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601 New Jersey Avenue, N.W. • Suite 9000 

Washington, DC 20001 

202-220-3700 • Fax: 202-220-3759 

Website: www.medpac.gov

Glenn M. Hackbarth, J.D., Chairman

Robert D. Reischauer, Ph.D., Vice Chairman 

Mark E. Miller, Ph.D., Executive Director

Medicare payment to physicians for professional liability insurance 

The purpose of this document is to 

describe how Medicare’s payment 

system for physicians takes into account 

the costs of professional liability 

insurance. 

Physicians’ professional liability 

insurance (PLI) premiums have been 

rising, dramatically for some specialties 

in some areas of the country. While PLI 

costs are a small share of total physician 

revenues, Medicare’s payment system 

for physicians is designed to reflect: 

• differences in PLI costs among 

services and geographic areas 

and 

• national increases in PLI

premiums. 

Trends in private liability insurance 

Historically, changes in premiums for 

PLI have followed a cyclical pattern, but 

in 2001 through 2002, premiums did not 

drop in the way that past experience 

would have predicted. 

Quarterly estimates of annual changes in professional liability insurance premiums, 

1990-2002 
The increase in PLI premiums in 2002 was 

the highest in over a decade, at 11.3 

percent. Several factors may have played 

a role in the current rise in premiums, 

which is more pronounced in certain 

markets. In some states, the strong 

economy in the 1990s prompted insurers 

to enter new markets. Typically, new 

entry in insurance markets is marked by a 

period of low premiums (to gain market 

share), then higher premiums to build 

reserves, which may be what is happening 

now. At the same time, there are reports 

that the size of jury awards in malpractice 

cases rose. Increases in awards together 

with lower investment returns from

financial markets could have led some

insurers to adopt more conservative 

business strategies, including exiting some

markets and raising premiums, with 

particularly large effects in some areas of 

the country. 

PLI insurance and Medicare’s 

physician fee schedule 

Medicare uses information on PLI 

premium costs to redistribute funds among 

specialties, services, and areas and to 

increase payments to reflect overall cost 

increases. The fee schedule calculation 

changes the distribution of payments 

among services and geographic areas to 

reflect changes in the distribution of PLI 

premiums within a fixed pool of dollars. 

The update formula accounts for changes 

in the cost of providing services. 

 

The fee schedule calculation 

The fee schedule sets the level of 

payments for a given service and 

geographic area. Medicare pays 

physicians using a fee schedule for more 

than 7,000 services. 

RVUs⎯Each service has three 

weights⎯called relative value units 

(RVUs)⎯that measure the relative 

costliness of three types of resources used 

to provide different physician services: 

physician work, practice expenses, and 

expenses for PLI. RVUs measure cost 

differences by type of service, regardless 

of geographic area. Although data are 

collected on a specialty basis, they are 

mapped to specific services based on each 

specialty’s share of the total use of the 

service and the services’ work RVUs. 

GPCIs⎯Payments vary among the 89 

geographic fee schedule areas to the extent 

that the costs of providing services differ. 

This variation in the costs for work, 

practice expense, and PLI is measured 

using geographic practice cost indexes 

(GPCIs). GPCIs measure cost differences 

by geographic area, regardless of service. 

The PLI GPCI reflects the average 

premium in an area relative to the national 

average premium. 

 

The three RVUs, the GPCIs, and the 

conversion factor combine to calculate the 

rate for a given service.

Calculating 2003 physician payments: an 

illustration 

The payment rate for an office visit (in West 

Virginia) is: 

 

Work RVU x work GPCI (0.67 x 0.963) + 

Practice expense RVU x practice expense 

GPCI (0.69 x 0.850) + 

PLI RVU x PLI GPCI (0.03 x 1.378) 

x conversion factor in 2003 ($36.79) 

= payment rate ($46.84) 

The GPCI for PLI of 1.378 shows that the 

relative cost of PLI in West Virginia is around 

38 percent higher than the national average. 

2
CMS uses new data to revise the RVUs 

and GPCIs according to a schedule 

specified in law—every five years for 

RVUs and every three years for GPCIs. 

The agency will next revise the PLI RVUs 

in 2006 and the GPCIs in 2004. 

These revisions are budget neutral but can 

redistribute payments among services (in 

the case of RVUs) or among geographic 

areas (in the case of GPCIs). 

The update and the Medicare Economic 

Index 

Changes in the input prices for physician 

services are measured using the Medicare 

Economic Index (MEI), a weighted 

measure of average national prices for 

inputs needed to produce physicians’ 

services (such as employee wages, rents, 

and PLI premiums). The index measures 

changes in prices each year, based on data 

from a variety of sources. 

PLI premiums contribute 3.2 percent to the 

total index, so even large changes in

national premiums have a relatively small 

effect on the MEI. For example, if PLI 

premiums rose nationally by an average of 

4.6 percent, as was forecast for 2003, and 

the cost of no other components rose, the 

MEI would rise by 3.2 percent of 4.6 

percent, or 0.147 percentage points. Data 

on PLI premiums come from a survey of 

major insurers conducted by CMS. The 

component weights of the MEI are 

reviewed every five to six years, but there 

is not a set schedule. If PLI costs were to 

increase substantially more than costs for 

other components, the portion of the MEI 

represented by these costs would increase. 

From 1990 through 1998, PLI premiums

remained in a narrow range, from 3 to 5 

percent of revenues. 

Even though the update formula provides 

for additional payments for PLI through 

the MEI, updates are limited if growth in 

the volume of physician services exceeds a 

target rate of growth. Until recently, 

Medicare’s payments have generally 

increased at the rate of the MEI. 

Age of the data and stability of

estimates 

For both the RVUs and GPCIs, CMS 

generally needs about three years to 

collect and analyze data, publish a notice 

of proposed rulemaking, respond to 

questions, and publish a new rule. 

Given this time lag, the schedule for 

revising the RVUs and GPCIs, and a PLI 

market that is usually cyclical, CMS uses 

multiple years of data to make the 

revisions. Averaging these data produces 

stable estimates, which reduce the 

possibility of payments that are distorted 

by anomalies in the data, transitory 

changes in PLI premiums, or unusual 

conditions in local markets. 

CMS recently announced in its 2003 

notice of proposed rulemaking that it will 

be taking steps to use more recent data for 

the PLI GPCI. 

Staff contact 

Kevin Hayes 

(202) 220-3700 

August 12, 2003 

3