R E P O R T T O T H E C O N G R E S S

Impact of Resource-Based

Practice Expense Payments

for Physician Services
Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 1

The Social Security Amendments of 1994 required CMS to develop a methodology for a

resource-based system for determining practice expenses for each physician service, and the

Balanced Budget Act of 1997 (BBA) required that the resource-based practice expense (PE)

relative value units (RVUs) be phased in over a four-year period beginning in 1999. The Medicare

Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) required that MedPAC

report on the impact of resource-based PE payments on payments for physician services,

beneficiaries’ access to care, and the willingness of physicians to furnish care to beneficiaries. 

MedPAC’s analysis shows that the transition to resource-based PE payments did, as expected, result

in some redistribution of practice expense RVUs and payments across specialty types and types of

services. Changes in the volume of services between 1998 and 2002 do not seem to be related to the

magnitude of the changes in payment rates or PE RVUs. Physician assignment rates remained high

and relatively unchanged, even for specialties experiencing the largest decline in PE RVUs and

payments during the transition. Beneficiaries are not facing systematic problems in obtaining needed

care, even for specialties experiencing the largest decline in PE RVUs and payments due to the

transition. 

We conclude with MedPAC’s future plans for assessing the data and the methods used to derive

practice expense RVUs. Our workplan includes analyzing the data that are used to establish practice

expense payments and the methods used to derive these payments to see if they can be improved.

Paying for physician services 

Physician services include office visits, surgical procedures, and a broad range of other diagnostic

and therapeutic services. These services are furnished in all settings, including physicians’ offices,

hospitals, ambulatory surgical centers, skilled nursing facilities and other post-acute care settings,

hospices, outpatient dialysis facilities, clinical laboratories, and beneficiaries’ homes. All

services—surgical and nonsurgical—are classified and reported to CMS according to the Healthcare

Common Procedure Coding System.

In 1992, Medicare changed how physicians are reimbursed by adopting a fee schedule, which

currently contains payment rates for more than 7,000 services. Its goal was to base physicians’

payments on the relative resources used to provide a service rather than on the physicians’ charges. 

A resource-based, relative-value payment system ranks services on a common scale, according to the

resources used for the service. Each service has a weight—called a relative value unit—that

measures the relative costliness of three types of resources used to provide physician services:

physician work, practice expenses, and expenses for professional liability insurance (PLI). Payment

rates for each service are calculated by adding the three relative weights and multiplying the sum by

the conversion factor. 

In the original fee schedule, the RVUs for physician work, which account for about 55 percent of

payments per service, were developed using surveys of actual physician resource costs. By contrast,
2 Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 

the RVUs for practice expenses and professional liability insurance, which account for about 42 and

3 percent, respectively, of payments per service, were based on physicians’ historical charges. 

The Social Security Amendments of 1994 required CMS to develop a methodology for a resourcebased system for determining practice expenses for each physician service. Before resource-based

methods were implemented, however, the Congress mandated some refinements to the charge-based

PE RVUs. For example, the Balanced Budget Act of 1997 (BBA) required CMS to reduce the 1998

PE RVUs for services to 110 percent of their work RVUs. These reductions were used to increase

practice expense RVUs for office visits. CMS estimated that this change resulted in an increase in

total payments of between 3 and 5 percent for office visits (HCFA 1997). 

Resource-based PE RVUs were phased in over a four-year period, 1999 to 2002, as mandated by the

BBA. Although the law required the transition to resource-based PE RVUs to be budget neutral,

Medicare payments could increase for some services and decrease for others. The change thus had

the effect, as expected, of reducing payments for certain specialties and increasing it for others. 

Specifically, in the agency’s final rule, CMS projected that the implementation would result in larger

increases in Medicare payments for those specialties that furnish more office-based services than

specialties that provide fewer office-based services (HCFA 1998) (Table 1). 

Table 1

CMS analysis of the impact of resource-based practice expense relative

value units on total payments relative value units, by specialty

Specialty Percent impact per year

Cardiology –2% 

Dermatology 5

Family/general practice 2

Gastroenterology –4

General surgery –2

Internal medicine 0

Ophthalmology 1

Orthopedic surgery 0

Pathology –3

Radiology –3

Thoracic surgery –3

Urology 1

Source: Health Care Financing Administration, 1998.
Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 3

Although practice expense payments were redistributed across specialties, aggregate payments for

physician services increased from about $32.4 billion in 1998 to $45.0 billion in 2002. Specifically,

Medicare updated physician payments by 2.0 percent in 1999, 5.3 percent in 2000, 4.8 percent in

2001, and –4.9 percent in 2002. 

Deriving resource-based practice expense payments 

CMS developed resource-based PE RVUs using two data sources—the American Medical

Association’s (AMA’s) Socioeconomic Monitoring System (SMS) data and the Clinical Practice

Expert Panel (CPEP) data. The basic methodology for developing resource-based payments for

practice expenses has three steps:

! First, CMS estimated aggregate annual practice expenses—the total PE pool—for six different

practice expense categories for each specialty. 

! Second, CMS allocated each practice expense pool to the services provided by that specialty,

based on estimates of the resources required to deliver each service. This step results in an

estimate of the practice expense for each service provided by each specialty. 

! Third, CMS averaged specialties’ expenses for services provided by more than one specialty. 

This methodology—also referred to as the “top-down” approach—assumes that aggregate specialty

practice costs are reasonable estimates of the relative resource costs of physicians’ services across

specialties. (Appendix A provides a diagram of this methodology.)

As mentioned previously, CMS made a final adjustment to ensure that total physician payments were

budget neutral—the same as they would have been under the previous payment system. On January

1, 1999, PE RVUs were a sum of 75 percent of the 1998 charge-based PE RVUs and 25 percent of

the resource-based RVUs. In each subsequent year, an additional 25 percent of the total PE RVUs

was resource-based until January 1, 2002, when 100 percent of the RVU became resource-based. 

Deriving the practice expense pools 

To establish the six practice expense pools, CMS uses 1995 through 1999 SMS survey data by

specialty and by expense category. The six expense categories or pools include three types of direct

expenses—nonphysician clinical labor (such as nurses and medical technicians), medical supplies,

and medical equipment—and three types of indirect expenses—administrative labor (such as office

managers or billing clerks), office supplies, and other expenses. 

Each specialty’s total practice expense pool by expense category is derived by: 
4 Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 

! Estimating the average hourly expense per hour of physician time for each of the six expense

categories from SMS survey data. The practice expense per hour for a specialty is derived by

dividing aggregate practice expenses for the specialty by the total number of hours spent in

patient care activities. 

! Multiplying these hourly practice expense estimates by the total hours spent by all physicians

in each specialty treating Medicare beneficiaries. The utilization data come from current

Medicare claims; the time data come from the AMA Specialty Society Relative Value Update

Committee (RUC) and from surveys conducted by Becker et al. (1988) during the development

of the original fee schedule.

! Multiplying utilization data and physician time data for each service code to determine the total

number of physician hours spent treating Medicare beneficiaries. 

Allocating aggregate costs to specific services 

CMS uses different approaches to allocate direct and indirect costs to specific services. 

! For direct costs—clinical labor, medical supplies, and medical equipment—CMS uses the

service-specific data derived by the CPEP. In the mid-1990s, CMS convened the CPEPs—15

expert panels organized by specialty and made up of physicians, nurses, and practice 

administrators—because no data source existed with the necessary information to allocate the

aggregate pool of practice expenses to individual services. These panels estimated the direct

resources used to deliver each service. Each panel’s estimates are calibrated to the direct

expense pools estimated with the SMS data.1

! For indirect costs—administrative labor, office expenses, and other expenses—CMS uses the

CPEP direct expense data (i.e., PE RVUs) and the physician work RVUs associated with a

service for allocating these expenses to individual services. 

! Direct and indirect cost estimates are combined to determine total practice expense values per

service for a specialty.

! For services performed by multiple physician specialties, the final allocation of PE costs for a

given procedure is a weighted average of allocations for the specialists that perform the

services. In this way, specialties that perform a given service frequently have more influence

over the payment than specialties that rarely perform it.
Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 5

Deriving PE values for nonphysician services—the alternative method 

Some services involve little or no physician work and are performed by other clinical staff. In

response to provider concerns that practice expense payments for these nonphysician services were

too low, CMS developed an alternative method for deriving their PE values. The alternative

methodology aggregates the costs of nonphysician services into what is called the “nonphysician

work pool” for all specialties. 

The methods used to derive PE payments for each nonphysician service are similar to the methods

used to derive PE payments for physician services. Specifically, in the alternative method, CMS

creates a separate “total PE pool” for nonphysician services for those specialties with services in the

pool. Direct and indirect costs are then allocated across services using adjusted 1998 PE RVUs. 

Because only one payment is estimated for each nonphysician service, CMS does not average

payments across specialties for these services. Finally, CMS removes services from the

“nonphysician work pool” if the specialties performing these services make that request. 

Impact of implementing resource-based practice expense payments 

MedPAC’s analysis shows that the transition to resource-based PE payments did, as expected, result

in some redistribution of practice expense RVUs and payments across specialty types and types of

services. We found that changes in the volume of services between 1998 and 2002 do not seem to be

related to the magnitude of the changes in payment rates or PE RVUs. Physician assignment rates

remained high and relatively unchanged, even for specialties experiencing the largest decline in PE

RVUs and payments during the transition. Beneficiaries are not facing systematic problems in

obtaining needed care, even for specialties experiencing the largest decline in PE RVUs and

payments due to the transition. 

Changes in RVUs and payment rates 

We used 1998 and 2002 Medicare physician/supplier claims data to assess the move to resourcebased RVUs on RVUs and payment rates. To measure changes in total, PE, work, and PLI RVUs, we

constructed an index that weights the average of the ratios of current-year RVUs to base-year RVUs

for each service. The box on page 11-12 provides a detailed description of the methods. We used the

same index approach to compute changes in the payment rates. This analysis allowed us to identify

the specific impact of changes in the practice expense RVUs, the specific impact of other RVU

changes, and the source of the greatest RVU change. The Urban Institute conducted this analysis on

behalf of MedPAC. 

Implementation of the resource-based RVUs did, as expected, redistribute payments among

specialties (Maxwell et al. 2004) (Table 2, p. 6–8). Dermatology and urology experienced the

biggest gains in PE RVUs (13.8 and 10.1 percent per year, respectively) and payments per service

(6.4 and 4.4 percent, respectively). 
6 Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 

 Table 2

Average annual change in physician payments and relative value units, by

specialty and type of service, 1998–2002

Average annual percent change

Percent

distribution of

payments, 2002

PE

RVUs

Work and

PLI RVUs

Total

RVUs

Payment

rate

Impact of resourcebased PE RVUs on

total payments

National 100.0% 1.9% –0.3% 0.7% 1.9% 0.7%

Cardiology Total 100.0 –3.7 –0.8 –2.3 –1.0 –1.8

Eval/mgmt 38.0 5.1 0.0 1.7 3.3 1.7

Imaging 35.5 –3.4 –2.3 –3.1 –2.1 –2.3

Major procedures 14.6 –15.1 –1.0 –6.9 –6.0 –6.3

Other procedures 0.4 –5.1 –0.8 –3.1 –3.1 –2.6

Tests 11.6 –6.9 –0.3 –4.3 –3.4 –4.3

Dermatology Total 100.0 13.8 –0.3 6.4 8.2 6.4

Eval/mgmt 26.4 10.7 –0.3 4.7 6.6 4.7

Imaging 0.0 –1.0 0.0 –0.5 –0.5 –0.5

Major procedures 0.1 11.9 –2.3 3.3 2.6 4.7

Other procedures 73.2 15.0 –0.3 7.0 8.8 7.0

Tests 0.3 6.8 0.2 5.1 5.5 4.9

Family/general

practice Total 100.0 4.2 0.2 1.7 3.6 1.5

Eval/mgmt 86.3 4.7 0.2 1.7 3.8 1.5

Imaging 3.6 –1.3 –1.8 –1.3 0.0 –1.0

Major procedures 1.1 –7.6 1.0 –2.1 –2.1 –2.9

Other procedures 6.7 11.0 0.2 4.9 6.4 4.7

Tests 2.4 –3.4 –1.0 –2.6 –1.0 –2.3

Gastroenterology Total 100.0 –8.9 –0.3 –4.0 –2.9 –3.7

Eval/mgmt 44.0 4.0 0.0 1.2 2.9 1.2

Imaging 0.6 –0.8 –1.8 –1.0 –0.3 –0.5

Major procedures 1.8 –3.1 2.4 0.5 0.5 –1.0

Other procedures 53.1 –15.5 –0.8 –7.3 –6.6 –6.6

Tests 0.4 –4.3 –1.3 –3.1 –1.8 –2.6

General surgery Total 100.0 –2.1 0.7 –0.5 0.5 –0.8

Eval/mgmt 28.0 4.7 0.0 1.7 3.6 1.7

Imaging 5.6 –3.4 –1.0 –2.6 –1.8 –2.1

Major procedures 45.0 –5.1 1.5 –1.0 –0.8 –2.1

Other procedures 20.3 –2.1 0.5 –0.5 0.2 –0.8

Tests 1.2 –5.1 –2.6 –4.3 –3.4 –3.4

Internal medicine Total 100.0 3.6 0.0 1.5 3.1 1.5

Eval/mgmt 82.4 5.9 0.0 1.9 4.0 1.9

Imaging 5.5 –2.1 –2.3 –2.1 –0.8 –1.5

Major procedures 0.8 –11.3 0.2 –4.6 –3.7 –4.6

Other procedures 8.2 1.0 –0.5 0.2 1.0 0.5

Tests 3.0 –4.8 –0.8 –3.4 –2.3 –3.1
Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 7

Table 2 (continued)

Average annual change in physician payments and relative value units, by

specialty and type of service, 1998–2002

Average annual percent change

Percent

distribution of

payments, 2002

PE

RVUs

Work and

PLI RVUs

Total

RVUs

Payment

rate

Impact of resourcebased PE RVUs on

total payments

Ophthalmology Total 100.0% 5.7% –0.8% 2.4% 4.0% 2.6%

Eval/mgmt 47.6 19.2 0.0 8.6 11.4 8.6

Imaging 3.0 7.2 –1.8 4.2 4.9 4.9

Major procedures 0.4 5.3 0.0 2.4 3.6 2.4

Other procedures 49.0 –3.1 –1.3 –2.3 –1.5 –1.5

Tests 0.0 0.7 –1.8 0.0 1.5 0.5

Orthopedic

surgery Total 100.0 2.6 –0.5 0.7 1.5 1.2

Eval/mgmt 23.4 10.7 0.0 4.0 6.4 4.0

Imaging 8.6 –0.5 –1.0 –0.8 –0.3 –0.5

Major procedures 44.6 –4.3 –1.0 –2.6 –2.1 –1.8

Other procedures 23.4 11.6 –0.3 5.1 5.1 5.3

Tests 0.1 2.4 –1.0 1.0 0.0 1.5

Pathology Total 100.0 2.6 –0.3 0.7 1.9 1.0

Eval/mgmt 80.4 1.2 –0.5 0.2 1.2 0.5

Imaging 0.4 –2.1 –1.0 –1.5 0.7 –1.0

Major procedures 0.1 –11.6 –1.0 –5.7 –6.3 –5.1

Other procedures 1.5 3.1 –0.3 1.0 1.2 1.0

Tests 17.7 10.3 0.2 3.6 5.9 3.6

Radiology Total 100.0 –2.3 –0.5 –1.5 –0.3 –1.0

Eval/mgmt 2.0 1.9 0.0 0.7 4.0 0.7

Imaging 75.1 –2.3 –0.5 –1.5 –0.3 –1.0

Major procedures 5.7 –7.6 0.5 –2.6 –0.8 –2.9

Other procedures 17.0 –1.0 –1.0 –1.0 –0.8 –0.8

Tests 0.3 –7.3 –2.1 –5.1 –4.0 –4.3

Thoracic surgery Total 100.0 –10.6 0.5 –4.0 –3.4 –4.3

Eval/mgmt 11.1 2.6 0.0 1.0 2.9 1.0

Imaging 2.6 –3.7 –1.3 –2.9 –2.1 –2.3

Major procedures 81.6 –12.4 0.7 –4.6 –4.3 –5.1

Other procedures 3.9 –2.3 –0.3 –1.3 –1.3 –1.0

Tests 0.9 –5.4 –1.8 –4.3 –3.7 –3.4

Urology Total 100.0 10.1 –0.3 4.4 6.2 4.4

Eval/mgmt 35.5 9.9 0.0 3.8 6.4 3.8

Imaging 4.7 0.0 –1.0 –0.3 0.5 0.0

Major procedures 19.0 5.7 –0.8 2.4 3.6 2.6

Other procedures 40.6 14.2 –0.3 6.6 8.2 6.6

Tests 0.1 4.9 –0.8 2.9 2.6 3.1

Other medical Total 100.0 1.9 –0.3 0.5 1.9 0.7

Eval/mgmt 72.2 2.2 –0.3 0.5 1.9 0.7

Imaging 1.5 –1.5 –1.5 –1.5 –0.5 –1.3

Major procedures 1.2 –4.3 1.0 –1.0 0.7 –1.5

Other procedures 17.0 2.2 –0.3 0.7 2.2 1.0

Tests 8.0 1.5 –0.8 0.5 1.7 1.0
8 Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 

Table 2 (continued)

Average annual change in physician payments and relative value units, by

specialty and type of service, 1998–2002

Average annual percent change

Percent

distribution of

payments, 2002

PE

RVUs

Work and

PLI RVUs

Total

RVUs

Payment

rate

Impact of resourcebased PE RVUs on

total payments

Other surgical Total 100.0% 3.6% –0.3% 1.5% 2.6% 1.7%

Eval/mgmt 38.2 10.7 0.0 4.2 6.8 4.2

Imaging 2.6 0.2 –1.5 –0.3 –0.5 0.2

Major procedures 26.5 –6.3 –0.3 –2.9 –2.9 –2.6

Other procedures 28.4 7.0 –0.3 3.1 4.2 3.3

Tests 4.3 1.7 –6.3 0.5 2.4 1.5

Other providers Total 100.0 4.9 0.0 2.2 3.1 2.2

Eval/mgmt 50.8 9.2 0.0 3.3 3.8 3.3

Imaging 12.3 –0.8 –2.3 –1.0 –2.1 –0.5

Major procedures 4.0 –4.8 0.0 –2.3 –3.4 –2.3

Other procedures 28.2 5.1 0.5 2.4 4.9 2.2

Tests 4.6 6.8 –0.8 4.2 4.9 4.4

Note: PE RVU (practice expense relative value units), PLI (malpractice insurance), Eval/mgmt (evaluation and management). To hold service use

constant, we applied 1998 and 2002 payments and RVUs to the mix of services used in 2002. "Major procedures" include breast, colectomy,

cholecystectomy, transurethral resection of the prostate, hysterectomy, cardiovascular, orthopedic, exploratory, and other. "Other procedures"

include eye procedures; ambulatory and minor groupings of skin, musculoskeletal, hernia repair, lithotripsy and other procedures; oncology;

endoscopy; and dialysis. "Other surgical" includes neurosurgery, ophthalmology, obstetrics/gynecology, otolaryngology, and

plastic/reconstructive surgery. "Other medical" includes neurology, physical medicine/rehabilitation, psychiatry, pulmonary disease,

nephrology, and allergy/immunology. “Other providers” includes several nonphysician services (e.g., therapy services, physician assistant

services); physician group practices and other organizations (e.g., labs, imaging centers); seven other (low Medicare prevalence) physician

specialties (e.g., maxillofacial surgery); and other/unknown care providers. 

Source: Urban Institute analysis of 1998 and 2002 summaries of Medicare physician/supplier claims.

By contrast, thoracic surgery and gastroenterology experienced the largest declines in PE RVUs

(–10.6 and –8.9 percent, respectively) and payments per service (–4.3 and –3.7 percent, respectively). 

Total payments for most of the other specialty groups—family/general practice, internal medicine,

other medical, ophthalmology, orthopedic surgery, other surgical, pathology, and other

providers—increased by 1 to 3 percent per year due to the transition. The move to resource-based

PE RVUs reduced payments for only 3 other specialty groups—cardiology, general surgery,

radiology—by no more than 2 percent per year.

Payments also changed by type of service as a result of the move to resource-based PE RVUs. The

transition increased PE RVUs per service and payments for evaluation and management services and

other procedures and decreased it for major procedures, imaging services, and tests (Maxwell et al.

2004) (Figure 1, p.10). 

The effect of the transition on a given specialty is related to the relative importance of the types of

services performed by the specialty and where the service is furnished. For example, total payments

per service for thoracic surgery decreased on average by 4.3 percent per year because: 

! the majority of services—81.6 percent—furnished by this specialty are major procedures, and
Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 9

! nationally, payments for major procedures declined by 3.1 percent per year. 

Consequently, thoracic surgery’s payment for major procedures declined by 5.1 percent per year due

of the transition. The PE RVUs and payment rates for surgical specialties also declined because

CMS adjusted the CPEP allocation data. In 1999, the agency excluded from the CPEP allocation

data the cost of physicians’ clinical staff used in facility settings because these services are already

paid for by Medicare through other payment systems (HCFA 1999). 2

By contrast, total payments per service for dermatology increased on average by 6.4 percent per year

because:

! About three-quarters of the services furnished by this specialty are other procedures and onequarter are evaluation and management services, and

! Nationally, payments for other procedures and evaluation and management services increased

by 1.0 and 2.4 percent per year, respectively. 

Our analysis also shows that the move to resource-based PE RVUs affected the payments of certain

services differently depending upon where the specialty furnished the service—in facility versus

nonfacility settings.3

 For example, the transition increased PE RVUs and payments for other

procedures performed by dermatologists (by 15.0 and 7.0 percent per year, respectively) and

decreased them for gastroenterologists (by –15.5 and –6.6 percent per year, respectively). This

differential impact is due to site of care differences between these two specialty groups. In terms of

2002 payments, dermatologists performed most other procedures in nonfacility settings whereas

gastroenterologists performed them in facility settings. 

Across all specialties and types of services, the effect of the transition on payment is less than its

effect on PE RVUs because practice expenses account for only about 42 percent of payment, on

average. For evaluation and management services, for example, PE RVUs increased by 6.8 percent

per year due to the transition, whereas payment increased by 2.4 percent per year. 

Our findings are generally consistent with the direction of the CMS’s regulatory impact analysis,

which are reported in Table 1 (HCFA 1998). Pathology, however, was an exception: Whereas CMS

projected the transition to reduce payments for pathology, it actually saw an increase in payments. 

Our results also differ from the agency’s projections in the magnitude of the effect on payments for

certain specialties. For example, we estimated an increase in urology payments by 4.4 percent per

year, but the agency projected an increase of 1 percent per year. 

In addition, our findings are generally consistent with the direction of an analysis conducted by the

Government Accountability Office (GAO) with two exceptions: pathology and general surgery

(GAO 2001). GAO projected the transition to reduce payments for these two specialties, whereas

our analysis shows small increases in payments. Differences between the findings from MedPAC

versus CMS and GAO probably stem from our use of more recent data (2002) on service mix and payments.
10 Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 

Figure 1

Average annual change in physician payment rates and practice expense

relative value units, by type of service, 1998–2002

Note: PE RVUs (practice expense relative value units).

Source: Urban Institute analysis of 1998 and 2002 summaries of Medicare physician/supplier claims.

-1.8

-2.6

-0.3

-3.1

-1.3

6.8

-7.3

2.2

-2.1

4.2

1.9

-1.0

2.4

1.0

-1.3

-10

-8

-6

-4

-2

0

2

4

6

8

Evaluation and

management

Imaging Major procedures Other procedures Tests

Type of service

Percent

PE RVUs

Payment rate

Impact of resource-based

PE RVUs on total payment
Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 11

Data sources and analytical approach

Our approach in constructing the analytic files and in assessing changes in relative value units

(RVUs), payment rates, and volume of services furnished to beneficiaries between 1998 and 2002

is described below. 

Constructing analytic files 

This study uses the 1998–2002 physician/supplier procedure summary (PSPS) files and relative

value unit files. In this file, services are aggregated at the payment locality level and each record is

a unique combination of eight items: procedure code, first and second modifier, type of service,

place of service, physician specialty, carrier, and payment locality. The file also includes

information about charges (submitted, allowed, denied); total payments; and service counts

(denied, assigned, total). We merged the annual RVU files, obtained from the American Medical

Association (AMA), to the PSPS files by each combination of procedure code, first modifier, and

place of service.

We then merged the 2002 Berenson-Eggers Type of Service (BETOS) grouping algorithm to the

data files.4

 Codes from prior years that did not group automatically were manually grouped into

the 2002 BETOS scheme. For this analysis, we grouped types of services into five summary

categories: evaluation and management; major procedures; other procedures; imaging; and tests. 

Small groups of durable medical equipment, other, and not-classified services were deleted. 

We grouped specialties using the algorithm that MedPAC and PPRC used in prior analyses. 

Physician/supplier services reimbursed wholly under other fee schedules (e.g., anesthesia services)

were excluded. 

Analytic approach 

To assess the impact between 1998 and 2002 of resource-based practice expense (PE) relative

value units (RVUs) on physician payments, we used a price index approach in which the mix of

physician services used by beneficiaries is held constant using the latest analysis year (2002). 

Using Medicare total payments per service as an example, we have 

Index = 3 (Pc

i

 Qc

i

) / 3 (Pb

i

 Qc

i

), 

where P denotes payments; Q denotes quantity or service mix; superscript I identifies individual

services; and subscripts c and b denote current (2002) and base year (1998) periods, respectively. 

Thus, the price index reflects the 1998 and 2002 conversion factors of $36.69 and $36.20,

respectively. We express the resulting index value in terms of average annual percent change,

Percent change = [Index ^ (1 / (c–b))]–1,

where c minus b equals the number of years over which the change occurred.

(continued) 
12 Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 

Data sources and analytical approach (continued)

Using this index approach, we calculated, by type of service, by specialty, and by specialty and

type of service, changes from 1998 to 2002 in: 1) PE RVUs per service; 2) work and professional

liability insurance (PLI) RVUs per service combined; 3) total RVUs per service; 4) total Medicare

payments per service. 

This index approach holds the mix of services constant based on the last year of the study period. 

By contrast, other price index approaches do not hold the mix of services constant. Accounting for

the change in mix of services can be important in analyses over long time periods or over periods

experiencing rapid change in practice patterns due to the use of new technologies or to the

introduction of new Medicare-covered benefits. We tested the significance of holding the service

mix constant by determining the extent to which the RVU and payment indexes differed when

using the 2002 versus the 1998 service mix. Our analysis showed that the 1998 and 2002 indexes

are similar, suggesting that at the national level, the mix of services furnished by specialty and by

type of service between 1998 and 2002 did not change enough to necessitate using an approach

that does not hold the mix of services constant.

The “impact” index is calculated as:

Impact index = 3 (Work RVUb

i

 + PE RVUc

i + PLI RVUbi ) Qci

 I

______________________________________ ,

3 (Total RVUb

i

 ) Qc 

I

 I

where Q denotes quantity or service mix; superscript I identifies individual services; and subscripts

c and b denote current (2002) and base year (1998) periods, respectively.

Finally, we calculated indices using actual Medicare payments per service as well as indices using

the Medicare fee schedule rate (i.e., allowed charges) per service. The results of the two were

extremely similar. Our analysis reports changes in terms of Medicare payments per service.

Changes in the volume of services 

To assess changes in volume between 1998 and 2002, we used the analytical files created for our

analysis of RVU and payment changes and measured volume two ways. First, we calculated per

capita use of services by beneficiaries in fee-for-service Medicare (referred to as “service volume”). 

Next, we weighted per capita use by each service’s relative weight from the physician fee schedule

(referred to as “RVU volume”). The latter measure is more precise because it accounts for both

changes in the number of services and the complexity, or intensity, of those services (Maxwell et al. 

2004). 
Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 13

Data on growth in the volume of physician services must be interpreted cautiously. If the overall

volume of services provided to beneficiaries falls, it may mean that providers are offering fewer

services because payments do not cover their costs. Conversely, large increases in volume growth

may indicate that Medicare is overpaying for services. However, some evidence suggests that

volume goes up when payment rates go down, the so-called volume offset (Codespote et al. 1998).

Such a volume offset makes interpreting an increase in volume of physician services very difficult.

Both service and RVU volume increased in each of the major service categories, even though

payments per service had increased for some categories and decreased for others (Maxwell et al.

2004) (Figure 2, p. 14). The biggest increase in RVU volume per beneficiary occurred within

imaging services, a service category whose payments fell by 1.3 percent annually due to the

introduction of the new PE RVUs. On the other hand, the smallest increase in volume per

beneficiary took place in evaluation and management, whose payments increased the most. 

Service and RVU volume per beneficiary increased for nearly all specialties, but the rates of increase

varied considerably (Maxwell et al. 2004) (Table 3, p. 15). The largest increase in RVU volume

occurred for cardiology, other providers, and pathology, while the largest decrease in RVU volume

occurred for thoracic surgery, general surgery, and ophthalmology. The variation in volume growth

does not seem to be related to the magnitude or direction of the changes in payments. The largest

increase in RVU volume (8.2 percent annually) occurred for cardiology, whose payments per service

fell by 1.8 percent annually due to the PE RVU changes. This relationship might suggest that some

type of offset mechanism is at work, but data for other specialties fail to confirm this. For the other

two specialties with the largest increases in RVU volume—other providers and pathology—the

transition increased their total payments. Moreover, thoracic surgery, whose payments declined the

most due to resource-based PE RVUs, had a 0.7 percent increase in RVU volume. 

Only in a few instances did services or volume decline for any of the specialty/service category

combinations (data not shown).5

 The RVU volume for major procedures performed by general

surgery, thoracic surgery, and ophthalmology declined per year by 0.5, 0.3, and 1.0 percent,

respectively. It is important to assess the decline within the context of technological changes that

could be reducing the use of certain invasive procedures and increasing the use of less invasive

procedures. Each of these specialties experienced increases in RVU volume for other procedures—

by 1.7 percent for general surgery, 5.5 percent for thoracic surgery, and 1.5 percent for ophthalmology.

Finally, volume also declined for the following specialty/service category combinations: 

! Imaging services furnished by ophthalmologists and pathologists declined by 1.3 and 3.4

percent per year, respectively. 

! Tests furnished by ophthalmologists, orthopedic surgeons, and thoracic surgeons declined by

5.7, 2.9, and 3.4 percent per year, respectively. 

These decreases might be due to other providers furnishing imaging services and tests. Nationally,

imaging services and tests increased by 9.5 and 7.2 percent per year, respectively.
14 Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 

Figure 2

Average annual change in per beneficiary use of services and impact of

resource-based practice expense relative value units on total payments

Note: PE RVUs (practice expense relative value units).

Source: Urban Institute analysis of 1998 and 2002 summaries of Medicare physician/supplier claims.

4.4

3.8

4.7

9.0

2.6

7.2

5.3

3.1

9.5

3.6

-1.3

1.0

-3.1

-1.3

2.4

-6

-4

-2

0

2

4

6

8

10

12

Evaluation

management

Imaging Major procedures Other procedures Tests

Type of service

Percent

Service volume

RVU volume

Impact of resource-based PE

RVUs on total payment
Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 15

Table 3

Average annual change in per beneficiary use of services,

by specialty, 1998–2002

Specialty Service volume RVU volume

All 4.2% 4.7%

Cardiology 5.9 8.2

Dermatology 5.9 5.9

Family/general practice 2.6 4.2

Gastroenterology 2.6 5.1

General surgery 1.5 1.0

Internal medicine 3.6 4.2

Ophthalmology 1.2 1.5

Orthopedic surgery 4.2 4.2

Pathology 6.4 6.6

Radiology 3.6 6.4

Thoracic surgery 0.0 0.2

Urology 0.7 2.2

Other medical 2.4 3.1

Other providers 8.6 8.0

Other surgical 2.2 3.6

Note: RVU (relative value unit). Service volume is per capita use of services by beneficiaries in fee-for-service Medicare. RVU volume is per capita use

weighted by each service’s relative weight from the physician fee schedule. The latter measure is more precise because it accounts for both

changes in the number of services and the complexity, or intensity, of those services. To hold RVU valuation constant in calculating service

volume, we applied 2002 RVU values to the 1998 and 2002 data. Results are similar using 1998 RVUs. See Table 2 for the specialties

included in the following groups: “Other surgical,” “Other medical,” and “Other providers.” 

Source: Urban Institute analysis of 1998 and 2002 summaries of Medicare physician/supplier claims.

Physician participation with Medicare 

The Congress asked MedPAC to examine changes in physician participation with Medicare in our

analysis of the PE transition and its effects. To measure changes in physician participation with

Medicare we examined two measures: growth in the share of physicians signing Medicare

participation agreements and growth in the share of allowed charges paid on assignment. Physicians

who sign participation agreements agree to accept the assigned fee schedule amount as the full 
16 Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 

charge for all their allowed Medicare claims. The box below provides more detailed descriptions of

the important benefits associated with being a participating provider and accepting assignment. 

These benefits, which existed prior to the implementation of the resource-based methods, likely

contribute to high rates of physician participation with Medicare.

Physician participation rates and assignment rates increased during the transition to the resourcebased RVUs. Specifically, between 1998 and 2002, the share of physicians signing Medicare

participation agreements grew from 83 to 90 percent (MedPAC 2003). Medicare claims analysis

shows that the share of allowed charges paid on assignment were quite high in 1998 and 2002; they

were 98 and 99 percent respectively (Maxwell et al. 2004) (Table 4). When analyzed by specialty,

the assignment rates of all specialities either stayed the same or increased slightly during the study

period. However, because the 1998 rates are so high, there is little opportunity for large increases in

these rates. A further breakdown by type of service within specialities shows that assignment rates

stayed constant or increased for most types of services, within most specialities (not shown in table). 

Medicare participation agreements and accepting assignment

Physicians who sign Medicare participation contracts agree to accept assignment on all their

allowed Medicare claims. When physicians accept assignment for a service, they accept the

Medicare fee schedule amount as the full charge for the service, and may not charge the

beneficiary more than the applicable deductible and coinsurance amounts. When physicians do

not accept assignment for a service, they may charge up to 115 percent of the fee schedule amount. 

The difference between the fee schedule amount and the physician’s actual charge is often called

the balanced bill amount.

Accepting assignment and being a participating physician confer certain benefits. For example,

when physicians accept assignment for a service, they may collect Medicare’s payment directly

from Medicare, which physicians report to be a key convenience, and thus a strong incentive for

accepting assignment and participating with Medicare. Participating physicians are also granted a

higher fee schedule payment. Specifically, Medicare pays participating physicians based on the

full fee schedule amount, but pays nonparticipating physicians based on 95 percent of the fee

schedule amount. 
Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 17

Table 4

Percent of allowed charges paid on assignment, 

by specialty, 1998 and 2002

Speciality 1998 2002 Percentage point

change, 1998–2002

All 98% 99% 1

Cardiology 99 99 0

Dermatology 96 98 2

Family/general practice 97 98 1

Gastroenterology 99 99 0

General surgery 99 99 0

Internal medicine 97 98 1

Ophthalmology 98 99 1

Orthopedic surgery 99 99 0

Pathology 99 99 0

Radiology 99 99 0

Thoracic surgery 99 99 0

Urology 98 99 1

Other medical 98 99 1

Other providers 97 98 1

Other surgical 97 98 1

Notes: To hold a given service's allowed charge constant over the two years, 2002 allowed charge rates were applied in calculating both the 1998 and

the 2002 assignment rates. (Results were similar when charge rates were not held constant, or were held constant using 1998 rates.) To hold the

mix of services constant over the two years, we examined 1998 and 2002 assignment rates on the mix of services utilized in 2002. (Results were

similar when service mix was held constant using the 1998 service mix.) See Table 2 for the specialities included in the following groups: “Other

medical,” “Other providers,” and “Other surgical.”

Source: Urban Institute analysis of 1998 and 2002 summaries of physician/supplier claims.

Beneficiaries’ access to care 

To analyze changes in beneficiary access to physician services during the PE transition, we examined

beneficiary and physician survey information from three sources: the Medicare Current Beneficiary

Survey (MCBS) of beneficiaries, the National Ambulatory Care Survey (NAMCS) of physicians, and

a MedPAC-sponsored survey of physicians. Findings from these surveys show that access to

physician care remained generally good during the PE transition period. Many factors can affect

beneficiary access to physician services, making it difficult to determine the effect that the resource-
18 Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 

based PE RVUs had on access to physician care. Indeed, no clear relationship emerged between the

introduction of the resource-based PE RVUs and trends in access to physician care. 

Analysis of the MCBS shows that in both 1998 and 2002, most Medicare beneficiaries reported

having adequate access to physicians. Specifically, a steady 95 percent of beneficiaries who had a

doctor’s appointment during the year reported that the doctor they saw was their first choice. 

Further, beneficiary satisfaction with access to specialists remained high during this time frame. 

Most beneficiaries (at least 95 percent) were either “satisfied” or “very satisfied” with the availability

of care by specialists (Table 5).

Table 5

Satisfaction of beneficiaries with availability of specialists, 1998 and 2002

1998 2002

Percentage point change

1998–2002

Very satisfied 20.9% 22.2% 1.2

Satisfied 75.5 73.4 –2.2

Dissatisfied 2.9 3.6 0.7

Very dissatisfied 0.6 0.8 0.2

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Access to Care files, 1998–2002.

To track physician willingness to serve Medicare patients and patients with other types of insurance,

we analyzed results from NAMCS and a previous MedPAC-sponsored survey. 6

 Averaged across all

specialities, the NAMCS survey found small declines in the acceptance of both Medicare patients and

privately insured patients, between 1999 and 2002 (Table 6). The MedPAC-sponsored survey found

a decline in the acceptance of Medicare and HMO (private and Medicaid) patients, but not of private

fee-for-service and preferred provider organization patients (Schoenman and Feldman 2002) (Table

7, p. 20). 

Both of these physician surveys found that surgeons and physicians who conduct relatively high

numbers of procedures were more likely to accept new Medicare patients than physicians who focus

more on primary care and conduct relatively few procedures. Between 1999 and 2002, the share of

primary care physicians who accepted new patients dropped at the same rate for both Medicare and

privately insured patient (Table 6). Also, the share of specialists accepting new privately insured

patients dropped from 92 to 79 percent (12 percentage points); the share dropped less for Medicare

patients—from 88 to 84 percent (4 percentage points). 
Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 19

Table 6

Percent of physicians accepting new patients, by type of insurance,

1999–2002

Type of insurance 1999 2002

Percentage point change

1999–2002

All specialties

Any patients 95.5% 94.9% –0.6

Self-pay 92.4 90.9 –1.5

Private insurance 91.8 85.8 –6.0

Medicare 90.0 87.0 –3.0

Medicaid 72.5 70.4 –2.1

No charge/charity 51.9 53.5 1.6

Primary care

Any patients 92.6 93.0 0.4

Self-pay 88.6 89.1 0.5

Private insurance 89.6 85.3 –4.3

Medicare 88.1 83.1 –5.0

Medicaid 71.0 66.0 –5.0

No charge/charity 47.4 49.6 2.2

Surgical specialties

Any patients 98.8 98.6 –0.2

Self–pay 95.6 96.2 0.6

Private insurance 95.4 92.3 –3.1

Medicare 94.8 96.4 1.6

Medicaid 83.1 79.8 –3.3

No charge/charity 58.9 60.7 1.8

Medical specialties

Any patients 97.2 94.3 –2.9

Self-pay 96.1 88.5 –7.6

Private insurance 91.7 79.3 –12.4

Medicare 88.2 83.7 –4.5

Medicaid 62.6 67.9 5.3

Nocharge/charity 52.2 52.5 0.3

Note: Survey excludes pediatric specialities, nonoffice-based specialities, and federally-employed physicians.

Source: National Ambulatory Medical Care Survey, physician screen, 1999–2002.
20 Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 

Table 7

Change in acceptance of new patients, by patient insurance

 and physician type, 1999–2002

Percent of physicians in open practices accepting new patients, by insurance typea

Type of physician 

Private

FFS/PPO

Medicare 

FFS Medicaid HMO Othera

1999

All physicians 97.9% 96.8% 73.7% 87.6% 90.5%

Proceduralistsb 98.4 98.4 79.7 87.6 90.4

Surgeons 98.8 97.9 79.6 89.5 92.9

Nonproceduralists 97.2 95.5 67.9 86.4 89.1

2002

All physicians 99.3% 95.9% 69.5% 86.3% 92.8%

Proceduralists 98.7 100.0* 77.0 93.2* 96.0

Surgeons 98.8 98.1* 74.5 89.8* 92.5

Nonproceduralists 99.7* 93.4 64.0 81.9 92.3

Percentage point

change, 1999–2002c

All physicians 1.4* –0.9 –4.2 –1.3 2.3

Proceduralists 0.3 1.6 –2.7 5.6 5.6

Surgeons 0.0 0.2 –5.1 0.3 –0.4

Nonproceduralists 2.5* –2.1 –3.9 –4.5 3.2

Note: FFS (fee-for-service), PPO(preferred provider organization). Analysis excludes physicians who were not accepting any new patients (regardless of 

type) in the year. 

 a “Other” coverage includes uninsured, self-pay, and charity.

b

 “Proceduralists” include physicians specializing in cardiology, dermatology, gastroenterology, and radiation oncology. “Nonprodeduralists”

include all other eligible medical specialties.

c Comparisons over time by type of patient may not reflect changes due to patient classification differences.

*Change since 1999 is significantly different from zero at the 95 percent confidence level.

Source: 2002 Survey of Physicians about the Medicare Program, conducted by the Project HOPE Center for Health Affairs for MedPAC.
Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 21

Future MedPAC issues 

CMS used the best available data sources at the time—the SMS and CPEP data—to derive resourcebased practice expense RVUs. CMS, with the assistance of the AMA, engaged in a substantial effort

to refine the allocation data during and after the transition.7

 With each passing year, however, the

ability of these data to accurately reflect current delivery patterns and practice expense costs becomes

more of an issue.

Medicare will need current and accurate practice expense data and refined service-specific expense

estimates to ensure appropriate payments across all services. The Secretary is required to review the

relative values for all physician fee schedule procedures at least once every five years. Since the

practice expense RVUs became final in 2002, CMS will need to review them by 2007. 

MedPAC plans to continue to analyze the data that are used to establish practice expense payments

and the methods used to derive these payments to see if they can be improved. It will be important to

examine the effect of future refinements on payments for individual services. Like all transitions to

resource-based payments, refinements to the data and methods would be expected to affect payments

across all specialties and services. This broad effect stems from how physicians are paid. The fee

schedule ranks services on a common scale based on the relative amount of resources needed to

provide each service, and then makes payments for each service proportional to those resources. 

The SMS data 

Obtaining current and accurate practice expense data is a critical issue facing Medicare. The SMS

data used to derive practice expense RVUs reflect practice patterns from the mid-1990s (1994

through 1998). Although the SMS is a longstanding survey that was originally developed by the

AMA in 1981, the AMA does not plan to conduct this survey at this time. Therefore, CMS needs to

consider how to obtain current practice expense data; i.e., the agency could administer an SMS-like

survey or it might opt for alternate methods.

Currently, Medicare relies on supplemental data submitted by specialty groups as the primary method

for updating practice expense data. The Balanced Budget Refinement Act of 1999 (BBRA)

mandated that the agency establish a process and consider supplemental data when updating the

physician fee schedule.8

 To ensure the validity and comparability to existing SMS data, CMS issued

criteria that groups must follow in collecting supplemental data. For example, physician groups must

use SMS survey instruments and protocols in collecting supplemental data. 9

 CMS has used the

supplemental data submitted by several groups to update their practice expense per hour. 
22 Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 

However, supplemental data do not provide a regular source of broad-based practice expense current

data. Although the BBRA gave specialities the option to submit supplemental data, they are not

mandated to do so on a regular basis. Since the BBRA, few groups have submitted supplemental

data. Physician groups informed MedPAC that collecting practice expense data is a costly and timeconsuming process, and that they do so only when it is likely to improve their payment rates. 

MedPAC will explore the feasibility of different approaches to updating the aggregate data on

physicians’ practice expenses. The issues that we will explore include:

! Choosing a sponsor. An effort sponsored by Medicare would ensure that information would be

collected for developing practice expense RVUs and for all specialty groups recognized by

Medicare—thereby overcoming two limitations of the SMS survey. Efforts sponsored by

private groups would need to be evaluated to assess whether the data could be used to derive

practice expense RVUs. 

! Collecting and verifying the data. A new effort could collect data from a nationally

representative sample of physicians or from all physicians. For example, CMS could select a

representative sample of physicians and obtain practice expense data from them over several

years. Physicians could be compensated for their expenses in return for participating in the

panel and permitting independent audits of their practice expense data. Whether data are

collected from a sample or from all physicians, processes (e.g., audits) need to be implemented

to ensure the accuracy of the data. 

! Designing the data collection instrument. A new data collection effort would offer

opportunities to overcome some of the shortcomings of the SMS data. To compensate for

these shortcomings, CMS had to make several adjustments to the data. The box on page 24

provides an overview of the limitations of the SMS data. 

! Improving the response rate. If a voluntary survey is conducted, steps need to be considered to

ensure that a new data collection effort would have an adequate response rate. Historically,

efforts to survey physicians about their practice expenses have had low response rates. 

Response rates to the practice expense questions on the SMS survey were lower than the

overall survey response rate (40 versus 60 percent, respectively). Problems with sample size

and response rate have also plagued previous attempts by CMS to gather reliable data on

practice expenses.

! Integrating new data with existing data. At issue is whether and how the new data on practice

expenses would be integrated with existing SMS data and supplemental survey data. 

Currently, when integrating supplemental data, CMS weight-averages the supplemental data

with the existing SMS data to increase the sample size. Using older data to increase the sample

size needs to be balanced with its ability to reflect current delivery patterns.
Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 23

! Funding an effort. Collecting and validating practice expense data is costly. If CMS were to

sponsor the effort, the agency would most likely need additional resources.

Another option is for Medicare to work with existing data (including data furnished by specialties)

and rely on a consensus group representing specialties to review the practice expense data and

recommend refinements to the agency. Such a process might be similar to the process for deriving

new work RVUs and refining the data on practice expense allocation. 

The CPEP data 

Beginning in 1998, the American Medical Association’s Relative Value Update Committee (RUC)

began reviewing the direct practice expense inputs. The RUC created a subcommittee, the Practice

Expense Advisory Committee (PEAC), a panel of physicians with representatives from all of the

major physician specialty societies, that met regularly and made recommendations to CMS on the

resources required to perform services. The PEAC’s effort was fairly comprehensive—it has

reviewed more than 6,500 codes since 1999. Providers interviewed by MedPAC indicated that they

were generally pleased with the work of the PEAC and the process for making refinements. 10 CMS

has accepted most of the PEAC’s recommendations with only minor changes. In addition, CMS has

made other updates to the CPEP data, such as repricing clinical staff wages.11 

At issue is how to ensure the availability of current and reliable allocation data. In the future,

MedPAC may explore various approaches. CMS could continue to receive input from the RUC and

its subcommittees. Alternatively, new expert panels could be convened to derive new estimates.

Addressing methodological issues 

Some policymakers and providers have raised concerns about how indirect expenses are allocated to

individual services. Additional work is needed in developing and comparing new methods for

allocating indirect expenses to current methods. 

As mentioned earlier, indirect expenses, or overhead administrative labor, office expenses, and other

expenses are allocated to specific services in proportion to the direct expenses and physician work

involved in providing each service. Some providers contend that because nonphysician services have

no physician work associated with them, they are allocated a lower share of indirect expenses

compared with most services performed by physicians. 

To address the perceived low payments for nonphysician services, CMS established the alternative

method to calculate PE payments for these services. However, this method does not address the more

fundamental problem affecting payment for nonphysician services—the allocation of indirect

expenses. It deviates from the basic approach in deriving and allocating PE RVUs by, for example,

averaging practice expenses for specialty groups with services in the pool, instead of using specialtyspecific data, and allocating costs based on charges rather than resource requirements.
24 Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 

Some limitations of the Socioeconomic Monitoring System data

Policymakers and providers have repeatedly discussed the shortcomings of the Socioeconomic

Monitoring System (SMS) data. Most stakeholders agree that the SMS was the best data source

available at the time to estimate hourly physician expenses. This survey, however, was not

initially intended to be used to derive practice expense relative value units. Some concerns about

the SMS data raised by policymakers and providers include: 

! Certain specialties were not represented in the SMS survey. The SMS reports practice

expense estimates for 26 specialties, while Medicare uses over 65 categories. Consequently,

CMS crosswalked these specialties to a specialty included in the survey. In addition, the

SMS survey was not representative of the mixes of practices for some specialties.

! The response rate for the practice expense questions on the SMS survey was lower than the

overall survey. This reduced the sample size for some specialty groups and raised concerns

about nonrespondent bias. 

! SMS data represent a physician’s portion of a group’s practice expenses. But CMS’s

methodology calculates practice expenses per hour for each physician respondent’s practice. 

CMS assumed that all physicians in a group practice had the same practice expenses as the

respondent. This assumption may be problematic for multispecialty practices. 

! The SMS data overestimated physician practice costs in some cases by including the cost of

services paid separately by Part B. For example, the SMS cost per hour includes the cost of

nonphysician practitioners even though the fee schedule pays separately for the services

provided by selected nonphysician practitioners—nurse practitioners, certified nurse

specialists, and physician assistants.

! Actual costs may not be adequately measured. SMS data may not appropriately reflect

certain expenses incurred by providers, such as providing uncompensated care. The hourly

rate estimated by SMS reflects expenses across all patients, not only Medicare beneficiaries. 

Some stakeholders contend that the rate may not reflect the actual cost of treating Medicare

patients, who, for certain practices, may be older and more complex than non-Medicare

patients. 

! Some primary care groups contend that specialties whose procedures may have been

overvalued under the charge-based system continue to benefit under the resource-based

method because of the use of the SMS data (GAO 1999). At issue is the extent to which the

SMS data accurately reflects a specialty’s practice expense costs or whether the data more

closely reflects the charge-based system.
Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 25

References

Becker E., D. Dunn, W. Hsaio. 1988. Relative cost differences among physicians’ specialty

practices. Journal of the American Medical Association 260, no. 16 (October): 2397–2402. 

Codespote, S.M., W.J. London, and J.D. Shatto. 1998. Centers for Medicare & Medicaid Services,

Department of Health and Human Services. Physician volume and intensity response. 

http://www.cms.hhs.gov/statistics/actuary/physicianresponse/

General Accounting Office. 2001. Medicare physician fee schedule. Practice expense payments to

oncologists indicate need for overall refinements. Washington, DC: GAO. 

General Accounting Office. 1999. Medicare physician payments. Need to refine practice expense

values during transition and long term. Washington, DC: GAO. 

Health Care Financing Administration, Department of Health and Human Services. 1999. 

Medicare program: Revisions to payment policies under the physician fee schedule for calendar year

2000; final rule. Federal Register 64, no. 211 (November 2). 

Health Care Financing Administration, Department of Health and Human Services. 1998. 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. Federal Register 63, no. 211

(November 2).

Health Care Financing Administration, Department of Health and Human Services. 1997. Medicare:

Physician fee schedule for calendar year 1998; payment policies and relative value unit adjustments

and clinical psychologist fee schedule; final rule. Federal Register 62, no. 211 (October 31): 59078. 

Maxwell, S., S. Zuckerman, and P. Aliaga. 2004. Effects of the implementation of resource-based

practice expense relative value units under the Medicare physician fee schedule, 1998-2002 (Final

report to MedPAC). The Urban Institute. 

Medicare Payment Advisory Commission. 2003. Report to the Congress: Medicare payment policy. 

Washington, DC: MedPAC. 

Schoenman, J., J. Feldman. 2002. Results of the Medicare Payment Advisory Commission’s 2002

Survey of Physicians (Report to MedPAC). Bethesda, MD, The Project HOPE Center for Health

Affairs. 
26 Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 

1. Specifically, the SMS pool is divided by the CPEP pool for each specialty to produce a scaling

factor which is applied to the CPEP direct cost inputs. This process was intended to match

costs counted as practice expenses in the SMS survey with items counted as a practice expense

in the CPEP data.

2. The MMA required MedPAC to conduct a separate study about the PE relative values for the

specialties of thoracic and cardiac surgery. This study is due to the Congress in January 2005.

3. Facility settings include hospitals, skilled nursing facilities, and ambulatory surgical centers. 

Nonfacility settings include physicians’ offices, patients’ homes, outpatient dialysis facilities,

and clinical laboratories.

4. The BETOS service classification system divides physician/supplier services into seven main

categories and additional subcategories. The first main category is evaluation and management

services. It includes office visits, hospital visits, emergency room services, home and nursing

home visits, consultations, and specialist visits. The second main category is procedures. It

includes major procedures (subdivided into cardiovascular, orthopedic, and other); and

ambulatory procedures (subdivided into eye, other ambulatory, minor procedures, and

endoscopy and oncology procedures). The third main category is imaging. It is subdivided

into standard imaging (routine X-rays and nuclear medicine), advanced imaging (CT scans and

magnetic resonance imaging), sonographic imaging, and imaging/procedures (largely cardiac

catheterization). The fourth main category is tests, divided into laboratory and other tests. 

Other tests is dominated by a wide range of cardiovascular tests. The three remaining

categories are durable medical equipment; other (a broad category including ambulance,

chiropractic, and vision/hearing/speech services; enteral/parenteral drugs or nutrition;

chemotherapy and other drugs); and a final category of not-classified services (including local

codes). 

5. See Urban Institute (2004) on www.medpac.gov.

6. Both of these physician surveys provide data for 1999 and 2002. The MedPAC-sponsored

survey excluded physicians who were not taking any new patients (closed practices),

regardless of insurance type. The NAMCS survey, however, included physicians with open

and closed practices.

7. The BBA required CMS to develop a refinement process for each of the four years of the

transition period. Refinement steps included:

Endnotes
Impact of Resource-Based Practice Expense Payments for Physicians’ Services * December 2004 27

! establishing a mechanism to receive independent advice for dealing with broad PE RVU

technical and methodological issues, 

! evaluating any additional recommendations from GAO, MedPAC, and the Practicing

Physicians Advisory Council, and

! consulting with physician groups and other groups affected.

8. In the August 2004 proposed rule, CMS extended until 2005 the period for accepting

supplemental data that meet the specific criteria set forth in the November 2000 final rule.

After that point, CMS will no longer accept supplemental practice expense data. The deadline

for submitting supplemental data to be considered in calendar year 2006 is March 1, 2005.

9. The specific criteria developed by CMS for considering supplemental data include: 

! Physician groups must draw their sample from the AMA physician masterfile.

! Physician groups must arrange for the AMA to send the sample directly to their contractor to

ensure confidentiality of the sample.

! Nonphysician specialties not included in the AMA’s SMS must develop a method to draw a

nationally representative sample of members and nonmembers.

! A group (or its contractors) must conduct the survey based on the SMS survey instruments and

protocols.

! A group must use a contractor that has experience with the SMS or a survey firm with

experience successfully conducting national multispecialty surveys of physicians using a

nationally representative random sample.

10. As noted by GAO (1999), some providers initially criticized the CPEP allocation data for: 1)

being “best guesses” of panel members, 2) not being representative of the different practice

settings or types of physicians who provide particular procedures, and 3) differences in the

resources identified by different panels for the same procedures. 

11. The PEAC held its last meeting in March 2004. The AMA has formed a new smaller subgroup

of the PEAC. This group will finish the review of about 150 codes remaining from the

PEAC’s effort and make recommendations to CMS on new and revised codes.
APPENDIX A

Calculating the practice expense method for

physician services
 

 

 

Calculating the practice expense method for physician services

SMS cost pools

+

Clinical

labor

$150,000,000

Medical

equipment

$50,000,000

Medical

supplies

$100,000,000

Administrative

labor

$150,000,000

Office

expenses

$200,000,000

Other

expenses

$100,000,000

Clinical

labor

$15

SMS practice

expense

estimates per

physician hour

Medical

equipment

$5

Medical

supplies

$10

Administrative

labor

$15

Office

 expenses

$20

Other

expenses

$10

x =

SMS indirect

expenses CP

$450,000,000

Step 1

CPEP direct

cost estimates

per service

Step 2

Direct expenses

Indirect expenses

x

Medicare

frequency = CPEP

CP

SMS

CP/

CPEP

CP

=

 

Total

physician

hours

treating

Medicare

patients

10,000,000

00001 $20 x 20,000,000 = $400,000,000 $150,000,000

00002 $ 5 x 5,000,000 = $ 25,000,000 $425,000,000

$425,000,000

00001 $ 5 x 20,000,000 = $100,000,000 $ 50,000,000

00002 $15 x 5,000,000 = $ 75,000,000 $175,000,000

$175,000,000

00001 $10 x 20,000,000 = $200,000,000 $100,000,000

00002 $20 x 5,000,000 = $100,000,000 $300,000,000

$300,000,000

For Specialty A, estimate the average

practice expenses for six different

expense categories

Allocate Specialty A’s total practice expenses to

individual services

 

A

Figure A-1
 

 

 

Source: GAO 2001.

SMS indirect CP/

CPEP-based

indirect CP

Scaling

factor

Step 2

x

CPEP direct

cost estimates

per service = SMS

CPS

SMS

clinical

labor

CPS

=

0.35 00001 $20 x .35 = $7.0 00001 $7.0 + $1.5 + $3.3 = $11.8

00002 $ 5 x .35 = $1.8 00002 $1.8 + $4.4 + $6.6 = $12.8

0.29 00001 $ 5 x .29 = $1.5

00002 $15 x .29 = $4.4

0.33 00001 $10 x .33 = $3.3

00002 $20 x .33 = $6.6

SMS

medical

equipment

CPS

Direct

+ + CPS

SMS

medical

supplies

CPS

+ Physician’s

work ($)

Indirect

cost

allocators

= x Medicare

frequency = CPEP-basedindirect CP

$ 450,000,000 = 0.35 00001 $44.8 x .35 = $15.7 + $11.8 = $27.5

$1,290,000,000 00002 $78.8 x .35 = $27.6 + $12.8 = $40.4

=

Indirect

scaling

factor

x

Indirect

cost

allocators = Indirect

CPS +

Direct

CPS = Estimated

practice

expense CPS

Step 3

Est. practice

expense CPS

00001 $27.5 20,000,000 00001 N/A 0 00001 $27.5

00002 $40.4 5,000,000 00002 $20 50,000,000 00002 $21.9

Specialty A Specialty B

Medicare

frequency

Est. practice

expense CPS

Medicare

frequency

Weighted avg.

per service

00001 $33 = $44.8 x 20,000,000 = $ 896,000,000

00002 $66 = $78.8 x 5,000,000 = $ 394,000,000

$1,290,000,000

Compute a weighted average of the expenses for services performed by multiple specialties

A

Note: CP (cost pool), CPEP (clinical practice expert panel), CPS (cost per service), SMS (socioeconomic monitoring system). 

Calculating the practice expense method for physician services (continued)
More About MedPAC
Commission members

Glenn M. Hackbarth, J.D., Chairman 

Independent consultant 

Bend, OR 

Robert D. Reischauer, Ph.D., Vice chairman

The Urban Institute

Washington, DC

Term expired April 2005 Term expires April 2006 Term expires April 2007

Nancy-Ann DeParle, J.D.

JPMorgan Partners

Washington, DC

David F. Durenberger, J.D.

National Institute of Health Policy

University of St. Thomas

Minneapolis, MN

Carol Raphael

Visiting Nurse Service of New York

New York, NY

Mary K. Wakefield, Ph.D., R.N.,

F.A.A.N.

Center for Rural Health 

University of North Dakota

Grand Forks, ND

Nicholas J. Wolter, M.D., J.D.

Deaconess Billings Clinic

Billings, MT

Autry O.V. "Pete" DeBusk

DeRoyal

Powell, TN

Glenn M. Hackbarth, J.D.

Alan R. Nelson, M.D.

American College of Physicians

Washington, DC

Robert D. Reischauer, Ph.D.

David A. Smith

Demos

New York, NY

Ray E. Stowers, D.O.

Oklahoma State University College

of Osteopathic Medicine

Tulsa, OK

John M. Bertko, F.S.A.,

M.A.A.A.

Humana, Inc.

Louisville, KY

Shelia P. Burke, M.P.A., R.N.,

F.A.A.N.

Smithsonian Institution

Washington, DC

Francis J. Crosson, M.D.

The Permanente Federation, LLC

Oakland, CA

Arnold Milstein, M.D., M.P.H.

Pacific Business Group on Health

San Francisco, CA

Ralph W. Muller

University of Pennsylvania Health

System

Philadelphia, PA

William J. Scanlon, Ph.D.

Health policy consultant

Oak Hill, VA
Commission staff

Mark E. Miller, Ph.D. 

Execuitve Director 

Sarah Thomas, M.S.

Deputy director

Research directors

Jack Ashby, M.H.A.

Jill Bernstein, Ph.D.

Scott Harrison, Ph.D.

Kevin J. Hayes, Ph.D.

Sally Kaplan, Ph.D.

Karen Milgate, M.P.P.

Nancy Ray, M.S.

Analysts

Cristina Boccuti, M.P.P.

Sharon Bee Cheng, M.S.

David V. Glass, M.S.

Timothy F. Greene, M.B.A.

Kathryn Linehan, M.P.H.

Craig K. Lisk, M.S.

Rachel Schmidt, Ph.D.

Joan Sokolovsky, Ph.D.

Jeffrey Stensland, Ph.D.

Ariel Winter, M.P.P.

Chantal Worzala, Ph.D.

Daniel Zabinski, Ph.D.

Research assistants

Chad Ellimoottil

Margo Harrison

Sarah Kwon

Special assistant to the executive director

Annissa McDonald

Administrative staff

Reda Broadnax, B.S.,

 Executive officer

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Donna M. Fletcher

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Cynthia Wilson
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