Report to Congressional Committees

United States Government Accountability Office

GAO 

December 2004 MEDICARE 

PHYSICIAN FEE 

SCHEDULE 

CMS Needs a Plan for 

Updating Practice 

Expense Component 

GAO-05-60 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-60.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Laura A. 

Dummit at (202) 512-7119. 

Highlights of GAO-05-60, a report to 

congressional committees 

December 2004

MEDICARE PHYSICIAN FEE SCHEDULE

CMS Needs a Plan for Updating Practice 

Expense Component 

CMS reviews supplemental data from medical specialties on total practice 

expenses to determine whether it should use the data, but aspects of CMS’s 

review may result in its not utilizing the best data. CMS’s review is 

necessary because it helps protect against perceived or actual bias in the 

estimates. Risk of bias exists because only specialties that believe their 

Medicare fees are too low are likely to submit supplemental data, and the 

data are not audited. CMS, however, may still use certain data submissions 

that are not representative of physician practices within a specialty. CMS 

also may reject some data that are more representative of a specialty’s total 

practice expenses than the data currently used for that specialty. In 

addition, CMS reviewed a 2002 data submission for accuracy, which is an 

important additional check, yet when the data did not meet the accuracy 

test, CMS did not reject the data. CMS has not stated whether it will review 

the accuracy of all supplemental data submissions. 

Stakeholders such as specialty societies and AMA said the expert panel 

improved resource estimates for individual services because of the rigor of 

its evaluation process. CMS and specialty societies generally accepted the 

panel’s estimates because the panel represented a broad range of specialties 

and its collaborative evaluation process became increasingly systematic. 

CMS implemented almost all of the panel’s estimates but appropriately 

changed some estimates that conflicted with Medicare coverage rules and 

changed others to make them consistent across services. In modifying 

other estimates, however, CMS did not always rely on adequate data or 

explain its rationale. Certain physician groups told GAO that this had 

diminished their confidence in the process for updating Medicare’s fees, and 

physicians’ confidence in the process is important to ensure their continued 

participation in Medicare. 

CMS does not have a plan for developing and using appropriate data for the 

mandated review of the fee schedule. CMS reported that it is in the process 

of obtaining a contract to collect practice expense data from the major 

physician and nonphysician specialties but did not provide specifics. A plan 

for the data collection is important for several reasons. Data sources that 

had been used no longer exist or are insufficient. The AMA physician survey 

that provided total practice expense data was last conducted in 1999 and 

was modified in 2000 such that it no longer collected the necessary data. 

Data submitted voluntarily by specialties to update these estimates are not 

an appropriate substitute for a systematic data collection effort. In addition, 

the expert panel that reviewed resource estimates for individual services 

completed its work in its final meeting in March 2004. CMS indicated that an 

ongoing AMA committee would continue to develop estimates for new and 

revised services. While CMS officials told GAO they believe CMS can 

complete the review of the fee schedule as required by 2007, without a 

specific plan CMS cannot ensure that it will be able to collect the data and 

update the fee schedule in a timely manner. 

Medicare’s payments for the costs 

physicians incur in operating their 

practices are based on two sets of 

estimates: total practice expenses 

and resource estimates for 

individual services. Total practice 

expense estimates were derived 

from American Medical 

Association (AMA) physician 

surveys, which the Centers for 

Medicare & Medicaid Services 

(CMS) refines with supplemental 

data submitted by medical 

specialty societies. Resource 

estimates for individual services 

were developed by expert panels 

and refined by CMS with 

recommendations from another 

expert panel. In response to a 

mandate in the Medicare, Medicaid, 

and SCHIP Benefits Improvement 

and Protection Act of 2000, GAO 

evaluated CMS’s processes for 

updating total practice expense and 

resource estimates and whether 

CMS will have the data necessary 

to update the fee schedule at least 

every 5 years as mandated by law. 

What GAO Recommends

GAO recommends that CMS modify 

its review of supplemental data 

submissions, base changes to the 

expert panel’s recommendations 

on data analysis and a documented, 

transparent process, and develop 

and implement a plan to develop 

data for the mandated updates. 

CMS said it had taken or planned to 

take most actions recommended, 

but its actions do not obviate the 

need for the recommendations. 

AMA agreed with the findings but 

not with all of GAO’s conclusions. 
Page i GAO-05-60 Medicare Physician Practice Expenses 

Letter 1

Results in Brief 3 

Background 6 

Certain Aspects of CMS’s Review Are Problematic 14 

Updating Process Improved Resource Estimates for Individual 

Services, Although Certain CMS Changes Were Made without 

Adequate Justification 18 

CMS Has Not Specified a Plan for Developing Appropriate Data to 

Update the Fee Schedule 20 

Conclusions 21 

Recommendations for Executive Action 21 

Agency and Industry Comments and Our Evaluation 22 

Appendix I Medical Specialty Societies Interviewed for This 

Report 28 

Appendix II Scope and Methodology 29 

Appendix III Comments from the Centers for Medicare & Medicaid 

Services 31 

Appendix IV GAO Contact and Staff Acknowledgments 38 

GAO Contact 38 

Acknowledgments 38 

Tables 

Table 1: CMS Criteria for Evaluating Specialty Society 

Supplemental Data Submissions 9 

Table 2: Supplemental Data Submissions by Specialty, CMS 

Decision, and Reasons for Rejection, 2000 through 2002 11 

Contents 
Page ii GAO-05-60 Medicare Physician Practice Expenses 

Abbreviations 

AMA American Medical Association 

AOA American Optometric Association 

ASCO American Society of Clinical Oncology 

BLS Bureau of Labor Statistics 

CMS Centers for Medicare & Medicaid Services 

CPEP clinical practice expert panels 

HCFA Health Care Financing Administration 

OIG Office of Inspector General 

PEAC Practice Expense Advisory Committee 

RUC RVS Update Committee 

SMS Socioeconomic Monitoring System 

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Page 1 GAO-05-60 Medicare Physician Practice Expenses 

December 13, 2004 

Congressional Committees 

Medicare pays for physician services using a fee schedule based on the 

resources required to deliver each service. Under this fee schedule, a 

single fee is paid for each of the more than 7,000 services (such as office 

visits, surgical procedures, and tests) delivered by physicians and certain 

other health professionals, regardless of the medical specialty performing 

the service. The fee is made up of three parts that recognize different types 

of resources required to provide each service. The physician work 

component provides payment for the physician’s time, skill, and training to 

perform the service. The malpractice component provides payment for the 

expenses of obtaining professional liability insurance. The practice 

expense component provides payment for the expenses incurred in 

operating a practice, such as nurses’ salaries, space, and equipment.1

Almost half of the approximately $53 billion Medicare paid for services 

under the physician fee schedule in 2003 compensated physicians for 

practice expenses. The Centers for Medicare & Medicaid Services (CMS), 

the agency within the Department of Health and Human Services (HHS) 

that administers Medicare, is required to review and adjust the fees for all 

physician services at least every 5 years to account for a number of 

factors, including changes in medical practice.2

Some medical specialty societies have raised concerns that Medicare’s 

practice expense payments do not cover their physicians’ practice 

expenses, in part because of inadequacies in the data used to establish the 

payments. We previously reported that although the data used were the 

best available at the time resource-based practice expense payments were 

developed, they needed refinements to correct potential weaknesses.3

 1

This report refers to the practice expense component of payments as “practice expense 

payments.” 

2

See 42 U.S.C. 1395w-4(c)(2)(B)(i), (ii). 

3

GAO, Medicare Physician Payments: Need to Refine Practice Expense Values During 

Transition and Long Term, GAO/HEHS-99-30 (Washington, D.C.: Feb. 24, 1999) and GAO, 

Medicare Physician Fee Schedule: Practice Expense Payments to Oncologists Indicate 

Need for Overall Refinement, GAO/HEHS-02-53 (Washington, D.C.: Oct. 31, 2001). 

United States Government Accountability Office

Washington, DC 20548 
Page 2 GAO-05-60 Medicare Physician Practice Expenses 

Practice expense payments are developed with (1) estimates of the total 

practice expenses that physicians in each specialty incur to operate their 

practices and (2) estimates of the resources required to perform each of 

the individual services provided by the physicians in each specialty. Total 

practice expenses were estimated originally using data from American 

Medical Association (AMA) surveys of physicians. To refine total practice 

expense estimates, CMS was required to establish a review process to 

accept data submitted voluntarily by medical specialty societies that were 

collected through a survey of physicians practicing in that specialty to 

supplement the AMA survey data.4

 As of June 2004, six specialties had 

submitted supplemental data,5

 and CMS had accepted three submissions. 

The resources required to perform individual services originally were 

estimated by panels of clinicians convened by the Health Care Financing 

Administration (HCFA).6

 To refine these estimates, CMS made its own 

changes but largely relied on recommendations from the AMA-sponsored 

Practice Expense Advisory Committee (PEAC), which comprised expert 

panels of physicians and other clinicians that developed service-specific 

resource estimates based on information from specialty societies. 

The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection 

Act of 2000 directed that we review the processes and data used to refine 

practice expense payments for all specialties.7

 As agreed with your offices, 

we (1) evaluated CMS’s process for reviewing the supplemental data 

submitted by specialty societies on total practice expenses, (2) evaluated 

CMS’s process for updating estimates of resources required to perform 

individual services, and (3) determined whether CMS will have the data 

necessary to review and adjust the physician fee schedule at least every 

5 years, as required by law. 

To conduct this work, we invited 50 medical specialty societies to meet 

with us to discuss their experiences with developing and submitting 

 4

See Section 212 of the Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 

1999, Pub. L. No. 106-113, App. F, 113 Stat. 1501A-321, 1501A-350. 

5

Since we sent our report to CMS for comment on June 15, 2004, CMS posted information 

on its Web site about four additional supplemental data submissions. 

6

On July 1, 2001, the agency that administers the Medicare program was renamed from 

HCFA to the Centers for Medicare & Medicaid Services (CMS). In this report, we will refer 

to HCFA where our findings apply to operations that took place before July 1, 2001. 

7

Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000, Pub. L. 

106-554, Appendix F, Section 411, 114, Stat. 2763A-463, 2763A-508. 
Page 3 GAO-05-60 Medicare Physician Practice Expenses 

supplemental practice expense data and their views of the PEAC process. 

We met with representatives of the 32 specialty societies that responded 

and reviewed written materials they gave us. (App. I lists the 32 medical 

specialty societies that responded.) We evaluated CMS’s review of the 

supplemental total practice expense data by examining specialty societies’ 

submissions and reports from the contractor CMS hired to provide 

technical assistance to the specialty societies and CMS on the 

supplemental data submission process. We also interviewed CMS officials 

and the contractor about the process CMS uses to review submissions. To 

evaluate CMS’s process for updating resource estimates for individual 

services, we interviewed the specialties’ representatives, attended PEAC 

meetings, and examined supporting materials that specialties provided to 

the PEAC. To determine CMS’s decisions on PEAC recommendations and 

CMS’s rationale for other changes to resource estimates for individual 

services, we reviewed relevant documents published in the Federal 

Register8

 and an HHS Office of Inspector General (OIG) report.9 We also 

discussed with CMS staff CMS’s rationale for decisions regarding the 

refinement processes and its views about prospects for obtaining data to 

perform the mandated reviews. We performed our work from November 

2001 through December 2004 in accordance with generally accepted 

government auditing standards. (App. II provides details of our scope and 

methodology.) 

CMS’s review of supplemental data provided by medical specialties on 

total practice expenses is necessary to protect against the risk of bias 

inherent in a voluntary submission process, since only those specialties 

that believe their estimates are too low are likely to submit data. However, 

certain aspects of the review may result in CMS’s not utilizing the best 

available data. First, in assessing whether the respondents to the 

supplemental data survey are representative of all physician practices 

within a specialty, CMS may not be examining physician practice 

characteristics that affect practice expenses. For example, CMS does not 

consider whether the respondents are in independent or hospital-based 

practices, which may have a greater bearing on practice expenses than 

some of the more general characteristics that are used, such as a 

 8

See 64 Fed. Reg. 59,380, 59,399 – 59,403, (1999); 65 Fed. Reg. 65,376, 65,390 – 65,399 (2000); 

66 Fed. Reg. 55,246, 55,255 – 55,262 (2001); 67 Fed. Reg. 79,966, 79,973 – 79,976 (2002). 

9

HHS, OIG, Medicare Payment for Nonphysician Clinical Staff in Cardiothoracic 

Surgery, OEI-09-01-00130 (Washington, D.C.: HHS, April 2002). 

Results in Brief 
Page 4 GAO-05-60 Medicare Physician Practice Expenses 

physician’s gender or number of years in practice. Second, CMS’s 

assessment of the precision10 of the estimates based on the data from the 

supplemental survey has led the agency to reject submissions that might 

be more representative of a specialty’s total practice expenses than the 

data CMS currently uses to establish practice expense estimates—

particularly for specialties that were not represented in the original AMA 

survey data, such as optometry. CMS also elected to assess the accuracy, 

or reasonableness, of a 2002 submission by comparing the data with 

benchmark data from other sources. Although specific expense items were 

much higher than comparable benchmark data, CMS ultimately accepted 

these data without revisions. These data were deemed representative, 

even though they were influenced by certain high-cost practices, 

indicating that CMS’s test for representativeness is problematic. Assessing 

submissions for accuracy is important; however, CMS has not indicated 

whether it will assess the accuracy of all supplemental data submissions.11

Stakeholders such as AMA and specialty societies stated that the PEAC 

recommendations CMS used to update resource estimates for individual 

services improved these estimates, but certain specialty societies told us 

that CMS modified estimates at times without adequate justification, and 

our review of CMS’s changes indicated that this had occurred. CMS and 

specialty society officials expressed confidence in PEAC-recommended 

estimates because the PEAC comprised representatives from multiple 

specialties and a cross section of providers, and the PEAC’s collaborative 

process of developing estimates became increasingly systematic from its 

inception in 1999. CMS implemented almost all of the PEAC-recommended 

estimates for approximately 6,500 services but modified certain original 

estimates and PEAC-recommended estimates at times without adequate 

justification. For example, CMS decided to remove expenses for clinical 

staff that certain surgeons bring to help them in the operating room and 

elsewhere in the hospital before it requested and received a study from the 

HHS OIG on this issue and without evidence that other Medicare payments 

accounted for these expenses. Because CMS indicated that it would not 

reverse this policy decision, the PEAC did not have the opportunity to 

deliberate on this issue. The success of the PEAC process depended on 

physician participation and acceptance, and physicians told us that CMS’s 

 10Precision measures how far the estimate may be from the true value; for example, there is 

a 95 percent chance an estimate is +/- 2 percent from the true value. 

11CMS assessed the accuracy of three of the four recently posted data submissions. 
Page 5 GAO-05-60 Medicare Physician Practice Expenses 

changes to estimates without adequate data or explanation lowered their 

confidence in the process and the resulting estimates. 

CMS has not developed a plan for systematically acquiring and using data 

to update total practice expense estimates. CMS reported that it is in the 

process of obtaining a contract to collect practice expense data from the 

major physician and nonphysician specialties but did not provide 

specifics. A plan for the data collection is important for several reasons. 

Data sources that had been used no longer exist or are insufficient. AMA’s 

Socioeconomic Monitoring System (SMS) survey, which was the source of 

total practice expense estimates for each specialty, was last conducted in 

1999 and had been modified such that it no longer collected data detailed 

enough for this purpose. Data submissions from specialty societies are 

voluntary and therefore unlikely to be comprehensive. In addition, the 

PEAC process concluded in March 2004 because, according to AMA 

representatives, it had successfully completed its work. CMS indicated 

that AMA’s ongoing resource review committee would update estimates 

for new or revised services. While CMS officials told us they believe they 

can complete the review as required by 2007, they have not laid out a plan 

to ensure that the necessary practice expense data are available. 

We are recommending that the CMS Administrator consistently assess the 

accuracy of all supplemental data submissions, modify the assessment of 

representativeness to ensure that supplemental data submissions better 

reflect the variation in practice expenses within a specialty, and adjust the 

precision requirement so that supplemental data submissions that would 

improve the information currently used to set fees are accepted; base 

changes to resource estimates for individual services on sufficient data 

analysis and a documented and transparent rationale; and develop and 

implement a plan to acquire representative data on total practice expenses 

and the resources required for individual services. In commenting on a 

draft of this report, CMS agreed with the need for a plan but said that it 

had substantial concerns with our report. CMS stated that the agency 

already conducted or planned to conduct most actions we recommended. 

We do not agree that CMS has taken actions that obviate the need for our 

recommendations; however, we have revised our report to reflect CMS’s 

recent actions. AMA did not comment on our recommendations. It agreed 

that the PEAC process had improved resource estimates for individual 

services but objected to our conclusions that CMS had not always 

provided adequate justification for making changes and that this reduced 

physician confidence in the process. 
Page 6 GAO-05-60 Medicare Physician Practice Expenses 

Practice expense payments under Medicare’s physician fee schedule are 

based on estimates of total practice expenses for each specialty and 

estimates of the resources required for individual services. The adequacy 

and appropriateness of fees are important to ensure Medicare beneficiary 

access to physician services. If fees for a particular service are too low, 

physicians may choose not to provide this service, which may limit 

Medicare beneficiary access. If fees are too high, the Medicare program 

will be wasting scarce resources. Determining the appropriateness of 

physician fees is particularly difficult with regard to practice expenses. 

The total expenses of operating a practice vary significantly, depending on 

the specialty, organization of the practice, and services provided. Further, 

these total expenses must be allocated to over 7,000 individual services, 

and the expenses associated with individual services cannot be easily 

identified because a large share of practice expenses, such as rent and 

office equipment, are not associated with the delivery of any given service 

but are incurred across all services provided by the practice. In addition, 

the resources involved in delivering certain services may be expected to 

shift over time with technological innovations or as wages change for 

clinical staff. Every year, approximately 200 to 300 service codes are 

added to the fee schedule, which could change resource allocations for 

other services. The uncertainty of these considerations underscores the 

importance of the method CMS employs to refine and update the estimates 

underlying practice expense payments. 

HCFA derived its original estimates of total practice expenses for each 

specialty using data from AMA’s annual SMS surveys from 1995 through 

1997. The SMS survey, which was not specifically designed for this 

purpose, gathered a broad range of information about economic and other 

characteristics of physician practices and included questions on the 

number of patient visits, medical practice revenues, and professional 

expenses. The survey sample was randomly drawn from the AMA 

Physician Masterfile, the most comprehensive available listing of 

physicians practicing in the United States. Other health care professionals 

(such as physical therapists or optometrists) paid under the physician fee 

schedule were not included in the survey sample. 

We have previously noted several potential problems with using SMS data 

to estimate total practice expenses across all specialties.12 First, the 

 12GAO/HEHS-99-30 and GAO/HEHS-02-53. 

Background 

SMS Survey Used to 

Estimate Specialties’ Total 

Practice Expenses 
Page 7 GAO-05-60 Medicare Physician Practice Expenses 

reported practice expenses may not have been representative of all 

physicians in some specialties because of a limited number of 

respondents. Even though AMA adjusted the survey results to minimize 

the effects of responding physicians who may not have been 

representative of all physicians in a specialty, the number of respondents 

may have been too small to ensure representative estimates.13 For 

instance, the 1995 through 1997 SMS data HCFA used for oncologists were 

based on 27 respondents, and the data for allergists/immunologists were 

based on 31 respondents. Second, the SMS survey only distinguished 

among 26 major physician specialties, while Medicare recognizes over 65 

physician and other health care professional specialties. Thus, HCFA had 

to use the practice expenses of the major physician specialties as proxies 

to represent the expenses of smaller specialties or other health care 

professionals, even though their practice expenses might not have been 

similar.14 Third, the reported expenses in the SMS survey included items 

that were not in Medicare’s definition of practice expenses. For example, 

some oncology practice respondents included chemotherapy drugs in their 

supply expenses. Such expenses need to be excluded from estimates of 

practice expenses in setting Medicare fees because Medicare pays for 

them outside of the physician fee schedule; however, there was no way for 

CMS to do this accurately with available data. 

As the physician fee schedule was implemented, Congress required CMS 

to establish a process to accept specialty-supplied total practice expense 

data that could supplement the SMS survey data. Any specialty society 

may submit data for CMS to consider in refining the physician fee 

schedule. CMS evaluates the supplemental data collection method and the 

survey respondents to ensure that they meet the criteria used in its review 

process for acceptance. If CMS accepts a specialty society’s submission, 

the data are blended with the existing SMS data used to estimate that 

specialty’s practice expense payments, although for some nonphysician 

specialties that were not represented in the original AMA survey, the 

 13In making these adjustments, AMA considers characteristics such as AMA membership, 

physician gender, years since the physician graduated from medical school, physician 

membership in a medical specialty organization, and board certification status. 

14Total practice expense estimates for smaller specialties or subspecialties were based on 

practice expense data from the major specialty that was the “closest fit.” For example, data 

from internal medicine practices were used to estimate the expenses for practices from the 

subspecialties of internal medicine, such as nephrology (the medical specialty concerned 

with kidney function and disease) or infectious diseases. 

Physician Specialty 

Societies May Submit 

Supplemental Data on 

Total Practice Expense 

Estimates 
Page 8 GAO-05-60 Medicare Physician Practice Expenses 

supplemental data replace the existing SMS data.15 To be considered for 

changes to the following year’s fee schedule, supplemental data must be 

submitted by March 1 of the preceding year. The last year that CMS will 

accept such submissions is 2005. 

CMS’s criteria for acceptance of supplemental data govern the data 

collection method and the survey respondents (see table 1). To collect the 

data, a contractor experienced with the SMS survey (or other national 

survey of physicians) must use an instrument based on the SMS survey 

instrument and protocols.16 The surveyed physicians must be randomly 

selected from the AMA Masterfile or, for nonphysician specialties, from a 

nationally representative listing of practitioners.17 The names of the 

physicians contacted for the survey must be kept confidential so no 

interested parties can contact them about the survey. 

 15The supplemental data have also replaced the original SMS data for two physician 

specialties—oncology and cardiothoracic surgery. 

16For example, the instrument must request expense data for the categories that CMS uses 

in establishing Medicare’s practice expense payments and must use SMS definitions of 

expenses and hours worked. 

17CMS allows specialties to use a stratified sample (that is, a specialty’s practices may be 

divided into subgroups from which random samples are drawn) to help ensure that the 

responding practices are representative. Stratification allows more follow-up to encourage 

participation among subgroups with low response rates. 
Page 9 GAO-05-60 Medicare Physician Practice Expenses 

Table 1: CMS Criteria for Evaluating Specialty Society Supplemental Data 

Submissions 

 CMS criteria 

Data collection 

Survey instrument Is based on SMS survey. 

Survey administration Is conducted by experienced contractor. 

Uses SMS protocols. 

Keeps sample member identity confidential. 

Sample selection Is randomly drawn from the AMA Masterfile of physicians 

or from a nationally representative listing of practitioners 

for nonphysician specialties. 

May be a stratified sample with random selection within 

each stratum. 

Survey respondents 

Representativeness of 

responses 

Must have a high response rate, or respondents must 

have the same characteristics as all physicians in the 

specialty or responses must be weighted to reflect the 

overall composition of the specialty. 

Precision of responses Estimates must have an error rate of no more than plus 

or minus 15 percent of the mean. 

Sources: 67 Fed. Reg. 43,555 – 43,557 (2002) (interim final rule with comment period) and 67 Fed. Reg. 79,971 – 79,972 (2002) (final 

rule with comment period). 

The supplemental data survey respondents must be representative of the 

entire specialty, as demonstrated by a high response rate or by the 

respondents’ having the same characteristics as all physicians in the 

specialty.18 The number of respondents must be sufficient so that the 

estimated expenses comply with a precision criterion. Specifically, the 

estimates must have an error rate of no more than plus or minus 

 18A specialty may show that the physicians who did not respond were not different from 

those who responded with regard to factors affecting practice expenses. Alternatively, the 

estimates could be adjusted to reflect the differences between the respondents and all 

practitioners in that specialty. For example, if solo practitioners represent 20 percent of all 

physicians within a specialty but represent 40 percent of the physicians responding to the 

survey, responses from the solo practitioners would be weighted according to their 

representation in the specialty. 
Page 10 GAO-05-60 Medicare Physician Practice Expenses 

15 percent.19 The supplemental data from a typical specialty need about 

140 usable responses for the estimates to meet the precision criterion.20

Six specialties have submitted supplemental data, and CMS accepted three 

of these submissions (see table 2).21 The data from vascular surgery met 

the criteria and were accepted for use in establishing the practice expense 

payments. The data from physical therapy were initially rejected because 

they did not meet the precision criterion. That criterion was relaxed, 

however, in June 2002, and the physical therapy submission was accepted 

because the data met the new requirements. CMS deferred acceptance of 

data submitted by oncology in 2002. After the agency resolved its concerns 

about the accuracy of the data, it accepted the submission. 

 19The estimated average practice expenses from the supplemental surveys must have a 

margin of error not greater than 15 percent of the estimated average, at a 90 percent 

confidence level. A 90 percent confidence level means that there is a 90 percent probability 

that the actual average falls within plus or minus 15 percent of the estimated average. The 

precision criterion had originally required a margin of error of no more than plus or minus 

10 percent of the estimated average, but this was relaxed in June 2002. As a result, the 

number of responses needed to meet this criterion was reduced by about half. 

20This estimate is based on the amount of total practice expense variation exhibited across 

all the practices included in the SMS survey. Small, homogeneous specialties with less 

variation across their practices will require fewer survey responses, whereas specialties 

with wide variation in their practice expenses will require more. 

21Since we sent this report to CMS for comment on June 15, 2004, CMS has posted 

information on its Web site about four additional supplemental data submissions. Three 

specialties’ data met the criteria: CMS indicated that it would accept the data from 

pathology for use in the 2005 practice expense methodology and stated that it would wait 

to accept the data from cardiology and radiology, at the specialties’ request, until technical 

issues about the practice expense methodology have been resolved. CMS rejected data 

from the fourth specialty, radiation oncology, because they did not meet the precision 

criterion. 
Page 11 GAO-05-60 Medicare Physician Practice Expenses 

Table 2: Supplemental Data Submissions by Specialty, CMS Decision, and Reasons 

for Rejection, 2000 through 2002 

Specialty CMS decision Reason for rejection 

2000 submissions 

Physical therapy Rejected Precision criterion not met. 

Vascular surgery Accepted 

2001 submissions 

Physical therapy Rejected Precision criterion not met. 

Optometry Rejected Precision criterion not met. 

Pediatrics Rejected SMS protocols and survey not used; 

sample was not representative. 

2002 submissionsa 

Physical therapyb Accepted 

Oncology Accepted 

Cardiology Rejected SMS protocols and survey not used. 

Pediatricsc Rejected SMS protocols and survey not used; 

sample was not representative. 

Sources: GAO analysis of the annual reports prepared by CMS’s contractor: The Lewin Group, Recommendations Regarding 

Supplemental Practice Expense Data Submitted for 2001 (Falls Church, Va.: 2000); The Lewin Group, Recommendations Regarding 

Supplemental Practice Expense Data Submitted for 2002 (Falls Church, Va.: 2001); and The Lewin Group, Recommendations 

Regarding Supplemental Practice Expense Data Submitted for 2003 (Falls Church, Va.: 2002). 

a

The precision criterion was relaxed in June 2002. 

b

The American Physical Therapy Association resubmitted the data it had submitted in 2001. These 

data met the relaxed precision criterion. 

c

Pediatrics resubmitted the data it had submitted in 2001. 

To develop the original estimates of the resources required for individual 

services, HCFA convened 15 specialty panels composed of physicians, 

nurses, and practice administrators. These clinical practice expert panels 

(CPEP) estimated the amount of direct expenses, such as clinical labor, 

medical equipment, and medical supplies, associated with providing each 

service to the typical patient.22 In general, the panel for a particular 

specialty included clinicians from that specialty who reviewed the services 

that its physicians typically provided. AMA, some specialty societies, and 

some researchers who specialize in physician reimbursement issues 

 22Indirect 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 that service. 

Expert Panels Establish 

and Refine Resource 

Estimates for Individual 

Services 
Page 12 GAO-05-60 Medicare Physician Practice Expenses 

supported using the panels’ estimates of service-specific resources to 

establish the practice expense payments, but other specialty societies 

noted some concerns.23 They stated that panel members did not represent 

a cross section of physician practices (by size or urban and rural location) 

or all types of physicians who provided a particular service. They also 

stated that the panels used differing assumptions about and definitions of 

the resources required for providing similar services, resulting in 

inconsistent estimates across panels. 

In 1999, AMA convened the PEAC as an expert panel to refine the resource 

estimates for individual services. The PEAC had representation from all 

major medical specialties and rotating membership for smaller 

subspecialties. CMS representatives also participated, as observers, in the 

PEAC meetings. The PEAC reviewed the resource estimates for 

approximately 6,500 services from 1999 through March 2004, which 

account for close to 90 percent of total Medicare physician payments. It 

initially focused on high-volume services for each specialty, “families” of 

similar services (for example, an endoscopy procedure without biopsy, 

with biopsy, with removal of a single tumor, or with removal of multiple 

tumors are considered a family of endoscopy services), and services that 

specialty societies believed had inaccurate estimates. After completing its 

review, the PEAC made recommendations to CMS, through AMA’s ongoing 

physician payment review committee, about modifications to service 

resource estimates.24

The PEAC review relied on data from specialties on the resources required 

to provide the specialties’ services. Once a service or family of related 

services was identified for refinement by the PEAC, specialties that 

normally provide these services gathered data on the resources needed to 

furnish each service to a typical patient, such as the time a nurse spends 

with a patient and the supplies and equipment used.25 AMA provided the 

specialty societies with background materials, such as the current 

 23GAO, Medicare: HCFA Can Improve Methods for Revising Physician Practice Expense 

Payments, GAO/HEHS-98-79 (Washington, D.C.: Feb. 27, 1998). 

24This committee is known as the RVS Update Committee (RUC). 

25A specialty society can gather these data using a panel of experts or a survey of the 

specialty’s practitioners. If data are collected through a survey, the survey sample size, 

response rate, and distribution of respondents by geographic setting and type of practice 

(single-specialty, multispecialty, independent, or hospital-based) have to be submitted with 

the proposed resource estimates. 
Page 13 GAO-05-60 Medicare Physician Practice Expenses 

resource estimates for the service and any estimates the PEAC had 

previously approved for individual tasks or supplies involved in 

performing the service.26 The specialty society then presented the PEAC 

with its proposed resource estimate for a service, a description of how the 

estimate was developed, and a list of the tasks included in the estimate.27

The PEAC reviewed the resource estimate in a two-step process. First, a 

subgroup of the PEAC examined the data gathered by the specialty, 

assessed whether the resource estimate for a service was reasonable and 

comparable to those for similar services, and voted on whether to endorse 

the resource estimate. The subgroup recommended that the full PEAC 

approve the estimate, consider modifying it, or request additional data. 

Second, the full PEAC made its decision, either approving the specialty’s 

estimate or a modified version of it or delaying its decision until it received 

additional data. Official recommendations to CMS required the approval of 

two-thirds of the PEAC members. 

CMS made all final decisions about changes to the resource estimates that 

were used in calculating physician fees, including its own changes to 

original or existing resource estimates and those recommended by the 

PEAC. Its approach to reviewing PEAC recommendations varied: CMS 

staff made site visits to observe services being performed or consulted the 

medical directors of insurance companies to learn how other payers 

established payments for a service. CMS modified estimates for different 

reasons, including to make them consistent with estimates for other 

services and to remove expenses that were accounted for in other 

Medicare payments. For example, CMS changed the PEAC-recommended 

time spent by a nurse providing patient education and counseling for one 

service to be consistent with the time for this task already assigned to a 

comparable service. In the earlier years of the process, HCFA rejected or 

modified certain recommendations. In 2003, CMS accepted all of the 

PEAC’s recommendations. AMA stated that the PEAC process was 

concluded in March 2004 because the PEAC had completed its work of 

reviewing most services. In May 2004, a representative from AMA told us 

 26For example, the PEAC established 3 minutes as the standard time for clinical staff to 

obtain between one and three patient vital signs before the physician sees the patient for an 

office visit. 

27The tasks included might be completing paperwork, explaining the procedure to the 

patient, obtaining the patient’s consent, calling in prescriptions to a pharmacy, and 

arranging follow-up visits. 
Page 14 GAO-05-60 Medicare Physician Practice Expenses 

that although the PEAC had been officially discontinued, a committee 

would be appointed to refine the resource estimates for the approximately 

200 services that had not been reviewed by the PEAC. 

Although a review of specialty-provided supplemental data from surveys 

on total practice expenses is necessary to protect against the risk of bias 

inherent in a voluntary submission process, because of certain aspects of 

its review, CMS may not be accepting the best available supplemental 

practice expense data. In assessing whether the respondents to the survey 

for supplemental data are representative of all physician practices within a 

specialty, CMS may not be examining practice characteristics that 

adequately reflect the range of practice expenses within a specialty, such 

as whether a practice is single- or multispecialty or hospital-based. In 

addition, CMS’s precision requirement for estimates based on the 

submitted data has led the agency to reject some supplemental 

submissions that could improve upon the information it currently uses to 

establish estimates. CMS also elected to assess the accuracy, or 

reasonableness, of a recent submission by comparing it with data from 

other sources but has not indicated whether it will consistently assess the 

accuracy of all supplemental data submissions. Moreover, CMS ultimately 

accepted practice expense data in this submission that were much higher 

than comparable benchmark data, which is problematic. The data were 

deemed representative, yet were influenced by high-cost practices, raising 

concerns about CMS’s test for representativeness. 

A review of supplemental data submissions is necessary because medical 

specialty societies voluntarily gather and submit these data, and the data 

are not audited or verified before being used to establish fees. In addition, 

because the specialty societies have an incentive to engage in this 

endeavor only if they believe the practice expense estimates used to 

establish their Medicare fees are too low, the supplemental submission 

could be biased if a disproportionate share of those who complete the 

survey represent high-cost practices. CMS has established review criteria 

regarding the data collection method and the respondents to help guard 

against any perceived or actual bias in the estimates based on these data. 

CMS’s review of the data collection method—the survey instrument, 

survey administration, and sample selection—helps ensure that 

supplemental data can be used to update practice expense estimates. For 

example, by requiring that the survey instrument be based on the SMS 

survey instrument, CMS ensures that the definitions of the various 

Certain Aspects of 

CMS’s Review Are 

Problematic 

Review of Supplemental 

Data Is Necessary 
Page 15 GAO-05-60 Medicare Physician Practice Expenses 

categories of expenses between supplemental and previously used data 

are consistent.28 CMS’s requirement that the supplemental data 

submissions be based on the same survey administration protocols as the 

SMS survey increases the comparability of the supplemental data to the 

SMS data. 

CMS’s review of respondent characteristics is necessary to ensure that the 

data are representative of the average practice expenses within a specialty 

and are not distorted by a disproportionate share of respondents of one 

type or another. If the response rate is high, and the sample is randomly 

drawn from a nationwide listing of the physician specialty, the 

submissions are assumed to be representative of the entire specialty. If the 

response rate is low, CMS evaluates whether the respondents are 

representative of the specialty by comparing respondent characteristics 

with characteristics of the entire specialty.29 In 2002, CMS also reviewed a 

data submission to determine whether the reported values were 

reasonable, as a test for accuracy. Assessing the accuracy of the data, by 

comparing them with other benchmarks or norms, is important because 

establishing the representativeness of the respondents and the precision of 

the data do not guarantee that the responses themselves are accurate. 

In evaluating whether supplemental data submissions are representative of 

the entire specialty, CMS examines practice characteristics of the 

respondents that do not necessarily reflect the variation in the specialty’s 

practice expenses. CMS compares its survey respondents with all 

physician practices within a specialty using characteristics that AMA used, 

such as physician gender, years in practice, and membership in a medical 

specialty organization, to adjust responses to produce published reports 

on the nation’s physicians. CMS uses these characteristics to ensure that 

supplemental data submissions are consistent with SMS data already 

collected, but other characteristics may better reflect the potential range 

and distribution of practice expenses for the specialty. For example, 

 28Supplemental data surveys may include questions not included in the SMS that are 

designed to provide previously unavailable information needed for the practice expense 

estimates. For example, the supplemental data survey might ask for information on the 

cost of separately reimbursed supplies, such as drugs for oncology and optical materials 

and supplies for optometry, which should be excluded from the practice expense 

estimates. CMS must approve these additions. 

29Most of the specialty societies’ supplemental data submissions have been based on 

surveys with response rates below 20 percent. 

Certain Aspects of Review 

Process Are Problematic 
Page 16 GAO-05-60 Medicare Physician Practice Expenses 

hospital-based practices may have lower practice expenses than 

independent practices because hospitals may pay for clinical staff, 

supplies, and equipment needed to provide a service, while in an 

independent practice the physician bears these expenses.30 For some 

specialties, expenses for practices that are independent can be as much as 

50 percent higher than those for practices that are hospital-based. If a 

supplemental data submission includes a disproportionate share of 

hospital-based practices compared to the specialty as a whole, then the 

total practice expense estimates for the specialty may be too low; if the 

submission includes a disproportionate share of independent practices, 

the total practice expense estimates for the specialty may be too high. 

Thus, practice expense payments, which are based in part on these total 

practice expense estimates, may also be correspondingly either too low or 

too high.31

In addition, CMS may be rejecting data that could improve estimates. In 

rejecting data that do not meet the agency’s precision criterion, even 

though they are deemed representative, CMS ignores data that could 

provide a better estimate of the specialty’s practice expense data than the 

data it currently uses, particularly the proxy data used for nonphysician 

specialties. For example, in 2001, the American Optometric Association 

(AOA) collected supplemental practice expense information from 

optometrists. CMS rejected the data because they did not meet the 

precision criterion, although its contractor recommended that the data be 

accepted because they were valid and the best available information on 

practice expenses of optometry practices.32 Optometrists’ practice 

expenses were originally established with the practice expenses of the 

average physician because optometrists were not included in the SMS 

survey. Supplemental data submitted by the specialty would be likely to 

 30In a 2000 report, CMS’s contractor acknowledged that the characteristics used to make 

the data representative of all physicians in a specialty did not necessarily relate to practice 

expenses because the SMS survey was not designed to calculate practice expense 

payments. The contractor suggested that characteristics such as the size of a practice and 

whether it is a single- or multispecialty practice would be more relevant to consider. The 

Lewin Group, An Evaluation of the Health Care Financing Administration’s Resource 

Based Practice Expense Methodology (Falls Church, Va.: 2000). 

31CMS examined whether practices were independent or hospital-based to determine 

representativeness in one of the four recent submissions, and used other characteristics, 

such as the type of services provided, for another two of the four submissions. 

32The Lewin Group, Recommendations Regarding Supplemental Practice Expense Data 

Submitted for 2002 (Falls Church, Va.: 2002). 
Page 17 GAO-05-60 Medicare Physician Practice Expenses 

improve the estimates because they are specific to the specialty, whereas 

the practice expenses of the average physician would be less likely to 

closely match optometrists’ practice expenses. Supplemental data also 

could improve the estimates for those specialties with few respondents in 

the SMS survey, as long as the data were from a representative sample of 

practices. 

In addition to assessing representativeness and precision, CMS assessed 

the accuracy of a 2002 submission, although it has not indicated whether it 

will consistently assess the accuracy of all submissions.33 CMS delayed 

accepting the 2002 submission from the American Society of Clinical 

Oncology (ASCO) because ASCO’s estimates appeared to be too high. CMS 

assessed the accuracy of this submission by comparing the supplemental 

data with data for similar specialties and from other sources to see 

whether the submitted data appeared reasonable. The comparison with 

benchmark data enabled CMS to evaluate aberrant data that had passed 

the representativeness and precision tests. Salaries in the supplemental 

data were more than four times higher for clerical staff than salaries 

reported in Bureau of Labor Statistics data; and salaries for clerical staff in 

the oncology submission were even higher than some of the salaries for 

clinical staff that ASCO reported. These comparisons indicated that the 

supplemental data might not accurately represent oncologists’ practice 

expenses. CMS later accepted the submission for use in setting 2004 

payments without revisions after ASCO explained that the differences 

were due to certain high-cost practices among the respondents in the 

sample. 

CMS’s acceptance of the ASCO data raises concerns about the review 

process. First, the respondents in the ASCO survey were deemed 

representative, yet the reported costs were much higher than benchmark 

data, underscoring the concern that CMS’s assessment of 

representativeness is problematic. Second, the basis on which CMS 

accepted the ASCO data after assessing its accuracy is problematic 

because the explanation that the estimates were influenced by high-cost 

practices should have increased, not alleviated, CMS’s concerns about the 

representativeness of the data. Our replication of the hourly practice 

expense calculations and discussions with CMS’s contractor led us to 

conclude that the average hourly practice expense estimates were higher 

when the few practices with high costs were included. 

 33CMS also assessed the accuracy of three of the four recent submissions. 
Page 18 GAO-05-60 Medicare Physician Practice Expenses 

Stakeholders agree that the PEAC improved resource estimates for 

individual services, and although CMS used almost all of the PEACrecommended estimates, it at times used estimates that differed from 

PEAC recommendations and made other changes to estimates without 

adequate justification. CMS relied on the PEAC’s recommendations to 

update the estimates. The PEAC’s process for developing estimates 

became increasingly systematic from its inception in 1999, and its 

recommendations were widely accepted by specialty societies and AMA as 

leading to improved resource estimates for individual services. This 

acceptance stemmed in part from the broad representation on the PEAC 

of multiple specialties and a cross section of physicians and from the 

PEAC’s standardization of estimates for tasks that are common to many 

services. CMS implemented almost all of the PEAC-recommended 

estimates, but it has modified certain original estimates and PEACrecommended estimates. However, CMS did not always use adequate 

supporting data or explain the rationale for its changes, which has reduced 

some physician specialties’ confidence in the PEAC process and the 

resulting estimates. 

AMA and CMS officials, as well as representatives from specialties told us 

that they believe the PEAC improved the estimates of the resources 

required to furnish individual services. These stakeholders said the PEAC 

process for developing estimates became more systematic from its 

inception in 1999. The PEAC established standard estimates for the 

clinical staff time, equipment, and supplies needed to perform certain 

activities or tasks common to many services, such as taking vital signs, 

whereas previously estimates for the same task may have varied by type of 

service or specialty. The PEAC’s multispecialty representation further 

standardized estimates because many of the tasks, such as administration 

of an injection, are performed by multiple specialties. A specialty could 

receive PEAC approval to deviate from an estimate for a service only if the 

specialty satisfied the PEAC that the existing estimate was not appropriate 

for that service because the service the specialty provided was different 

from other services that appeared comparable. In addition, the PEAC 

adopted rules about how estimates were to be established. For example, 

the PEAC provided guidance to specialty societies on how to gather data, 

such as through expert panels or a survey, and on the information that had 

to accompany any recommendation to change a resource estimate, such as 

a detailed listing of tasks performed by nurses in providing a service. As a 

result of these changes in the PEAC process, CMS accepted most of the 

PEAC’s recommended estimates without modification in recent years. 

Updating Process 

Improved Resource 

Estimates for 

Individual Services, 

Although Certain CMS 

Changes Were Made 

without Adequate 

Justification 

Stakeholders Agree that 

PEAC Improved Estimates 
Page 19 GAO-05-60 Medicare Physician Practice Expenses 

Although CMS implemented almost all of the PEAC’s recommended 

resource estimates for individual services, it at times made changes to 

PEAC-recommended estimates and to the original physician panel 

estimates. Some of these changes were to estimates that conflicted with 

Medicare coverage rules or to make estimates consistent across services. 

For other changes, however, CMS did not always use adequate supporting 

evidence. For example, CMS removed from the original resource estimates 

the cost of clinical staff time associated with certain procedures 

performed by specific surgical specialties, basing its decision to do so on 

inadequate data. Certain surgical specialties, primarily thoracic surgeons, 

provided CMS data showing that they routinely bring their own clinical 

staff to the hospital to help in the operating room and provide other 

assistance on patient floors and stated that these expenses should be 

reflected in their resource estimates for individual services.34 CMS rejected 

these claims and removed the expense of clinical staff time from these 

surgical specialties’ resource estimates for all services provided in the 

hospital. CMS officials claimed that Medicare paid for these expenses 

through other payment mechanisms. CMS also stated that it removed this 

expense on the basis of evidence that most physicians across all 

specialties combined did not bring staff with them to the hospital. 

Although CMS later asked the HHS OIG to assess whether specific 

specialties typically brought clinical staff to the hospital, it did not reverse 

its decision in the meantime. The OIG subsequently issued a report 

indicating that it was a typical practice for certain surgical specialties to 

bring clinical staff to the hospital.35 However, the OIG did not analyze 

whether other Medicare payments account for the expenses associated 

with clinical staff accompanying physicians in the hospital setting. 

In addition, CMS did not always make public its reasons for making 

changes to PEAC recommendations. In our meetings with specialty 

representatives, some noted that CMS did not provide adequate 

explanations for some of its changes to PEAC recommendations. For 

example, in reducing the time established by the PEAC for radiation 

therapists to deliver a specific radiation therapy, CMS stated that the 

 34PEAC representatives told us that the thoracic surgeons did not formally present to the 

PEAC their resource estimates for services that include the costs of clinical staff they bring 

to the hospital because CMS officials said the agency would not accept resource estimates 

that included these expenses. 

35Medicare Payment for Nonphysician Clinical Staff in Cardiothoracic Surgery, April 

2002. 

CMS Changed Certain 

Estimates without 

Adequate Justification 
Page 20 GAO-05-60 Medicare Physician Practice Expenses 

service commonly takes less than the recommended time and requires 

fewer therapists to perform. CMS officials told us that they based their 

conclusion on interviews with practicing physicians and a site visit to 

witness the procedure being performed, neither of which was mentioned 

in the public notice.36 Physicians told us that they did not understand why 

CMS did not explain these decisions, since CMS representatives 

participated in all of the PEAC meetings and had the opportunity to raise 

concerns there. Moreover, they said that CMS’s inadequate explanation for 

certain decisions lessened their confidence in the process used to develop 

the estimates. 

CMS has not outlined a plan for obtaining and using the necessary data to 

update practice expense resource estimates for all specialties. Such a plan 

would include data collection, evaluation, and incorporation. CMS officials 

told us they are in the process of obtaining a contract to collect total 

practice expense data from the major physician and nonphysician 

specialties, although it has not provided specifics. CMS has indicated that 

the ongoing AMA committee—the RUC—will develop resource estimates 

for new and revised services. Although CMS officials told us that they 

believe they can complete data collection and review by 2007 as required, 

they did not identify nor outline a plan to implement the actions needed to 

ensure that CMS will be able to comply with the mandate to update the fee 

schedule at least every 5 years. 

CMS cannot rely on its previous approaches to complete this review. Data 

sources CMS used to refine the fee schedule no longer exist or are 

insufficient. The SMS survey, which was the source of total practice 

expense data for all major specialties, was last conducted in 1999, and a 

modified version of that survey fielded in 2001, called the Patient Care 

Physician Survey, did not collect data detailed enough for this purpose. 

Data submissions from specialty societies are voluntary and therefore 

unlikely to be comprehensive. In March 2004, AMA discontinued its 

sponsorship of PEAC after it had concluded its review of over 6,500 

physician services. AMA told us that the RUC would review resource 

estimates for new and revised services and that there would be no need 

for a detailed review of the services that had been reviewed by the PEAC. 

 36See 66 Fed. Reg. 55,310 (2001). 

CMS Has Not 

Specified a Plan for 

Developing 

Appropriate Data to 

Update the Fee 

Schedule 
Page 21 GAO-05-60 Medicare Physician Practice Expenses 

Updating estimates of total practice expenses and resource estimates for 

individual services is increasingly important given the ongoing 

introduction of new medical services and technologies, and changes in 

wages. The attendant resource requirements for individual services can 

change significantly when, for example, a new procedure augments or 

replaces a traditional procedure, resulting in changes to the staff or 

equipment needed to provide the service. Similarly, a new pharmaceutical 

can change the treatment for a condition, resulting in different resource 

requirements for caring for the typical patient. 

CMS’s collaboration with physician specialty societies to update total 

practice expense estimates and resource estimates for individual services 

has helped ensure the appropriateness of fees and physician acceptance of 

Medicare’s payment approach. However, CMS’s updates to estimates of 

total practice expenses using supplemental survey data that do not always 

represent the range of practices within a specialty may result in Medicare 

payments that either overcompensate practices for their costs or 

undercompensate practices, which could discourage physician 

participation. In addition, CMS’s deviation from its own process in 

evaluating resource estimates for individual services has caused some 

physician and specialty societies to question the soundness of the process 

and CMS’s decision making. 

Congress recognized the importance of continually updating the fee 

schedule by mandating that CMS review the fee schedule at least every 5 

years. The processes CMS had in place to update total practice expense 

estimates and estimates of the resources required for individual services 

were not suitable for the comprehensive update required for this review. 

While CMS has taken a first step at collecting data for this review, without 

a detailed plan, CMS may not be able to gather and refine representative 

data necessary to update the fee schedule in a timely manner and ensure 

its integrity over time. 

To improve and update the physician fee schedule, we recommend that 

the CMS Administrator take the following three actions: 

• Consistently assess the accuracy of all supplemental data submissions on 

total practice expenses, modify the assessment of representativeness such 

that the data submitted by specialties better reflect the variation in 

practice expenses within a specialty, and adjust the precision requirement 

Conclusions 

Recommendations for 

Executive Action 
Page 22 GAO-05-60 Medicare Physician Practice Expenses 

so that supplemental data submissions that would improve the 

information currently used to set fees are accepted. 

• Base any revisions to the resource estimates for individual services on 

sufficient data analysis and a documented and transparent rationale. 

• Develop and implement a plan to update the fee schedule in a timely 

manner with representative data on total practice expenses and the 

resources for individual services so that the fees appropriately reflect 

changes in medical services and the costs of their delivery. 

We received comments on a draft of our report from CMS and AMA. CMS 

indicated that it routinely conducted, or was in the process of conducting, 

most of the actions we recommended. However, it stated that it had 

substantial concerns with our report. AMA agreed in general with our 

findings but took issue with some of our conclusions. AMA also conveyed 

comments from ASCO, which disagreed with our conclusion regarding 

CMS’s acceptance of ASCO’s supplemental survey data. CMS and AMA 

also provided technical comments, which we incorporated as appropriate. 

(We have reprinted CMS’s comments in app. III but have not included the 

attachment pages reprinting statements from specialty societies and 

detailing technical comments, nor have we reprinted the technical 

comments submitted by AMA.) 

To address our first recommendation, that CMS make revisions to its 

assessment of supplemental data submissions, CMS responded that its 

contractor consistently assessed the representativeness of supplemental 

data submissions. CMS noted that its contractor’s assessments of surveys 

submitted in 2004 from three specialties included as “a fundamental 

feature” a review of whether a physician practice was hospital- or officebased. The contractor’s report was made available on CMS’s Web site after 

our report went to CMS for comment. While we applaud CMS’s use of the 

practice location characteristic in its assessment of recent surveys, we 

believe that CMS should conduct an analysis to determine whether there 

are other characteristics that could be used to better describe the potential 

variation in practice expenses within a specialty. 

CMS said it rejected AOA’s data on the basis of the precision requirement, 

noting that (1) the data’s representativeness was questionable because the 

data did not include responses from non-AOA members and (2) the 

inclusion of the data would have made little difference to the final practice 

expenses because the AOA per hour data were very similar to the data 

currently used. We note that CMS’s contractor had recommended that 

CMS accept the AOA data because they were “valid and the best available 

Agency and Industry 

Comments and Our 

Evaluation 
Page 23 GAO-05-60 Medicare Physician Practice Expenses 

information on practice expenses for optometry practices,” and we have 

added this information to the report. We believe that including the data 

from the specialty, rather than relying on the use of proxy data, would 

improve the estimates. Our concern with the precision requirement is that 

in applying it CMS may reject data that are more representative than data 

it currently uses. If data were deemed representative on the basis of 

characteristics that describe the variation in practice expenses across 

practices, a precision requirement might not be needed. 

In assessing ASCO’s 2002 submission for accuracy, CMS stated that its 

acceptance of the data complied with requirements in the Medicare 

Prescription Drug, Improvement, and Modernization Act of 2003 that CMS 

use supplemental survey data meeting certain requirements, which CMS 

says these data met. CMS added that it was satisfied with ASCO’s 

explanation that the anomalous results were caused by a few extreme 

survey responses and that elimination of these extreme responses had 

little effect on the hourly practice expense estimates. We were able to 

obtain the ASCO survey data only after our draft report went to CMS and 

AMA for comment. Our own analysis of the ASCO data and discussions 

with CMS’s contractor led us to conclude that elimination of the extreme 

values would have had a significant effect on the hourly practice expense 

calculations, and we have revised the report to reflect this. Although CMS 

considered the data “anomalous,” CMS accepted them because they met 

the representativeness criterion as required by law. CMS’s acceptance of 

these data raises issues about the review process. We are concerned that 

the practice characteristics CMS uses to assess representativeness may 

not describe the range and distribution of practice expenses. CMS was 

silent regarding our recommendation that it consistently assess 

supplemental data submissions for accuracy. 

In response to our second recommendation, that CMS base revisions to 

resource estimates for individual services on sufficient data analysis and a 

documented and transparent rationale, CMS stated that the vast majority 

of these revisions had been based on PEAC recommendations and that on 

the rare occasions when it disagreed with the PEAC, CMS documented its 

rationale in the proposed or final rules. As we noted in the draft report, 

CMS implemented almost all of the PEAC-recommended estimates 

without change and it generally documented its rationale in instances in 

which it did make changes to PEAC-recommended or original estimates. 

Also as noted in the draft report, however, CMS did not always use 

adequate justification when it made changes. For example, CMS based its 

decision to remove from the original estimates the cost of clinical staff for 

all services provided in the hospital on data from the American Hospital 
Page 24 GAO-05-60 Medicare Physician Practice Expenses 

Association survey pertaining to all specialties, rather than on evidence 

pertaining to certain surgical specialties that claim that they routinely 

bring their own staff to the hospital. CMS took issue with our statement 

that its lack of supporting data or rationale in these cases has reduced 

physician confidence in the PEAC process and in the resulting estimates, 

and provided comments from six specialty organizations as evidence of 

support for CMS’s decision making regarding PEAC data revisions. As we 

noted in the draft report, specialty societies and AMA told us they 

supported the PEAC process. Nevertheless, other specialties conveyed 

their concerns to us regarding the PEAC process. 

CMS agreed with our recommendation that it needs to develop and 

implement a plan to acquire representative data on an ongoing basis to 

update the fee schedule. CMS indicated that it was in the process of 

obtaining a contract to collect data for future updates to the practice 

expense portion of the physician fee schedule and that the RUC would 

continue to be involved in developing practice expense resource estimates 

for new or revised individual services. We are encouraged by this new 

information from CMS and have revised our finding and recommendation 

accordingly. However, contracting for data collection, collecting and 

reviewing the data, using the data in developing the fees, and addressing 

public comments take time, making it imperative that CMS expedite these 

actions. CMS needs to develop a plan to ensure that it can comply with the 

congressional mandate to update the physician fee schedule at least every 

5 years. 

In its other comments, CMS took issue with our draft report’s reference to 

updating estimates of total practice expenses with data that are not 

representative of the range of practices within a specialty, which, as we 

stated in the draft report, either “overcompensate practices for their costs 

and waste taxpayer dollars or undercompensate practices and discourage 

physician participation.” CMS stated that because the system is budget 

neutral, any alternative would reduce payments to the overcompensated 

specialty and raise payments to all other specialties. Even within a budget 

neutral system it is wasteful to overcompensate for some services. 

However, it was not our intention to imply that the system was not budget 

neutral, and we have revised the report to avoid misinterpretation. 

AMA’s comments covered the method for establishing total practice 

expense estimates and resource estimates for individual services and 

included specific comments it had received from ASCO. AMA commented 

that it had advised CMS in the past that CMS’s criteria for supplemental 

practice expense data appeared to be appropriate. AMA also stated that it 
Page 25 GAO-05-60 Medicare Physician Practice Expenses 

would be inappropriate to use supplemental data that were significantly 

less reliable and valid than the original SMS data. We concur with this 

statement. AMA agreed with our conclusion that the PEAC process has 

improved resource estimates for individual services. It objected to the 

draft report’s statement that AMA had discontinued sponsoring the PEAC 

as a result of resource constraints and stated rather that the PEAC process 

had concluded in March 2004 because it had successfully completed its 

work. It also reported that it would continue to review, through the RUC, 

the resource estimates for new or revised codes. Although AMA 

representatives of the PEAC had told us that resource constraints had 

contributed to their decision to discontinue the PEAC, we have modified 

the report to indicate that the PEAC concluded its initial review of the 

codes as of March 2004 and that the RUC will continue this review for new 

or revised codes. AMA also objected to our conclusion that certain CMS 

revisions to the PEAC recommendations were made without adequate 

information, stating that this was unfair criticism of the process. As we 

noted in the draft report, CMS accepted the majority of PEAC 

recommendations, although there were instances in which it modified 

earlier resource recommendations without using adequate information or 

providing adequate explanation. Finally, AMA noted that CMS’s 

collaboration with physician specialty societies to update the practice 

expense estimates does not help ensure the appropriateness of the fees 

because the level of Medicare payments largely depends on other 

components of the payment methodology. While it is true that other parts 

of the payment method affect the final payment amounts, the practice 

expense estimates remain an important determinant. 

ASCO disagreed with our concerns about its supplemental survey data. It 

reiterated that it had discussions with CMS regarding the few practices 

with high costs for certain items that had no significant effect on the 

average hourly practice expense estimates used in CMS’s methodology. As 

noted earlier, our replication of the hourly practice expense calculations 

and discussions with CMS’s contractor led us to conclude that including 

the few practices with high costs did in fact raise the average hourly 

practice expense estimates. We have revised the report to include this 

information. 
Page 26 GAO-05-60 Medicare Physician Practice Expenses 

We are sending copies of this report to the Administrator of CMS and 

other interested parties. We will make copies available to others upon 

request. This report also is available at no charge on GAO’s Web site at 

http://www.gao.gov. 

Please call me at (202) 512-7119 if you or your staffs have any questions. 

Major contributors to this report are listed in appendix IV. 

Laura A. Dummit 

Director, Health Care—Medicare Payment Issues 
Page 27 GAO-05-60 Medicare Physician Practice Expenses 

List of Committees 

The Honorable Charles E. Grassley 

Chairman 

The Honorable Max Baucus 

Ranking Minority Member 

Committee on Finance 

United States Senate 

The Honorable Joe Barton 

Chairman 

The Honorable John D. Dingell 

Ranking Minority Member 

Committee on Energy and Commerce 

House of Representatives 

The Honorable Bill Thomas 

Chairman 

The Honorable Charles B. Rangel 

Ranking Minority Member 

Committee on Ways and Means 

House of Representatives 
Appendix I: Medical Specialty Societies 

Interviewed for This Report 

Page 28 GAO-05-60 Medicare Physician Practice Expenses 

We interviewed representatives from the following 32 medical specialty 

societies: 

American Academy of Dermatology 

American Academy of Family Physicians 

American Academy of Neurology 

American Academy of Ophthalmology 

American Academy of Otolaryngology – Head and Neck Surgery 

American Association of Neurological Surgeons & The Congress of 

 Neurological Surgeons 

American Association of Vascular Surgery 

American College of Cardiology 

American College of Emergency Physicians 

American College of Obstetricians and Gynecologists 

American College of Physicians-American Society of Internal Medicine 

American College of Radiation Oncology 

American College of Radiology 

American College of Rheumatology 

American College of Surgeons 

American Optometric Association 

American Osteopathic Association 

American Physical Therapy Association 

American Podiatric Medical Association 

American Psychiatric Association 

American Society for Gastroenterology 

American Society for General Surgery 

American Society of Anesthesiologists 

American Society of Clinical Oncology 

American Society of Plastic Surgeons 

American Thyroid Association 

American Urology Association 

College of American Pathologists 

Joint College of Asthma, Allergy and Immunology 

Renal Physicians Association 

Society of Thoracic Surgeons 

The Endocrine Society 

Appendix I: Medical Specialty Societies 

Interviewed for This Report 
Appendix II: Scope and Methodology 

Page 29 GAO-05-60 Medicare Physician Practice Expenses 

To evaluate the process that CMS uses to review specialty-submitted 

supplemental practice expense data, we interviewed representatives from 

medical specialty societies. We identified 50 medical specialty societies by 

searching the Internet using AMA’s categories of major specialties. We 

contacted each group and met with representatives from the 32 specialty 

societies that responded (listed in app. I). Using structured interviews, we 

asked the specialty society representatives whether they were satisfied 

that AMA Socioeconomic Monitoring System (SMS) survey data used to 

estimate their specialty’s total practice expenses were representative. We 

obtained their views about whether the supplemental data submissions 

improved the practice expense estimates and about CMS’s process for 

evaluating the data. We reviewed written materials provided by specialty 

societies and followed up by telephone when necessary. We reviewed 

relevant Federal Register documents to determine how CMS evaluated the 

supplemental data submissions and reviewed CMS’s decisions about 

whether to accept the data. We interviewed CMS staff about the 

supplemental data submission process and interviewed the contractor that 

CMS hired to provide technical assistance to the specialty societies. We 

also reviewed the contractor’s report on the oncology data submitted by 

the American Society of Clinical Oncology.1

To evaluate the process that CMS uses to update resource estimates for 

individual services, we asked the specialty society representatives about 

the resource estimates developed by the clinical practice expert panels 

(CPEP) and the refinement process used by the Practice Expense 

Advisory Committee (PEAC). We asked for their views about the role CMS 

played in the PEAC and any changes CMS made to the estimates. We also 

met with representatives of AMA to determine AMA’s views on the PEAC 

process. We attended PEAC meetings and reviewed supporting materials 

provided by specialties. To better understand the issue of physicians’ use 

of clinical staff in the inpatient hospital setting, we reviewed survey data 

and other materials provided by the Society of Thoracic Surgeons. To 

determine whether clinical staff time was included in the physician work 

component, we analyzed detailed estimates from AMA’s RVS Update 

Committee (RUC). We reviewed the Department of Health and Human 

Services Office of Inspector General (OIG) report, Medicare Payment for 

Nonphysician Clinical Staff in Cardiothoracic Surgery, including 

 1

The Lewin Group, Recommendations Regarding Supplemental Practice Expense Data 

Submitted for 2002 (Falls Church, Va.: 2001), and The Lewin Group, Recommendations 

Regarding Supplemental Practice Expense Data Submitted for 2003 (Falls Church, Va.: 

2002). 

Appendix II: Scope and Methodology 
Appendix II: Scope and Methodology 

Page 30 GAO-05-60 Medicare Physician Practice Expenses 

analyzing the raw survey data upon which the report was based, and 

discussed it with OIG staff. OIG indicated that its data reliability checks 

were performed in accordance with generally accepted government 

auditing standards. We interviewed CMS staff about the bases for their 

decisions relating to changes to PEAC resource estimates. We attended 

CMS’s “Open Door Forum Meetings,” during which physicians and other 

clinicians discussed their concerns about fees and other issues related to 

services provided to Medicare beneficiaries. We conducted a review of 

relevant Federal Register documents to identify any decisions CMS had 

made with regard to resource estimates. 

To determine whether CMS will have the data needed for the mandated 

review of the physician fee schedule at least every 5 years, we held 

discussions with CMS staff. 

We performed our work from November 2001 through December 2004 in 

accordance with generally accepted government auditing standards. 
Appendix III: Comments from the Centers for Medicare & Medicaid Services 

Page 31 GAO-05-60 Medicare Physician Practice Expenses 

Appendix III: Comments from the Centers for 

Medicare & Medicaid Services 
Appendix III: Comments from the Centers for Medicare & Medicaid Services 

Page 32 GAO-05-60 Medicare Physician Practice Expenses 
Appendix III: Comments from the Centers for Medicare & Medicaid Services 

Page 33 GAO-05-60 Medicare Physician Practice Expenses 

Now on p. 4. 
Appendix III: Comments from the Centers for Medicare & Medicaid Services 

Page 34 GAO-05-60 Medicare Physician Practice Expenses 
Appendix III: Comments from the Centers for Medicare & Medicaid Services 

Page 35 GAO-05-60 Medicare Physician Practice Expenses 

Now on p. 17. 

Now on p. 16. 
Appendix III: Comments from the Centers for Medicare & Medicaid Services 

Page 36 GAO-05-60 Medicare Physician Practice Expenses 

Now on p. 21 and p. 5. 

Now on pp. 20-21. 

Now on p. 19. 
Appendix III: Comments from the Centers for Medicare & Medicaid Services 

Page 37 GAO-05-60 Medicare Physician Practice Expenses 
Appendix IV: GAO Contact and Staff 

Acknowledgments 

Page 38 GAO-05-60 Medicare Physician Practice Expenses 

Laura A. Dummit, (202) 512-7119 

Major contributors were Iola D’Souza, Elizabeth T. Morrison, and 

Gerardine Brennan. 

Appendix IV: GAO Contact and Staff 

Acknowledgments 

GAO Contact 

Acknowledgments 

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