American College of Surgeons;
    <bullet> American Nurses Association;
    <bullet> American Psychiatric Association;
    <bullet> American Society of Anesthesiologists;
    <bullet> American Society of Internal Medicine;
    <bullet> American Society of Plastic and Reconstructive 
Surgeons;
    <bullet> American Urological Association;
    <bullet> College of American Pathologists;
    <bullet> Medical Group Management Association; and
    <bullet> Society of Thoracic Surgeons.

Four seats would be added to include other organizations representing 
nursing or practice managers, for example, National Federation of 
Licensed Practical Nurses or American Licensed Practical Nurses 
Association, American Association of Medical Assistants, Association of 
Surgical Technologists, Professional Association of Health Care Office 
Managers, and Healthcare Financial Management Association.
    Also contributing to this refinement process would be 80 members of 
the RUC Advisory Committee, representing those specialty societies with 
a seat in the AMA House of Delegates who have elected to participate in 
the RUC process. The RUC process will also include input from the 
HCPAC, which represents audiologists, chiropractors, nurses, 
occupational therapists, optometrists, physical therapists, physician 
assistants, podiatrists, psychologists, social workers, and speech-
language pathologists.
    The RUC has not yet implemented the PEAC, pending the initial 
response(s) to the proposed rule. However, the RUC has authorized the 
RUC Chair to convene the PEAC in a timely fashion and requests that we 
share all comments we wish to have reviewed regarding changes to the 
CPEP data with the RUC soon after the conclusion of the comment period 
on the final rule. The RUC would assure that all members of the RUC 
Advisory Committee and HCPAC Advisory Committee are contacted regarding 
the comments and will solicit interest in bringing recommendations 
forward to the PEAC on these comments. Specialty societies would 
collect additional data and, where possible, form a consensus 
recommendation with other interested specialty societies or HCPAC 
organizations. After considering the comments and the specialty society 
recommendation, the PEAC would present a report with their 
recommendations to the RUC which would submit its recommendations to 
us, along with its usual submission of work relative value 
recommendations, at the end of May.
    The RUC comment contained the following proposal for refinement of 
the crosswalk for 1996, 1997, 1998, and 1999 new codes. The RUC 
proposes that the PEAC, when constituted, also review any comments on 
the final rule that are forwarded by us regarding the appropriateness 
of crosswalks and extrapolated code-specific data for those codes that 
were new in 1996, 1997, 1998, and 1999. The RUC would encourage 
specialty societies and HCPAC organizations to collect data or evidence 
to support new code-specific data on clinical staff types and times, 
quantity and cost of medical supplies, and quantity and cost of medical 
equipment for each of those new services that are frequently performed.
    The RUC comment also contained the following proposal for the 
development of practice expense RVUs for codes that will be new in 2000 
and beyond. The RUC proposes that recommendations for practice expense 
RVUs for new codes in 2000 and beyond be developed simultaneously with 
the work RVU recommendations. After a new code is approved by the CPT 
Editorial Panel, specialty societies would conduct a survey that would 
include a section on physician work and a section on direct expense 
inputs for that service. The specialty society would then present their 
recommendations on both the work and practice expense RVUs, along with 
all of their supporting data from the survey, to the RUC to review. The 
RUC would review both RVUs and submit the recommendations to us in a 
format similar to its current submission.
    The RUC comment stated that the majority of the discussion on the 
expense inputs would focus on the clinical staff time and, potentially, 
the comparison between this time and the physician time. This time 
information will not be available for new codes. If we were to utilize 
two different processes for work and practice expenses for new codes, 
it would be necessary to establish a process to reconcile differences 
in time between the two sets of recommendations. The RUC comment 
recommended that the RUC process represents the best choice for 
reviewing this relationship and providing verifiable recommendations. 
The comment also recommended that for new codes for services performed 
by nonphysicians only, the RUC HCPAC Review Board would review both 
work and practice expense RVUs and would submit their recommendations 
to us directly. Throughout the updating process of practice expense, 
the RUC will also seek the input of nurses, practice managers, and 
others who have expertise in physician practice expense.
    Comment: Almost all specialty societies and individuals commenting 
on refinement, as well as MedPAC and the AMA, agreed that the RUC or a 
group like the RUC should undertake the refinement of the CPEP input 
data for individual procedure codes, including reviewing our crosswalks 
for CPT codes new in 1996 through 1999, and recommending practice 
expense values for codes that will be new in 2000 and beyond. Several 
specialty societies, while supporting the role of the RUC in handling 
the complex issue

[[Page 58834]]

of refining CPEP data, stated that the RUC would need to include 
nonphysicians such as practice administrators and nurses in order to 
accomplish this task, as staff in management roles have more expertise 
than practitioners on the intricacies of practice management and the 
details of practice expenses. The American Podiatric Medical 
Association commented that podiatry must have full participation on an 
equal basis with other physicians' specialties; membership on the HCPAC 
would not be sufficient. The American Academy of Audiology has also 
commented that they want an audiologist to be represented on any group 
refining RVUs and the American Occupational Therapy Association 
commented on the need for therapy representatives. The Society of 
Vascular Technology/Society of Diagnostic Sonographers commented that 
they would support the use of a RUC-like group only if there would be 
appropriate representation of technical component service providers; 
otherwise they would not favor the RUC handling refinement issues.
    Response: As previously described, there are four key data items we 
used for our methodology. Three are needed to develop practice expense 
``pools'' per specialty, and the fourth is needed to allocate these 
aggregate practice cost pools to individual CPT codes. The data sources 
we used are as follows:

Practice Cost Pools

    1. AMA SMS survey data for practice costs per hour, by specialty.
    2. Harvard and RUC data for length of time to perform each service
    3. Medicare claims frequency data for each procedure.

Allocation to Individual CPT Codes

    4. ABT CPEP resource inputs per CPT code.
    Refinement requires consideration of three broad types of 
activities:
    1. Review of broad strategy and general methodology issues. 
Examples of these types of activities include review of the basic 
methodology, formulas for allocation of indirect expenses, development 
of criteria for consideration of alternative data sources, survey 
sample size consideration, development of possible approaches to 
validate survey data, and other similar methodology issues.
    2. Refinement of specialty level practice cost per hour data.
    3. Refinement of detailed code level data (CPEP data, procedure 
time data).
    The RUC has proposed to be involved in the refinement process by 
creating a subcommittee to advise it, referred to as the Practice 
Expense Advisory Committee (PEAC). It would consist of over 35 members 
(RUC specialties supplemented by other groups such as MGMA, nurses, 
practice managers and others). The vast majority of specialties that 
commented on the refinement process indicated their support for the RUC 
proposal or for a similar process.

Initial Refinement Process

    We continue to believe that our proposed general methodology is 
sound and responsive to the BBA requirements. We did receive a large 
variety of comments about broad methodology issues, practice expense 
per hour data, and detailed code level data. As described elsewhere, we 
have made some adjustments to our original proposal for a select number 
of situations in which we were convinced an adjustment was appropriate 
at this time. We are considering other comments for possible future 
refinement. The values of all codes will be considered interim for 1999 
and for future years during the transition period. Rather than specify 
a detailed refinement process at this time, we will continue to work 
with the professional community to further develop the refinement 
process. We will modify the process as necessary during the period, 
based on our experiences and recommendations received.
    Our plans to start the initial refinement process are as follows:
    1. We plan to establish a mechanism to receive independent advice 
for dealing with broad practice expense RVU technical and 
methodological issues. We are considering contractor support and/or 
other ways of obtaining independent advice and assessments of comments 
that we have already received or will receive in the future about 
important technical issues, especially those that result in major 
redistributions among specialties. We welcome continuing advice and 
specific recommendations from the GAO, MedPAC, and the Practicing 
Physicians Advisory Council. We will also continue to actively consult 
with physician and other groups about these issues. We are particularly 
interested in receiving additional comments and suggestions about 
methodology from organizations that have a broad range of interests and 
expertise in practice expense and survey issues. All comments will be 
considered, but we especially encourage organizations that represent a 
broad range of physician, practitioner, and provider groups (for 
example, groups that represent both ``winning'' and ``losing'' 
specialties) with expertise in practice costs issues to make specific 
recommendations regarding the following methodology issues:
    <bullet> Bias in ``Top Down'' methodology. Some commenters believe 
the methodology we are using to establish initial practice expense RVUs 
is flawed. They indicate that it is inappropriate to pass through costs 
and that the method will perpetuate inequities among specialties 
because high revenue specialties have more to spend on their practices. 
One possible way of dealing with this issue is to further analyze the 
differences in practice costs per hour by specialty to determine the 
``reasonableness'' of these differences. Edits or other adjustments in 
practice costs data could be established if appropriate.
    <bullet> Validation of data. It is difficult to establish an 
unbiased method for refining and validating practice costs data. Data 
from the SMS survey are self-reported. There could be major incentives 
in the future for respondents to expand the definition and reporting of 
``costs'' for purposes of this methodology. In addition, we would 
expect that individual specialties would be likely to bring undervalued 
practice expense RVUs to our attention, but would not have an incentive 
to report overvalued practice expense RVUs. We welcome comments on the 
following:
    + What specific methods should HCFA use to validate key components 
of the data used for establishing practice expense RVUs?
    + What specific approaches should be used to ensure fairness among 
specialties?
    + Should we, for example, require that the specialty obtain review 
by an independent auditor before we consider changes in the data?
    <bullet> Criteria for using alternative survey data. The primary 
source of practice costs per hour data was the AMA's SMS survey. Some 
specialties have already requested that alternative, supplementary, or 
more recent data be used. We welcome comments on what specific criteria 
should be established for use of these alternative data?
    <bullet> Allocation of indirect expenses. We allocated indirect 
expenses to individual CPT codes based on physician work and direct 
expenses. Some commenters suggest that indirect expenses should be 
allocated by alternative methods, such as physician time and direct 
expenses, or just direct expenses. We would welcome your 
recommendations.
    2. RUC/PEAC. We would welcome comments from the RUC/PEAC or any 
other organization or individual for individual code level data--both 
for

[[Page 58835]]

resource inputs and time data. The RUC and PEAC would function as an 
entity independent from us, much like the current RUC operates for 
purposes of providing comments on work RVUs. We also recognize the RUC/
PEAC may wish to comment on other aspects of the process, such as 
methodology. We would consider such comments along with those received 
from others and would likely discuss them as part of the process 
described in paragraph 1 above. However, we wish to emphasize that, as 
in our dealings with the current RUC, we would retain the ultimate 
authority and responsibility to establish practice expense RVUs.
    3. Comments on the refinement process.
    We seek comments January 4, 1999 and suggestions on any aspect of 
the refinement process as described above.
    Comment: All but one of the organizations commenting on the issue, 
as well as many individual commenters, recommended that we keep the 
practice expense RVUs as interim for the 4 years of the process. One 
national specialty society recommended we make the revised practice 
expense RVUs interim for 1 year, only extending the period based on the 
number of misvalued procedures identified and also ensuring that only 
changes based on compelling evidence are made.
    Response: We stated in our proposed rule that we would keep the 
practice expense RVUs as interim through at least through 1999. Due to 
the complexity of the issues that need to be addressed during 
refinement, we now believe that a longer period could be needed to 
finalize all the RVUs. Therefore, as stated above, we will be keeping 
all the RVUs as interim throughout the transition period.
    Comment: Many commenters recommended acceptance of information from 
alternative data sources during the refinement period, including data 
provided by specialty societies. One commenter suggested that we 
develop a standard survey instrument for specialties to use. Another 
organization commented that we should consider using MGMA's cost survey 
as an alternative source of information that could be used to 
supplement, validate, or otherwise expose further areas of refinement 
in the SMS, or perhaps be a substitute for SMS in the future. This 
comment also stated that we should remain open to challenges about 
current practice expense per hour calculations from all specialties, 
even from those larger specialties represented in the SMS survey, in 
both the short and long term. Many commenters also recommended that we 
develop a process for validating any supplemental data that we use.
    Response: We believe that the refinement process that we outlined 
above is responsive to these concerns. One of the major purposes of the 
technical support and advice mentioned will be to help us to determine 
what additional data, whether from large or small specialties, are 
needed, whether submitted information is valid, and whether and how 
alternative sources of data, such as the MGMA survey, can be used to 
validate the assumptions used to create the practice expense pools.
    Comment: One specialty society commented that we should conduct 
specialty-specific surveys for all HCFA-designated specialties during 
the refinement period. The comment stated that it is not reasonable for 
us to put the burden of ``oversample'' costs, which exceed $100,000 on 
the HCFA-designated specialties that the AMA has chosen not to include 
in its annual survey sample.
    Response: Decisions on what surveys are needed, what the criteria 
should be for those surveys, who should conduct the surveys, and who 
should fund them will be made as we address these issues during 
refinement.
    Comment: One organization recommended that the refinement process 
distinguish between intra-specialty refinement issues that can be 
resolved within a specialty, and inter-specialty refinement issues 
which change the cost pool of one specialty with respect to all other 
specialties.
    Response: Again, we believe that our chosen refinement process 
addresses this concern. The intra-specialty refinement issues will, for 
the most part, revolve around adjustments to the CPEP data and will be 
referred to the PEAC for their recommendations. Those issues that 
affect the relative size of the practice expense pools are generally 
more fundamental methodological questions for which we will seek 
technical and methodological input as well as input from the medical 
community.
    Comment: One national organization commented that the SMS data 
appears to be the best data available for the purpose of determining 
practice expense RVUs and that SMS data closely mirrors the specialty's 
own data. The comment recommended that refinement should focus on 
identifying the proper inputs for particular codes, rather than 
adjusting the current SMS data, or revamping the design of the survey, 
which currently does not reflect a bias towards inflating practice 
expenses for individual specialties.
    Response: We agree that the SMS survey is, at present, the best 
data available for determining aggregate specialty-specific practice 
costs. We believe one of the purposes of refinement is to pinpoint 
where appropriate adjustments need to be made in the data that we use. 
We also agree, as mentioned above, that we will need to develop a 
system to validate the accuracy of data collected in the future.
    Comment: One commenter recommended that we ensure that cost-saving 
innovations are not discouraged by the refinement process. This means 
that the practice expense scale should not be refined to immediately 
reflect the full impact of every cost-saving development, or 
specialties will be permanently discouraged from implementing such 
innovations.
    Response: We are required by law to develop practice expense 
relative values that are resource-based. Therefore, we do not believe 
that we could develop an alternative approach that would only apply to 
cost-saving innovations. We also do not believe that the use of 
resource-based practice expense RVUs will have a significant effect on 
cost-saving innovations; on the contrary, the use of a prospectively 
determined payment system, in itself, offers an incentive for any 
individual practitioner to cut costs.
    Comment: Two commenters recommended that codes for entirely new 
procedures and technologies have their practice expense values taken 
from the all-specialty practice expense pool; two organizations 
recommended that codes that apply to new technologies to replace 
current procedures come from the pertinent specialty's pool.
    Response: There would be no budget neutrality adjustment for new 
codes that represent entirely new procedures and technologies. However, 
we believe that, in the majority of cases (since we would typically 
expect some type of substitution of new services for more established 
services) a budget neutrality adjustment would be appropriate. In such 
a case, we would spread the adjustment across all services. However, 
new codes that merely replace existing services would only affect the 
pertinent specialty's pool at the time when the practice expense pools 
are recalculated.
    Comment: A primary care specialty group recommended that we leave 
undisturbed the Harvard and RUC time data during the refinement period 
because of the implications for the work RVUs assigned to codes, while 
a surgical specialty group recommended that we remain open to revising 
the Harvard physician time data.

[[Page 58836]]

    Response: The physician time data plays an important role in 
determining the size of each specialty's practice expense pool and, for 
this reason, it is important that this data be as accurate as possible. 
Therefore, we cannot rule out the need for adjustments in the time data 
during the refinement period. However, according to our chosen 
refinement process, requests to adjust the physician time data would be 
initially referred to the RUC. We believe that the RUC will understand 
the implications that changes in physician times could have for the 
work RVUs.
    Comment: One commenter agreed with our proposal that we address 
potential bias toward specialties which use more midlevel providers 
during the refinement period.
    Response: This is one of the issues on which we will be seeking 
input during the refinement period.
    Comment: The AMA, supported by comments from two physician 
specialty groups, recommended that, to avoid confusion, we publish only 
the blended set of values each year, but make a list of the resource-
based practice expense RVUs available to interested parties. Any 
proposed changes in the resource-based practice expense RVUs could then 
be published in the spring proposed rules. Four organizations 
recommended that both sets of RVUs be published throughout the period.

Response: We are publishing both sets of RVUs in Addenda B and C.

5. Reductions in Practice Expense Relative Value Units for Multiple 
Procedures
    Comment: Two commenters expressed agreement with our decision not 
to propose further multiple procedure reductions. Gastroenterologists 
stated that multiple procedure reductions should not apply to GI 
procedures done through different orifices.
    Response: Although we have not made a specific proposal with 
respect to multiple procedures thus far, we may do so in the future. We 
continue to believe there are efficiencies when more than one service 
is performed during a single encounter.
6. Transition

The Proposed Rule

    The transition to resource-based practice expenses, enacted in 
section 4505(b) of BBA, requires practice expense RVUs in 1999 to be 
based 75 percent on the existing charge-based practice expense system 
and 25 percent on the new resource-based system. In 2000, the shares 
are 50 percent of the former and 50 percent the latter, and in 2001, 
the shares are 25 percent and 75 percent, respectively. Beginning in 
2002, practice expense RVUs are entirely resource-based.
    In our October 31, 1997 final rule (62 FR 59052), we indicated that 
we would use, as the first factor in the transition formula, the 1998 
practice expense RVUs actually used for payment. (``The practice 
expense RVUs for 1999 will be based on the product of 75 percent of the 
previous year's practice expense RVUs (1998) and 25 percent of the 
resource-based practice expense RVUs.'') In response to this statement, 
we received a comment suggesting that we consider interpreting the law 
to use 1997 practice expense RVUs as the starting point for the 
transition. This interpretation would have eliminated from the 
transition the 1998 changes in practice expenses enacted by section 
4505 of BBA. Those commenting contended that the 1998 changes applied 
only to 1998 and should not be included in the first practice expense 
factor in the transition formula. Using 1997 RVUs would have resulted 
in higher payments for certain specialty procedures and lower payments 
for office visits during 1999, 2000, and 2001. Beginning in 2002, the 
starting point for the transition does not matter because the 
transition will be complete and practice expenses will be based 
entirely on the new resource-based system.
    When we developed the proposed rule, we specifically considered the 
suggestion that we use actual 1997 practice expense RVUs as the 
starting point for the transition. In the proposed rule we indicated 
that we did not believe that we could use 1997 practice expense RVUs 
for several reasons. First, this approach seemed to us contrary to the 
statute's intent of moving toward a resource-based payment system; 
also, the interpretation could potentially result in a ``yo-yoing'' of 
practice expense RVUs for certain services between 1998 and future 
years. We pointed out that practice expense RVUs for office medical 
visits, explicitly increased by the Congress in 1998, could be reduced 
in 1999 only to be increased again when the practice expenses are fully 
resource-based.
    We also stated that we would not use 1997 practice expense RVUs as 
the starting point for the transition because this result was 
inconsistent with our construction of similar reductions, enacted in 
OBRA 1993, to practice expense values for 1994, 1995, and 1996. We also 
indicated that we would reject the only other possibility, using 1991 
practice expense RVUs; using 1991 RVUs would be unacceptable since to 
do so would exclude the effects of the series of reductions to practice 
expense RVUs mandated by the Congress between 1993 and 1998 and would 
instead return the system to outmoded practice expense RVUs established 
at the very inception of the fee schedule. We indicated that we 
believed this to be a poor alternative. Basing the transition on data 
for 1991, from which the original practice expenses were derived, would 
require us to retrospectively impute charge data for the many new 
procedure codes that had been added since the beginning of the fee 
schedule. It also would have been contrary to the statutory scheme, 
which is moving steadily toward a resource-based payment system. We 
indicated that adoption of 1991 data for the transition starting point 
would not gradually transition payments to the new resource-based 
system, but instead would represent an abrupt change in direction. This 
result is at odds with the purpose of a transition and inconsistent 
with other transitions in Medicare. Therefore, the June 1998 rule 
proposed to use the 1998 practice expense RVUs for purposes of the 
transition formula in 1999, 2000, and 2001.
    We received comments strongly supporting the approach we took in 
the proposed rule, as well as strongly opposing our approach. These 
comments centered on section 1848(c)(2)(C)(ii) of the Act. That 
provision requires practice expense RVUs to be computed by multiplying 
``base allowed charges'' by a practice expense percentage. BBA then 
requires that this ``product'' be used as the first factor in the 
transition formula. A cross-reference to section 1848(c)(2)(D) of the 
Act appears to require base allowed charges to be generated from charge 
data for 1991. However, we believe that a number of other factors 
demonstrate the irrationality of using data for 1991 as the transition 
starting point. Using data for 1991 would be a total aberration from 
the course of the past 7 years of congressional directives to decrease 
practice expense RVUs from which office-based and visit codes were 
generally excepted and would turn the clock back without any 
congressional direction to do so. We have analyzed both the statutory 
language and the context in which it is found, and we have determined 
that the best accommodation of the two is to use current 1998 practice 
expense RVUs as the basis for the transition to the resource-based 
practice expense system.
    We have considered, among other things, that we are authorized by 
law to make such ancillary policies as are

[[Page 58837]]

necessary to implement section 1848 of the Act; that the equation, 
based on 1991 average allowed charges that the law seems to instruct us 
to use as the transition starting point, ignores consistent legislative 
direction since 1993, as well as our consistent implementation; that we 
have not used the average allowed charge provision since the 
establishment of practice expense RVUs in 1991, that it has no ready 
application to the more than 2000 codes developed since 1992, and, 
therefore, that using 1991 allowed charges for the transition creates a 
significant administrative burden, unintended by the Congress, 
particularly given the short time period for implementation; that the 
language describing the transition formula and the language describing 
the ``product'' upon which it is based are internally inconsistent; 
that our implementation of adjustments in accordance with section 
1848(c)(2)(G) of the Act is consistent with our implementation of the 
OBRA 1993 3-year reductions; that the Congress is familiar with our 
implementation, has amended section 1848(c) of the Act since the 
implementation, and has not acted legislatively to alter our 
implementation prospectively. In addition, we note that the Physician 
Payment Review Commission (PPRC) studied resource-based practice 
expenses for a number of years, that the Congress is familiar with 
PPRC's data and analyses, and that the results of our transition are 
consistent with the results PPRC predicted. In sum, we believe that our 
construction of the law most appropriately resolves the tensions 
inherent in the practice expense transition provisions of the BBA.
    We address below the specific comments we received with respect to 
transition issues.
    Comment: Some commenters, mainly societies representing surgical 
specialties, opposed our proposed approach and indicated that our 
proposal to use the 1998 practice expense RVUs in the transition 
formula is in conflict with the language and intent of BBA. These 
commenters argued that section 1848(c)(2)(C)(ii)(I) and (II) of the Act 
require that the practice expense charge data relied upon in 1991 to 
establish the 1992 practice expense RVUs be used for the first factor 
in the transition formula. They also contend that the adjustments to 
the 1998 practice expense RVUs, required by BBA, were intended to 
accomplish a one-time redistribution of RVUs from specialty codes to 
primary care codes and that using these RVUs during the transition 
would perpetuate the redistribution for three more years. These 
commenters claimed that this transition would redistribute an estimated 
additional $490 million from specialists to office-based codes.
    These commenters assert that the charge-based factor in the 
transition must be the formula in section 1848(c)(2)(C)(ii) of the Act 
that established practice expense RVUs as the product of (I) the base 
allowed charges for a service, and (II) the practice expense percentage 
for the service. Base allowed charges are defined in section 
1848(c)(2)(D) of the Act as ``with respect to a physician's service, 
the national average allowed charges for the service . . . for services 
furnished during 1991, as estimated by the Secretary using the most 
recent data available.'' (The practice expense percentage is defined in 
section 1848(c)(3)(C)(ii) of the Act.) Therefore, according to these 
commenters, the reference in the transition provision that RVUs be 
determined based on ``such product'' requires us to use 1991 average 
charges to compute 1999 RVUs.
    Response: We disagree with these commenters. We believe that the 
formula in section 1848(c)(2)(C)(ii) of the Act is internally 
inconsistent, that it was intended for the establishment of the 
original practice expense RVUs, that it has no ready application to the 
2,000 codes new or revised since 1991, and that it produces results 
inconsistent with the balance of section 1848(c)(2)(C) of the Act. The 
commenters' construction of the law would eviscerate the changes the 
Congress made to practice expense RVUs since 1993 and would require 
that we revert to the beginning of the program in the absence of 
congressional direction to do so.
    First, we believe that the reference to ``such product'' in section 
1848(c)(2)(C)(ii) of the Act supports our view that the Congress 
contemplated that the first factor in the transition formula would be 
based on RVUs and not on 1991 average allowed charges. Under the 
commenters' reading, the transition formula requires that in 1999 we 
multiply 75 percent of a product based on average allowable charges and 
25 percent of the resource-based RVUs. However, ``average allowed 
charges'' are expressed as dollar figures, while the resource-based 
factor is expressed in RVUs. This internal inconsistency suggests that 
the Congress contemplated instead that both factors in the formula 
would be expressed in RVUs and that we would use current RVUs produced 
under section 1848(c)(2)(C) of the Act for the first factor in the 
transition.
    Moreover, although the Congress has not repealed section 
1848(c)(2)(C)(ii)(I) and (II) of the Act, the provisions have not been 
applied in the fee schedule computations since 1992 when the first 
practice expenses were established. The language of the provisions 
indicate the inappropriateness of their application here. Thus, section 
1848(c)(2)(D) of the Act, incorporated by reference, provides for use 
of average allowed charges ``as estimated by the Secretary using the 
most recent data available.'' This language would seem to require us to 
use 1998 data to recompute 1991 charges, surely an unintended result. 
In addition, in 1993, the Congress required us to compute practice 
expenses RVUs on a basis other than that contained in section 
1848(c)(2)(C)(ii) of the Act: effective January 1, 1994, section 
1848(c)(2)(E) of the Act provided for a ``[r]eduction in practice 
expense relative value units for certain services.'' The Congress did 
not explicitly state that the amendment applied notwithstanding the 
existing language of section 1848(c)(2)(C)(ii) of the Act; instead, the 
amendment operated without recourse to that provision at all. The 
amendment envisioned that reductions would be made to the ``relative 
value units [being] applied'' at that time, not to charges for 1991. At 
the end of the period for which reductions were specified in section 
1848(c)(2)(E) of the Act, practice expense RVUs did not revert to 1992 
values based on 1991 charges; RVU changes produced by section 
1848(c)(2)(E) of the Act were permanent and carried forward into the 
next year's (1997) practice expense RVUs. These more recent and more 
specific provisions added by the Congress in subsequent years obviously 
control over the original provision, and the commenters' argument, if 
adopted, would wipe out the effects of these intervening changes in the 
law. We believe that it is far more rational and consistent with 
congressional intent to harmonize the computation during the 4-year 
transition period with recent legislative changes rather than reverting 
back to a system from 1991 that has been unused since that time.
    Section 1848(c)(2)(G) of the Act, like section 1848(c)(2)(E) of the 
Act, provides specified reductions for specified services for a 
particular year to lower excessively high practice expense RVUs; it 
explicitly raises low RVUs attributable to office visit codes. Section 
1848(c)(2)(E) of the Act also provides that ``the aggregate amount of 
reductions'' to practice expense RVUs for services furnished in 1998 
cannot exceed $390 million. We believe that the Congress intended that 
RVU changes resulting from application of section

[[Page 58838]]

1848(c)(2)(G) of the Act be treated in the same way as we had treated 
changes resulting from application of section 1848(c)(2)(E) of the Act, 
that is, that the RVU changes produced by section 1848(c)(2)(G) of the 
Act would be permanent and carried forward into the next year's fee 
schedule.
    Accepting the comments advocating use of the 1991 average allowed 
charges in the transition formula would present other difficulties. We 
did not establish average allowed charge RVUs for codes new or revised 
since 1991. Thus, using 1991 average allowed charges in the transition 
would require us to retroactively impute average allowed charges for 
procedure codes that did not exist in 1991. This would be a significant 
administrative burden, particularly given the obligation to have these 
amendments implemented by January 1, 1999.
    We believe that the Congress intended that we devote our efforts to 
developing the resource-based practice expense system and refining 
practice expense RVUs, rather than to creating a set of imputed charges 
for new codes to be used only for the transition. BBA explicitly 
requires the Secretary to develop a process to refine resource-based 
practice expense RVUs during each year of the transition (see section 
4505(d)(1)(C) of the Act). On the other hand, there is no mention of 
our refining what 1991 national average allowed charges would have been 
for more than 2,000 new codes. It is unlikely that the Congress 
contemplated that we would pursue the imputation of 1991 charges in the 
limited time we had to retool the resource-based practice expense 
system, especially given that the imputed values would have no utility 
after 2001.
    Additionally, we note that section 1848(c)(4) of the Act provides 
authority for us to ``establish ancillary policies (with respect to the 
use of modifiers, local codes, and other matters) as may be necessary 
to implement this section.'' We view this situation as one appropriate 
for the application of the ancillary policies provision. We believe, as 
we have noted, that the statutory language and the context in which it 
appears are at odds and create an ambiguity that we must resolve based 
on the design of the section as a whole and the congressional policies 
underlying it, and we are using section 1848(c)(4) of the Act for that 
purpose. In order to rationally implement section 1848(c) of the Act, 
we will use 1998 RVUs for the first factor in the transition formula.
    Comment: The surgical specialty societies argue that implementing 
section 1848(c)(2)(G) of the Act in the same manner as section 
1848(c)(2)(E) of the Act is prohibited because the ``adjustments in 
relative value units for 1998'' are limited to $390 million and that 
including the reduced practice expense RVUs in the base for the 
transition makes reductions total more than $390 million.
    Response: We do not agree with that statement. We believe that the 
commenters are misreading the limitation on the ``aggregate'' 
reallocation; that limitation applies only to amounts attributable to 
services furnished in 1998. The law requires us to ``increase the 
practice expense relative value units for office visit procedure codes 
during 1998 by a uniform percentage which [HCFA] estimates will result 
in an aggregate increase in payments for such services equal to the 
aggregate decrease in payments'' for the overpriced practice expenses. 
The provision simply contemplates that we add the increase for each 
service and assure that the total of all increases is equal to the 
total of all decreases in payments for the overpriced practice 
expenses. This provision does not restrict the use of the 1998 practice 
expense RVUs in future years. To read the law as these commenters 
suggest would be to reverse years of intentional redistribution of 
practice expense RVUs mandated by the Congress.
    Comment: Primary care groups who commented on the proposed rule 
asserted that the 1998 ``down payment'' (the increased practice expense 
RVUs for office visit codes created by section 1848(c)(2)(G)) of the 
Act was a step in the direction of the ultimate resource-based system. 
On the other hand, a surgical group believed that we were biased 
because we presumed that a resource-based practice expense RVU system 
would lead to a reduction in most specialty codes and a corresponding 
increase in primary care codes.
    Response: The trend in practice expense RVU redistributions under a 
resource-based system is clear, and section 1848(c)(2)(G) of the Act is 
another step in that progression, consistent with the preceding 
redistributions which the Congress mandated in 1993. The direction of 
payment changes for major categories of service--increases for medical 
visits and reductions for surgical procedures--has been mandated by the 
Congress, implemented by HCFA, and known to the public for some time. 
The exception of office-based services from the 1993 practice expense 
RVU reductions clearly indicated that the Congress intended a relative 
redistribution toward those services. While the Congress could not 
know, on a procedure-by-procedure basis, the impact of the new 
resource-based system, it was cognizant of the general direction of a 
resource-based system before it enacted section 121 of the Social 
Security Act Amendments of 1994, mandating resource-based practice 
expense RVUs.
    Establishment of a resource-based system for practice expenses has 
been discussed for some time. In 1992, the PPRC, a statutorily 
established Commission that provided advice and recommendations to the 
Congress, issued a report titled ``Practice Expenses Under the Medicare 
Fee Schedule: A Resource-Based Approach'' (Number 92-1). That report 
described the Commission's research on a resource-based alternative for 
calculating practice expense RVUs. It showed the direction of the 
projected redistributions. The report showed that RVUs for the category 
of evaluation and management services (medical visits or primary care 
services) would increase and the category of surgical procedures would 
decrease.
    In its 1993 Annual Report to the Congress, the Commission 
specifically recommended that the Congress enact a resource-based 
system for payment of practice expenses. The report, at page 147, 
indicated:

    The Commission has long questioned the appropriateness of these 
charge-based practice expense and malpractice expense relative 
values as part of the Medicare Fee Schedule. Since it suggested the 
OBRA 89 approach as an interim measure in the Annual Report to 
Congress 1989, the Commission has been working to develop methods 
for calculating practice expense and malpractice expense relative 
values that are more consistent with the reform goals of resource-
based payments (PPRC 1989). This work has lead to the identification 
of methods for calculating these two components that the Commission 
thinks are more appropriate than the OBRA 89 formulas. Both the 
practice expense and malpractice expense methods have been described 
in previous reports to Congress, and each is the topic of a special 
research report issued by the Commission (PPRC 1992b; PPRC 1992c).

In the same report, the Commission specifically recommended:

    The Congress should revise the practice expense component of the 
Medicare Fee Schedule so that it will be resource-based. Practice 
expense relative values should be based on data about the direct 
costs incurred in delivering each service and an incentive-neutral 
formula to allocate indirect costs. A transition to new practice 
expense relative values should be introduced beginning in 1997. This 
date will allow for completion of the current fee schedule 
transition process

[[Page 58839]]

and for development and refinement of the resource-based approach.

Id. This report also showed the impact of a resource-based system for 
four major categories of services. The Commission estimated that the 
total payment for evaluation and management services would increase by 
12 percent, that diagnostic procedures would decrease by 19 percent, 
that surgical global services would decrease by 29 percent and that 
technical procedures would not be changed. (These impacts reflect the 
total Medicare payment; when measured relative to the practice expense 
component alone, there would be greater percentage changes.) Thus, the 
PPRC reports put the Congress on notice about the direction of changes 
under a resource-based system.
    The Congress, in section 13513 of OBRA 1993, enacted reductions in 
the practice expense component payment to move toward resource-based 
practice expense RVUs. (The Congress also used these reductions to 
achieve savings in the Medicare program.) The Congress specifically 
exempted from reduction any services that were performed at least 75 
percent of the time in an office setting. Therefore, the impact of the 
reductions fell on surgical procedures, and the largest impact occurred 
for those procedure codes for which the practice expense RVUs most 
exceeded work RVUs. The structure of section 1848(c)(2)(E) of the Act--
reduction of one-quarter of the amount of excess practice expense in 
each of 3 years--was itself a transition to moderately reduce practice 
expense RVUs for non-office-based codes rather than to decrease them 
precipitously.
    Section 121 of the Social Security Act Amendments of 1994 required 
us to develop and implement resource-based practice expense RVUs 
effective January 1, 1998. Section 4505 of the BBA postponed the change 
to resource-based values, but included another round of reductions for 
certain non-visit codes. We agree with the comment that the 1998 
payment changes were simply another step in the ongoing process moving 
payments in the direction of the resource-based practice expense 
system.
    Comment: Groups representing primary care physicians supported our 
proposal, stating that using 1997 RVUs for the transition would cause 
some RVUs to ``ping-pong'' between 1998 practice expense RVUs and the 
transition years. Some commenters opposing the transition policy in the 
proposed rule stated that the ``yo-yoing'' of practice expense values 
around the transition was not inconsistent with the statutory scheme.
    Response: We agree that it is inconsistent with the statutory 
scheme to create sharp reversals in practice expense RVUs. A transition 
in the direction of a resource-based practice expense system began in 
1993, and a one-time upward spike in RVUs for surgical procedures, 
which ignores the changes previously made, would be inconsistent with 
congressional intent and with the very purpose of a transition.
    In response to comments on our proposed rule, we have examined the 
impact of the transition more precisely for a limited set of 
procedures. While this example is illustrative only, it shows that 
using 1991 average allowed charges in the transition formula 
(disregarding the 1998 redistribution, the OBRA 1993 practice expense 
payment reductions, and all budget neutrality adjustments) would result 
in marked payment spikes in 1999 for procedures whose fully-implemented 
resource-based practice expense RVUs are lower than their 1998 practice 
expense RVUs.
    The chart below illustrates the changes in practice expense RVUs 
for each year from 1992 through 1998 and the estimated practice expense 
RVUs for 1999, 2000, 2001, and 2002, using data for 1991 and 1998 RVUs 
as alternative starting points for the transition. The chart shows the 
figures for cataract removal and intraocular lens insertion (CPT code 
66984); the practice expense RVUs for cataract surgery decreased under 
both the OBRA 1993 and BBA reductions. Practice expense RVUs for 
cataract surgery will decrease between 1998 and 2002 when the resource-
based system is fully implemented. The chart shows that there would be 
smooth, moderate decreases between 1998 and 2002, as we understand the 
Congress to have intended, if the 1998 practice expense RVUs are used 
in the transition formula. The chart also shows that there would be 
large increases in 1999 practice expense RVUs (compared to 1998 and 
even compared to earlier years) if the transition practice expense RVUs 
were based on 1991 average allowed charges. There would indeed be 
spikes in Medicare payments unless the 1998 practice expense RVUs are 
used in the transition formula, as we understand the Congress to have 
intended, during 1999, 2000, and 2001.

BILLING CODE 4120-01-P

[[Page 58840]]

[GRAPHIC] [TIFF OMITTED] TR02NO98.273



BILLING CODE 4120-01-C

[[Page 58841]]

    Comment: Commenters opposing the proposed policy stated that the 
legislative history does not indicate that the Congress shares our 
concern about sharp changes in the redistribution of practice expense 
RVUs.
    Response: We believe, instead, that the shape of the reductions 
made by section 1848(c)(2)(G) of the Act evidences the Congress' 
concern on this point. That provision explicitly exempted from 
reduction any procedure if the in-office or out-of-office practice 
expense RVUs would have increased under our June 1997 proposed rule. 
Thus, the Congress specifically chose not to reduce RVUs for a 
procedure if they were subsequently to be increased under the resource-
based system. In this way, the law reflects congressional intent to 
avoid perverse shifts in practice expense RVUs during the transition.
    Comment: Commenters opposed to the proposed rule also suggested 
that the OBRA 1993 changes codified at section 1848(c)(2)(E) of the Act 
were intended by the Congress to be temporary and apply only during 
1994, 1995, and 1996.
    Response: We disagree; the provisions were scored legislatively as 
permanent reductions, and we note that we implemented the OBRA changes 
in that way. Moreover, the Congress has acquiesced in our 
implementation of section 1848(c)(2)(E) of the Act. As discussed 
earlier, the OBRA 1993 reductions for practice expenses were designed 
to achieve Medicare savings while moving the system in the direction it 
would ultimately move under a resource-based system, greater relative 
payments for office-based procedures. The Congressional Budget Office 
and the Administration ``scored'' section 13513 of OBRA as having 
permanent savings, from which it can be inferred that the payment 
reductions were permanent. Until we received this comment in response 
to the proposed rule, it had not been suggested that our implementation 
of section 1848(c)(2)(E) of the Act was contrary to congressional 
intent. In fact, the Congress has since amended section 1848(c) of the 
Act without legislatively altering our implementation of section 
1848(c)(2)(E) of the Act. We believe that the Congress' failure to take 
contrary legislative action on our implementation of section 
1848(c)(2)(E) of the Act indicates that we have implemented that 
provision as the Congress intended.
    Comment: One specialty society commented that there should be no 
transition for services that are new in 1999 and beyond.
    Response: The law is silent as to whether there should be a 
transition for new services in 1999 and beyond. However, we agree with 
the commenter and will not provide a transition for codes representing 
services that are new beginning in 1999.
    Comment: One specialty society suggested that we consider asking 
the Congress for additional transition time due to the disruption 
caused by the year 2000 computer systems overhaul.
    Response: For 1999, we plan to make routine provider payment 
updates and other BBA changes. These pose minimal risks to contractors' 
year 2000 (Y2K) efforts and, therefore, can be done. Routine updates 
between October 1, 1999 and April 1, 2000 may need to be delayed 
because they would occur during a critical timeframe in late 1999 and 
early 2000 when final Y2K testing and refinements must be accomplished. 
We will actively consult with interested professional groups, the 
Congress and other parties as we develop our plans to achieve Y2K 
compliance while causing minimum disruption in fee schedule updates.
    Comment: A surgical group suggested that we limit the magnitude of 
the changes in physician payments by imposing some reasonable limit on 
payment increases and decreases for individual services. They argue 
that such an approach is advisable because of what they believe is 
uncertainty about the accuracy of the resource-based RVUs.
    Response: We do not believe that it is appropriate to place limits 
on increases or decreases in payments as a result of the implementation 
of the new system. We believe that the Congress addressed concerns 
about the accuracy of new values by explicitly providing for a 
transition and requiring a refinement process to be used each year of 
the transition. We believe that, in so doing, the Congress indicated 
its view of the appropriate contours of relief from the effects of 
redistribution of practice expense RVUs.

Resolution

    We have considered all of the comments on our proposal to use 1998 
practice expense RVUs in the formula for the 1999, 2000, and 2001 
transition to fully resource-based practice expense values. We believe 
that use of 1998 practice expense RVUs is most consistent with the 
statutory design for resource-based practice expense and that using 
1991 average allowed charges for this purpose would be antithetical to 
this scheme and to the purpose of providing a smooth transition. Thus, 
we are using the current, 1998, practice expense relative values in the 
transition formula for 1999 through 2001.
Revisions to the Regulations
    We are revising Sec. 414.22 (Relative value units (RVUs)), 
paragraph (b), (Practice expense RVUs), to state that for services 
beginning January 1, 1999, the practice expense RVUs will be based on a 
blend of 75 percent of practice expense RVUs used for payment in 1998 
and 25 percent of the relative practice expense resources involved in 
furnishing the service. For services beginning January 1, 2000, the 
practice expense RVUs will be based on a blend of 50 percent of the 
1998 PE RVUs and 50 percent of the relative practice expense resources 
involved in furnishing the service. For services beginning January 1, 
2001, the practice expense RVUs will be based on a blend of 25 percent 
of the 1998 practice expense RVUs and 75 percent of the relative 
practice expense resources involved in furnishing the service. For 
services beginning January 1, 2002, the practice expense RVUs will be 
based on 100 percent of the relative practice expense resources 
involved in furnishing the service.
    There will be only one level of practice expense RVUs per code for 
the following categories of services: those that have only the 
technical component of the practice expense RVUs; only the professional 
component practice expense RVUs; certain evaluation and management 
services, such as hospital or nursing facility visits that are 
furnished exclusively in one setting; and major surgical services. For 
other services, there will be two different levels of practice expense 
RVUs per code. The lower practice expense RVUs will apply to services 
furnished to hospital or ASC or SNF patients. The higher practice 
expense RVUs will apply to services furnished in a physician's office 
or services other than visits but performed in a patient's home and 
services furnished to patients in a nursing facility or an institution 
other than a hospital, ASC, or SNF.
    Result of evaluation of comments: Based on our evaluation of all 
comments received on our proposed resource-based practice expense 
methodology, we have made the following modifications:
    <bullet> Creation of a separate pool for services with work RVUs 
equal to zero. We created a separate practice expense pool for services 
with work RVUs equal to zero (including the technical components of 
services with professional and technical components) using the top-down 
methodology except we used the average clinical staff time

[[Page 58842]]

from the CPEP data (since these codes by definition do not have 
physician time) and, as an interim measure, we used the current 1998 
practice expense RVUs to allocate the direct cost pools (clinical 
labor, medical supplies, and medical equipment). For services with 
professional and technical components paid under the physician fee 
schedule, the global practice expense RVUs are set equal to the sum of 
the professional and technical components.
    <bullet> Allocation of the indirect cost pool. In the indirect 
allocation methodology, we are converting the work RVUs to dollars 
using the Medicare conversion factor (expressed in 1995 dollars for 
consistency with the SMS survey years).
    <bullet> SMS based practice expenses per hour. For the specialty of 
emergency medicine, we are using the ``All Physician'' practice expense 
per hour to create practice expense cost pools for the categories 
``clerical payroll'' and ``other expenses.''
    For the specialty of pathology, we are removing the supervision and 
autopsy hours reimbursed through Part A of the Medicare program from 
the practice expense per hour calculation.
    For the specialty of podiatry, we are using the ``All Physician'' 
practice expenses per hour to create the practice expense cost pools.
    For the specialty of allergy/immunology, we are using the 
``allergy/immunology'' supply practice expenses per hour to create the 
supply practice expense pool.
    We are splitting the ``radiology'' practice expenses per hour into 
``radiation oncology'' practice expenses per hour and ``radiology other 
than radiation oncology'' practice expenses per hour and using these 
split practice expenses per hour to create practice expense cost pools 
for these specialties.
    <bullet> Corrections to code crosswalks. We had inadvertently 
crosswalked some codes in settings where CPEP data existed. We have 
removed these crosswalks.
    <bullet> Use of the current practice expense relatives for 
radiology services. For the specialty of radiology, we are using the 
current practice expense relatives for radiology services, as an 
interim measure, to allocate radiology's direct practice expense cost 
pools. For all other specialties that perform radiology services, we 
are using the CPEP relatives for radiology services in the allocation 
of that specialty's direct practice expense cost pools. Note that 
radiology services or components of radiology services that lack work 
relative value units are handled as described above under ``Creation of 
a separate pool for services with work relative value units equal to 
zero.''
    <bullet> Physician's time for radiology codes. For radiology codes 
for which we lacked Harvard or RUC survey data, we calculated the 
physician's time using the average work per unit time of CPT codes 
71010 and 71020.
    <bullet> Maxillofacial prosthetics. For maxillofacial prosthetics, 
we are using the ``All Physician'' practice expenses per hour to create 
practice expense cost pools and, as an interim measure, allocating 
these pools using the current practice expense RVUs.

B. Medical Direction for Anesthesia Services

General Requirements
    The conditions for payment of medical direction for anesthesia 
services are included in Sec. 415.110 (Conditions for payment: 
Medically directed anesthesia services). Before January 1999, the 
regulations referred to these conditions as applying to services 
furnished directly or concurrently. The reference to services furnished 
directly is not correct. It suggests that the physician personally 
performing the anesthesia services only has to provide the same kind of 
services as the physician medically directing the anesthesia service. 
In fact, the physician personally performing the anesthesia service 
must perform the entire anesthesia service alone. This policy is 
included in Sec. 414.46(c)(1)(i) (Additional rules for payment of 
anesthesia services, Physician personally performs the anesthesia 
procedure). Therefore, we are deleting the reference in Sec. 415.110 to 
services furnished directly.
    The December 1995 final rule (60 FR 63152) allows the physician's 
medical direction of a certified registered nurse anesthetist (CRNA) 
performing a single anesthesia service. However, this provision did not 
take effect until January 1, 1998. This policy was incorporated in 
Sec. 414.46(d)(iii) (Additional rules for payment of anesthesia 
services, Anesthesia services medically directed by a physician). A 
program memorandum explaining this policy was issued to the Medicare 
carriers in January 1998.
    In the June 1998 proposed rule, we proposed revising Sec. 415.110 
(Conditions for payment: Medically directed anesthesia services) so 
that it is consistent with Sec. 414.46(d)(iii) by stating that medical 
direction can apply to the single anesthesia service furnished by a 
CRNA.
    The law provides that the payment allowance for the physician's 
medical direction furnished on or after January 1, 1998, is 50 percent 
of the fee schedule amount that would have been paid if the anesthesia 
service was furnished by the physician alone.
    Both the ASA and the American Association of Nurse Anesthetists 
(AANA) have pointed out that our medical direction requirements are 
outdated and too restrictive. The requirements are oriented to the 
administration of a general anesthetic, which was the predominant mode 
of practice when the regulations were originally implemented. There are 
other types of anesthesia, such as regional, spinal or epidural 
anesthesia, and monitored anesthesia care, that are becoming more 
common and for which the Associations argue, the current requirements 
are not completely appropriate. For example, in monitored anesthesia 
care, there is no definable emergence as there is for general 
anesthesia.
    Also, the AANA has advised us that requiring the presence of the 
anesthesiologist for induction for all cases may not be appropriate and 
may delay the start of surgery and result in the inefficient use of 
operating room time. In addition, the ASA has advised us that neither 
the regulations nor the operating instructions explain the level of 
documentation required by the anesthesiologist to support the payment 
for the medical direction service. The ASA believes that the lack of 
instructions for medical documentation and the concerns about payment 
audits have reportedly prompted anesthesiologists to overly document 
anesthesia records.
    The ASA and the AANA reached substantial consensus on a revised 
recommended set of medical direction requirements. The only area that 
they had a difference of opinion was with respect to the pre-anesthetic 
exam and evaluation. The ASA favored the requirement that the physician 
personally perform the examination and the AANA initially favored the 
requirement that the physician ensure that the examination and 
evaluation be performed by a qualified individual. We chose the 
proposed language as a compromise position. We reviewed their 
recommendations and proposed revising our regulations in Sec. 415.110 
(Conditions for payment: Anesthesia services) to reflect current 
anesthesia practice arrangements. Namely, we proposed to--
    <bullet> Provide that the physician either perform the pre-
anesthesia examination and evaluation or review one performed by 
another qualified individual;

[[Page 58843]]

    <bullet> No longer require the physician to be present during 
induction and emergence on all anesthesia cases; and
    <bullet> Require that the physician--
    + Monitor the course of anesthesia at intervals medically indicated 
by the nature of the procedure and the patient's condition;
    + Remain physically present in the facility and immediately 
available for diagnostic and therapeutic emergencies; and
    + Provide indicated post-anesthetic or ensure that it is provided 
by a qualified individual.

      Summary of Proposed Changes To Medical Direction Requirements
-----------------------------------------------------------------------
-
                    For each patient the physician--
-----------------------------------------------------------------------
--
                              Current regulations   Proposed 
regulations
-----------------------------------------------------------------------
-
(i)........................  Performs a pre-        Performs a pre-
                              anesthetic             anesthetic
                              examination and        examination and
                              evaluation.            evaluation, or
                                                     reviews one
                                                     performed by
                                                     another qualified
                                                     individual
                                                     permitted by the
                                                     State to 
administer
                                                     anesthesia.
(ii).......................  Prescribes the         Participates in the
                              anesthesia plan..      development of the
                                                     anesthesia plan 
and
                                                     gives final
                                                     approval of the
                                                     proposed plan.
(iii)......................  Personally             Personally
                              participates in the    participates in 
the
                              most demanding         most demanding
                              procedures in the      aspects of the
                              anesthesia plan        anesthesia plan.
                              including induction
                              and emergence.
(iv).......................  Ensures that any       Ensures that any
                              procedures in the      aspect of the
                              anesthesia plan that   anesthesia plan 
not
                              he or she does not     performed by the
                              perform are            anesthesiologist 
is
                              performed by a         performed by a
                              qualified individual   qualified
                              as defined in          individual as
                              program operating      specified in
                              instructions.          operating
                                                     instructions.
(v)........................  Monitors the course    Monitors the course
                              of anesthesia at       of anesthesia at
                              frequent intervals.    intervals 
medically
                                                     indicated by the
                                                     nature of the
                                                     procedure and the
                                                     patient's
                                                     condition.
(vi).......................  Remains physically     Remains physically
                              present and            present in the
                              available for          facility and
                              immediate diagnosis    immediately
                              and treatment of       available for
                              emergencies.           diagnostic and
                                                     therapeutic
                                                     emergencies.
(vii)......................  Provides indicated     Provides indicated
                              post-anesthesia care.  post-anesthesia
                                                     care or ensures
                                                     that it is 
provided
                                                     by a qualified
                                                     individual.
-----------------------------------------------------------------------
-

    Comment: Almost all commenters recommended that we drop the 
proposed medical direction requirements and retain the current 
requirements. They pointed out that the proposed regulations would 
significantly relax the requirements for physician involvement in the 
provision of anesthesia care when a qualified nonphysician anesthetist 
is providing these services. They believe these changes would be to the 
detriment of patients and would diminish the current standards of care. 
The focus of these commenters' concerns was on the proposed 
requirements that the medically directing physician--(1) Could review a 
pre-anesthetic examination and evaluation performed by a qualified 
individual permitted by State law to administer anesthesia; and (2) 
ensure that indicated post-anesthesia care is provided by a qualified 
individual.
    Several commenters also pointed out that the proposed requirement 
that the physician participate in the most demanding procedures in the 
anesthesia plan could be construed as meaning that the medically 
directing physician does not have to participate in any aspect of 
anesthesia care. Commenters also objected to the proposed requirement 
that the physician remain physically present in the facility and 
immediately available for diagnostic and therapeutic emergencies. The 
commenters pointed out that the proposed requirement is too lax and 
could be interpreted to mean the medically directing physician could be 
located anywhere in the facility.
    Response: The medical direction requirements specify the activities 
that the medically directing physician, who is usually an 
anesthesiologist, must perform in order for the carrier to allow 
payment for a physician's service under the physician fee schedule. The 
medical direction requirements are not quality of care standards. As 
one commenter pointed out, these requirements are minimum requirements. 
Practicing anesthesiologists can, if they choose, furnish a level of 
services beyond the minimum standards.
    As we noted in the proposed rule, we had decided to propose revised 
medical direction requirements because of concerns that the ASA and the 
AANA presented. We had asked the ASA and AANA to work together, to the 
extent practicable, to come up with a revised set of medical direction 
requirements. In February 1998, we met with both groups and heard their 
views and concerns. At that time, with the exception of the first 
proposed requirement that the CRNA be able to furnish the preanesthesia 
exam and evaluation and have the medically directing physician review 
it, it was our understanding that the leadership of both groups agreed 
to the uniform revised requirements.
    However, because of concerns raised by their membership, the ASA 
and several State anesthesiologist societies are now requesting, for 
the most part, that we retain the current requirements, established in 
1983.
    We have decided to retain the current requirements (that is, 
requirements (i) and (ii), and (iv) through (vii)) in the preceding 
table and make only one technical revision in requirement (iii) at the 
present time. We will study the medical direction issue further and may 
propose to make a change in the future. The technical revision pertains 
to the requirement that the physician participate in the most demanding 
procedures in the anesthesia plan including, induction and emergence. 
We published a final rule in the Federal Register on March 2, 1983 (48 
FR 8928) in which the current requirements for medical direction were 
included to implement section 108 of TEFRA of 1982. Since general 
anesthesia was the usual mode of practice for anesthesia services, the 
requirement reflected this practice. However, since 1983, other types 
of anesthesia care, such as regional anesthetics and monitored 
anesthesia care have become more common. One of our objectives was to 
revise the current requirement so that it is consistent with current 
anesthesia practices. As a result, we have decided that the medically 
directing physician must be present at induction and emergence for 
general anesthesia. That final requirement is as follows: The medically 
directing physician participates in the most demanding

[[Page 58844]]

aspects of the anesthesia plan, including, if applicable, induction and 
emergence.
Documentation Requirements
    The current regulations do not specifically include medical record 
documentation requirements for medical direction. The proposed 
regulations state that the physician inclusively documents in the 
patient's medical record that the conditions set forth in paragraph 
(a)(1) of Sec. 415.110 have been satisfied, specifically documenting 
personal participation in the most demanding aspects of the anesthesia 
plan.
    The ASA asked initially that we include the medical documentation 
requirements in the regulations so that physicians, carrier staff, and 
other claims/medical record auditors have a clear and uniform 
understanding of the documentation requirements.
    In addition, within the past 2 years, we have established medical 
documentation requirements for teaching physicians, including teaching 
anesthesiologists, that specify the amount of documentation needed to 
support the claim for the physician's service when the attending 
physician is involved in a medical/surgical case with a resident. We 
sought to establish some level of reasonable documentation for the 
medically directing physician considering that--(1) The teaching 
anesthesiologist is paid as if he or she personally performed the 
anesthesia service alone (that is, 100 percent of the fee); (2) the 
medically directing anesthesiologist is paid 50 percent of the total 
fee; and (3) the documentation requirements for the teaching 
anesthesiologist, as found at Sec. 415.178, are that the record 
demonstrates the physician's presence or participation in the 
administration of the anesthesia. The operating instructions in MCM 
section 15016 specifically require that the teaching physician document 
in the medical records that he or she was present during the critical 
(or key) portions of the procedure, including induction and emergence. 
The teaching anesthesiologist's presence is not required during the 
preoperative or postoperative visits with the beneficiary.
    Comment: The AANA asked that we revise the medical documentation 
requirements to require that the physician alone personally document 
the record; the Association stated that the CRNA should not have to 
document the physician's participation since the CRNA may not agree 
concerning the extent of the physician's participation in the case.
    Response: We believe the proposed regulation text accomplishes this 
objective since it clearly says the physician must document the medical 
record. However, for purposes of further clarity, we will accept the 
commenter's recommendation.
    Comment: The ASA asked us if their interpretation of the proposed 
medical documentation requirement is correct. ASA interprets the 
provision as allowing an anesthesiologist to state in the medical 
record that the medical direction standards have been met, without 
enumerating each such standard, and as requiring the anesthesiologist 
to specify in the record those demanding aspects of the case in which 
he or she personally participated.
    Response: We understand the ASA's concerns about the medical 
direction requirements. We do not wish to make the act of medical 
documentation overly burdensome to the anesthesiologist. However, the 
medical record must include an amount of documentation to enable a 
medical records' auditor to conclude that the physician was 
sufficiently involved to support the payment of a medical direction 
fee.
    The medical direction requirements specify certain functions or 
services that the physician must perform and cannot delegate to the 
directed qualified individual. We do not believe it is onerous to 
require the medically directing physician to document that he or she 
performed the pre-anesthetic exam and evaluation, provided indicated 
post-anesthesia care, and was present during the most demanding 
procedures, including induction and emergence where indicated. We also 
expect that there would be some indication in the record that the 
medically directing physician was present during some portion of the 
anesthesia monitoring.
Limited Activities Permitted During Medical Direction
    The preamble to the final regulations (48 FR 8928) to implement 
section 108 of TEFRA of 1982 allows the medically directing physician 
to respond to medical emergencies and obstetrical patients in labor and 
also continue to furnish medical direction. The specific preamble 
language is as follows:
    ``We do not expect that a physician who is directing the 
administration of anesthesia to four surgical patients would be 
involved routinely in furnishing any additional services to other 
patients. However, addressing an emergency of short duration in the 
immediate area, or administering an epidural or caudal anesthetic to 
ease labor pain, or periodic rather than continuous monitoring of an 
obstetrical patient, would not substantially diminish the scope of 
control exercised by the physician in directing the administration of 
anesthesia to surgical patients. However, the carriers will review 
hospital records to ensure that such circumstances do not occur 
frequently, are of short duration, and do not constitute a diminution 
of the physician's involvement in the surgical procedure.''
    In addition, the preamble addressed the specific question of 
whether the medically directing physician could perform certain routine 
tasks, such as receiving patients entering the operating suite for the 
next surgery, checking on or discharging patients in the recovery room 
and handling scheduling matters. The preamble included the following 
response to this comment:
    ``We agree that a physician may appropriately receive patients 
entering the operating suite for the next surgery while directing 
concurrent anesthesia procedures. However, checking or discharging 
patients in the recovery room and handling scheduling matters is not 
compatible with our reimbursing the physician on a reasonable charge 
basis (now physician fee schedule basis) for directing concurrent 
anesthesia procedures. The time devoted to such activities potentially 
can be extensive and would diminish the degree of involvement in the 
concurrent care beyond levels acceptable for purposes of reasonable 
charge reimbursement (now physician fee schedule payment).'' This 
continues to be our position.
    Comment: Some commenters asked whether the policy of allowing 
certain other activities during medical direction would continue since 
the proposed regulation did not specifically address this matter. Also, 
the ASA asked whether this list of activities was exclusive or whether 
other similar services of short duration could be performed without 
violating the medical direction payment standards. The ASA did not 
provide examples of the kinds of services they would consider ``other 
limited services of short duration.''
    Response: We believe this comment goes beyond our proposal. We will 
continue the policy enunciated in the preamble to the final TEFRA 
section 108 regulations. We will not expand or limit the current policy 
until we receive and have our medical staff evaluate information from 
the anesthesia societies on the specific services or the kinds of 
circumstances for which they are seeking an expansion of the policy. We 
invite comments on this issue.
    Result of evaluation of comments: We have decided to include the 
following

[[Page 58845]]

set of requirements for medical direction in Sec. 415.110 of this final 
rule. For each patient, the physician--
    (i) Performs a pre-anesthetic examination and evaluation;
    (ii) Prescribes the anesthesia plan;
    (iii) Personally participates in the most demanding aspects of the 
anesthesia plan, including, if applicable, induction and emergence;
    (iv) Ensures that any procedures in the anesthesia plan that he or 
she does not perform are performed by a qualified individual as defined 
in program operating instructions;
    (v) Monitors the course of anesthesia administration at frequent 
intervals;
    (vi) Remains physically present and available for immediate 
diagnosis and treatment of emergencies; and
    (vii) Provides indicated post-anesthesia care.
    Also, the physician directs no more than four anesthesia services 
concurrently and does not perform any other services while he or she is 
directing the single or concurrent services so that all of the 
conditions for medical direction are met. The physician can attend to 
medical emergencies and perform other limited services as allowed by 
Medicare instructions and still be deemed to have medically directed 
anesthesia procedures.
    The physician alone inclusively documents in the patient's medical 
record that the medical direction requirements have been met, 
specifically documenting that he or she performed the pre-anesthetic 
exam and evaluation, provided indicated post-anesthesia care, and was 
present during the most demanding procedures, including induction and 
emergence, where applicable.

C. Separate Payment for a Physician's Interpretation of an Abnormal 
Papanicolaou Smear

    As stated in the proposed rule (63 FR 30841), with the exception of 
services to hospital inpatients, we do not allow separate payment for a 
physician's interpretation of an abnormal Pap smear. Under our proposed 
rule, separate payment may be allowed for a physician's interpretation 
of the abnormal Pap smear furnished for any patient on or after January 
1, 1999.
    About 10 percent of Pap smears are abnormal and are interpreted by 
a physician, usually a pathologist. If a physician interprets an 
abnormal Pap smear for a patient, other than a hospital inpatient, 
payment for a physician's interpretation (and the underlying test) is 
made under the clinical laboratory fee schedule payment for the Pap 
smear test. The physician negotiates with the laboratory for payment 
for the physician's service.
    The College of American Pathologists requested that we recognize 
separate payment for a physician's interpretation of an abnormal Pap 
smear in all settings. We believe this would establish an 
understandable and uniform definition of physicians' services across 
sites. Therefore, we proposed recognizing, under the physician fee 
schedule, separate payment for a physician's interpretation of an 
abnormal Pap smear in all settings.
    The Pap smear test may be furnished by a hospital or an independent 
laboratory. For hospital inpatients, the Pap smear test is paid to the 
hospital on a prospective payment basis. For other than hospital 
inpatients, the Pap smear test is paid under the clinical laboratory 
fee schedule to the hospital laboratory or independent laboratory. For 
services to hospital patients, the Pap smear interpretation usually is 
furnished by the hospital pathologist who can bill for the professional 
component of the service. If the independent laboratory's pathologist 
furnishes the Pap smear interpretation, payment can be made to the 
pathologist or the independent laboratory if it is an appropriate 
reassignee.
    We received 25 comments from individuals and organizations on our 
proposal to recognize separate payment for a physician's interpretation 
of an abnormal Pap smear. All of the commenters supported our proposal.
    Comment: Several commenters stated that our policy in section 15020 
of the Medicare Carriers Manual that allows separate payment for a 
physician's interpretation of a Pap smear for a hospital inpatient only 
as long as there is an abnormality, is too restrictive. They pointed 
out that regulations implementing the Clinical Laboratory Improvement 
Amendments at Sec. 493.1257(c)(1) require a pathologist to confirm all 
Pap smears identified by the screening personnel as showing an 
abnormality. This includes, by regulation, all smears thought to show 
``reactive or reparative changes, atypical squamous or glandular cells 
of undetermined significance, or to be in the premalignant (dysplasia, 
cervical intraepithelial neoplasia or all squamous intraepithelial 
lesions including human papilloma virus-associated changes) or 
malignant category.''
    Response: Our regulation will permit separate payment for a 
physician's interpretation of an abnormal Pap smear in all settings as 
long as--(1) The laboratory's screening personnel suspect an 
abnormality; and (2) the physician reviews and interprets the smear.
    We contrast these services with other services of laboratory 
physicians that we considered hospital services. For example, the 
services of the physician that involve the review of Pap smears as part 
of the laboratory's quality control assurance procedures are considered 
hospital services and payable only to the hospital. Such services 
include reviewing slides that are considered normal by the 
cytotechnologist but are routinely reviewed by a pathologist, because 
of the risk status of the patient, as part of a random sample selected 
for quality review.
    Comment: Two commenters recommended that we treat a physician's 
interpretation of an abnormal blood smear similar to the interpretation 
of an abnormal Pap smear.
    Response: This comment is outside the scope of our proposal. Our 
proposal did not address abnormal blood smears. However, we will look 
into this issue next year as part of our review of physician fee 
schedule policies.
    Comment: One commenter pointed out that the percentage of Pap 
smears that are abnormal or thought to be abnormal by the 
cytotechnologist and that require a physician's interpretation can vary 
considerably from geographical area to area and among laboratories 
within an area. The commenter wanted to point out that the fact that 
some laboratory-specific percentages of Pap smears that are interpreted 
to be abnormal are above 10 percent is not necessarily indicative of 
unacceptable utilization levels.
    Response: We appreciate the commenter's clarification. In our 
proposal, we stated that ``about 10 percent of Pap smears are abnormal 
and are interpreted by a physician.'' We note that the 10 percent is a 
national estimate and that differences among laboratories could vary 
from this amount based on the population that the laboratory serves.
    Result of evaluation of comments: We are allowing separate payment 
for a physician's interpretation of a Pap smear to any patient (that 
is, hospital or nonhospital patient) as long as--(1) The laboratory's 
screening personnel suspect an abnormality; and (2) the physician 
reviews and interprets the Pap smear.

D. Rebasing and Revising the Medicare Economic Index

    Background
    The Medicare Economic Index (MEI) represents a weighted sum of the 
annual price changes of the inputs used to produce physicians' 
services. It attempts

[[Page 58846]]

to present an equitable measure for the changes in the costs of 
physician time and operating expenses. The MEI now in use was rebased 
and revised as stipulated in a final rule published in the Federal 
Register (57 FR 55896) on November 25, 1992.
    The MEI is comprised of two broad components, which are physician 
net income and physician practice expenses. Physician net income is 
comprised of wages, salaries, and benefits. The physician practice 
expense portion is comprised of six major categories: (1) Nonphysician 
employee compensation, including the wages and salaries and benefits of 
nonphysician employees in physicians' offices; (2) office expenses; (3) 
medical materials and supplies; (4) professional liability insurance; 
(5) medical equipment; and (6) other professional expenses.
    We believe that it is desirable to rebase and revise the index 
periodically, in order that the expense shares and proxies will reflect 
approximate current conditions. Therefore, we are rebasing the MEI to 
reflect 1996 physician expenses. We chose 1996 as the base year for two 
main reasons: (1) The 1996 data were the most recent available data for 
most of the data sources we are using; and (2) the 1996 data were 
representative of the changing distribution of physician earnings and 
practice expenses over time. We have selected what we believe is the 
most appropriate proxy for each expense category. We will continue to 
adjust the physician and nonphysician employee compensation for 
economy-wide labor productivity, to avoid accounting for both physician 
practice productivity and economy-wide productivity in the physician 
update framework.
    We determined the number and composition of expense categories 
based on the criteria used to develop the previous MEI expenditure 
weights and our other input price index expenditure weights (for more 
information on these criteria, see the November 25, 1992 final rule (57 
FR 55900)). To determine the expenditure weights, we used currently 
available, valid data sources on physician earnings and practice 
expenses.
    While we consulted numerous data sources, we used five sources to 
determine the rebased and revised MEI expenditure weights: (1) The 1997 
American Medical Association Socioeconomic Monitoring System (AMA SMS) 
survey (1996 data); (2) the March 1997 Bureau of Labor Statistics (BLS) 
Employment Cost Index; (3) the 1992 Bureau of the Census Asset and 
Expenditure Survey (the latest available); (4) the 1996 Bureau of the 
Census Current Population Survey; and (5) the Medical Economics 
continuing survey published October 1997 (1996 data). No one data 
source provided all of the information needed to determine expenditure 
weights according to our criteria.

Rebasing and Revising the Medicare Economic Index

    In the June 5, 1998 Federal Register (63 FR 30841), we published a 
proposed rebased and revised MEI. In that rule, we discussed in detail 
the methodology and data sources used to rebase and revise the MEI. The 
final rebased and revised MEI will have a 1996 base year and use the 
same data sources we proposed in the June 5, 1998 rule. Therefore, the 
weights and price proxies in this final rule are the same as those we 
proposed and are shown in Tables 1 and 2.

          Table 1.--Revised Medicare Economic Index Expenditure 
Categories, Weights, and Price Proxies
-----------------------------------------------------------------------
-----------------------------------------
                                                         Weights
               Expense category                ------------------------
--         Proposed price proxies
                                                  1989 \1\     1996 \1\
-----------------------------------------------------------------\2\---
-----------------------------------------
Total.........................................      100.000      
100.000  ......................................
Physician Earnings \4\........................       54.155       
54.460  ......................................
Wages and Salaries............................       45.342       
44.197  AHE-Private \3\.
Benefits \5\..................................        8.813       
10.263  ECI-Ben: Private \3\.
Physician Practice Expenses...................       45.845       
45.540  ......................................
Nonphysician Employee Compensation............       16.296       
16.812  ......................................
Employee Wages and Salaries...................       13.786       
12.424  ......................................
Prof/Tech Wages...............................        3.790        
5.662  ECI-W/S: Private P&T \3\.
Managers Wages................................        2.620        
2.410  ECI-W/S: Private Admin \3\.
Clerical Wages................................        5.074        
3.830  ECI-W/S: Private Clerical \3\.
Services Wages................................        2.233        
0.522  ECI-W/S: Private Service \3\.
Craft Wages...................................        0.069  
...........  ......................................
Employee Benefits \5\.........................        2.510        
4.388  ECI-Ben: Priv. White Collar \3\.
Office Expenses...............................       10.280       
11.581  CPI(U)-Housing
Medical Materials and Supplies................        5.251        
4.516  PPI Drugs/PPI Surg. Appl/CPI(U) Med
                                                                           
Sup.
Professional Liability Insurance..............        4.780        
3.152  HCFA-Prof. Liab. Phys. Prem. Survey.
Medical Equipment.............................        2.348        
1.878  PPI-Medical Instruments and Equip.
Other Professional Expense....................        6.890        
7.601  ......................................
Automobile....................................        1.400        
1.300  CPI(U)-Private Transportation.
All Other.....................................        5.490        
6.301  CPI(U)-All Items less Food and Energy
                                                                           
\1\.
-----------------------------------------------------------------------
-----------------------------------------
\1\ Due to rounding, weights may not sum to 100.000 percent.
\2\ Sources: Socioeconomic Monitoring System 1997 Survey of Physicians, 
Center for Health Policy Research,
  American Medical Association; Anne L. Finger, ``What it costs to run 
a practice,'' Medical Economics, October
  27, 1997; U.S. Department of Labor, Bureau of Labor Statistics; and 
U.S. Department of Commerce, Bureau of the
  Census, 1992 Asset and Expenditure Survey, and 1997 Current 
Population Survey.
\3\ Net of change in the 10-year moving average of output per man-hour 
for the nonfarm business sector.
\4\ Includes employee physician payroll.
\5\ Includes paid leave.


[[Page 58847]]


    Table 2.--Percent Distribution of Nonphysician Payroll Expense by
                        Occupational Group: 1996
-----------------------------------------------------------------------
-
                                                             
Expenditure
                   BLS occupational group                     shares 
\1\
-----------------------------------------------------------------------
-
Total......................................................      
100.000
Professional and Technical Workers.........................       
45.570
Managers...................................................       
19.399
Clerical Workers...........................................       
30.831
Service Workers............................................        
4.199
-----------------------------------------------------------------------
-
\1\ These weights were derived from the 1996 Current Population Survey,
  U.S. Bureau of the Census.

    The time series of percent changes in the current and rebased MEI 
are presented and compared in Table 3.

   Table 3.--Annual Percent Change in the Current and Revised Medicare
                             Economic Index
-----------------------------------------------------------------------
-
                                         Current    Revised
                                         MEI 89-    MEI 96-
         Years ending June 30              base       base    
Difference
                                         percent    percent
                                          change     change
-----------------------------------------------------------------------
-
1985..................................        3.3        3.2         
0.0
1986..................................        3.3        3.1        -
0.2
1987..................................        3.0        2.8        -
0.2
1988..................................        3.6        3.5        -
0.1
1989..................................        3.4        3.4         
0.0
1990..................................        3.0        3.2         
0.2
1991..................................        3.2        3.3         
0.1
1992..................................        2.8        2.7        -
0.1
1993..................................        2.1        2.2         
0.1
1994..................................        2.1        2.1         
0.0
1995..................................        2.0        2.0         
0.0
1996..................................        2.0        1.8        -
0.2
1997..................................        2.2        2.2         
0.0
1998..................................        2.5        2.3        -
0.2
Average:
  1985-1998...........................        2.7        2.7         
0.0
-----------------------------------------------------------------------
-

    The CY 1999 increase in the MEI, one of the components used to 
update the physician fee schedule, is 2.3 percent.
    We received numerous Comments on the rebased and revised MEI. Each 
Comment, with a response, is provided below. The Comments are organized 
into four major sections: index structure, expenditure weights, price 
proxies, and productivity adjustment.

Index Structure

    Comment: A commenter believed we should re-examine the structure of 
the MEI, rather than make minor changes to an index that was developed 
in 1972 when physicians were paid reasonable charges.
    Response: The structure of the MEI consists of weights associated 
with each of the cost categories, price proxies for each of the cost 
categories, and an overall adjustment for changes in productivity. The 
1996-based MEI structure is identical to the revised structure we 
proposed on September 9, 1991 that was based on issues discussed at a 
public conference on March 19, 1987, thoroughly reviewed by the 
industry through a public Comment period, and ultimately adopted in 
1992. This commenter did not offer any specific recommendations for 
change, and we know of no structural change we could make to improve 
the MEI. Consequently, the structure of the MEI will remain the same.
    Comment: A commenter suggested that we indicate in the annual 
physician fee schedule proposed rule what the forecasted MEI would be 
under the different options considered and under the agency's final 
recommendation. The commenter noted that forecast data generally are 
provided when the agency updates the hospital market basket.
    Response: The physician fee schedule is updated by a statutory-
specified formula equal to the MEI plus or minus an update adjustment 
factor. The agency does not consider various options and make an update 
recommendation. The MEI for a year is based on changes in prices for 
prior periods. The performance adjustment is based on actual data; no 
options are considered. Thus, the situation for physician updates is 
not analogous to the hospital update process where changes in hospital 
payments are based on forecasts of the hospital market basket increase 
in the upcoming Federal fiscal year. In the case of physicians, the 
changes in the physician payment levels are based on the most current 
historical and performance data available.
    Comment: A commenter believed that we should establish a regular 
schedule for updating weights of various elements of the MEI so that 
the index reflects the most recent data and information available.
    Response: In the past, more frequent rebasing would have resulted 
in little or no difference in the update factors. For this current 
rebasing, the 1989-based MEI and the 1996-based MEI grew at the same 
rate on average between 1985-1998 as shown in Table 3. We will continue 
to monitor changes in the structure of physician costs as they might 
affect the MEI and we will update and rebase as needed.
    Comment: A commenter believed that the MEI should contain an 
adjustment reflecting the fact that different inputs are used when 
services are provided by a SNF.
    Response: Part of the fundamental design of the Medicare fee 
schedule is that payment is based on the service performed without 
regard to the place where the service is performed. The MEI is 
consistent with that design and provides a single national factor to 
update payments under the fee schedule, regardless of the site of 
service or the specialty of the health professional.

Expenditure Weights

    Comment: One commenter was concerned that the proposed MEI does not 
reflect adequately the much larger portion of practice expenses the 
average obstetrician-gynecologist pays for professional liability 
insurance as compared to other specialties. The commenter pointed out 
that professional liability consists of 6.88 percent of the 
obstetrician-gynecologist's practice expenses, but only 3.2 percent of 
the practice expense of all physicians.
    Response: The purpose of the MEI is to recognize the aggregate 
``pure price'' increase of providing physicians'' services, regardless 
of specialty or site of service. Therefore, all input costs across all 
specialties are considered when determining the appropriate cost 
weights. The resulting cost weights, along with the price proxies and 
productivity adjustment, are used to calculate a national average 
percent change in the inputs used to provide physicians' services. This 
national average percent change is used to update the national payments 
under the fee schedule. We recognize that professional liability 
expenses as a portion of total expenses are above the average for some 
specialties and below the average for other specialties. However, 
differences in regional or specialty costs are accounted for by the 
GPCI or the RVU weight, respectively.
    The only change to the professional liability insurance price proxy 
is that premiums are now collected for $1 million/$3 million of 
coverage on a quarterly basis, as opposed to premiums for $100,000/
$300,000 of coverage on an annual basis. We continue to survey the same 
professional liability insurers that we surveyed for the 1989-based 
MEI.

Price Proxies

    Comment: Several commenters suggested the price proxy for the 
physician earnings component should be the Employment Cost Index (ECI) 
for professional and technical workers, rather than the average hourly 
earnings (AHEs) for total nonfarm workers, for two reasons. First, the 
rationale for using a proxy of a highly heterogenous group no longer 
exists under the current payment system. Thus, our concern regarding 
circularity (increases in physician fees, which are tied to prevailing 
charges, are linked to

[[Page 58848]]

increases in physician payments) is no longer an issue. Second, 
earnings of professional workers are used as the proxy for the 
physician work component in the GPCI while AHEs for total nonfarm 
workers are used for physician earnings in the MEI. The commenter 
believes that we should use earnings for professional workers as the 
proxy in the MEI to be consistent with the GPCI.
    Response: The commenters have raised issues that need to be 
clarified regarding the most fair and relevant price proxy to use for 
the physician work component of the MEI. The commenters are correct 
that circularity does not now exist between charge levels for 
individual physicians and subsequent Medicare fee levels for all 
physicians in the aggregate. However, paying based on a fee schedule 
does not override the need for us to continue to use fair and relevant 
price proxies.
    We believe that the current price proxy, AHEs in the nonfarm 
business economy, is still the most appropriate proxy to use for the 
physician work component. AHEs continue to best meet the criteria of 
the 1972 Senate Finance Committee report shown in the June 5, 1998 
Federal Register (63 FR 30844), including the criterion of ``fairness 
to all concerned.'' AHEs are also the best general earnings wage 
variable of which we are aware for our specific purpose. As a measure 
of equitable payment increases, AHEs reflect the impact of supply, 
demand, and economy-wide productivity for the average worker in 
society. By using the AHEs as the price proxy for physician time, the 
physician wage component captures this parity in rates of increase for 
physicians and the average worker in society.
    The ECI for professional and technical workers includes occupations 
like engineer, architect, mathematical and computer scientist, and 
other types of technicians. Excess supply or excess demand for 
professional and technical workers on average can cause their wages to 
move differently than wages are moving in the overall economy or for a 
specific professional and technical occupation, such as a physician. 
Consequently, the ECI for professional and technical workers does not 
necessarily provide a good normative indicator of the percent increases 
in general earnings. Therefore, the ECI for professional and technical 
workers would fail to meet the criteria of fairness in the Senate 
Finance Committee report.
    The commenters are correct that the proxy for physician work time 
in the GPCI is different than the price proxy in the MEI. This design 
reflects the different purposes of the GPCI and the MEI. The GPCI 
determines how total outlays are allocated among localities based on 
relative input price levels for each locality, or the ``pieces of the 
pie.'' Thus, the GPCI price proxy needs to validly reflect the relative 
levels of the specific category being proxied. The MEI, on the other 
hand, determines the aggregate increase in total outlays, or the ``size 
of the pie.'' These different purposes require that different proxies 
be used. Thus, the purpose of the proxy in this case is to measure the 
normative change in physician earnings. Our other input price indexes 
(market baskets), like the prospective payment system (PPS) hospital 
market basket and the HHA market basket, also use different price 
proxies than the geographic adjustment variable for similar reasons.
    We are going to carefully monitor the price proxy used for 
physician work time in the MEI to ensure that it continues to be the 
most appropriate price proxy available for that purpose.
    Comment: Several commenters suggested that the nonphysician 
employee compensation component of the MEI should be adjusted using a 
price proxy that reflects the increased skill mix of staff in 
physicians' offices.
    Response: The MEI is a Laspeyres (fixed-weight) index that measures 
the normative ``pure price'' increase associated with physicians' 
services. Our other input price indexes, for hospitals, home health 
agencies, and skilled nursing facilities, are Laspeyres indexes as 
well. Changes in skill mix are appropriately captured in the volume-
and-intensity adjustment in the fee schedule update, as they are with 
similar update formulas for our other payment programs, for example, 
PPS hospitals. By capturing skill mix shifts in the volume-and-
intensity adjustment, we are able to appropriately separate quantity 
and ``pure price'' effects in the update framework. If we included 
positive and negative skill mix shifts in the MEI, there would be 
double-counting. Therefore, we will not adjust for changes in skill mix 
for the nonphysician employee compensation components of the MEI.
    Comment: A commenter recommended that we adjust the office expense 
component using a price proxy based on inflation in commercial rents 
rather than inflation as measured by the housing component of the CPI 
for urban consumers.
    Response: The CPI-U for housing is a comprehensive measure of 
changes in the cost of housing, including rent, owners' equivalent 
rent, insurance, maintenance and repair services, fuels, utilities, 
telephones, furnishings, and housekeeping services. Note that the GPCI 
also uses a consumer rather than a commercial rent index. The GPCI uses 
an index of Fair Market Rents (FMR) published by the Department of 
Housing and Urban Development for use in the Section 8 rental subsidy 
program because a valid indicator of commercial rents was not 
available. This measure does not meet the criterion of timeliness to be 
used in an input price index as it is only available prospectively on 
an annual basis. It would not represent historical data or be available 
quarterly like the rest of the proxies in the MEI.
    Comment: One commenter questioned why we proposed using wholesale 
price changes, as measured by producer price indices (PPI), to measure 
cost changes for medical supplies and equipment. The commenter believed 
most physician practices are small entities that are unlikely to be 
able to purchase supplies and equipment at wholesale prices.
    Response: In revising and rebasing the MEI, we selected wage and 
price proxies based on relevance, reliability, fairness, timeliness, 
and length of time a series had been established. Relevance means that 
the price proxy should represent price changes for goods or services 
within the expense category. We believe that use of the PPI for medical 
instruments and equipment appropriately captures price changes for the 
offices of physicians. Note that movement in the PPI at any given time 
is followed within a few months by approximately the same movement in 
the CPI. If this were not true, retailers would soon be out of business 
as their expenses rose but their revenues did not. Movement in the PPI 
essentially drives movement in the CPI, albeit with a slight lag. An 
increase in the wholesale level for a commodity will be followed by the 
same approximate increase in the retail level. Over time, the PPI does 
not move faster or slower than does the CPI. As mentioned in our June 
5, 1998 proposed rule (63 FR 30846), use of the PPI for medical 
instruments and equipment as the price proxy for medical equipment is 
consistent with the 1989-based MEI.

Productivity Adjustment

    Comment: A commenter proposed the elimination of the productivity 
adjustments to both the physician and nonphysician personnel 
components. The commenter believed the validity of the proposed MEI is 
compromised severely by this productivity adjustment.
    Response: The Medicare fee schedule is appropriately adjusted for 
``pure price'' inflation using a price index that approximates a price 
change in a freely functioning, competitive market. In

[[Page 58849]]

such a market, competitive forces lead to increased efficiencies 
(productivity). Therefore, a competitive output price does not rise as 
fast as a competitive input price, with the difference reflecting this 
increased efficiency (productivity). Thus, the input prices in the MEI 
need to be appropriately adjusted for productivity to approximate a 
freely functioning, competitive output price change. The PPS hospital 
input price index (market basket) is similarly adjusted for 
productivity, but the adjustment is included as a separate component of 
the PPS update framework.
    The commenter believed that using economy-wide labor productivity 
to make the adjustment to the MEI input prices was inappropriate 
because physician productivity is lower than economy-wide productivity. 
While it is true that service industry productivity tends to be lower 
than economy-wide productivity, there is wide variation in productivity 
among specific sectors of the service industry. For physicians, the 
substantial influence they have over the volume and intensity of 
services provided to their patients allows them to increase output and, 
therefore, productivity.
    The commenter provided information on the declining number of 
patient contacts per physician as evidence of declining productivity. 
To estimate productivity per physician, however, the large increase in 
volume and intensity of services per contact has to be accounted for. 
An approximation of the change in volume and intensity of physicians' 
services is the increase in allowed charges per enrollee in excess of 
the MEI increase (shown in the 1998 Annual Report of the Board of 
Trustees of the Federal Supplementary Medical Insurance Trust Fund). 
The increase in allowed charges per enrollee from Table II.F3. of this 
report has exceeded the MEI increase by 3.1 percentage points in 1994, 
5.8 percentage points in 1995, and 2.1 percentage points in 1996. These 
data show that volume-and-intensity increases for physicians' services 
are still high relative to economy-wide productivity, which has 
historically grown around 1 percentage point annually on a 10-year 
moving average basis.
    Economy-wide labor productivity increases automatically result in 
economy-wide wage rate increases as less worker time or other inputs 
are needed to produce the same outputs. Thus, the AHEs wage variable 
implicitly includes productivity increases in the overall economy. The 
productivity adjustment to the MEI factors out these economy-wide 
productivity increases. However, an individual physician practice still 
benefits from its own productivity increases in excess of economy-wide 
productivity increases. This means each individual physician practice 
is allowed to reap the rewards of having high productivity. Thus, it is 
both technically correct and fair to both providers and payers to 
adjust the MEI input prices by economy-wide productivity increases.

Result of Evaluation of Comments

    As proposed, we rebased the MEI to 1996. We used the same data 
sources (for base year weights and price proxies) and methodology as 
explained in the June 5, 1998 proposed rule. The percent change in the 
MEI for CY 1999 is 2.3 percent.

III. Implementation of the Balanced Budget Act

    In addition to the resource-based practice expense relative value 
units, BBA provides for revisions to the payment policy for drugs and 
biologicals, includes a provision allowing private contracting with 
Medicare beneficiaries, institutes payment for outpatient 
rehabilitation services based on the physician fee schedule, and 
changes the policy for nonphysician practitioners and for 
teleconsultations.

A. Payment for Drugs and Biologicals

    Before January 1, 1998, drugs and biologicals not paid on a cost or 
prospective payment basis were paid based on the lower of the estimated 
acquisition cost (EAC) or the national average wholesale price (AWP) as 
reflected in sources such as the Red Book, Blue Book, or Medispan. (For 
purposes of this discussion, we will use the term ``drugs'' to refer to 
both drugs and biologicals). Examples of drugs that are paid on this 
basis are drugs furnished incident to a physician's service, drugs 
furnished by pharmacies under the durable medical equipment (DME) 
benefit, and drugs furnished by independent dialysis facilities that 
are not included in the end-stage renal disease (ESRD) composite rate 
payment.
    Section 4556 of BBA established payment for drugs not paid on a 
cost or prospective payment basis at the lower of the actual billed 
amount or 95 percent of the AWP, effective January 1, 1998. In this 
final rule, we are revising the current regulations at Sec. 405.517 to 
conform to this statutory change. This regulation is removing the EAC 
and provide for payment at the lower of the actual charge on the 
Medicare claim or 95 percent of the AWP.
    Also, we are revising the method of calculating the AWP. Our 
current regulations provide that, for multiple-source drugs, the AWP 
equals the median AWP of the generic forms of the drug. The AWP of the 
brand name products is ignored on the presumption the brand AWP is 
always higher than the generic AWPs. While this may have been true when 
the policy was first promulgated, it is not always true now. Therefore, 
the AWP for multiple-source drugs would equal the lower of the median 
price of the generic AWPs or the lowest brand name AWP.
    Comment: We received some comments on the proposed methodology for 
determining the AWP in the case of multi-source drugs. Some commenters 
suggested we use the average AWP instead of the median AWP. Others 
objected to the use of the lowest brand AWP saying that in all cases 
all AWPs, both generic and brand, should be used. One commenter stated 
that the law does not distinguish brand AWP from generic AWP; 
therefore, we should not make this distinction.
    Response: We agree that the law does not define the term ``average 
wholesale price,'' and, therefore, does not distinguish brand AWP from 
generic AWP or average versus median price. However, we believe it is 
within our general authority in implementing the statute to define 
terms that do not have explicit statutory definitions. We believe that 
when there is an array of charges, the median is an appropriate measure 
of central tendency. This is consistent with many other areas of the 
program in which the median is used. With respect to distinguishing 
between brand and generic AWPs, as we stated in the final rule titled 
``Medicare Program; Fee Schedule for Physicians'' Services (BPD-712-
F),'' published in the Federal Register on November 25, 1991 (56 FR 
59502), when this policy was promulgated, the brand AWP was believed to 
be always greater than the generic AWPs (56 FR 59507). Now there is 
evidence from the Office of Inspector General (OIG) in its report 
titled ``The Impact of High-Priced Generic Drugs on Medicare and 
Medicaid'' (OEI-03-97-00510) that this is no longer true. From a series 
of OIG reports spanning the past 10 years, it is clear that the AWP is 
higher than the amount typically paid for drugs by physicians who bill 
the program. It is also true that when a brand AWP is lower than the 
median generic AWP, typically there are also other generic AWPs that 
are as low as or lower than this brand AWP. We believe, therefore, that 
the payment allowance resulting from this methodology will be adequate.

[[Page 58850]]

    Comment: Some commenters objected to a payment allowance of less 
than the AWP. One commenter alleged that not all physicians can buy 
drugs at less than retail prices. Another commenter stated that only 
large physician practices can obtain bulk purchase discounts. Another 
commenter suggested that we monitor access to drugs. Another suggested 
that we study actual acquisition costs before implementing the limit of 
95 percent of AWP. Two commenters stated that physicians should not be 
burdened with maintaining price controls or cost containment or 
tracking the prices of drugs. Physicians should only be responsible for 
choosing the best drug and not be responsible for the cost of the drug. 
Furthermore, if physicians are not paid sufficiently for the drugs they 
now inject, they will stop injecting drugs and refer patients to the 
hospital instead. This will cost the program much more.
    Response: First, the law now requires that the Medicare program 
limit its payment allowance to 95 percent of the AWP. Furthermore, 
there are numerous reports by the OIG over the past 10 years showing 
that significant discounts from the AWP are common and are not related 
to bulk purchases. In the absence of evidence to the contrary of the 
OIG findings, we believe it is reasonable to set the payment limit as 
we have proposed. With respect to the comment that physicians will 
refer patients to hospitals for injections, we believe that for the 
reasons stated and because payment for outpatient hospital services 
will be changed to a prospective payment basis, this will not occur.
    Comment: One commenter stated that our definition of ``brand'' 
should be ``the product of the innovator company.'' The commenter 
objected to considering other manufacturers' products that are marketed 
under a proprietary name other than the generic chemical name of the 
drug as a ``brand.''
    Response: Our definition of ``brand'' is any product that is 
marketed under a name other than the generic chemical name of the drug. 
If a manufacturer chooses to market its product under a proprietary 
name rather than the generic chemical name of the drug, we believe this 
is a brand. We do not limit the definition of ``brand'' to the 
innovator company product or any product manufactured under a direct 
license from the innovator. Furthermore, we believe that it is an 
unreasonable administrative burden to require our contractors to 
determine which of the thousands of AWPs they must look up, to also 
determine which of those are innovator drugs or licensed by the 
innovator company.
    Comment: Two commenters supported our proposal stating that our 
proposal was consistent with the statute.
    Response: We agree with this comment.
    Comment: A commenter stated that radiopharmaceuticals are drugs, 
but because of their unique nature they do not have AWPs. Therefore, 
the commenter recommended that we pay for radiopharmaceutical drugs at 
the billed amount.
    Response: We agree that radiopharmaceutical drugs do not have AWPs, 
and, therefore, require a different pricing methodology. However, we do 
not agree that these drugs should be paid at the amount billed to the 
program. Currently, our contractors determine an allowance for these 
drugs that is reasonable in light of prices paid by physicians who use 
them. We will continue this policy of local pricing by our contractors.
    Result of evaluation of comments: We are adopting our proposal with 
further clarifications. The Medicare allowed charge for drugs and 
biologicals is the lower of 95 percent of the median generic AWP or 95 
percent of the lowest brand AWP. A ``brand'' product is defined as a 
product that is marketed under a labeled name that is other than the 
generic chemical name of the drug or biological. The allowed charge for 
drugs and biologicals that do not have an AWP is determined by the 
local Medicare contractor considering the prices paid by physicians and 
suppliers who use them.

B. Private Contracting with Medicare Beneficiaries

    Section 4507 of BBA 1997 amended section 1802 of the Act to permit 
certain physicians and practitioners to opt-out of Medicare and to 
provide through private contracts services that would otherwise be 
covered by Medicare. This rule conforms the regulations to sections 
1802(b) and 1862(a)(19) of the Act. In addition, this rule contains 
ancillary policies that we believe are necessary to clarify what it 
means when a physician or practitioner ``opts-out'' of Medicare, and to 
otherwise effectuate the Congress'' intent in enacting section 4507 of 
BBA 1997.
    The private contracting provision is effective for private 
contracts entered into on, or after, January 1, 1998. We implemented 
private contracting through a series of operating instructions for 
Medicare carriers and information that carriers were instructed to 
provide to physicians and practitioners.
    The Medicare claims submission and private contracting rules apply 
only when a physician or practitioner furnishes Part B Medicare-covered 
services to a beneficiary who is enrolled in Medicare Part B. The 
private contracting rules do not apply to individuals who have only 
Medicare Part A, to individuals who are age 65 or over but who do not 
have Medicare, or to services that Medicare does not cover.

General Issues

State of Law Before Section 4507 of the BBA

    Comment: Some commenters disagreed with our view that private 
contracting is not valid except as specified in section 4507 of the 
BBA. They believed that section 1848(g) of the Act does not preclude 
private contacting. In addition, they believed that the claims 
submission requirements apply only to ``services for which payment is 
made'' under the fee schedule and, therefore, by definition, do not 
apply if no claim is submitted.
    Response: We continue to believe that under the Act, private 
contracts between beneficiaries and physicians or practitioners are not 
enforceable unless they meet the requirements of section 4507 of the 
BBA. The mandatory claims submission rules of section 1848(g)(4) of the 
Act specify that: ``For services furnished on or after September 1, 
1990, within 1 year after the date of providing a service for which 
payment is made under this part on a reasonable charge or fee schedule 
basis, a physician, supplier or other person (or an employer or 
facility in the cases described in section 1842(b)(6)(A))--
    <bullet> (i) Shall complete and submit a claim for such service on 
a standard claim form specified by the Secretary to the carrier on 
behalf of a beneficiary, and
    <bullet> (ii) May not impose any charge related to completing and 
submitting such a form.''
    Because there must be a claim to Medicare before payment can be 
made, the meaning of the phrase ``. . . for which payment is made on a 
reasonable charge or fee schedule basis . . . (emphasis added)'' must 
be to define the universe of claims to which the mandatory claims 
submission rules apply as being those services for which Medicare makes 
payment on a fee schedule or reasonable charge basis once a claim is 
submitted. The only exceptions the law provides to the mandatory claims 
submission rules are those found in the private contracting provisions 
of section 1802(b) of the Act and those implied by the phrase ``on

[[Page 58851]]

behalf of the beneficiary.'' In addition, one cannot omit the word 
``basis'' and argue that the claims submission requirement applies only 
to services for which ``payment is made under this part on a reasonable 
charge or fee schedule.'' The word ``basis'' has meaning and was 
specifically included because it defines a universe of services to 
which the provision applies. The clear intention of the claims 
submission provision is to apply to all services for which payment is 
made under part B on a reasonable charge or fee schedule basis, but not 
to include services for which payment is made under part B on a 
reasonable cost basis (for example, hospital outpatient department 
services).
    The phrase ``. . . for which payment is made . . .'' cannot, as 
commenters contend, mean that the mandatory claims submission rules 
apply only if payment is actually made in an instant case. That reading 
would mean the mandatory claims rules would never apply where no 
payment was made because of the absence of a submitted claim, rendering 
the mandatory claims provision meaningless.
    Moreover, the limiting charge rules of section 1848(g)(1)(A) of the 
Act establish explicit limits on the charges of a nonparticipating 
physician or nonparticipating supplier or other person who does not 
accept payment on an assignment-related basis for a physician's 
services furnished to an individual who is enrolled in Part B. The only 
exception to these limits is that found in the private contracting 
provisions of section 1802(b) of the Act.
    Comment: Commenters disagree that the limiting charge applies in 
the absence of a claim. They believe that if the claims submission rule 
can be waived by the beneficiary, then the limiting charge rule can 
also be waived by the beneficiary.
    Response: As noted above, there is specific language in section 
1848(g) of the Act that indicates that the physician, supplier, or 
other person must submit the claim ``on behalf of the beneficiary.'' In 
contrast, there is no language included in the flat prohibition in 
section 1848(g)(1)(A)(i) of the Act against nonparticipating 
physicians, suppliers, and other persons charging more than the 
limiting charge. For these reasons, we believe that we have no 
discretion to waive the limiting charge, except when the criteria 
established by section 4507 of the BBA are met.
    Participating physicians, suppliers, and other persons who have 
agreed to always take assignment on claims for Medicare covered 
services, and nonparticipating physicians, suppliers, and other persons 
who take assignment, have also implicitly agreed to submit claims 
because one cannot take assignment on a claim unless one submits a 
claim. Moreover, because taking assignment means agreeing to accept 
Medicare allowed amounts as payment in full for covered services, they 
have also voluntarily agreed not to collect more than deductibles and 
coinsurance from all patients they see. For these reasons, signing a 
participation agreement, or accepting assignment by a nonparticipating 
physician, precludes private contracting outside of section 4507 of the 
BBA.

Claims for services that are not reasonable and necessary according to 
Medicare standards

    Comment: Commenters asked that we clarify that there is no limit on 
the amount physicians and practitioners may charge beneficiaries when 
services furnished are denied as not reasonable and necessary, and the 
physician or practitioner has provided the advance beneficiary notice 
(ABN). Some commenters also asked that we clarify that when an ABN is 
provided, there is no private contract. They indicated that some 
physicians and practitioners are refusing to furnish non-covered 
services to beneficiaries, because they believe that giving an ABN will 
compel them to opt-out of Medicare.
    Response: When a physician or practitioner furnishes a service that 
does not meet Medicare's criteria for being reasonable and necessary, 
and the physician or practitioner has furnished the beneficiary with an 
ABN that advises the beneficiary that for this reason there is a 
likelihood of denial of the claim by Medicare, there are no limits on 
what the physician or practitioner may charge the beneficiary. An ABN 
that states that the physician or practitioner believes that the 
service will not be covered by Medicare is not a private contract. The 
act of providing an ABN does not then require that the physician or 
practitioner opt-out of Medicare so that he or she avoids being at risk 
of having a penalty assessed for a limiting charge violation. Hence, 
physicians and practitioners should not hesitate to furnish services to 
Medicare beneficiaries when the physician or practitioner believes that 
those services are in accordance with accepted standards of medical 
care, even when those services do not meet Medicare's particular and 
often unique coverage requirements.

Beneficiaries in Medicare risk HMOs and Medicare+Choice organizations

    Comment: Some commenters wanted us to reaffirm that a physician or 
practitioner may charge without regard to the limiting charge, when he 
or she furnishes a service to a beneficiary who is enrolled in a 
Medicare risk plan and the plan will not pay for that service. In 
addition, we were requested to address what happens in situations in 
which the beneficiary appeals the denial of the service and the 
Medicare risk plan subsequently agrees to pay the claim. Commenters 
asked that we define what is meant by ``covered services,'' for 
purposes of physicians and practitioners being able to charge Medicare 
risk plan or Medicare+Choice (M+C) organization enrollees more than the 
Medicare fee schedule, without having the physician or practitioner 
opt-out of Medicare for services not covered by the plan or the M+C 
organization.
    Response: When a Medicare beneficiary enrolls in a Medicare risk 
plan (either currently under section 1876 of the Act or after January 
1, 1999, under the M+C program), that beneficiary has Medicare coverage 
only to the extent that the services are covered under the risk plan 
according to the plan's rules for coverage. A risk plan may deny 
payment for a service if the beneficiary has not abided by the rules 
for coverage of care under the risk plan. (Examples of non-adherence to 
the plan's rules could be a beneficiary acquiring care without the 
required plan prior authorization, or acquiring care from a non-network 
physician if coverage is limited to network physicians.) In that 
situation there is no plan coverage of that service and the beneficiary 
is fully liable for the payment of the service, even when payment would 
have been made under original Medicare if the beneficiary were not in 
the risk plan. In these types of situations, the physician or 
practitioner may charge the beneficiary without regard to the limiting 
charge for the service furnished, and no claim need be submitted for 
the non-covered service. A private contract is not needed and the 
physician or practitioner need not opt-out of Medicare.
    We would caution, however, that if the beneficiary seeks plan 
payment and the plan pays for the service, either initially or on 
appeal, then the physician or practitioner is entitled to receive no 
more than the amount he or she would have received under original 
Medicare. An adjustment would then have to be made to ensure that the 
beneficiary received a refund for any amount in excess of the Medicare 
allowed amount (if the physician participates in original Medicare) or 
the Medicare limiting charge (if the physician does not participate in 
original Medicare).

[[Page 58852]]

Application to Medicaid

    Comment: A commenter wanted us to revise the final rule to specify 
that a physician or practitioner who opts-out of Medicare may not bill 
Medicaid for services he or she furnishes to individuals who are 
enrolled in both Medicare and Medicaid.
    Response: There is nothing in section 4507 of the BBA that 
prohibits either dually eligible Medicare and Medicaid beneficiaries, 
or Medicare providers, from entering into a private contract, or that 
prohibits these providers from billing Medicaid for Medicaid covered 
services.

Excluded physicians and practitioners who opt-out

    A physician or practitioner may be excluded from Medicare by the 
Office of Inspector General (OIG) for violations of the law according 
to sections 1128, 1156, and 1892 of the Act. An excluded physician or 
practitioner may not furnish, order, prescribe, or certify the need for 
Medicare-covered items and services (except as permitted in 42 CFR 
1001.1901) for the term of the exclusion. A physician or practitioner 
must request and be granted reinstatement by the OIG before billing 
Medicare.
    Comment: A commenter asked that we not permit excluded physicians 
and practitioners to opt-out. She believes that we need to clarify the 
relationship between opting-out and being excluded. She believes that 
if we permit excluded physicians and practitioners to opt-out, all the 
rules that apply to excluded physicians and practitioners can and 
should apply to physicians and practitioners who have opted-out. For 
example, excluded physicians cannot order covered services. Commenters 
also wanted us to agree that a private contract entered into by an 
excluded physician or practitioner would be recognized by us and the 
Office of the Inspector General as a notice to the beneficiary that the 
physician or practitioner is excluded, because the private contract 
must say whether the physician or practitioner is excluded.
    Response: Section 1802(b)(2)(B) of the Act says, ``[s]uch contract 
shall also clearly indicate whether the physician or practitioner is 
excluded from participation under the Medicare program under section 
1128.'' We have interpreted this to mean that, although excluded 
physicians can enter into private contracts, they must not only 
indicate their excluded status through the contract, but also still 
abide by the terms of their sanction under section 1128 of the Act. 
Practically speaking, this means that excluded physicians or 
practitioners may file affidavits and enter into private contracts, but 
that all the provisions of section 1128 of the Act and regulatory 
requirements pertaining to section 1128 of the Act, such as per-
encounter issuances of ABNs, must still apply. Further, although 
section 1802(b)(2)(B) of the Act specifically mentions exclusions under 
section 1128 of the Act, the Secretary also has authority to exclude 
physicians and practitioners under sections 1156 and 1892 of the Act 
for the reasons specified therein. We believe it was Congress's intent 
to require clear notice of any exclusion, regardless of the specific 
statutory basis for it, in the contract with the beneficiary. 
Therefore, we have added language to Secs. 405.415 and 405.425 to 
require a physician or practitioner provide clear notice of any 
exclusion, be it under section 1128, 1156, or 1892 or any other 
provision of the Act. We have also added language to Sec. 405.440 to 
make clear that excluded physicians and practitioners are bound by the 
standards in 42 CFR Sec. 1001.1901 for obtaining Medicare payment for 
emergency or urgent care services.

Grandfathering of physicians and practitioners who already opted-out

    Comment: Commenters requested affirmation that the physicians and 
practitioners who have already opted-out will not have to file either 
revised affidavits or revised private contracts to meet the new 
standards contained in these regulations.
    Response: We agree. These regulations are effective for private 
contracts entered into on or after January 1, 1999, and for affidavits 
submitted to carriers on or after January 1, 1999.
    The provisions of section 4507 of the BBA were effective for 
private contracts entered into on or after January 1, 1998. We have 
therefore implemented the provisions of section 4507 of the BBA through 
operational instructions. Specifically, we issued Medicare program 
memoranda to implement the law in November 1997, January 1998, April 
1998, July 1998. Medicare carriers have provided the information in 
these documents to all physicians and practitioners as they were 
released throughout the year. If physicians and practitioners submit 
affidavits in accordance with these program memoranda before January 1, 
1999, they have opted-out of Medicare for the 2-year opt-out period, 
and need not submit revised affidavits to comply with the regulations. 
Similarly, when they have entered into private contracts with Medicare 
beneficiaries before January 1, 1999, they need not revise the private 
contracts or have beneficiaries sign second private contracts.
    Comment: Commenters requested that physicians and practitioners who 
have opted-out before the regulations take effect, be provided with an 
opportunity to terminate their opt-out within 90 days of the date the 
new rules are effective, under the terms of early termination of opt-
out.
    Response: We agree. We have provided a special one time 90-day 
early termination opportunity for physicians and practitioners who 
opted-out during 1998, and who are willing to terminate their opt-out 
by complying with the requirements of Secs. 405.445(b) (3) and (4) and 
405.445(c).

Charitable care

    Comment: Commenters indicated that physicians and practitioners 
should be permitted to opt-out of Medicare to do charitable care. They 
believed that because currently physicians and practitioners must 
collect deductible and coinsurance, they can be found to have made an 
illegal remuneration if they do not. They believed that the deductible 
and coinsurance are a financial burden for beneficiaries who do not 
have Medicaid. In addition, they believed that physicians and 
practitioners should be able to privately contract on a patient-by-
patient basis, when they choose to offer free services to Medicare 
patients in need of those services.
    Response: A physician or practitioner need not opt-out of Medicare 
to furnish services for which they do not charge, nor need they opt-out 
when either the deductible or coinsurance or both are waived because of 
indigence. Under current law, regulations, and instructions, nothing 
prevents a physician or practitioner from not charging a beneficiary 
for medical services. Moreover, longstanding Medicare policy permits 
physicians and practitioners to waive Medicare deductibles and 
coinsurance, when the physician's or practitioner's analysis of the 
beneficiary's financial information leads him or her to believe that 
collecting either the deductible or coinsurance or both would impose a 
hardship on the beneficiary. This policy has long been stated in 
Medicare Carrier Manual section 5220, and was stated as a permitted 
exception to the prohibition on the waiver of the deductible and 
coinsurance in section 231(h) of Health Insurance Portability and 
Accountability Act of 1996 (Public Law 104-191).
    However, the commenter is correct that the provision of free 
services can become problematic in some cases, as

[[Page 58853]]

for example, when a charge is not made as an inducement for the 
beneficiary to return for covered services, or as an inducement for the 
beneficiary to provide referrals. The commenter is also correct that 
indigence is the only explicitly permitted basis for waiver of either 
the deductible or coinsurance or both.

Definitions (Sec. 405.400)

Beneficiary

    Comment: Commenters wanted the definition of ``beneficiary'' 
clarified to indicate that it applies only to individuals who are 
enrolled in original Medicare and does not apply to individuals who are 
enrolled in Medicare risk plans, or, after January 1, 1999, the M+C 
organizations.
    Response: We have not made this change. The commenters are under 
the mistaken impression that a physician or practitioner may opt-out of 
original Medicare, but continue to be paid by an M+C organization for 
Medicare-covered services furnished to a beneficiary who is enrolled in 
an M+C organization. Instead, under the law and as specified in these 
regulations at Sec. 405.220, a physician or practitioner who opts-out 
of Medicare may not provide services for which payment is made by 
Medicare, including where payment is made to the physician or 
practitioner by an M+C organization for services to a Medicare 
beneficiary enrolled in such an organization.

Emergency care services

    Comment: Some commenters raised the question of whether we would 
use the ``prudent layperson'' definition of emergency medical condition 
of Sec. 422.2, instead of the provider agreement definition of the term 
at Sec. 489.24. The commenter believed that the ``prudent lay person'' 
definition is preferable.
    Response: We agree. In order to give both beneficiaries and 
physicians and practitioners the greatest protection and flexibility in 
medical decision-making, we have decided to adopt the more inclusive 
``prudent layperson'' standard of Sec. 422.2, which was recently 
published as part of the M+C regulations at 63 FR 34968.

Legal representative

    Comment: Some commenters objected to permitting a beneficiary's 
``legal representative'' signing a private contract, because the law 
makes no provision for this action. They believed the regulations 
should permit no one but the beneficiary to sign a private contract.
    Response: We permit a beneficiary's legal representative to sign a 
private contract so that beneficiaries who have legal representatives 
will not be treated differently than beneficiaries who do not have 
legal representatives. We can foresee a situation in which the legal 
representative of a beneficiary believes that signing a private 
contract that allows the physician or practitioner to furnish care 
would be in the beneficiary's best interest, and, we believe that, if 
legal representatives have the right to do so under applicable State 
law, they should not be precluded from doing so by Medicare 
regulations.
    Comment: Some commenters stated that the proposed definition of 
``legal representative'' is too restrictive. These commenters believed 
that we should define a ``legal representative'' to be any person 
permitted by State law to make health care decisions on behalf of the 
beneficiary. They believed that we defer to State law under the M+C 
rules, and that there is no reason to make a different rule for private 
contracting.
    Some commenters requested that the definition of ``legal 
representative'' be expanded to include any person who would be willing 
to pay the beneficiary's bill, as, for example, family members. Some 
commenters stated that we should not define ``legal representative'' or 
use the term. Rather we should state that the private contract must be 
recognized under State law as a legally binding contract on the 
beneficiary, thereby letting the State determine when someone other 
than the beneficiary may sign it.
    Some commenters indicated that the definition is not clear and 
should be revised. They wanted the revision to reflect differences in 
State law, or differences in the scope of the court order that 
appointed the beneficiary's legal guardian, by defining ``legal 
representative'' as ``the beneficiary's court-appointed surrogate 
(guardian, conservator or other State law terminology) who has 
authority to enter into a contract for health care services. Some 
commenters indicated that the regulation should be revised to clarify 
that the ``legal representative'' accepts responsibility for making 
payment from the beneficiary's financial resources or from the 
beneficiary's estate, but is not responsible for making payments using 
the legal representative's personal funds. In addition, commenters 
wanted the regulation to clarify that the legal representative is not 
personally liable for the beneficiary's bills.
    Commenters also indicated that the party who can make health 
decisions may not be the same party who can make financial decisions. 
These commenters believed that private contracting involves both health 
and financial decisions, and, thus, that both parties should have to 
consult and agree before any one party enters into a private contract 
on behalf of a beneficiary.
    Response: We believe that the question of who should be allowed to 
enter into a private contract should be determined in accordance with 
State law. Therefore, we have changed the definition of legal 
representative as specified in Sec. 405.400 to be: ``one or more 
individuals who, as determined by applicable State law, has the legal 
authority to enter into the contract with the physician or practitioner 
on behalf of the beneficiary.''
    Comment: One commenter requested that the regulation require that 
the court order or power of attorney document establishing a ``legal 
representative'' be attached to the contract.
    Response: We leave this matter to the States to regulate in accord 
with their applicable contract and agency laws.

Physician

    Comment: Some commenters wanted optometrists to be able to opt-out.
    Response: Section 1802(b)(5)(B) of the Act defines a physician 
according to the definition given in section 1861(r)(1) of the Act, 
which defines a physician as a doctor of medicine or osteopathy. For 
the purposes of opting-out and private contracting, the Congress did 
not define the term physician to mean the many other types of health 
care professionals as listed in section 1861(r)(2) through (5) of the 
Act. Optometrists are included in the definition only at section 
1861(r)(4) of the Act.

General Rules (Sec. 405.405)

Two-year opt-out period

    Comment: Many commenters objected to the requirements that when a 
physician or practitioner opts-out of Medicare, he or she must agree to 
sign private contracts with all Medicare beneficiaries, for all 
services furnished to Medicare beneficiaries for 2 years (other than 
emergency and urgent care services). These commenters believed that the 
2-year requirement transforms private contracting from a vehicle for 
maximizing patient choice and access to services, into a barrier to the 
acquisition of services by the patient from the physician or 
practitioner of the patient's choice.
    Response: The statute specifies that, in order to privately 
contract, the physician or practitioner must file an affidavit with 
Medicare. In the affidavit he or she must agree to enter into private 
contracts with Medicare beneficiaries (except in the case of those

[[Page 58854]]

who require emergency or urgent services) for 2 years.

Effect of opt-out that occurs during a continuum of care

    Comment: Commenters asked that we clarify the effect of private 
contracting when the beneficiary is in a continuum of care that 
overlaps the opt-out period. For example, what will happen when a 
beneficiary is in the midst of a course of chemotherapy and the 
physician chooses to opt-out?
    Response: When a Medicare beneficiary is in a continuum of care 
such as a course of chemotherapy and the physician chooses to opt-out 
of Medicare, the beneficiary may either privately contract with the 
physician, or the beneficiary may acquire the remainder of the care 
from a physician who has not opted-out of Medicare. If a physician or 
practitioner has opted-out of Medicare by filing an affidavit with the 
carrier, then he or she must enter into a private contract with every 
beneficiary to whom he or she furnishes care, except in situations 
where the beneficiary requires emergency or urgent care.

Conditions for Properly Opting-Out of Medicare (Sec. 405.410)

Advance notice of opt-out

    Comment: A commenter requested that we require that physicians and 
practitioners give 60 days advance notice of their intention to opt-
out. For nonparticipating physicians, this would be 60 days prior to 
filing the affidavit. For participating physicians, this would be 60 
days before the calendar quarter in which their opt-out becomes 
effective. The notice would be given to beneficiaries treated by the 
physician or practitioner within 3 years, and to new beneficiaries with 
pending appointments.
    The commenter knew of cases where beneficiaries traveled long 
distances for medical services without having been informed that the 
physician or practitioner had opted-out. Then, after arriving for the 
appointment, the beneficiaries had to leave without receiving the 
needed medical services, because they could not afford to enter into a 
private contract. According to the commenter, the beneficiaries in 
these cases suffered anxiety, distress, expense, and a delay in 
receiving the needed medical services. Those negative consequences 
could have been avoided if the beneficiaries had been advised, at the 
time the appointment was made or earlier, that the physicians had 
opted-out of Medicare. The commenter believed that the absence of 
advance notice leaves beneficiaries subject to duress in the 
physician's or practitioner's office.
    Response: We have not imposed an advance notice requirement for 
physicians and practitioners who opt-out. We do not believe that kind 
of requirement is warranted. Moreover, the 60-day advance notice the 
commenter requested may cause physicians and practitioners to refuse to 
provide services during those 60 days, possibly resulting in the delay 
of needed medical services.
    However, we hope that organizations will encourage member 
physicians and practitioners who have opted-out to notify the Medicare 
beneficiaries to whom they provide care as soon as possible after they 
file the affidavit. We also hope that these physicians or practitioners 
require that their office staff advise beneficiaries, at the time the 
beneficiary makes an appointment, that the physician or practitioner 
has opted-out of Medicare. Advance notice would spare beneficiaries the 
inconvenience, anxiety, duress, and delay in receiving needed medical 
services that might otherwise occur if they cannot enter into the 
private contract.
    There are also significant administrative and good will advantages 
to the physician or practitioner of these notices. Advance notices will 
prevent the beneficiary from being surprised and possibly upset or 
angry in the office. Moreover, they will minimize the ill will that may 
occur if the beneficiary is asked to enter into a private contract at 
the time of the appointment as a condition of seeing the physician or 
practitioner, without being given advance notice. In addition, an 
advance notice will minimize the chance that beneficiaries will leave 
without having received the needed services, and result in an avoidable 
loss of income and time for the physician or practitioner.
    We also hope that beneficiary organizations will encourage 
beneficiaries when they make an appointment to seek out information on 
whether they will need to sign a private contract before seeing a 
physician or practitioner. Then, the beneficiary could make a 
thoughtful and careful decision, in an environment less stressful than 
the physician's or practitioner's office.
    Although we hope that the physician and practitioner communities 
will cooperate to provide an appropriate advance notice, we are 
concerned about the scenarios presented by the commenter and will 
continue to consider whether further guidance is needed.

Notice of change in participation status

    Comment: A commenter indicated that there should be a mechanism for 
beneficiaries who have not signed private contracts, to be notified 
when they receive either emergency or urgent care services from an opt-
out physician or practitioner who participated in Medicare before 
opting-out (and cannot sign a private contract at that time), that the 
physician or practitioner is now a nonparticipating physician or 
practitioner. That notification would benefit the beneficiary because 
the beneficiary's financial liability for those services will rise as a 
result of the change in the Medicare status of the physician or 
practitioner.
    Response: We believe that this recommendation is an impractical 
burden to impose on physicians and practitioners, and is of little 
value to the beneficiary who needs emergency or urgent care services. 
When a beneficiary needs emergency or urgent care services, he or she 
probably does not have the alternative to seek care from a 
participating physician.

Signage

    Comment: A commenter asked that we require that physicians and 
practitioners who opt-out to post a sign in a conspicuous space in his 
or her office in 5-inch type, stating that the physician or 
practitioner has opted-out of Medicare. Then beneficiaries will know 
when they enter the office that they will be required to sign a private 
contract to acquire non-emergency or urgent care services.
    Response: We have not adopted this suggestion. As noted earlier we 
hope the physician and practitioner communities will cooperate to 
provide an appropriate advance notice to beneficiaries. We believe that 
a sign such as the commenter recommends would provide little or no 
value to the beneficiary who has already come to the physician or 
practitioner's office, and is about to be asked to enter into a private 
contract.

Relationship of opt-out physicians and practitioners to beneficiaries 
who do not enter into private contracts

    Comment: A commenter asked that Secs. 405.410 and 410.420 be 
revised to include an affirmative prohibition that physicians or 
practitioners cannot furnish an item or service to any beneficiary who 
has not privately contracted. The commenter believed that it should 
also be a condition to properly opt-out and maintain opt-out so that, 
if the physician or practitioner does not privately contract, the 
penalties of Sec. 405.435(b) would be invoked.

[[Page 58855]]

    Response: We have revised Sec. 405.435 to specify that when a 
physician or practitioner who has opted-out fails to enter into a 
private contract (except in emergency or urgent care situations), he or 
she has failed to maintain opt-out. Therefore, where an opt-out 
physician or practitioner fails to enter into a private contract 
(except in emergency or urgent care situations), he or she will be 
subject to the penalties in that section for failure to maintain opt-
out. We believe that this change addresses the commenter's concerns, 
and that changes to Secs. 405.410 and 405.420 are not useful.

Timing of opt-out by participating physicians

    Comment: Some commenters believed that participating physicians 
should be allowed to opt-out at any time after they provide sufficient 
advance notice. These commenters did not believe that participating 
physicians should have to await the beginning of a calendar quarter to 
be able to opt-out. Other commenters believed that physicians should 
only be permitted to opt-out during the standard participating 
physician enrollment period. They argued that permitting participating 
physicians to opt-out on a quarterly basis, and permitting 
nonparticipating physicians to opt-out at any time, leaves 
beneficiaries with too little time to find another physician or 
practitioner if theirs chooses to opt-out.
    Response: We have decided to make no changes to the conditions 
regarding the timing of the opt-out period, either to permit opt-out by 
participating physicians at will, or to permit opt-out only during the 
participation enrollment period. Medicare carriers must make systems 
changes to permit participating physicians to opt-out, and, thereby, 
become nonparticipating physicians in the middle of the year, in such a 
way that they do not reduce Medicare payments for services furnished 
during the part of the year that they had a participation agreement in 
effect.
    Medicare has a longstanding policy of making systems changes no 
less often than on a quarterly basis. The quarterly opt-out for 
participating physicians is designed to accommodate that schedule, 
while simultaneously permitting participating physicians to opt-out 
without having to await the annual participation enrollment or 
disenrollment period. The law does not link the opt-out election to the 
annual participation period and, therefore, we do not preclude 
participating physicians from opting-out only during that period.

Whether a carrier should send a return receipt to a physician or 
practitioner that submitted an affidavit

    Comment: A commenter wanted carriers to be required to send a 
return receipt verifying the accuracy and acceptance of the affidavit. 
The commenter believed that procedure will eliminate problems with lost 
mail or an incorrect affidavit, and reduce the incidence of physicians 
and practitioners not properly opting-out and later finding themselves 
in trouble for having failed to properly opt-out.
    Response: Our experience with those physicians and practitioners 
who have opted-out, indicates that there have been no notable problems 
with lost mail or incorrect affidavits. Hence, we do not believe that 
there is sufficient justification at this time for requiring the 
carrier (and the Medicare program) to incur the costs associated with 
sending return receipts to the physician or practitioner.

Impact of changes in carrier jurisdiction

    Comment: A commenter asked that we address how carrier terminations 
and replacements will affect the opt-out status of physicians and 
practitioners. Specifically, the commenter wanted to know if the 
physician or practitioner needs to again file the affidavit with the 
carrier that is taking over the jurisdiction.
    Response: Physicians and practitioners who have filed affidavits 
opting-out of Medicare will not need to refile when a carrier is 
replaced by a new carrier. The information will be transferred from the 
existing contractor to the new contractor, as part of the systems and 
records transition process.

Requirement to submit affidavits to all carriers

    Comment: Commenters objected to the requirement that the physician 
or practitioner must submit affidavits to all carriers to which he or 
she has submitted claims in the past 2 years. They believed that this 
is a burdensome requirement that will become more so as there are more 
M+C organizations. Commenters also believed that this requirement is 
particularly burdensome for physicians and practitioners in States that 
have a lot of ``snowbirds.'' They asked whether the physician or 
practitioner must submit an affidavit to each carrier to which they 
would send claims. A commenter requested that there should either be a 
standard form that contains all addresses, or the affidavit should be 
submitted to us for distribution to all carriers.
    Response: We do not believe that this requirement is burdensome. 
The submission of an affidavit is done no more than once every 2 years, 
and requires simply mailing it to the addresses to which the physician 
or practitioner ordinarily sends claims. Physicians and practitioners 
already know to whom they have sent claims within the past 2 years, and 
this is the reason we proposed this standard.
    We want to reinforce the importance of mailing the affidavits to 
the appropriate carriers. We have received many affidavits that were 
sent to the Secretary, rather than being sent to the physician's or 
practitioner's carrier. The result of the misrouting of the affidavits 
has been significant delays in the processing of these misdirected 
affidavits by carriers. Physicians and practitioners were instructed 
where to send the affidavit in the November 1997 ``Dear Doctor'' 
letter. That letter was sent to all physicians and practitioners who 
had submitted claims to Medicare within the previous year.
    Moreover, the comments reflect several misunderstandings. First, 
the number of M+C organizations has no relationship to the number of 
affidavits to be filed, because an M+C organization is not a Medicare 
carrier. M+C organizations will acquire information on physicians and 
practitioners who have opted-out through mutually agreed upon 
arrangements with carriers.
    Also, when a physician furnishes care to a Medicare beneficiary who 
lives much of the time in another State, the physician files the 
Medicare claim with the carrier that has jurisdiction over the claims 
for the services furnished in the physician's or practitioner's 
Medicare locality. For example, when a physician in Jacksonville treats 
a Medicare beneficiary who resides most of the time in Detroit, the 
physician files the claim with the carrier who processes claims for 
services furnished in Jacksonville, not with the carrier who processes 
claims for services furnished in Detroit. Hence, the physician would 
file the affidavit with the carrier for Jacksonville, not with the 
carrier for Detroit.
    We recognize that this process could be more streamlined. 
Therefore, we are considering ways to simplify it for physicians, 
practitioners, carriers, and M+C organizations, and would welcome 
suggestions on this subject.
    Comment: A commenter asked for specific guidance in the case of 
physicians and practitioners who have not filed claims with Medicare in 
the past 2 years.
    Response: The physician or practitioner should file the affidavit 
with the carrier that has jurisdiction over claims for the services 
furnished in

[[Page 58856]]

the Medicare localities in which the physician furnishes services.

Requirements of Private Contracts (Sec. 405.415)

Need for a model contract

    Comment: Some commenters wanted us to develop a model contract. 
They believed that it would help physicians and practitioners by 
ensuring that they maintain their opt-out status. They believed that a 
model contract would increase the probability that beneficiaries will 
understand the effects of the private contract.
    Response: We agree. We plan to create boilerplate language that may 
be included with any other contractual document the physician or 
practitioner and beneficiary create. We plan to create boilerplate 
language as part of the development of manual instructions, after 
consultation with the physician, practitioner, and beneficiary 
communities.

Wording of the private contract

    Comment: Commenters requested that we require that the wording of 
the private contract be plain and simple, and not reference law, 
regulations, or government instructions. They believed such references 
cause beneficiaries to cease reading documents.
    Response: We agree that the wording of private contracts should be 
plain and simple. At the same time, a private contract is a binding 
legal document. Its purpose is to waive a beneficiary's right to have 
his or her government-sponsored insurance coverage pay for certain 
health services. It is unlikely that a sensible and intelligent 
contract on this issue could be developed without a reference to law or 
regulation. Therefore, we are not prohibiting inclusion of references 
to law and regulations because such references may be necessary. 
However, contracts could have references to law or regulations and 
still be in plain and simple language.
    Comment: Commenters requested that we require that the private 
contract specify that the beneficiary does not forego Medicare coverage 
for the services furnished by other physicians or practitioners who 
have not opted-out. In addition, commenters requested that the private 
contract specify that the beneficiary is not compelled to enter into 
private contracts that apply to other Medicare-covered services.
    Response: We believed that these concerns were addressed in 
Sec. 405.415(g) of the proposed rule. However, because of this comment, 
we have revised Sec. 405.415(g), adding that the beneficiary must be 
advised that he or she is not compelled to enter into private contracts 
that apply to other Medicare-covered services furnished by other 
physicians or practitioners who have not opted-out. In addition, this 
and other terms a private contract should contain may be incorporated 
in boilerplate language that we plan to create after consulting with 
the physician, practitioner, and beneficiary communities. That 
boilerplate language could then be included as part of the private 
contract document.
    Comment: Commenters requested that we require that the private 
contract contain wording that specifies that the private contract 
applies to all services by the opt-out physician or practitioner, 
including emergency and urgent care services, and that, therefore, 
Medicare will not pay for any services furnished by the opt-out 
physician or practitioner. Commenters indicated that this wording is 
needed, because many private contracts specify that the beneficiary 
will have to pay for certain services, wrongly implying that other 
services not identified in the contract will be paid by Medicare. If 
the beneficiary is misled by this wording, it increases the likelihood 
that he or she will sign the private contract without understanding the 
effect.
    Response: We have revised Sec. 405.415(c) to clarify that the 
private contract must state that the beneficiary understands that by 
signing the private contract, the beneficiary or his or her legal 
representative accepts full responsibility for payment of the 
physicians's or practitioner's charge for all services furnished by the 
physician or practitioner. We will consider the exact language to be 
used in the private contract as part of the development of the 
boilerplate private contract language.

Beneficiary's copy of the private contract

    Comment: Commenters asked how far in advance must the physician or 
practitioner give the beneficiary a copy of the private contract as 
required by Sec. 405.415(l).
    Response: Under Sec. 405.415(l), we proposed that the beneficiary 
receive a copy of the contract before receiving any services under the 
contract, but we did not require that this occur a specific duration of 
time before services are furnished under the contract. We only proposed 
that the beneficiary be in possession of the private contract, or a 
copy of the private contract, by the time services under the private 
contract are furnished. This is consistent with the policy we have in 
place under the interim operating instructions issued to carriers in 
November 1997, January 1998, April 1998, and July 1998.

Duration of retention of the private contract

    Comment: Commenters requested that we require the opt-out physician 
and practitioner to retain the private contract for the duration of the 
longest statute of limitations in the relevant state jurisdiction, so 
it would be available to use in potential claims against the physician 
or practitioner. They believed that this would assist in settling 
disputes about whether a private contract was required.
    Response: We proposed that the private contract be retained for the 
duration of the opt-out term to which it applies. However, we are aware 
that, for example, a particular physician's or practitioner's opt-out 
term may run from January 1, 1999 to December 31, 2001. In this 
example, a beneficiary could enter into a contract with that 
practitioner or physician in November 2001, and a dispute over the 
existence or validity of the contract could arise in January 2002. If 
the physician or practitioner disposed of the contract on December 31, 
2001, the physician or practitioner would not have the contractual 
evidence in the subsequent dispute. However, because retention of the 
private contract would be to the practitioner's or physician's benefit, 
we believe that the contract would become part of the patient's 
permanent record. In addition, although the physician or practitioner 
might have disposed of his or her copy of the contract, the beneficiary 
should still have the copy of the contract the beneficiary was given 
when the beneficiary entered into the contract.

Private contract type size

    Comment: Commenters indicated that they support the absence of 
specified requirements regarding size of the print in the private 
contract, but that the regulations should stipulate that the physician 
or practitioner and the beneficiary should reach mutual agreement on 
all aspects of the private contract.
    Response: Implicit in the fact that both parties enter into a 
private contract is the notion that both parties have read, fully 
understand, and agree to the terms and provisions of the private 
contract.

Requirements of the Opt-Out Affidavis (Sec. 405.420) Reassignment 
Implications

    Comment: Commenters wanted the proposed regulations to be revised 
to explicitly authorize continued reassignment of Medicare benefits for

[[Page 58857]]

services furnished by opt-out physicians and practitioners to community 
mental health centers (CMHCs). They believed that opt-out physicians 
and practitioners should be able to opt-out of Medicare for purposes of 
their private practices, but be able to remain in Medicare when they 
furnish services in other settings like CMHCs. That would allow the 
physician and practitioner to continue to furnish services to low 
income persons for which the CMHC could bill Medicare.
    Response: We disagree. Under the law, when a physician or 
practitioner opts-out of Medicare, he or she signs an affidavit that 
promises that he or she will privately contract for all Medicare-
covered services he or she furnishes to Medicare beneficiaries. Hence, 
the opt-out decision applies to all services furnished by the physician 
or practitioner, including those for which a CMHC bills and is paid by 
Medicare under a reassignment of benefits to the CMHC, a billing agent 
arrangement, or through an employment relationship. Except as discussed 
below, no payment may be made to the physician or practitioner or to 
the CMHC for the services of a physician or practitioner who has opted-
out of Medicare.
    The only exception occurs when a clinical social worker (CSW) who 
is recognized by Medicare as a practitioner provides services as part 
of a partial hospitalization program for which Medicare is paying the 
CMHC. In this case, the CMHC (and not the CSW) is the provider of a 
partial hospitalization service (not a CSW service) and the fact that 
the CSW opted-out of Medicare does not preclude payment for the partial 
hospitalization service.

Identifying Information

    Comment: Commenters objected to the quantity of information that we 
proposed requiring in the affidavits. They believed that we have gone 
beyond what the law requires for the specific identifying information 
that must be provided. They requested that the proposed regulations be 
revised to require only a name, address, phone number, and one 
identifying number such as either the national provider identifier, the 
uniform provider identification number, or the tax identification 
number.
    Response: We are sympathetic to these commenters concerns, but we 
believe that we have requested the minimum practical quantity of 
information be provided in the affidavit that we, and carriers, need to 
properly and uniquely identify opt-out physicians and practitioners. 
Given the possibility that a large number of physicians or 
practitioners could opt-out of Medicare, the potential for having 
confusion among physician or practitioners with the same name or 
business address is significant. This is especially true when the 
additional factors such as the prevalence of the use of billing agents 
and reassignments are considered.
    We need sufficient information to ensure that no entity is billing 
on behalf of an opt-out physician or practitioner. We also need 
sufficient information to identify persons who have never been involved 
in the Medicare program. In addition, and most importantly from the 
physician's or practitioner's standpoint, we need what some physicians 
and practitioners may believe to be duplicate information to ensure 
that we have correctly identified the opt-out physician or practitioner 
and have not incorrectly assumed that a physician or practitioner has 
opted-out.

Failure to Properly Opt-Out (Sec. 405.430)

Difference Between Failing to Properly Opt-Out and Failing to Maintain 
Opt-Out

    Comment: Commenters asked that we clarify the difference between 
failing to properly opt-out (Sec. 405.430) and failing to maintain opt-
out (Sec. 405.435).
    Response: Failure to properly opt-out means failure to meet the 
criteria that change a physician's or practitioner's status, from a 
physician or practitioner who is bound by the Medicare claims filing 
rules and limits on charges (that is, participating or 
nonparticipating), to a physician or practitioner who is no longer 
bound by Medicare claims filing and limits on charges and must 
privately contract with Medicare beneficiaries (that is, an opt-out 
physician or practitioner). The effects of failing to properly opt-out 
as specified in Sec. 405.435(b) are the same conditions that existed 
before the private contract provisions of section 4507 of the BBA were 
effective. These conditions continue to exist for all physicians and 
practitioners who do not properly opt-out by meeting all of the 
requirements of these rules. A physician or practitioner who has never 
filed an affidavit is bound by the rules in Sec. 405.430(b) because he 
or she has not properly opted-out.
    Failing to maintain opt-out means failure to continue to comply 
with the requirements of properly opting-out, but only after having 
properly opted-out. A physician or practitioner who has opted-out by 
meeting the requirements of Sec. 405.410, but who fails to continue to 
meet one of the requirements specified in Sec. 405.435(a), has failed 
to maintain opt-out and is subject to the effects of Sec. 405.435(b).

Beneficiary rights when a physician or practitioner does not properly 
opt-out

    Comment: Commenters asked that we specify the beneficiary's rights 
when the physician or practitioner fails to properly opt-out. 
Specifically, are beneficiaries entitled to refunds for services 
furnished under private contracts? If the answer is yes, are the 
refunds based on Medicare rules, and does the pre-opt-out or post opt-
out status (participating versus nonparticipating) control the payment?
    Response: Beneficiary rights when a physician or practitioner fails 
to properly opt-out are specified in Sec. 405.430(b). However, we 
realize that the proposed rule failed to indicate that a participating 
physician in Part B of Medicare who has not properly opted-out may not 
charge more than the deductible and coinsurance that applies to the 
service furnished because, in the absence of the physician properly 
opting-out of Medicare, the participation agreement to accept 
assignment on all claims continues to apply. We have made the relevant 
change to this section.

Repeated attempts to opt-out

    Comment: Commenters asked us to clarify what happens when the 
physician or practitioner fails to properly opt-out. Does a 
participating physician have to wait until the next calendar quarter to 
properly opt-out? Commenters wanted the regulations to specify that all 
attempts to properly opt-out must meet the same criteria as if no opt-
out attempt had occurred.
    Response: A physician or practitioner who fails to properly opt-out 
continues to be bound by the Medicare claims filing and charge limit 
rules identified in Sec. 405.430(b). However, he or she may make an 
unlimited number of attempts to properly opt-out at any time. We 
believe that the regulations are clear that the criteria for properly 
opting-out as specified in Sec. 405.410 must be met for the physician 
or practitioner to opt-out.

Failure to Maintain Opt-Out (Sec. 405.435)

Inclusion of failure to enter into a private contract as a failure to 
maintain opt-out

    Comment: Some commenters requested that the regulations specify 
that the failure of a physician or practitioner who has properly opted-
out to privately contract with a beneficiary to furnish services, that 
are not emergency or urgent care services, is a failure to maintain 
opt-out. In those

[[Page 58858]]

cases, the commenters wanted the penalties for failure to maintain opt-
out to apply.
    Response: We agree and have revised Sec. 405.435(a). Failure to 
enter into a private contract with a beneficiary who requires services 
that are neither emergency nor urgent care services is now a condition 
that results in the physician or practitioner failing to maintain opt-
out as specified in Sec. 405.435(a)(5). Commenters have provided 
information about situations in which physicians and practitioners who 
opted-out of Medicare failed to enter into private contracts with 
beneficiaries who did not need emergency or urgent care services. Those 
beneficiaries subsequently learned that they would be wholly liable for 
the physician's or practitioner's charges because they had opted-out of 
Medicare. We believe that failing to privately contract after promising 
to do so in the affidavit clearly violates the intent of the law. That 
intent, we believe, is to ensure that beneficiaries have entered into 
private contracts before they assume liability for payment of furnished 
services without regard to charge limits.

Medicare payment when the beneficiary has not entered into a private 
contract

    Comment: Some commenters requested that we require that when the 
opt-out physician or practitioner fails to enter into a private 
contract before furnishing services that are not emergency or urgent 
care services, the beneficiary be reimbursed by Medicare. In addition, 
the physician or practitioner would have to refund to the beneficiary 
any amount in excess of the limiting charge. Commenters indicated that 
this would parallel longstanding policy in which Medicare pays the 
first claim submitted by an excluded physician or practitioner.
    Response: We have revised Sec. 405.435 to add failure to enter into 
a private contract as a failure to maintain opt-out. Under these 
provisions, the physician or practitioner would be required to refund 
amounts in excess of the charge limits under the limited terms 
described in Sec. 405.435(b). Under those terms, where a carrier 
notifies a physician or practitioner that he or she appears to have 
failed to maintain opt-out, the physician or practitioner would have 45 
days to respond to the carrier with the good faith efforts that he or 
she has taken to resolve the problem. In cases in which the physician 
or practitioner did not sign private contracts, those good faith 
efforts would have to include refunds to those beneficiaries of amounts 
in excess of the charge limits (that is, the limiting charge for 
physicians, and deductible and coinsurance for practitioners). Where a 
carrier notified a physician or practitioner that there was an apparent 
failure to maintain opt-out and he or she did not respond within 45 
days with an explanation of how the problem was or would be solved, the 
charge limits would apply after the 45th day, resulting in refund of 
excess amounts if any are collected for the remainder of the opt-out 
period. Where the physician or practitioner responded to the carrier 
notice and resolved the problem, no refunds would be required and the 
opt-out would continue unaffected.
    In addition, we have added Sec. 405.435(c), which specifies that 
payment may be made to beneficiaries in a similar manner as payment 
made to beneficiaries who receive services from physicians and 
practitioners who are excluded from Medicare by the Office of the 
Inspector General (OIG).
    Under a longstanding exclusion provision at 42 CFR 1001.1901(c), 
payment may be made to a beneficiary who has not been notified of the 
physician's exclusion, for the first claim submitted by the enrollee. 
Payment to the beneficiary may also be made for services received by 
the beneficiary no more than 15 days after the date of the carrier's 
notice to the beneficiary that the physician has been excluded from 
Medicare. Therefore, in Sec. 405.435(c), we have included similar 
provisions with respect to physicians and practitioners who have opted-
out of Medicare, but failed to enter into private contracts before 
furnishing services that are not emergency or urgent care services.
    We agree with the commenters that it is not fair to deny 
beneficiaries reimbursement for otherwise allowable services when they 
had no reason to believe that Medicare would not pay for the furnished 
services. We should point out, however, that as a practical matter, 
payment to the beneficiary will probably be made after denial of the 
beneficiary's claim and as part of the appeal process. In other words, 
the beneficiary's claim initially would be denied on the basis that the 
physician or practitioner opted-out. Should the beneficiary then appeal 
on the basis that he or she did not enter into a contract with the 
physician or practitioner, and should the physician or practitioner 
fail to produce documentation that there was a contract, the 
beneficiary's appeal would be allowed and the claim would be paid.
    Comment: Commenters objected to any recovery of payment from the 
physician or practitioner when the physician or practitioner failed to 
maintain opt-out, because he or she failed to enter into a private 
contract with the beneficiary before furnishing services that were not 
emergency or urgent care services.
    Response: As discussed above, we have revised Sec. 405.435 to 
define failure of an opt-out physician or practitioner to enter into a 
private contract as being a failure to maintain opt-out. When a carrier 
notifies an opt-out physician or practitioner that he or she appears to 
have failed to maintain opt-out by not entering into a private 
contract, he or she may continue to opt-out if he or she makes good 
faith efforts at fixing the problem that led to the failure to maintain 
opt-out and notifies the carrier of these efforts within 45 days of the 
carrier notice. When a physician or practitioner appears to have failed 
to maintain opt-out by not entering into a private contract with a 
Medicare beneficiary (except in emergency or urgent care cases), these 
good faith efforts should include refunding amounts collected in excess 
of applicable charge limits (that is, limiting charge for physicians 
and deductible and coinsurance for practitioners) to beneficiaries. 
Where the physician or practitioner makes good faith efforts to correct 
the problem he or she would not be subject to the consequences of 
failing to maintain opt-out. However, if he or she does not make good 
faith efforts to fix the problem that resulted in violating the opt-
out, the consequences of Sec. 405.435(b) would apply.

Treatment of incidental failure to maintain opt-out

    Comment: Some commenters indicated that the first time the carrier 
becomes aware that a physician or practitioner failed to enter into a 
private contract before furnishing services that were not emergency or 
urgent care services, there should be a presumption that there was an 
isolated error. They believed in those cases that no adverse 
consequences should occur to the physician or practitioner. Some 
commenters stated that there should be a process for dealing with 
physicians and practitioners who demonstrate a pattern of failing to 
enter into private contracts with beneficiaries, before furnishing 
services that are not emergency or urgent care services.
    Response: We agree that, as written, an isolated error causes the 
physician or practitioner to fail to maintain opt-out. We also 
recognize that isolated errors will occur and should not result in the 
consequences provided in Sec. 405.435(b). We accommodated this concern 
in our operating instructions to carriers. Consequently, we have 
revised the

[[Page 58859]]

regulation at Sec. 405.435(b). We have limited the effects of failing 
to maintain opt-out when the physician or practitioner has failed to 
maintain opt-out in accordance with the provisions of Sec. 405.435(a), 
by failing to make a good faith effort to advise carriers regarding how 
they will correct violations of opt-out within 45 days of the date a 
carrier brings those violations to their attention. This change 
comports with the current operating procedures in place when a 
physician or practitioner submits a claim for Medicare payment in 
violation of the affidavit, in which he or she promised not to submit 
claims.

Payment to physicians and practitioners when they fail to maintain opt-
out

    Comment: Commenters indicated that it is unclear whether the 
physician or practitioner would be paid anything for the services they 
furnished if they fail to maintain opt-out. Commenters objected to what 
they view as provisions that prevent them from collecting more than the 
deductible and coinsurance if the physician or practitioner fails to 
maintain opt-out.
    Response: Physicians and practitioners who have opted-out and who 
fail to maintain opt-out are not precluded from collecting payment from 
the beneficiary. But if they failed to privately contract with a 
beneficiary (other than in an emergency or urgent care case), they may 
have to refund amounts in excess of the applicable charge limits to 
those beneficiaries with whom they failed to privately contract in 
order to preserve their opt-out status.
    Specifically, under Sec. 404.435(b) when a physician or 
practitioner fails to maintain opt-out, he or she is given 45 days 
after a notice from the carrier to respond with a description of the 
good faith efforts that he or she has made to correct the problem that 
led to the failure to maintain opt-out. If the failure to maintain opt-
out was caused by the physician's or practitioner's failure to 
privately contract with a beneficiary (other than one in need of 
emergency or urgent care), then the good faith efforts would include 
refunding to that beneficiary amounts collected in excess of the 
applicable charge limits (that is, the limiting charge in the case of 
physicians, and the deductible and coinsurance in the case of 
practitioners). If the physician or practitioner does not respond with 
a description of the good faith efforts taken to resolve the problem 
that led to the failure to maintain opt-out, then the provisions of 
Sec. 405.435(b) apply after the 45th day after the carrier notice and 
the physician or practitioner become again required to submit claims 
and are bound by the applicable charge limits (that is, the limiting 
charge in the case of physicians, and the deductible and coinsurance in 
the case of practitioners) for the rest of the opt-out period.

Medicare inspection of private contracts

    Comment: Commenters stated that a very high threshold should be met 
before we are allowed to inspect private contracts. Commenters wanted 
the regulations to specify that we would be allowed to inspect private 
contracts only if the request is reasonable and does not interfere with 
the delivery of services. Commenters wanted the regulations to require 
that we obtain beneficiary consent before asking to see the private 
contract. Otherwise, they believed it is a violation of privacy. Some 
commenters indicated that when it is alleged that a physician or 
practitioner opted-out but did not enter into private contracts before 
furnishing services that are not emergency or urgent care services, 
settlement of the case should be on a case-by-case basis by the appeal 
process.
    Response: We anticipate that we will request to see private 
contracts rarely, and only in cases where a beneficiary alleges that he 
or she did not enter into a private contract before the service was 
furnished. We anticipate we will have the consent of the beneficiary, 
or his or her legal representative, to acquire a copy of the private 
contract from the physician or practitioner who alleges that one was 
entered into, and that the contract will be requested as part of the 
processing of an appeal of a denial of a claim for services.

Application of effects of failure to maintain opt-out

    Comment: Commenters objected to considering the provisions of 
Secs. 405.435(a)(2), (3), and (4) to be a failure to maintain opt-out 
resulting in the adverse effects of Sec. 405.435(b). Commenters 
believed that the statute provides for the adverse effects in 
Sec. 405.435(b) only if the physician or practitioner who has opted-out 
submits a claim for Medicare payment. In addition, they believed that 
we have exceeded what the law permits by providing adverse consequences 
in these other cases:
    <bullet> The physician or practitioner fails to use private 
contracts that meet the requirements of Sec. 405.435(a)(2).
    <bullet> The physician or practitioner fails to comply with the 
emergency and urgent care rules as specified in Sec. 405.435(a)(3).
    <bullet> The physician or practitioner fails to keep a copy of a 
private contract or fails to permit us to review contracts on request 
as specified in Sec. 405.435(a)(4).
    In these cases, commenters believed that nothing supports applying 
the penalties of Sec. 405.435(b) for failing to maintain opt-out, and 
they objected that we do not apply the knowing and willful test in 
these cases.
    Response: We believe that under general rulemaking authority, we 
have the authority to impose the requirements we believe are necessary 
to implement the law in a manner that conforms with the intended 
effect. We believe that it would be inconsistent with the intent of the 
law if we could not ensure that--(1) private contracts adequately 
protect beneficiaries who enter into them; (2) emergency and urgent 
care services are provided without the patient being asked to enter 
into a private contract; and (3) a private contract is available for 
review when an appeal is based on the allegation that a contract was 
not entered into.
    Comment: Commenters wanted the regulations to specify that when the 
physician or practitioner who has opted-out fails to maintain opt-out, 
the physician or practitioner must refund amounts collected in excess 
of the limiting charge for services he or she furnished before the 
failure to maintain opt-out occurred.
    Response: We have not made this change. When a physician or 
practitioner has properly opted-out, he or she is not limited in what 
he or she can collect from the beneficiary for services furnished 
during the period in which he or she has properly opted-out.
    As discussed previously, to avoid the consequences of failing to 
maintain opt-out, the physician or practitioner must respond within 45 
days after the carrier notice with good faith efforts to resolve the 
problem (including refunding to the beneficiary amounts in excess of 
the charge limits where the physician or practitioner failed to enter 
into a private contract with a beneficiary who did not need emergency 
or urgent care). However, if the physician or practitioner does not 
respond within 45 days with good faith efforts to maintain opt-out, he 
or she becomes bound by the consequences of failing to maintain opt-out 
(including applicable charge limits), but only for services furnished 
in the remainder of the opt-out period--not for services furnished 
while he or she was in compliance with the opt-out.

[[Page 58860]]

Emergency and Urgent Care Services (Sec. 405.440)

Disagreements about emergency or urgent care services

    Comment: Commenters asked what will happen if the physician or 
practitioner furnishes services that they believe are emergency or 
urgent care services, but the carrier disagrees. Will the physician or 
practitioner be subjected to any penalties for failure to privately 
contract? Commenters believed that this is particularly problematic in 
instances of furnishing urgent care services, when the carrier or M+C 
organization believes those services could wait more than 12 hours, but 
the physician or practitioner disagrees. There should be some 
protection for the physician or practitioner who believes that the 
proper categorization of the needed furnished services was urgent care, 
even if the physician or practitioner loses on appeal.
    Response: We believe that changing the definition of emergency 
care, from the ``anti-dumping'' definition specified at Sec. 489.24 to 
the ``prudent layperson'' standard specified at Sec. 422.2, will offer 
more protection to physicians and practitioners who are presented with 
a beneficiary who believes he or she is in need of emergency or urgent 
care services. Therefore, we have revised the text of emergency care 
services to mean ``services furnished to an individual for treatment of 
an `emergency medical condition' as that term is defined in Sec. 422.2 
of this chapter.''
    Comment: Commenters asked what oversight processes we will use to 
ensure that physicians and practitioners that opt-out do not abuse 
their ability to see patients without private contracts. The commenters 
were concerned that beneficiaries may be left unprotected if Medicare 
disagrees with the physician's or practitioner's view that the services 
were emergency medical care or urgent care services. They were also 
concerned that beneficiaries who believe that they need emergency 
medical care or urgent care services may be coerced by physicians or 
practitioners to enter into private contracts. The reason for that 
coercion would be to protect the physician or practitioner from 
potential conflict with the carrier, if the physician or practitioner 
does not believe that the patient needs emergency medical care or 
urgent care services.
    Response: Section 1802(b)(2)(A)(iii) of the Act is clear that a 
physician or practitioner cannot enter into a private contract with a 
beneficiary if the private contract is entered into when the 
beneficiary is facing an emergency or urgent health care situation. We 
also extend this analysis to mean that, in case of a beneficiary 
emergency, the beneficiary's legal representative cannot enter into a 
private contract on the beneficiary's behalf. Because we are adopting 
the prudent layperson standard the test would be whether the 
beneficiary is a prudent layperson, and whether a prudent layperson 
would have thought he or she was facing an emergency or urgent health 
care situation under the particular circumstances involved.

Renewal and Early Termination of Opt-Out (Sec. 405.445)

Early termination of opt-out

    Comment: Commenters asked that we clarify whether a physician or 
practitioner who opted-out but then completed an early termination of 
opt-out, may reapply for a subsequent opt-out period. They also asked 
that we also identify what notice he or she must give to the 
beneficiary.
    Response: A physician or practitioner who opted-out of Medicare and 
completed an early termination of opt-out may reapply for a subsequent 
opt-out period under the same terms, including the same beneficiary 
notice terms, that would apply if he or she had not opted-out and then 
terminated opt-out.
    We would note, however, that a physician or practitioner can 
terminate opt-out early only once. Therefore, if a physician or 
practitioner opts-out, then executes an early termination of opt-out, 
and then submits a second affidavit opting-out again, he or she will 
not be permitted early termination of that or any subsequent opt-out. 
We expect that a single early termination of opt-out will be sufficient 
to meet the needs of a physician or practitioner who has opted-out and 
decides that it was a mistake. Moreover, permitting more than one early 
termination of opt-out would be very difficult for carriers' systems to 
accommodate and would impose a costly systems burden to them (and to 
Medicare).
    Comment: Commenters asked what participation status applies to a 
physician or practitioner who completes early termination of opt-out. 
In addition, they asked what payment status (participating versus 
nonparticipating) applies to service charges for services furnished 
during the aborted opt-out period.
    Response: When a physician or practitioner terminates opt-out 
early, he or she resumes the participation status that existed before 
he or she opted-out. That participation status would apply to the 
service furnished during the shortened opt-out period.

Medicare+Choice Organizations (Sec. 405.450)

Acquisition of information on opt-out physicians and practitioners by 
Medicare+Choice organizations

    In Sec. 405.455, we indicate that M+C organizations may not pay for 
services of physicians or practitioners who opt-out of Medicare under 
these rules. We also specify that M+C organizations must acquire the 
information needed to implement this requirement from Medicare carriers 
that have jurisdiction over the claims in the areas the M+C 
organization serves.
    We recognize that this approach for acquiring this information may 
not be optimal and we want to streamline it. We welcome suggestions on 
the specific information M+C organizations need to implement these 
rules and the most efficient means by which they could receive it.

C. Payment for Outpatient Rehabilitation Services

    The term outpatient rehabilitation therapy encompasses outpatient 
physical therapy (including speech-language pathology) and outpatient 
occupational therapy.
1. BBA 1997 Provisions Affecting Payment for Outpatient Rehabilitation 
Services
    a. Reasonable Cost-Based Payments. Section 4541(a) of BBA 1997 
added new section 1834(k) to the Act. Section 1834(k)(2) establishes a 
10-percent reduction in the reasonable cost of therapy services 
furnished during 1998. The 10-percent reduction does not apply to 
outpatient therapy services furnished by hospitals. In accordance with 
this provision, we have revised our policy to make payment for 
outpatient rehabilitation services furnished during 1998 based upon the 
lesser of the charges imposed or the reasonable cost determined for 
such services, reduced by 10 percent. The 10-percent reduction does not 
apply to outpatient physical therapy or occupational therapy services 
furnished by a hospital to an outpatient or to a hospital inpatient 
entitled to benefits under Part A but who has exhausted benefits or is 
otherwise not in a covered Part A stay.
    As stated in our proposed rule, the salary equivalency guidelines 
will remain in effect until all BBA provisions regarding a prospective 
payment system for outpatient rehabilitation services are implemented. 
The prospective payment system, which is effective for services

[[Page 58861]]

furnished on or after January 1, 1999, removes the need for salary 
equivalency guidelines because providers will no longer be paid on a 
reasonable cost basis for their therapy services. The salary 
equivalency guidelines were a tool used to determine the reasonable 
cost of therapy services provided by practitioners other than 
physicians.
    Comment: We received several comments stating that the 10-percent 
payment reduction may cause certain small providers to cease operations 
or cease providing services to Medicare beneficiaries. The commenters 
also stated that the Congress did not adequately consider the impact of 
the 10-percent reduction on small providers and that the Congress was 
misled.
    Response: The 10-percent payment reduction is required by BBA.
    b. Prospective Payment System for Outpatient Rehabilitation 
Services.
(1) Overview
    Section 4541 of BBA adds a new section 1834(k) to the Act that 
provides for a prospective payment system for outpatient rehabilitation 
services and all services provided by CORFs. The prospective payment 
system is effective for services furnished on or after January 1, 1999. 
Section 1834(k)(1)(B) of the Act provides for payment for those 
services to be made at 80 percent of the lesser of (1) the actual 
charge for the services, or (2) the applicable fee schedule. Section 
1834(k)(2) defines the applicable fee schedule amount as the amount 
determined under the physician fee schedule, or, if there is no such 
fee schedule established for those services, the amount determined 
under the fee schedule established for comparable services as specified 
by the Secretary.
    The physician fee schedule is currently applied to certain 
outpatient rehabilitation therapy services. It is now the basis of 
payment for outpatient rehabilitation services furnished by physical 
therapists in independent practice (PTIPs) and occupational therapists 
in independent practice (OTIPs), physicians, and certain nonphysician 
practitioners or incident to the services of these physicians or 
nonphysician practitioners. The physician fee schedule has been the 
method of payment for outpatient rehabilitation therapy services 
provided by such entities for several years. As discussed in our 
proposed rule, fee schedule payment will now apply when outpatient 
physical therapy, occupational therapy, and speech-language pathology 
services are furnished by rehabilitation agencies, public health 
agencies, clinics, SNFs, home health agencies for beneficiaries who are 
not eligible for home health benefits because they are not homebound or 
to homebound beneficiaries who are not entitled to home health 
benefits, hospitals (when such services are provided to an outpatient 
or to a hospital inpatient who is entitled to benefits under Part A but 
who has exhausted benefits, or is not entitled), and CORFs. The fee 
schedule also applies to outpatient rehabilitation services furnished 
under an arrangement with any of the cited entities that are to be paid 
on the basis of the physician fee schedule. The fee schedule will not 
apply to outpatient rehabilitation services furnished by critical 
access hospitals. Under section 1833 of the Act as amended by section 
4541 of BBA, these services will be paid on a reasonable cost basis.
    Comment: We received one comment in support of delaying the 
implementation of a prospective payment system for outpatient 
rehabilitation services until April 2000 because implementation of the 
hospital outpatient prospective payment system is being delayed. The 
commenter stated that a delay would provide sufficient time for HCFA to 
develop a site-of-service differential and, at the same time, would 
allow for implementation of all revisions to hospital outpatient 
billing. It was also noted that hospitals are faced with Year 2000 
(Y2K) problems as well and that the piecemeal implementation of 
outpatient regulations adds to the already daunting Y2K task.
    Response: We disagree that development of a site-of-service 
differential for outpatient rehabilitation services is a rational basis 
for seeking to delay implementation of a prospective payment system for 
outpatient rehabilitation services because as we noted in our proposed 
rule, we find no legislative basis for making such a payment 
differential. On the other hand, we are sensitive to the commenter's 
concerns about the Y2K system compliancy challenges confronting 
hospitals and their need to effectively and efficiently renovate their 
systems. We face similar challenges and have therefore, to delay 
implementation of certain BBA provisions such as the hospital 
outpatient PPS to which the commenter refers. However, we will not be 
delaying implementation of the outpatient rehabilitation PPS. 
Implementation of hospital outpatient PPS must be delayed by the year 
2000 system renovations because it requires massive system changes. 
Major contractor systems will be affected and the consequence of these 
required changes to the basic systems will be to change the entire way 
fiscal intermediaries process and pay hospital outpatient and community 
mental health claims (These latter claims will be paid under the 
hospital outpatient PPS).
    By contrast, implementation of the fee schedule provision for 
outpatient rehabilitation services does not require that we develop an 
entirely new system or even undertake extensive reprogramming of the 
existing system in order to accommodate the new entities such as CORFs 
and rehabilitation agencies that will bill under this system. 
Basically, we can implement the fee schedule provision because it 
involves extending billing under an existing system (the physician fee 
schedule) to additional practitioners and services.
    However, extension of the two $1,500 outpatient financial 
limitations or caps on a per-beneficiary basis as proposed in our June 
5, 1998 rule requires considerable new programming that we are not able 
to undertake concurrent with our Y2K efforts. Therefore, we are 
delaying full implementation of the caps, effective January 1, 1999. We 
will implement them as discussed in our proposal as soon as possible 
after January 1, 2000.
    Effective January 1, 1999, we will begin employing a transitional 
approach to implementing the caps on a provider/practitioner specific 
basis. This approach, will require each provider/practitioner not 
subject to the current limitations to cap their Medicare billings at 
$1,500 per beneficiary. We describe this partial implementation measure 
elsewhere in this rule under the section on financial limitations.
(2) Services Furnished by Skilled Nursing Facilities
    Section 4432(a) of BBA added a new subsection(e) to section 1888 of 
the Act to establish a prospective payment systems for SNFs. Under the 
statute, effective for cost reporting periods beginning on or after 
July 1, 1998, Medicare pays for covered Part A SNF stays on the basis 
of prospectively determined payment rates that encompass all costs of 
``covered SNF services'' furnished to an SNF resident. The statute 
defines covered SNF services to include (1) post-hospital extended care 
services paid for under Part A, and, (2) certain services that may be 
paid under Part B and that are furnished to SNF residents receiving 
covered post-hospital extended care services. Section 1888(e)(2) 
provides for exclusion of specific services from the definition of 
covered SNF services, but the statute explicitly states that the 
exclusions do not encompass ``any

[[Page 58862]]

physical, occupational or speech-language therapy services regardless 
of whether or not the services are furnished by, or under the 
supervision of, a physician or other health care professional.'' Thus, 
if an SNF resident is in a covered Part A stay, therapy services 
furnished to the SNF resident are encompassed in the PPS payment and 
Medicare does not make a separate Part B payment.
    Under the new payment system for SNF inpatient services, and 
consistent with current policy (which applied before enactment of BBA), 
services furnished to SNF residents that are not covered under Part A 
may nevertheless be covered under Part B. Section 4432(b) of BBA 
amended section 1842(b)(6) of the Act to require that payment for most 
services furnished to an individual who is a resident of an SNF, 
including outpatient rehabilitation services, be made to the facility 
(without regard to whether the service was furnished by the facility, 
by others under arrangement with the facility, or under any other 
arrangement). When the services are not being furnished directly, the 
facility then pays the provider of therapy services. The consolidated 
billing provision was scheduled to be effective for services furnished 
on or after July 1, 1998. However, due to systems modification delays 
in implementing SNF consolidated billing, instructions in Program 
Memorandum (PM) AB-98-18 dated July 1998, as they apply to services and 
supplies furnished to residents in a Part A stay in an SNF not yet on 
the PPS and to the Part B stay (Part A benefits exhausted, posthospital 
or level of care requirements not met), are delayed until further 
notice. We announced this decision in a subsequent Program Memoranda, 
that is, PM AB-98-35 dated July 1998.
    Section 4432(b)(3) of BBA added a new paragraph (9) to section 
1888(e) of the Act to provide that, with respect to a service covered 
under Part B that is furnished to an SNF resident, the amount of 
payment for the service is the amount provided under the fee schedule 
for such item or service. This provision must be read in conjunction 
with the provisions of section 4541 of BBA. Section 4541 added a new 
section 1833(a)(8) to specify that the amounts payable for outpatient 
rehabilitation services furnished by an SNF will be the amounts 
determined under section 1834(k) of the Act. Section 1834(k) of the Act 
provides that payment in 1998 is to be based on the lesser of the 
charges imposed for these services or the adjusted reasonable costs 
and, in 1999 and thereafter, 80 percent of the lesser of the actual 
charge for the service or the physician fee schedule. Thus, as 
discussed in our proposed rule, we have revised our policy so that Part 
B services furnished to a SNF inpatient (Part A benefits exhausted, 
posthospital or level of care requirements not met) remain payable on a 
reasonable cost basis until January 1, 1999. Effective January 1, 1999, 
the services will be paid in accordance with the physician fee 
schedule.
    The physician fee schedule amount applicable to services furnished 
in a nonfacility setting will apply to the Part B services to 
inpatients (Part A benefits exhausted, posthospital or level; of care 
requirement not met) and other outpatient rehabilitation services 
furnished by the SNF. The nonfacility amount applies because the 
consolidated billing provision requires that the SNF be directly paid 
for the entire therapy service (including facility costs) based on the 
physician fee schedule. This is in contrast to the amount applicable to 
physician services, excluding outpatient rehabilitation services, 
billed for SNF residents. In this case, the physician payment is not 
intended to cover the facility costs associated with the service and 
the fee schedule amount applicable to services furnished in a facility 
applies. Through PM AB-98-63 dated October 1998, we advised our fiscal 
intermediaries to require SNFs to bill Medicare directly for all 
outpatient therapy services provided to their SNF residents in a 
noncovered Part A stay and to the their nonresidents covered under Part 
B.
(3) Services Furnished by Home Health Agencies
    Section 1833(a)(8)(A) applies the physician fee schedule to 
outpatient rehabilitation services furnished by an HHA to an individual 
who is not homebound. Most outpatient rehabilitation services furnished 
by an HHA under section 1861(s)(2)(D) of the Act is to individuals who 
are not homebound. The likelihood is great that most individuals who 
are homebound and are receiving physical therapy, speech-language 
pathology, or occupational therapy are entitled to home health 
benefits. However, there may be some individuals who are homebound and 
have not required a qualifying service for home health benefits but who 
need occupational therapy services. If provided by an HHA, these 
services could be provided under section 1861(s)(2)(D) of the Act. 
Although section 4541 of BBA did not expressly address these services, 
the statute allows them to be remain payable on a reasonable cost basis 
under section 1861(v)(1) of the Act. All other services furnished by 
the HHA will be paid under a prospective payment system. 
(Implementation of an HHA prospective payment system that was scheduled 
to take effect October 1, 1999 has been delayed due to our Y2K 
compliancy efforts.) Section 1861(v)(1) provides that the reasonable 
cost of any service is the cost actually incurred, excluding any costs 
unnecessary to the efficient delivery of needed health services.
    Section 1861(v)(1) also allows, use in determining reasonable cost, 
to provide for the use of estimates of cost for particular items and 
services. In enacting section 4541 of BBA, the Congress determined that 
payment in the amounts dictated by the physician fee schedule 
represents the appropriate level of payment for outpatient 
rehabilitation services provided by HHAs to certain non-homebound 
beneficiaries who do not qualify for the HHA benefit. (Of course, 
pursuant to section 4541, this payment level applies to all suppliers 
of rehabilitation services enumerated in the provision.) The Congress 
has, thus, evinced its view that payment at the fee schedule level 
adequately compensates HHAs for their expenses for this group of 
services. We believe that the Congress' determination in this case 
forms a basis for us to find that this level of payment represents an 
acceptable estimate of the expenses of providing rehabilitation 
services to other, homebound beneficiaries receiving services from 
HHAs, but also not eligible for the HHA benefit. Thus, we are applying 
the fee schedule payment level as our estimate of the reasonable costs 
of these services for these beneficiaries receiving outpatient 
rehabilitation services and not eligible for HHA benefits. Therefore, 
Sec. 413.125 is modified to provide that effective for services 
furnished on or after January 1, 1999, the reasonable cost of 
outpatient rehabilitation services furnished by an HHA to homebound 
patients who are not entitled to home health benefits may not exceed 
the amounts payable under the fee schedule.
(4) Services Furnished by Comprehensive Outpatient Rehabilitation 
Facilities
    Section 4541(a)(1) of the BBA adds a new section 1832(a)(2)(D)(9) 
to the Act to provide that all services furnished by a CORF, not just 
outpatient rehabilitation services, will be paid the applicable fee 
schedule amount. In cases in which there is no physician fee schedule 
amount for the services, section 1834(k) of the Act specifies that


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