a

GAO

United States Government Accountability Office

Report to Congressional Committees

March 2005 MEDICARE 

PHYSICIAN FEES

Geographic 

Adjustment Indices 

Are Valid in Design, 

but Data and Methods 

Need Refinement

GAO-05-119
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-119.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact A. Bruce 

Steinwald at (202) 512-7119. 

Highlights of GAO-05-119, a report to 

congressional committees 

March 2005

MEDICARE PHYSICIAN FEES 

Geographic Adjustment Indices Are Valid 

in Design, but Data and Methods Need 

Refinement 

The physician work GPCI, the practice expense GPCI, and the malpractice 

expense GPCI are valid in their fundamental design as tools to account for 

geographic cost differences. The three GPCIs as implemented appropriately 

reflect broad patterns of geographic differences in the costs of running a 

medical practice. For example, nurses’ wages, which constitute a 

substantial share of physicians’ practice expenses, vary across the nation 

and contribute to differences in practice expenses. (See table.) 

Geographic Differences in Hourly Wage for Registered Nurses, 2000 

Medicare payment locality Median hourly wage for registered nurses

Oakland/Berkeley, California $29.16

Massachusetts, excluding 

metropolitan Boston 22.06

Fort Worth, Texas 21.26

New Mexico 19.83

South Carolina 19.60

Source: GAO analysis of data from CMS and U.S. Census Bureau.

In addition to adjusting for cost differences, the work GPCI is valid in that it 

also reflects a goal of protecting physician fees in low-cost areas from 

dropping to levels that could be considered unfair relative to fees in highcost areas. The work GPCI does so by limiting downward cost adjustments. 

Despite the GPCIs’ validity, however, data and methodology problems may 

detract from the GPCIs as measures of cost differences. For example, the 

wage data used in the work and practice expense GPCIs are not current, and 

the data used in the malpractice GPCI are incomplete. The Centers for 

Medicare & Medicaid Services (CMS) in the Department of Health and 

Human Services (HHS) has options to remedy some of these flaws. 

GPCIs appear to have a negligible bearing on physicians’ decisions to locate 

in rural areas. Because Medicare revenue constitutes only part of a 

physician’s income—typically 25 percent—the secondary impact of the 

GPCIs on a physician’s income is generally modest, raising or lowering 

income by no more than 2 to 3 percent in most localities. GAO’s interviews 

with physician recruitment experts and GAO’s review of the literature 

indicate that income is only one of several factors—such as a spouse’s 

employment opportunities, the quality of local schools, and the availability 

of other physicians to share night and weekend calls—that drive physicians’ 

decisions to locate in rural areas. 

The Medicare physician fee 

schedule adjusts physician fees for 

area differences in physicians’ 

costs of operating a private medical 

practice. Three separate indices, 

known as geographic practice cost 

indices (GPCI), raise or lower 

Medicare fees in an area, 

depending on whether the area’s 

physician practice costs are above 

or below the national average. The 

three GPCIs correspond to the 

three components of a Medicare 

fee: physician work, practice 

expense, and malpractice expense. 

Advocates for rural physicians have

criticized the GPCIs, which lower 

fees in areas where costs are below 

the national average. The Medicare 

Prescription Drug, Improvement, 

and Modernization Act of 2003 

directed GAO to evaluate 

Medicare’s method of geographic 

adjustment. This report examines 

the extent to which Medicare’s 

GPCIs are valid in their design and 

appropriate in the data and 

methods used in their construction, 

and affect physician incomes, 

location, recruitment, and 

retention. 

What GAO Recommends

GAO recommends that HHS 

improve the GPCIs by augmenting 

the data and refining the methods 

used to construct them. HHS 

characterized GAO’s findings as 

important but disagreed with most 

of the recommendations, citing 

concerns about when they could be 

implemented. GAO holds that its 

recommendations account for 

these timing issues. 
Page i GAO-05-119 Geographic Adjustment of Medicare Fees

Contents

Letter 1

Results in Brief 3

Background 4

GPCIs Are Generally Valid in Design, but CMS’s Data and Methods 

Have Weaknesses 13

GPCIs Appear to Have Little Effect on Physicians’ Incomes, 

Location, Recruitment, and Retention 21

Conclusions 29

Recommendations for Executive Action 30

Agency and Industry Comments and Our Evaluation 31

Appendixes

Appendix I: Data and Methods 37

Appendix II: Rent Indexes and the Practice Expense GPCI 41

Appendix III: Comments from the Department of Health and Human 

Services 42

Appendix IV: GAO Contact and Staff Acknowledgments 48

GAO Contact 48

Acknowledgments 48

Tables Table 1: The Physician Work, Practice Expense, and Malpractice 

GPCIs for Five Payment Localities, 2004 8

Table 2: The Medicare Physician Fee for a Midlevel Office Visit in 

Five Payment Localities, 2004 9

Table 3: Geographic Differences in Hourly Wage for Registered 

Nurses, 2000 17

Table 4: Hypothetical Example of GPCIs’ Effect on Income of 

Physicians with Identical Number and Types of Services 

Who Derive One-Quarter of Professional Income from 

Medicare, 2004 22

Table 5: Data Sources Used in CMS’s Construction of GPCIs 37

Table 6: Factors Explaining Variation in Physicians’ Average 

Annual Income for 513 Geographic Areas 40

Figures Figure 1: Effect of Different Policies Altering the Work GPCI on the 

Weighted Average of the Three GPCIs in an Urban Area 

(Oakland/Berkeley, California) and in a Relatively Rural 

Area (South Carolina) 12
Contents

Page ii GAO-05-119 Geographic Adjustment of Medicare Fees

Figure 2: Variation in Private Plans’ Physician Fees and Average 

Medicare GPCI by Medicare Payment Locality, 2002 25

Figure 3: Number of Retirements of Iowa Physicians and Standard 

& Poors Composite Index of Stock Prices, 1993-2003 29

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Abbreviations

AAFD American Academy of Family Physicians

ACS American Community Survey 

AMA American Medical Association

CMS Centers for Medicare & Medicaid Services

CMSA consolidated metropolitan statistical area

CPI Consumer Price Index

FMR fair market rent 

GAF geographic adjustment factor

GPCI geographic practice cost index

HCFA Health Care Financing Administration

HHS Department of Health and Human Services 

HUD Department of Housing and Urban Development 

MedPAC Medicare Payment Advisory Commission

MMA Medicare Prescription Drug, Improvement, and 

 Modernization Act of 2003

MSA metropolitan statistical area 

NAIC National Association of Insurance Commissioners

NECMA New England county metropolitan area

RVU relative value unit

USPS United States Postal Service
Page 1 GAO-05-119 Geographic Adjustment of Medicare Fees

United States Government Accountability Office

Washington, D.C. 20548

A

March 11, 2005 Letr

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 William M. Thomas

Chairman

The Honorable Charles B. Rangel

Ranking Minority Member

Committee on Ways and Means 

House of Representatives

Since 1992, when Medicare’s physician fee schedule was put into place, 

physicians’ fees have been adjusted for area differences in physicians’ costs 

of operating a private medical practice. The purpose of this adjustment is 

to help ensure that Medicare’s payment is appropriate and adequate in all 

areas. Three separate indices, known as geographic practice cost indices 

(GPCI), are used in making the geographic fee adjustments. These GPCIs 

raise or lower Medicare fees in an area, depending on whether that area’s 

costs of staff and other expenses—including office rent, malpractice 

premiums, and the cost of physicians’ own time—are above or below the 

national average. The three GPCIs correspond to the three main 

components of a Medicare fee: physician work, practice expense, and 

malpractice expense. As part of its responsibility to set and adjust 

Medicare fees, the Centers for Medicare & Medicaid Services (CMS) in the 

Department of Health and Human Services (HHS) determines the 

methodology used to develop the GPCIs.

Since the implementation of the GPCIs, physician groups have expressed 

concerns about the data and methods used to construct them. In 1991, the 

year before the GPCIs’ implementation, CMS (at the time called the Health 
Page 2 GAO-05-119 Geographic Adjustment of Medicare Fees

Care Financing Administration (HCFA))1 noted that the cost would be 

prohibitive to collect the detailed locality-level data needed to measure 

every area’s staff costs and other expenses compared to the national 

average. The agency therefore limited data sources to those that existed 

and were readily available, selecting data proxies for each GPCI. 

Physicians have viewed certain of these proxies as detracting from the 

GPCIs as measures of cost differences. For example, physician groups find 

fault with CMS’s use of apartment rent as a proxy for physician office rent 

in constructing the practice expense GPCI.

Groups representing physicians practicing in rural areas have also 

questioned the GPCIs’ fairness, as GPCIs adjust fees downward when an 

area’s costs and expenses are lower than the national average. The 

contention is that setting Medicare fees higher in an urban area is unfair 

because an internist in rural Maine, for example, does the same work in 

providing care to a patient as an internist in Los Angeles. Advocates for 

rural physicians also argue that GPCI-related disparities in Medicare 

payment are jeopardizing the supply of physicians in rural areas. 

In the Medicare Prescription Drug, Improvement, and Modernization Act of 

2003 (MMA), Congress directed GAO to evaluate several issues related to 

physician compensation, among them Medicare’s method of geographic 

adjustment and the potential for such adjustment to affect physician 

location, recruitment, and retention—matters related to physician supply.2

In this report, we examine (1) the extent to which the GPCIs are valid in 

their fundamental design and appropriate in the data and methods used to 

measure cost differences and (2) whether GPCIs affect physician incomes, 

location, recruitment, and retention.

To assess the GPCIs’ validity, we reviewed the design of each GPCI to 

determine if the design was appropriate for achieving the intended 

objectives in geographically adjusting physician fees.3

 In addition, we 

reviewed the data and methods that CMS used to construct the GPCIs. 

These data included wage and malpractice premium data from CMS as well 

as fair market rent (FMR) data from the Department of Housing and Urban 

Development (HUD). We also reviewed an index of geographic differences 

1

The Health Care Financing Administration (HCFA) was renamed CMS on July 1, 2001. 

2

Pub. L. No. 108-173, § 413(c), 117 Stat. 2066, 2277-78.

3

The MMA directs us to examine the GPCIs’ validity but does not define the term.
Page 3 GAO-05-119 Geographic Adjustment of Medicare Fees

in commercial rents, using U.S. Postal Service (USPS) data, in order to 

assess the rent component of the practice expense GPCI.

To examine the impact of GPCIs and other factors on geographic 

differences in physicians’ income, we examined data from the 2003 Area 

Resource File, which is maintained by the Health Resources and Services 

Administration; Medicare physician claims; and survey data from the 

American Medical Association Physician Socioeconomic Statistics 2000-

2002 Edition. To assess the roles of market factors and GPCIs in 

explaining the geographic variation in physician income, we obtained an 

analysis commissioned by the Medicare Payment Advisory Commission 

(MedPAC) comparing private insurers’ fees to geographically adjusted 

Medicare fees. To analyze the extent to which income, Medicare fees, and 

other factors affect physician location, recruitment, and retention, we 

reviewed relevant literature, including an analysis of the retention of 

physicians from the University of Iowa Carver College of Medicine. We also 

interviewed physician recruiters, physician groups, and other experts on 

GPCI-related topics. We did not review such non-GPCI factors as volume 

and type of service that may result in geographic variations in Medicare 

payments to physicians because these issues were outside our scope. For 

more details on our data and methods, see appendix I. We performed our 

work according to generally accepted government auditing standards from 

January 2003 through March 2005.4

Results in Brief The work GPCI, the practice expense GPCI, and the malpractice GPCI are 

valid in their fundamental design as tools to account for geographic cost 

differences. The three GPCIs, as implemented, appropriately reflect broad 

patterns of geographic differences in the costs of running a medical 

practice. For example, nurses’ median hourly wages across the United 

States range widely—for example, in 2000, from $19.60 in South Carolina to 

$29.16 in Oakland, California. Since nurses’ wages vary across the nation 

and constitute a significant share of physicians’ practice expenses, nurses’ 

wages contribute to geographic differences in practice expenses. In 

addition to adjusting for cost differences, the work GPCI is valid in that it 

also reflects a goal of protecting physician fees in low-cost areas from 

dropping to levels that could be considered unfair relative to fees in highcost areas. The work GPCI does so by limiting downward cost 

4

Our work began in response to a request from the Senate Finance Committee and 

continued pursuant to MMA.
Page 4 GAO-05-119 Geographic Adjustment of Medicare Fees

adjustments. However, problems with data and methodology underlying 

the GPCIs may detract from the GPCIs as measures of cost differences. 

For example, the wage data used in the work and practice expense GPCIs 

are not current, and the data used in the malpractice GPCI are incomplete. 

CMS has options to remedy these and other problems. 

GPCIs appear to have a negligible bearing on matters of physician supply—

location, recruitment, and retention—in rural areas. Because Medicare 

revenue constitutes only part of a physician’s income—typically 25 

percent—the impact of the adjustment factors on physicians’ income is 

generally modest, raising or lowering income by no more than 2 to 3 

percent in most localities. Our interviews with physician recruitment 

experts and published studies indicate that income is only one of many 

factors affecting physicians’ decisions to locate in rural areas and in 

employers’ successful efforts to recruit and retain physicians. These 

factors include a spouse’s employment opportunities, the quality of local 

schools, and the availability of other physicians to share night and weekend 

calls. Given GPCIs’ limited effect on physician income and income’s 

secondary effect on physician supply, GPCIs are not important factors in 

physician location, recruitment, and retention. 

We are making several recommendations to the Secretary of Health and 

Human Services to improve the data and methods used to construct the 

GPCIs. Among them, we recommend refining the practice expense GPCI 

by augmenting wage data and replacing the rent index; we also recommend 

refining the malpractice GPCI by making the input data more complete and 

representative and by standardizing data collection. In commenting on a 

draft of this report, HHS characterized our findings as important but 

disagreed with most of our recommendations to refine the GPCIs’ input 

data and methods because of concerns about the timing of their 

implementation. GAO contends that the steps recommended explicitly 

take account of these timing issues. Two national physicians’ associations 

also reviewed the draft report, stating that it provided a good description of 

the GPCIs and current GPCI issues. One of the associations agreed with 

our analysis of the GPCIs’ validity and of their effect on physician location, 

while the other disputed the GPCIs’ validity and maintained that the 

physician fee for a service should be the same, regardless of location.

Background The Medicare physician fee schedule has distinct payment rates for over 

7,000 services, from office visits to complex surgical and diagnostic 
Page 5 GAO-05-119 Geographic Adjustment of Medicare Fees

procedures. It has been in effect since 1992, and, although there have been 

some modifications, its basic structure has not changed.

Medicare Physician 

Payment

Each of the more than 7,000 services on the Medicare physician fee 

schedule has three relative value units (RVU), which correspond to the 

three components of physician payment: 

• Physician work—the financial value of physicians’ time, skill, and effort 

that are associated with providing the service.

• Practice expense—the costs incurred by physicians in employing office 

staff, renting office space, and buying supplies and equipment.

• Malpractice expense—the premiums paid by physicians for professional 

liability insurance. 

On average across all procedures, work represents 52.5 percent of total 

RVUs, practice expense represents 43.7 percent, and malpractice 3.9 

percent.5

Each RVU measures the relative costliness of providing a particular 

service. For example, for a midlevel office visit for an established patient,6

the most common Medicare procedure, the RVU for the practice expense 

component is 0.71, meaning that this procedure is half as costly as a 

chemotherapy infusion procedure7

 with a practice expense RVU of 1.42. 

To calculate a fee for a service, each of the three RVUs for a service is 

adjusted for geographic differences in resource costs and converted into 

dollars. This process has several steps. First, each of the three RVUs is 

multiplied by its geographic adjuster. Second, these adjusted RVUs are 

added together. Third, that sum is converted into dollars using a 

5

These percentages do not total to 100 percent due to rounding. The percentages 

correspond to shares of the average cost of running a physician practice.

6

A more complete description is “office or other outpatient visit for the evaluation and 

management of an established patient.” In the American Medical Association (AMA) coding 

system, it is CPT code 99213. In this report, a midlevel office visit refers to this CPT code.

7

The full description is “infusion technique, initiation of prolonged infusion (more than 8 

hours) requiring the use of a portable or implantable pump.” It is CPT code 96425.
Page 6 GAO-05-119 Geographic Adjustment of Medicare Fees

conversion factor—a dollar amount calculated by CMS that translates each 

service’s RVUs into a payment amount. The sum of these adjusted RVUs 

for a particular service in a particular area, multiplied by the conversion 

factor, results in the Medicare fee for that service in that area.8

 For 

example, in Cleveland, Ohio, in 2004, the adjusted RVUs for a midlevel 

office visit sum to 1.37; multiplied by the conversion factor ($37.3374), the 

Medicare fee for this procedure in Cleveland is $51.13. By contrast, in Little 

Rock, Arkansas, where practice costs are lower, the adjusted RVUs total 

1.28, which the conversion factor translates into the Medicare fee for a 

midlevel office visit in Little Rock of $47.73. Updates that change the 

GPCIs’ values effectively redistribute payments among Medicare payment 

localities but do not generally alter total Medicare outlays for physicians’ 

services.

The physician fee schedule was designed to increase payment rates for 

primary care services compared to rates for services typically performed 

by specialists. Rural physicians overall have benefited from the 

introduction of the physician fee schedule, since the proportion of 

physicians delivering mostly primary care—in particular, family and 

general practice physicians—is higher in rural areas than in urban areas.

GPCIs for Physician Work, 

Practice Expense, and 

Malpractice 

GPCIs adjust payments for differences among 89 distinct Medicare 

payment localities (technically known as fee schedule areas) in physicians’ 

costs of providing Medicare services. Thirty-four of these localities are 

statewide and include both urban and rural areas.9

 The remainder includes 

large metropolitan areas such as Manhattan, New York, and smaller, less 

populated metropolitan areas such as Santa Clara, California. These 

payment localities differ in size, population density, and the extent to which 

they are urban or rural. Practice costs tend to vary considerably within 

many payment localities, especially those that contain both urban and rural 

areas. 

8

The same fee would result from multiplying each of the three RVUs by the conversion 

factor, multiplying each product by the corresponding geographic adjuster, and adding the 

three components together. 

9

HCFA has stated that [it] “favors statewide localities because of their understandability, 

simplicity, and ease of administration, and because they reduce urban/rural payment 

differences.” HCFA, Medicare Program: Revisions to Payment Policies and Five-Year 

Review of and Adjustments to the Relative Value Units Under the Physician Fee Schedule 

for Calendar Year 1997, 61 Fed. Reg. 59,491, 59,497 (Nov. 22, 1996). 
Page 7 GAO-05-119 Geographic Adjustment of Medicare Fees

The three GPCIs—work, practice expense, and malpractice—are 

numerical factors expressed as the ratio of an area’s cost to the national 

average cost. For example, the practice expense GPCI for Cleveland, Ohio, 

is 0.944, which means that the practice expense component of the fee for a 

service is 5.6 percent below the national average. The work GPCI 

measures the relative cost to a practice in a particular locality of a 

physician’s time, skill, and effort, while the practice expense and 

malpractice GPCIs measure the relative costs of obtaining resources to 

operate a practice and acquiring malpractice insurance. CMS is required 

to review the GPCIs at least every 3 years and, based on that review, may 

revise them using the most recent available data. 

Unlike the other two GPCIs, the work GPCI measures relative costs 

exclusively by an indirect measure: the relative wages of six categories of 

nonphysician professional occupations, including lawyers, architects, 

social workers, and teachers.10 Geographic differences in the wages of the 

six professions are used to capture the differences among geographic areas 

in living costs and the value of amenities.11 These data are drawn from the 

decennial census; consequently, CMS updates the work GPCI only once 

every 10 years. By law, the work GPCI incorporates only one-quarter of the 

difference between localities in the six professions’ wages, meaning that a 

20 percent difference in wages results in a 5 percent difference in the work 

GPCI.

The practice expense GPCI is designed to adjust for geographic differences 

in three types of costs incurred by a practice: nonphysician staff wages, 

office rent, and costs of supplies and equipment. 

• In calculating the relative wages of nonphysician staff, CMS uses wage 

data from the decennial census for four occupations: registered nurses, 

licensed practical nurses, health technicians, and administrative staff.

10The six categories are architecture and engineering; computer, mathematical, and natural 

sciences; social scientists, social workers, and lawyers; education, training, and library; 

registered nurses and pharmacists; and writers, artists, and editors. 

11This refers to the value—as perceived by these professionals—of a locality’s attributes, 

such as schools, entertainment, and quality of professional colleagues. 
Page 8 GAO-05-119 Geographic Adjustment of Medicare Fees

• In measuring physician office rent, CMS uses a proxy—HUD’s FMR 

residential index of the average rent for a two-bedroom apartment.12 

CMS relies on the FMR residential index because measures of 

commercial office rent have not been available for nonmetropolitan 

areas and for some metropolitan areas. 

• In regard to the costs of supplies and equipment, CMS treats these costs 

as uniform nationwide since it considers the market for these items to 

be national, not local or regional.

The malpractice GPCI is based on average malpractice premiums in a 

payment locality. CMS obtains premium data from state insurance 

departments and private insurers. In calculating the average premium for a 

payment locality, CMS weights the average malpractice premiums for a 

county within a payment locality by total RVUs for the county—a measure 

of the volume and complexity of Medicare services in the county. 

Each GPCI varies by geographic area, as table 1 shows. The work and 

practice expense GPCIs tend to be higher in large metropolitan areas and 

lower in predominantly rural payment localities.

Table 1: The Physician Work, Practice Expense, and Malpractice GPCIs for Five 

Payment Localities, 2004

Source: CMS. 

a

Selected localities represent the 90th, 75th, 50th, 25th, and 10th percentiles of the Medicare payment 

localities ranked by the weighted average of their GPCIs. Localities above the 90th percentile include 

Manhattan, New York; San Francisco, California; Santa Clara, California; San Mateo, California; New 

12The Secretary of Housing and Urban Development is required to publish the FMR index 

annually. The FMR index is used to determine payment amounts for the Housing Choice 

Voucher program (formerly known as the Section 8 housing program).

Payment localitya

Physician work

GPCI

Practice 

expense GPCI

Malpractice

GPCI

Oakland/Berkeley, California 1.041 1.235 0.669

Massachusetts, excluding 

metropolitan Boston area

1.010 1.129 0.803

Fort Worth, Texas 1.000b 0.981 0.996

New Mexico 1.000b 0.900 0.898

South Carolina 1.000b 0.904 0.336
Page 9 GAO-05-119 Geographic Adjustment of Medicare Fees

York City Suburbs/Long Island, New York; Queens, New York; metropolitan Boston; and Northern New 

Jersey. Those below the 10th percentile include Arkansas; Missouri, excluding St. Louis and Kansas 

City; Mississippi; South Dakota; Oklahoma; Nebraska; Idaho; and Iowa. Alaska was excluded from the 

analysis because the MMA set Alaska’s GPCIs at 1.67.

b

MMA set a temporary floor of 1.00 for the physician work GPCI.

Applying the GPCIs to their respective RVUs for a single service, such as a 

midlevel office visit, results in a Medicare fee that varies geographically. 

(See table 2.) Since the work, practice expense, and malpractice RVUs for 

a single service are the same in every payment locality, this variation in the 

Medicare fee for that service mirrors the variation in the GPCIs across 

payment localities. For example, for Oakland the Medicare fee for a 

midlevel office visit is $59.32. By contrast, for South Carolina the Medicare 

fee for the same office visit, $49.14, is lower because the fee is calculated 

using different, lower values for the GPCIs, which reflect lower practice 

costs. 

Table 2: The Medicare Physician Fee for a Midlevel Office Visit in Five Payment 

Localities, 2004

Source: GAO calculation using CMS data.

a

Selected localities represent the 90th, 75th, 50th, 25th, and 10th percentiles of the Medicare payment 

localities ranked by the weighted average of their GPCIs. Localities above the 90th percentile include 

Manhattan, New York; San Francisco, California; Santa Clara, California; San Mateo, California; New 

York City Suburbs/Long Island, New York; Queens, New York; metropolitan Boston; and Northern New 

Jersey. Those below the 10th percentile include Arkansas; Missouri, excluding St. Louis and Kansas 

City; Mississippi; South Dakota; Oklahoma; Nebraska; Idaho; and Iowa. Alaska was excluded from the 

analysis because the MMA set Alaska’s GPCIs at 1.67.

b

A midlevel office visit is technically known as “office or other outpatient visit for the evaluation and 

management of an established patient.” It is CPT code 99213.

Payment localitya

Medicare physician fee for 

a midlevel office visitb

Oakland/Berkeley, California $59.32

Massachusetts, excluding metropolitan Boston area 55.97

Fort Worth, Texas 52.14

New Mexico 49.88

South Carolina 49.14
Page 10 GAO-05-119 Geographic Adjustment of Medicare Fees

Evolution of GPCIs In the Omnibus Budget Reconciliation Act of 1989,13 Congress required the 

establishment of a national Medicare physician fee schedule, which would 

allow for some variation in fees to reflect physician practice cost 

differences across the country. It required the use of the three GPCIs to 

measure these cost differences and adjust fees accordingly. Before the 

physician fee schedule was established, Medicare payments to physicians 

varied widely, not only between urban and rural areas, but also among 

metropolitan areas and among rural areas. In addition, variations in 

Medicare charges (the basis of Medicare payments prior to the fee 

schedule) were largely not explained by costs. When the physician fee 

schedule was established, there was consensus among experts that the 

practice expense and malpractice components of the Medicare physician 

fee be geographically adjusted in line with underlying costs. In contrast, 

little agreement existed on whether the work component should be 

adjusted, and a compromise was struck: only one-quarter of the variation in 

the proxy for physicians’ earnings would constitute the work GPCI.14

Changes made to GPCIs since their implementation have further limited 

the extent of geographic adjustment and have tended to raise fees in rural 

areas above what they would have been without the changes. 

• The payment localities were consolidated in 1997, reducing the number 

from 210 to 89.15 This consolidation generally resulted in slightly higher 

GPCIs for smaller, more rural areas that were merged into metropolitan 

or statewide areas. By contrast, urban areas that had previously had 

their own geographic adjustment and were merged into larger 

nonmetropolitan or statewide areas generally received a lower GPCI 

due to the consolidation. 

13See Pub. L. No. 101-239, § 6102(a), 103 Stat. 2106, 2169-84 (adding section 1848 to the 

Social Security Act) (codified at 42 U.S.C. § 1395w-4 (2000)).

14Specifically, the law required that the work GPCI for a given payment locality was to be 

one-quarter of the relative cost of physicians’ work, compared to the national average. 

15There were 240 payment localities before the physician fee schedule was implemented; as 

of January 1, 1995, the number had been gradually reduced to 210.
Page 11 GAO-05-119 Geographic Adjustment of Medicare Fees

• In December 2003, Congress established a temporary floor for the work 

GPCI of 1.0 as part of a package of payment increases to Medicare 

providers in rural areas.16 This action further reduced geographic 

variation by raising the work GPCI to 1.0 (which had been the national 

average) in all payment localities where it would otherwise have been 

less than 1.0.

The effects of the quarter-variation work GPCI and the temporary floor for 

the work GPCI on the weighted average of the three GPCIs are illustrated 

in figure 1.17 Figure 1 also shows the effect of a hypothetical 100 percent 

work adjustment to the work GPCI (instead of the current adjustment of 25 

percent) and, alternatively, the effect of a hypothetical elimination of the 

work GPCI.

16MMA, § 412, 117 Stat. at 2274 (to be codified at 42 U.S.C. § 1395w-4(e) (1)). The floor 

applies to payment for services furnished from January 1, 2004, through December 31, 2006. 

The implementation of the floor did not reduce the payments in payment localities where 

the work GPCI was 1.0 or greater.

17This weighted average for a locality is a measure of that locality’s Medicare fees relative to 

other localities’ Medicare fees. 
Page 12 GAO-05-119 Geographic Adjustment of Medicare Fees

Figure 1: Effect of Different Policies Altering the Work GPCI on the Weighted 

Average of the Three GPCIs in an Urban Area (Oakland/Berkeley, California) and in a 

Relatively Rural Area (South Carolina)

Geographic Distribution of 

Physicians and Federal 

Efforts to Augment Rural 

Supply

Differences in the geographic distribution of physicians are long-standing 

and predate GPCIs and the Medicare physician fee schedule. Compared to 

larger metropolitan areas, smaller metropolitan areas and rural areas 

typically have had fewer physicians per capita. These differences are 

greater for specialists than for primary care physicians.18 

Several federal programs are designed to encourage physicians to practice 

in areas with perceived shortages. Shortage areas are those areas in which 

the physician-to-population ratio is below a threshold. For example, the 

1.5

1.0

0.5

Weighted average of GPCIs

1992

Oakland/ Berkeley

South Carolina

Difference between weighted averages

Source: GAO analysis of CMS data.

Full-variation work GPCI 

(hypothetical) Quarter-variation work GPCI 

(implemented in 1992 with 

Medicare fee schedule)

2004

Floor of 1.0 set on work 

GPCI (enacted in 2003)

Elimination of work GPCI 

(hypothetical)

Difference between 

weighted averages

18Council on Graduate Medical Education, Tenth Report, Physician Distribution and 

Health Care Challenges in Rural and Inner-City Area (Washington, D.C.: HHS, Public 

Health Service, Health Resources and Services Administration, February 1998), xiv. 
Page 13 GAO-05-119 Geographic Adjustment of Medicare Fees

Medicare Incentive Payment program pays physicians 10 percent more 

than the usual Medicare fee for services provided to beneficiaries in health 

professional shortage areas.19 For 2005 through 2007, MMA adds a 5 

percent incentive to the Medicare fee for primary care and specialist 

physicians providing services in physician scarcity areas.20

Other programs use different tools to address physician supply. For 

example, the National Health Service Corps focuses on debt burden—

repaying the educational loans of physicians and other primary care 

professionals who agree to provide primary health care in a health 

professional shortage area for 2 years.

GPCIs Are Generally 

Valid in Design, but 

CMS’s Data and 

Methods Have 

Weaknesses

In adjusting Medicare physician fees for geographic cost differences, the 

GPCIs are valid in their fundamental design, but data weaknesses detract 

from them as measures of cost differences. Specifically, the work GPCI is 

generally valid as a tool to both adjust for cost differences and bolster 

payments to physicians in low-cost areas by limiting downward 

adjustments. The data used to construct the work GPCI are not current, 

but new data sources will enable CMS to improve the currency of the data 

used. The practice expense and malpractice GPCIs are generally valid as 

tools to adjust for geographic differences in office expenses and 

malpractice insurance premiums. Data to construct the practice expense 

GPCI have been available only once each decade but can be updated 

through a newly available data source. In addition, the credibility of the 

practice expense GPCI could be enhanced with the use of a newly available 

commercial rent index. The data CMS uses to construct the malpractice 

19The Health Resources and Services Administration designates areas having a shortage of 

primary care providers as health professional shortage areas. See 42 U.S.C. § 254e(a)(1) 

(2000). There are several types, but the only ones covered by the Medicare incentive 

payment program are areas with a shortage of primary care physicians or psychiatrists. 

20MMA, § 413(a), 117 Stat. at 2275-77. Physician scarcity areas, defined by MMA, are of two 

types: primary care scarcity areas, which are determined by the ratio of primary care 

physicians to Medicare beneficiaries, and specialist care scarcity areas, which are 

determined by the ratio of specialty care physicians to Medicare beneficiaries. For both 

types, counties are ranked according to the ratio of physicians to Medicare beneficiaries, 

and the counties with the lowest ratios that represent 20 percent of Medicare beneficiaries 

are designated as scarcity areas. A physician who practices in an area that is both a 

shortage area and a scarcity area will receive a total incremental incentive payment of 15 

percent.
Page 14 GAO-05-119 Geographic Adjustment of Medicare Fees

GPCI have several weaknesses, which the agency can remedy through 

increased methodological rigor. 

Work GPCI Balances Two 

Objectives; New Data 

Source Will Make It More 

Current

Although critics of the work GPCI have disputed its validity, we found that 

the work GPCI is generally valid as a tool to adjust for cost differences and 

bolster payments to physicians in low-cost areas by limiting downward 

adjustments. However, the data used to construct the work GPCI are not 

current. A new data source that is expected to be available soon has the 

potential to improve the currency of the data used.

Validity of Work GPCI The work GPCI, which adjusts the component of the fee that reflects the 

physician’s time, is valid in its embodiment of two policy objectives. The 

first is to pay physicians who perform the same services in different areas 

the amount sufficient for them to supply these services, while the second is 

to narrow the difference in fees between rural and urban physicians. The 

work GPCI achieves each objective in part: it raises fees in areas with 

higher living costs and lowers fees in areas with lower costs—consistent 

with the concept of adjustment for geographic cost differences; it also 

narrows the disparities in fees between areas by limiting the full extent of 

downward adjustment that would occur without such limits. 

Under the work GPCI, downward adjustments to the work component of 

physician fees are limited in three ways: the adjustment constitutes only 

one-quarter of the variation in the proxy for physicians’ earnings, the 

temporary floor introduced in MMA prevents the work GPCI from falling 

below 1.0, and the consolidation of payment localities has resulted in 

higher GPCIs on average for the consolidated locality than for the low-cost 

areas within it. As a result of these limits, the work component of the 2004 

fee for a midlevel office visit in Oakland/Berkeley, California, for example, 

is $1.03 higher than in South Carolina. Without the work GPCI limitations, 

the difference in the work component of the fee would have been $6.71. 

Measurement of Work GPCI The data used for the work GPCI are not sufficiently up-to-date. Since 

1992, the source of wage data for the work GPCI has been the decennial 

census’s long form,21 which was last administered in 2000. 

21This form is given to a sample of about one in every six U.S. households and contains 

questions on income, housing, and other issues.
Page 15 GAO-05-119 Geographic Adjustment of Medicare Fees

A new data source that is under development will make the work GPCI 

more current. The Census Bureau plans to replace the long form with the 

American Community Survey (ACS), an annual survey designed to produce 

more current data. The ACS is designed as a continuous survey. For larger 

communities (defined by Census as those with populations over 65,000), 

the ACS data are expected to yield usable estimates each year; for smaller 

communities, data must be accumulated over 3 to 5 years, depending upon 

community size.22 Beginning in 2010, CMS should be able to use the ACS to 

construct GPCIs for all areas in the nation, contingent upon the resolution 

of several technical issues regarding the Census Bureau’s implementation 

of the ACS. The Census Bureau is working with government agencies that 

have used data from the long form to transition to the ACS.23 

Compared to the decennial census, ACS data will be more up-to-date but 

are unlikely to change the work GPCI substantially. The work GPCI is 

based on relative wages—the average of the median hourly wages of six 

nonphysician professional categories in a geographic area relative to the 

national average. Relative wages are generally stable over time. If this 

stability continues, the newer ACS data may not make much difference 

quantitatively. 

In constructing the work GPCI, CMS does not rely on direct measures of 

physicians’ earnings, which are contained in the decennial census data, 

because of two drawbacks:

• Geographic differences in physician earnings are likely to be misleading 

as a measure of geographic differences in living costs and the value of 

amenities. Physicians’ earnings by geographic area vary with the 

volume of services provided to patients and the complexity and 

costliness of these services.24 If the work GPCI was based on physician 

earnings, these differences in the volume and intensity of services could 

increase the work GPCI in high-expenditure areas and lower it in low22The ACS is a continuous sample. Communities with populations less than 20,000 will 

require 5 years of ACS data. Communities with populations between 20,000 and 65,000 will 

require 3 years of ACS data.

23See GAO, American Community Survey: Key Unresolved Issues, GAO-05-82

(Washington, D.C.: Oct. 8, 2004).

24Elliott S. Fisher and others, “The Implications of Regional Variations in Medicare 

Spending. Part 1: The Content, Quality, and Accessibility of Care,” Annals of Internal 

Medicine, vol. 138, issue 4 (2003), 273-287. 
Page 16 GAO-05-119 Geographic Adjustment of Medicare Fees

expenditure areas. Similarly, since physicians’ earnings vary by 

specialty and the census data do not identify a physician’s specialty, 

geographic differences in the mix of specialties could increase the work 

GPCI in areas with relatively large numbers of high-earning specialists 

and lower it in areas with relatively few. 

• Using physicians’ earnings would produce a circular measure: the work 

adjustment would depend on past payments to physicians, including 

past Medicare payments.25

Practice Expense GPCI 

Generally Valid in Design, 

but Can Be Better Measured

The practice expense GPCI is generally valid in its fundamental design as a 

tool to geographically adjust physician office and other practice expenses. 

However, the data CMS used to measure practice expense have drawn 

criticism and may be improved by the availability of new data sources. 

Validity of Practice Expense 

GPCI

In its fundamental design, the practice expense GPCI is generally valid for 

the physician payment localities. These localities differ—sometimes 

sharply—in rent for office space and wage rates for office staff and 

nurses.26 For example, the median hourly wage for registered nurses in 

2000 was $29.16 in Oakland/Berkeley, California, compared to $19.60 in 

South Carolina. (See table 3.) In taking account of systematic differences 

in rent and wage rates, the practice expense GPCI gives physicians who 

provide a particular Medicare service in different geographic areas the 

ability to obtain roughly equivalent amounts of office space, nurses’ time, 

and other resources with their Medicare fee. 

25See W. Pete Welch, Stephen Zuckerman, and Gregory Pope, The Geographic Medicare 

Economic Index: Alternative Approaches, Final Report to the Health Care Financing 

Administration (Needham, Mass.: Health Economics Research, and Washington, D.C.: The 

Urban Institute, June 1989); and Hearing on Medicare’s Geographic Cost Adjustors Before 

the House Committee on Ways and Means, Subcommittee on Health, 107th Cong. 99-103 

(July 23, 2002) (Statement of Stephen Zuckerman, Ph.D., Principal Research Associate, 

Urban Institute.)

26In creating its wage index for nonphysician employees, CMS includes four occupations: 

registered nurses, licensed practical nurses, health technicians, and administrative support 

staff. The wages of these occupations, taken together, account for almost 43 percent of the 

practice expense component.
Page 17 GAO-05-119 Geographic Adjustment of Medicare Fees

Table 3: Geographic Differences in Hourly Wage for Registered Nurses, 2000 

Source: GAO analysis of data from CMS and U.S. Census Bureau.

a

Selected localities represent the 90th, 75th, 50th, 25th, and 10th percentile of the Medicare payment 

localities ranked by the weighted average of their GPCIs. Localities above the 90th percentile include 

Manhattan, New York; San Francisco, California; Santa Clara, California; San Mateo, California; New 

York City Suburbs/Long Island, New York; Queens, New York; metropolitan Boston; and Northern New 

Jersey. Those below the 10th percentile include Arkansas; Missouri, excluding St. Louis and Kansas 

City; Mississippi; South Dakota; Oklahoma; Nebraska; Idaho; and Iowa. Alaska was excluded from the 

analysis because the MMA set Alaska’s GPCIs at 1.67.

Measurement of Practice 

Expense GPCI

In the future, new data sources will become available that could be used in 

updating the practice expense GPCI. As with the work GPCI, the shift from 

the decennial census long form to the ACS will produce wage data for the 

practice expense GPCI that are more current and make it possible to 

update this GPCI annually. The new ACS data may not alter the practice 

expense GPCI much, since relative wages by geographic area change little 

over time.

Nonetheless, opportunities exist to improve the data CMS uses to measure 

geographic differences in the practice expense GPCI. First, CMS does not 

use certain readily available data in constructing the wage component of 

the practice expense GPCI. For example, data on one type of nonphysician 

staff—physician assistants—are available from the decennial census and 

are expected to be available from the ACS. These data could be 

incorporated into the calculation of the practice expense GPCI. Doing so 

would enhance its credibility, but the effect of the inclusion of these data is 

likely to be slight.27

Payment localitya Median hourly wage for registered nurses

Oakland/Berkeley, California $29.16

Massachusetts, excluding

metropolitan Boston 22.06

Fort Worth, Texas 21.26

New Mexico 19.83

South Carolina 19.60

27We did not investigate whether wages of other types of staff, such as accountants, lawyers, 

or data technicians, should also be used in constructing the wage component of the practice 

expense GPCI. We know of no data source that would give the proportion of these types of 

staff used by physicians’ practices.
Page 18 GAO-05-119 Geographic Adjustment of Medicare Fees

Second, a new data source on commercial rent holds some promise for 

improving measurement of one component of the practice expense GPCI 

since the FMR index, which measures the rent of a two-bedroom 

apartment, has several weaknesses as a measure of physician office rent. 

This reliance on a residential rent index is a technical problem that reduces 

the practice expense GPCI’s credibility, as physician offices are typically 

located in commercial buildings rather than in physicians’ personal 

residences. Further disadvantages of the FMR include its focus on rents 

relevant to subsidized housing and HUD’s practice of permitting local 

public housing authorities, in some cases, to affect an area’s FMR by 

substituting other data. However, systematic, representative data on 

physician office rent throughout the country are not available, and data on 

commercial office rent have been available only for metropolitan areas.

Two alternatives to the current rent index are available or will be soon. 

First, in 2004, a potential measure of commercial office rent nationwide 

became available: A researcher sponsored by the USPS created an index of 

commercial rent for both urban and rural areas. (See app. II.) This 

commercial rent index,which is based on rents paid by USPS for post 

office space, is consistent with the pattern of higher rents in large 

metropolitan areas than in rural areas.Although this rent index is 

promising, before it could be incorporated into the practice expense GPCI, 

CMS would need to ensure that the index was better than the alternatives 

in terms of technical characteristics and credibility and that it would be 

available for CMS’s use in the future. 

If the commercial rent index proves infeasible for use in the practice 

expense GPCI, an apartment rent index constructed directly from ACS rent 

data could be used, assuming that outstanding technical issues regarding 

the Census Bureau’s implementation of the ACS are resolved.28 The ACS 

rent index would not have the disadvantages of the FMR and could rely on 

standard methods of index construction, rather than the distinctive 

methods used for the FMR.

Malpractice GPCI Valid in 

Design, but CMS’s Data and 

Methods Remain a Concern 

The malpractice GPCI is valid in its fundamental design, but issues 

regarding the data and methods used in constructing this GPCI reduce its 

28See GAO-05-82.
Page 19 GAO-05-119 Geographic Adjustment of Medicare Fees

credibility. The index can be improved by applying rigorous procedures 

throughout the data collection and aggregation process. 

Validity of Malpractice GPCI The malpractice GPCI’s adjustment of Medicare physician fees for 

geographic differences in malpractice expense is valid in its design because 

it promotes a level playing field for physician practices in different 

geographic areas where malpractice premiums vary widely. That is, the 

malpractice GPCI permits Medicare fees to contribute Medicare’s share 

toward physicians buying a standard amount of malpractice coverage, 

regardless of where physicians practice. Failure to take these differences 

into account would penalize physicians in areas where malpractice 

premiums are high. These average premium differences between areas 

reflect differences in state law, decisions of state and local courts, and the 

concentration of specialties—especially orthopedic surgery and other 

specialties that often experience lawsuits.

Measurement of Malpractice 

GPCI

CMS’s methods for collecting malpractice premium data and aggregating 

them into the malpractice GPCI contain several flaws. The collective 

impact of these weaknesses on relative malpractice premiums is uncertain.

Two weaknesses pertain to CMS’s 2004 update of this GPCI and are 

relatively broad in scope: 

• CMS made two adjustments—once as required by law and once at its 

own initiative—to deal with a potential problem: sharp changes in 

physician fee schedule amounts due to the malpractice GPCI update. 

The law requires that changes in GPCIs be phased in, half in the first 

year and half in the second—when more than 1 year has elapsed since 

the date of the last adjustment. In addition, CMS introduced an 

adjustment, termed a "modulating factor," of 0.5, which further limited 

the change in the malpractice GPCI. The result was that in 2004, 

physicians' Medicare fees reflected only one-quarter of the change in the 

malpractice GPCI, compared to the 2003 malpractice GPCI. 

• CMS’s measure of average malpractice premiums may understate or 

overstate geographic differences in malpractice premiums, since CMS’s 

measure does not adjust for geographic differences between insurers in 

the mix of specialties that they cover. For example, average malpractice 

premiums paid by all physicians covered by a specific insurer are likely 

to be overstated when that insurer has an above-average proportion of 

physicians who are neurosurgeons and orthopedic surgeons, whose 

premiums tend to be high. Likewise, average premiums are likely to be 
Page 20 GAO-05-119 Geographic Adjustment of Medicare Fees

understated when the proportion of such specialists covered by a 

specific insurer is low.

Two flaws in calculating the malpractice GPCI were rooted in CMS’s 

process for updating premium data for 2002.

• One flaw—incomplete data—resulted from CMS’s efforts to make the 

malpractice GPCI more current. Due to concerns that malpractice 

premium data were out-of-date, CMS’s contractor collected malpractice 

premium data for 2002. On the basis of those data and previously 

collected data for 1999 through 2001, the contractor projected premiums 

by geographic area for 2003 and calculated the malpractice GPCI for 

each payment locality. However, the 2002 data were incomplete: CMS’s 

contractor, which allotted 7 weeks for data collection, was able to 

collect premium data for only 33 states. The contractor imputed 

premiums for the other 17 states, the District of Columbia, and Puerto 

Rico. The imputation method was reasonable, but CMS did not report 

on any tests of this method’s performance—for example, comparing 

actual 2001 data to imputed 2001 data. CMS also did not report testing 

the accuracy of its method of projecting 2003 premiums. For example, 

the 1999 through 2001 data could have been used to project 2002 

premiums, which could have been compared to the actual 2002 

premiums for the payment localities for which CMS has data. 

(See app. I.)

• The second flaw was that the 2002 data for the 33 states were potentially 

unrepresentative, as CMS’s contractor collected data from only one 

insurer per state. Under its previous procedure, CMS collected data 

from insurers that accounted for at least half of the malpractice 

insurance business in a state. 

Opportunities exist for CMS to improve the malpractice GPCI as a measure 

of geographic differences in malpractice expenses. More frequent data 

collection would likely enhance the credibility of the malpractice GPCI 

among physicians, since malpractice premiums often change each year—

sometimes markedly—and the size of premium increases often differs 

widely among states. Annual data collection would best capture the yearto-year volatility of premium increases, but annual data collection entails a 

greater commitment of CMS’s resources. Whatever the frequency of data 

collection, allowing more time to collect the needed premium data and 

increasing efforts to follow up with malpractice insurers and other sources 

of premium data could yield more complete data. Collecting data on 
Page 21 GAO-05-119 Geographic Adjustment of Medicare Fees

insurers that account for at least half of malpractice business in a state, as 

CMS has done in the past, would make CMS’s malpractice data more 

representative. In addition, collecting data on each insurer’s market share 

by physician specialty in each state would enable CMS to adjust average 

premiums for differences in specialty mix among insurers. Finally, further 

standardization of data and procedures for collecting data from insurers 

would improve comparability of premiums within a payment locality and 

between localities.

GPCIs Appear to Have 

Little Effect on 

Physicians’ Incomes, 

Location, Recruitment, 

and Retention

The impact of GPCIs on physicians’ incomes is generally modest and on 

physician supply—location, recruitment, and retention—in rural areas is 

negligible compared to other financial and nonfinancial factors. Medicare 

is typically the source of only one-quarter of physicians’ income; 

consequently, GPCIs’ effect on physicians’ income is limited. Income is 

only one of several factors that affect physicians’ location decisions. 

Nonfinancial factors, such as the quality of local schools or spouses’ 

employment opportunities, and other financial factors, such as a 

community’s average income level, are also major influences in physicians’ 

decisions to locate or remain in a rural area. 

GPCIs Less Important than 

Market Factors in Affecting 

Physicians’ Incomes 

The impact of GPCIs on physicians’ incomes is generally modest, raising or 

lowering physicians’ incomes by no more than 2 to 3 percent in most 

localities.29 Physicians typically derive one-quarter of their practice income 

from Medicare.30 Table 4, which shows examples of income before and 

after GPCIs’ adjustment, demonstrates the GPCIs’ effect on physicians’

29In this analysis, income refers to earnings of physicians.

30The Medicare proportion of practice income is based on 1999 data, the most recent year 

for which data are available, and is from the American Medical Association Physician 

Socioeconomic Statistics 2000-2002 Edition.
Page 22 GAO-05-119 Geographic Adjustment of Medicare Fees

income by locality.31 For illustrative purposes, the table assumes that the 

physicians provide the same number and types of services in high-cost and 

low-cost areas. It further assumes that these physicians would have an 

average income of $150,000 without any geographic adjustment.

Table 4: Hypothetical Example of GPCIs’ Effect on Income of Physicians with 

Identical Number and Types of Services Who Derive One-Quarter of Professional 

Income from Medicare, 2004

Source: GAO analysis of CMS and American Medical Association (AMA) data.

a

Selected localities represent the 90th, 75th, 50th, 25th, and 10th percentiles of the Medicare payment 

localities ranked by the weighted average of their GPCIs. 

b

The typical (median) physician derives one-quarter of professional income from Medicare. The 

Medicare proportion of practice income is based on 1999 data, the most recent year for which data are 

available, and is from the American Medical Association Physician Socioeconomic Statistics 2000-

2002 Edition.

For example, a physician in Oakland/Berkeley would earn $4,212 more than 

a comparable physician in a locality with average practice costs. By 

contrast, a physician in South Carolina would earn $2,507 less than a 

comparable physician in a locality with average practice costs. These 

31The examples in table 4 are relevant to most localities, since the table includes localities at 

the 90th percentile and at the 10th percentile, ranked by the weighted average of their GPCIs. 

Some localities have average GPCIs higher than the 90th percentile and others have average 

GPCIs lower than the 10th percentile. These outlier GPCIs have larger effects on Medicare 

fees and physician incomes than the effects shown in table 4. For example, for the New 

York City suburbs—the locality at the 95th percentile—the GPCIs raise physicians’ income 

by 4.5 percent; for South Dakota—the locality at the 5th percentile—they lower physicians’ 

income by 1.9 percent. (All comparisons are to a locality without any geographic 

adjustment.)

Income from identical physician 

practicesb

Payment localitya

Hypothetical 

income not 

adjusted by GPCIs

Hypothetical 

income

adjusted by GPCIs

Oakland/Berkeley, California $150,000 $154,212

Massachusetts, excluding metropolitan 

Boston area

150,000 152,060

Fort Worth, Texas 150,000 149,720

New Mexico 150,000 148,250

South Carolina 150,000 147,493
Page 23 GAO-05-119 Geographic Adjustment of Medicare Fees

differences in income would reflect differences in Medicare’s measures of 

the cost of running a medical practice.

Even when a sizable share of physicians’ income comes from Medicare, the 

GPCIs’ effect on physicians’ incomes is relatively modest. This effect is 

illustrated by a hypothetical example of physicians in different payment 

localities who provide the same number and types of services, who would 

earn $150,000 if there were no geographic adjustment of Medicare fees, and 

who derive 40 percent of their income from Medicare. Such physicians in 

Oakland/Berkeley would receive $6,739 more income than comparable 

physicians in a locality with GPCIs averaging 1.0, while such physicians in 

South Carolina would receive $4,011 less.

Unlike the GPCIs, market factors have a substantial and statistically 

significant impact on geographic differences in physicians’ earnings. We 

analyzed the geographic variation in physicians’ earnings in relation to the 

GPCIs and market factors and found that, controlling for market factors, 

the GPCIs’ effect on physicians’ earnings was not statistically significant. 

(For details of this analysis, see app. I.) By contrast, we found that market 

factors were important. Specifically, physician earnings were higher in 

areas where

• the average income of the population was relatively high, as higher 

income in a community is associated with higher demand for physicians’ 

services; 

• the number of nurses was large relative to the population; 

• the percentage of physicians was large in particular specialties, such as 

cardiovascular surgeons, orthopedic surgeons, and ophthalmologists; 

and 

• physicians experienced long working hours. 
Page 24 GAO-05-119 Geographic Adjustment of Medicare Fees

By contrast, physicians tended to have lower incomes in areas where 

managed care penetration was high and the overall number of physicians 

was large relative to the population.32 

Private plans’ fees vary more than Medicare fees, suggesting that market 

forces are more important than the GPCIs in accounting for geographic 

differences in physicians’ earnings. In a report for MedPAC, Dyckman & 

Associates analyzed fee data for 2002 and found greater variation in private 

plans’ fees than in Medicare fees. The data on private plans’ fees were 

drawn from 33 health plans that enrolled 45 million people and were 

distributed throughout the country.33 Unlike Medicare, private health plans 

are able to adapt their fee schedules to market forces. For example, private 

plans may pay relatively lower fees in areas that experience high managed 

care penetration and higher fees in areas where physicians have greater 

market power. In contrast, Medicare fees by design do not vary 

geographically in response to factors other than cost. Consequently, 

Medicare’s fees and private plans’ fees would be expected to be effectively 

unrelated across localities—as our statistical analysis shows.34 (See fig. 2.) 

Because the variation in private plans’ fees across areas is greater than the 

variation in Medicare fees, market factors—which do not affect Medicare 

32For example, according to one expert, the oversupply of physicians in some specialties, 

such as internal medicine and family practice, has halted increases in physician salaries and 

even led to small decreases of physician salaries in one state and in adjoining areas of 

neighboring states. Our analysis excluded federal physicians and nonpracticing physicians.

33The data are described in Dyckman & Associates, Survey of Health Plans Concerning 

Physician Fees and Payment Methodology: A Study Conducted by Dyckman & Associates 

for the Medicare Payment Advisory Commission, No. 03-7 (Washington, D.C.: MedPAC,

August 2003).

34For the same service, the difference in Medicare fees in two areas reflects the two areas’ 

Medicare GPCIs. The average Medicare GPCI—the weighted average of GPCIs in an area—

summarizes the extent of Medicare’s geographic adjustment to its fees in an area. To 

compute this summary measure, each GPCI is multiplied by the share of costs accounted for 

by its corresponding RVU. The weighted average of GPCIs is often referred to as the 

geographic adjustment factor (GAF). 
Page 25 GAO-05-119 Geographic Adjustment of Medicare Fees

fees—account for much more of the variation in physician incomes than do 

the GPCIs.35

Figure 2: Variation in Private Plans’ Physician Fees and Average Medicare GPCI by 

Medicare Payment Locality, 2002

Note: The average Medicare GPCI—the weighted average of the GPCIs for physician work, practice 

expense, and malpractice—summarizes the extent of Medicare’s geographic adjustment to its fees in a 

Medicare payment locality. Each observation represents the average fee paid by a private plan in a 

payment locality (relative to the national average of private plan fees) and the average Medicare GPCI 

in that locality.

35If market forces affect fees, it might suggest that physicians in rural areas—where there 

are fewer physicians—would have higher incomes, because their private practice fees 

would be higher. A recent study may provide some support for this view. According to this 

study, physicians’ average income, adjusted for the cost of living, is significantly higher in 

rural areas than in urban areas. See James D. Reschovsky and Andrea B. Staiti, Physician 

Incomes in Rural and Urban America, No. 92 (Washington, D.C.: Center for Studying 

Health System Change, January 2005). 

70

0

0

80

90

100

110

120

130

140

150

70 100 80 110 120 140 150 90 130

Average Medicare GPCI in a Medicare payment locality (percentage)

Private plans’ average physician fee in a payment locality 

relative to national average of private plan fees (percentage)

Source: Dyckman & Associates.
Page 26 GAO-05-119 Geographic Adjustment of Medicare Fees

Effect of GPCIs on 

Physician Supply in Rural 

Areas Is Negligible

Income is only one of several financial and nonfinancial factors that affect 

physician supply—that is, location, recruitment, and retention. Our 

interviews with representatives of national and regional recruiting firms as 

well as several small surveys show that income, regardless of its source, is 

generally not the primary factor influencing location, recruitment, and 

retention in rural areas. Since Medicare GPCIs adjust only a fraction of 

income and income’s effect on physician location is generally secondary, 

we believe that the effect of GPCIs on physician location is negligible.

Location and Recruitment Physicians’ decisions to locate and practice in a rural area are more 

strongly related to local amenities and personal preferences than to 

potential income. In our interviews with experienced recruiters from four 

national and regional physician search firms that place physicians in rural 

practices, all reported that income potential is important to physicians 

seeking new positions or relocating. However, they said that other 

factors—such as a spouse’s employment opportunities, the quality of the 

local schools, and the availability of other physicians to share night and 

weekend calls—are more likely than geographic differences in Medicare 

fees to drive physician location decisions. This information is consistent 

with studies of physicians’ location decisions. For example, a 1994 survey 

of third-year family practice residents asked the residents to rank the 

factors that were most important in choosing their first practice site.36 

Seven factors ranked higher than the initial income guarantee, with the 

significant other’s wishes ranking highest. Other factors that ranked above 

income included a medical community friendly to family physicians, 

recreation and culture, proximity to family and friends, significant other’s 

employment, schools for children, and the size of the community. 

Similarly, a study of family and general practice physicians in 

nonmetropolitan Nebraska counties found that a rural or small town 

lifestyle, sufficient personal time away from work, and a quality school 

system were influential in location decisions.37 Practice characteristics 

that influenced location decisions included clinical autonomy, the 

36Anthony J. Costa and others, “To Stay or Not to Stay: Factors Influencing Family Practice 

Residents’ Choice of Initial Practice Location,” Family Medicine, vol. 28 (1996), 214-219.

37Suzanne M. Minarick and John C. Allen, “Factors Influencing the Satisfaction and 

Retention of Nebraska’s Rural Physicians” (Lincoln, Neb.: University of Nebraska - Lincoln, 

June 2003), http://cari.unl.edu/rural-physician.htm (downloaded Aug. 27, 2004).
Page 27 GAO-05-119 Geographic Adjustment of Medicare Fees

opportunity to treat a variety of medical conditions, and patient 

relationships. 

According to recruiters we interviewed, efforts to attract physicians to 

rural areas are more likely to succeed when candidates have grown up in 

rural areas or have been trained at medical schools and residency programs 

that stress family practice and service to rural communities. This 

observation is consistent with the results of several studies identifying 

factors that draw physicians to rural areas.38 Recognizing the importance 

of medical education specifically oriented to rural practice, several medical 

schools, including those at the University of Nebraska and the University of 

Iowa, have established programs aimed at training physicians to serve in 

their states’ rural areas.39 

Physician recruiters also told us that certain business policies adopted by 

medical practices and hospitals in rural communities can increase or 

diminish the success of their recruitment efforts. For example, one expert 

in physician recruiting said that, in working with communities and medical 

practices that were having difficulty recruiting, he found two policies that 

discouraged recruiting: first, employment contracts often had strict 

“noncompete” stipulations, barring any physician who leaves the practice 

from working as a physician elsewhere within a broad geographic area—

for example, a 90-mile radius; second, some practices required that 

physicians who resigned pay for malpractice insurance to cover claims that 

might arise from their work in the practice. He added that relaxing these 

restrictions led to easier recruiting. 

Retention As with physicians’ decisions to locate in a rural area, physicians’ decisions 

to remain in a rural area reflect nonfinancial as well as financial factors and 

are not typically driven by income alone. Several of the recruiters we 

interviewed stressed that retaining new physicians in rural practice 

depends on integrating them and their families into the community. The 

Nebraska study of physicians in nonmetropolitan counties found that, in 

38See Howard K. Rabinowitz and others, “Critical Factors for Designing Programs to 

Increase the Supply and Retention of Rural Primary Care Physicians,” Journal of the 

American Medical Association, vol. 286, no. 9 (2001), 1041-1048.

39In addition, recruitment programs in several states seek to increase the number of 

physicians in rural areas to improve their residents’ medical care. Historically, the federal 

government has supported the recruitment of international medical graduates to rural and 

underserved areas by waiving certain visa requirements.
Page 28 GAO-05-119 Geographic Adjustment of Medicare Fees

general, the same factors that had caused physicians to locate in rural 

counties contributed to their satisfaction and, by extension, their 

willingness to remain in their rural practices.40 The factors that had the 

least to do with a physician’s satisfaction included on-call hours, income 

level, and opportunities for promotion. 

Several financial issues distinct from Medicare fees—such as the size of the 

patient base, the proportion of privately insured patients in the base, and 

the size of medical malpractice premiums—can also influence physicians’ 

decisions to remain in rural practice. Several programs, including the 

Medicare Incentive Payment Program, provide financial incentives to 

physicians to practice or continue practicing in underserved areas, many of 

which are rural. The broader economy may also influence practice 

decisions by individual physicians. The University of Iowa Carver College 

of Medicine maintains data on all physician retirements in Iowa. In recent 

years, Iowa physicians’ decisions to retire—a factor in reducing the local 

physician supply—appeared to reflect trends in the stock market: when the 

stock market fell, retirements also fell. (See fig. 3.)

40Minarick and Allen, “Factors Influencing the Satisfaction and Retention of Nebraska’s 

Rural Physicians.” 
Page 29 GAO-05-119 Geographic Adjustment of Medicare Fees

Figure 3: Number of Retirements of Iowa Physicians and Standard & Poors 

Composite Index of Stock Prices, 1993-2003

Conclusions The geographic adjustment of Medicare’s physician fees is essential to 

achieving the program’s goal of ensuring that Medicare’s payments are 

adequate and appropriate in all areas. GPCIs adjust for known differences 

in the cost of practicing medicine in different areas so that physicians can 

procure approximately equivalent resources with their Medicare fee to 

treat Medicare patients, regardless of location. When Congress introduced 

the work GPCI’s temporary floor, it raised Medicare fees to physicians in 

low-cost areas, thereby narrowing urban-rural fee differences. 

Nevertheless, because of issues regarding data and methods, the credibility 

of GPCIs continues to be questioned. Our analysis shows that 

opportunities exist to refine the GPCIs by improving the currency of the 

data used to construct all three GPCIs, improving the data used in the 

practice expense and malpractice GPCIs, and improving the methods used 

in the malpractice GPCI. These improvements would likely have only a 

marginal impact on Medicare fees and physician incomes but may have a 

more significant effect on the GPCIs’ credibility with the physician 

community. Additional improvements may be possible. For example, it 

would be desirable to adjust CMS’s malpractice premium data for 

0

10

20

30

40

50

60

70

80

90

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

Retirements of Iowa physicians

0

200

400

600

800

1000

1200

1400

1600

Standard & Poors index

Retirements

Standard & Poors

Source: GAO.
Page 30 GAO-05-119 Geographic Adjustment of Medicare Fees

differences in specialty mix among insurers, but to do so CMS would first 

need to assess the feasibility of collecting data on each insurer’s market 

share by physician specialty in each state. Similarly, it would be desirable 

to collect malpractice premium data more frequently—annually or every 2 

years—but CMS would need to weigh the costs and benefits of doing so. 

GPCIs appear to have been a negligible factor in physician supply 

matters—location, recruitment, or retention. Our work shows that GPCIs 

generally have at most a minor effect on physician incomes, and income 

has a secondary effect (compared to nonfinancial factors) on where 

physicians choose to practice. Consequently, GPCIs generally have not 

played a material role in physicians’ decisions to locate or remain in a rural 

area. 

Recommendations for 

Executive Action

We recommend that the Secretary of Health and Human Services seek to 

improve the GPCIs’ data and methods by taking the following six actions:

• develop a plan for transitioning from the Census Bureau’s decennial 

census to the annual ACS for earnings and wage data, pending 

resolution by the Census Bureau of key outstanding issues regarding the 

implementation of the ACS;

• add data on physician assistants’ wages to improve the measurement of 

the practice expense GPCI;

• consider the feasibility of replacing the practice expense GPCI’s current 

rent index with a commercial rent index; if using a commercial rent 

index is not feasible, consider a residential rent index directly based on 

ACS data; 

• collect malpractice premium data from all states;

• collect data from insurers that account for at least half of malpractice 

business in a state; and

• standardize collection of malpractice premium data.
Page 31 GAO-05-119 Geographic Adjustment of Medicare Fees

Agency and Industry 

Comments and Our 

Evaluation

We received written comments on a draft of this report from HHS (see app. 

III) and oral comments from two national associations of physicians—the 

American Medical Association (AMA) and the American Academy of 

Family Physicians (AAFP).

HHS Comments and Our 

Evaluation 

While characterizing our findings as important, HHS stated that the body of 

the report and the recommendations were phrased inconsistently, with the 

recommendations generally less cautious than the body of the report 

regarding the feasibility of refining the input data and methods used in 

constructing the GPCIs. In our view, the recommendations and the body of 

the report are consistent in characterizing the feasibility of options. For 

example, in discussing the rent index, we take account of feasibility in both 

the body of the report, where we suggest an alternative if the commercial 

rent index is not feasible, and in the recommendation. HHS disagreed with 

most of our recommendations. HHS’s disagreements with specific 

recommendations are as follows:

• American Community Survey. Regarding our recommendation that 

HHS develop a plan for transitioning to the ACS for earnings and wage 

data, HHS stated that such a plan seems premature, because the ACS 

data will not be available until 2010. In our view, HHS should begin 

considering how it will use ACS data because the Census Bureau’s long 

form—the current source of data for the work GPCI and the wage 

component of the practice expense GPCI—will not be available in the 

future. We know of no other source of wage and earnings data at the 

geographic level needed for the GPCIs. Although sufficient ASC data for 

the smallest communities (those with populations that are less than 

20,000) will not be available until 2010, annual data for communities 

with populations of more than 65,000 will be available beginning with 

2006.

41 The Census Bureau is working with federal agencies to achieve a 

smooth transition to the ACS. In particular, the Census Bureau and 

HUD are working together to transition to the use of the ACS in the 

calculation of the FMRs beginning with 2006. We believe that it would 

41Funding for the ACS (for all persons except those living in group quarters) was approved 

beginning with 2005. 
Page 32 GAO-05-119 Geographic Adjustment of Medicare Fees

be prudent for the CMS component of HHS to also begin planning the 

GPCI transition to the ACS.42

• Physician assistants’ wages. Regarding our recommendation that 

adding data on physician assistants’ wages would improve the 

measurement of the practice expense GPCI, HHS has said it believes 

that the current wage categories are representative of the typical private 

physician practice. Nonetheless, HHS said that it will examine these 

categories and the possible inclusion of physician assistants’ wages. 

Rent Index. Regarding our recommendation that HHS should, if feasible, 

replace the practice expense GPCI’s current apartment rent index with a 

commercial rent index, HHS noted that it had investigated alternative 

sources of rent data, including data supplied by the USPS, and none of 

them was adequate. We are aware that, over a decade ago, HCFA 

sponsored research on possible sources of rent data. In a 1994 report, 

HCFA compared the GPCI rent index to commercial office rents from three 

sources: USPS, General Services Administration, and the Building Owners 

and Managers Association.43 The report concluded that the HUD FMR, 

although imperfect, was preferable to any of the alternatives. However, in 

our view, HHS should assess the rent index that a USPS-sponsored 

researcher created recently based on post office data. HHS should 

determine whether his rent index is preferable to the GPCI rent index (the 

HUD FMR), since his index has national coverage and methodological 

advantages over the postal data reviewed over 10 years ago. We also 

recommended that, if a commercial rent index proves infeasible, HHS 

should use the ACS. HHS said that it would investigate the ACS as a source 

of rent data when it becomes available. In our view, the ACS should be a 

fallback source if a commercial rent index is not feasible, rather than the 

sole source considered. 

• Completeness of malpractice premium data. Regarding our 

recommendation that HHS should collect malpractice premium data 

from all states, HHS noted that it had previously collected data from all 

states but did not in 2002, because the attempt to make the data more 

42The Census Bureau told us that some parts of HHS have begun working with Census to 

achieve a smooth transition.

43Debra A. Dayhoff and Gregory C. Pope, Comparison of GPCI Rental Index to Three 

Sources of Commercial Office Rents: Final Report (Waltham, Mass.: Health Economics 

Research, Inc., Sept. 14, 1994).
Page 33 GAO-05-119 Geographic Adjustment of Medicare Fees

current imposed a short time frame. We agree that timeliness is 

important but believe that completeness should not be compromised—

particularly in planning future updates. HHS further noted that it 

imputed data for 17 states and did not agree with our concern in the 

body of the report that the performance of the imputation method had 

not been tested. In our view, the failure to collect data from 17 states is 

a methodological flaw, although our draft report recognized that the 

incomplete premium data resulted from HHS’s efforts to use more 

current data—a desirable objective. The draft report did not disagree 

with the imputation method, which it explicitly stated was reasonable. 

However, we continue to believe that, given the importance of the 

imputation, its performance should have been tested. Moreover, if 

premium data used in the future are incomplete, the imputation method 

would need to be tested.

• Representativeness of premium data collection. Regarding our 

recommendation that HHS collect data from insurers that account for at 

least half of malpractice insurance business in a state, HHS noted that it 

had done so in its original data collection for 1999 to 2001. However, in 

the 2002 supplemental collection, data were collected only from a state’s 

largest insurer, even if its market share was less than half. In our view, 

to enhance the representativeness and credibility of CMS’s premium 

data, it is important that these data always represent at least half of the 

malpractice insurance in a state. 

• Standardization of malpractice premium data. Regarding our 

recommendation that HHS standardize the collection of malpractice 

premium data, HHS stated that it has done a more than adequate job of 

standardizing the survey instrument for the collection of malpractice 

premium data. However, we found that HHS has not demonstrated that 

it has a standard protocol—procedures and survey instruments—for 

collecting these data. In particular, neither CMS’s regulation nor the 

contractor’s most recent report that updated the GPCIs contains a 

protocol or a detailed description of premium data collection. 

Publication of the protocol might help to make the malpractice GPCI 

more transparent.

Industry Association 

Comments 

The two industry associations that commented varied in their observations 

on the draft report. AMA stated that the draft report provided a good 

description of the background and evolution of the GPCIs. AMA agreed 

with our analysis of the GPCIs’ validity and with our finding that the GPCIs’ 
Page 34 GAO-05-119 Geographic Adjustment of Medicare Fees

role in influencing physician location is negligible. However, AMA 

disagreed with our estimate of the GPCIs’ effect on physician income and 

suggested that our concerns about using physicians’ earnings for the work 

GPCI could be overcome by using alternative earnings data. AAFP differed 

with our discussion of the validity of the work GPCI. The associations also 

provided us with technical comments, which we incorporated as 

appropriate. The associations’ major comments and our evaluation of 

those comments are summarized below.

AMA’s main concern was that we understated the GPCIs’ effect on 

physician income. AMA cited three reasons that the range of the GPCIs’ 

effect was greater than we estimated. Their reasons and our responses are 

as follows:

1. According to AMA, in general the GPCIs’ effect on physician income is 

closer to 5 percent than to the 2 to 3 percent we reported, because the 

GPCIs should be applied only to gross revenue, not net income. Since 

physicians’ gross revenue is about twice net income on average, 

according to AMA, the GPCIs’ true effect is about twice our estimate. 

We agree that Medicare’s geographic fee adjustments directly affect a 

physician practice’s gross revenue. However, in assessing the effect of 

GPCIs on physician net income, we took account of geographic 

differences in both physician revenue and physician expenses, whereas 

AMA’s approach assumes physician expenses are the same in all 

localities. Not to account for geographic differences in expenses (using 

the GPCIs) would ignore the fact that the GPCIs track significant 

differences across localities in physicians’ expenses, such as nurses’ 

wages and rent. 

2. AMA stated, as did AAFP, that the GPCIs’ effect on fees is amplified 

beyond their effect on Medicare fees because some private plans and 

state Medicaid programs base their physician fees on Medicare fees. In 

AMA’s view, the draft report should address the tendency of other 

payers to follow Medicare’s lead and therefore the draft report 

understated the GPCIs’ effect. Our analysis of private plan fees, 

however, found effectively no relationship between private plans’ fees 

and Medicare fees in different localities. While some private plans have 

adopted Medicare’s RVU scale or a variant, fewer have adopted the 

GPCIs. This is consistent with the data on private plan fees that we 

reviewed, showing that Medicare fees and private plan fees are 

effectively unrelated across localities. (See fig. 2.) Similarly, a study 

published in 2000 found that Medicaid fees did not track Medicare fees: 
Page 35 GAO-05-119 Geographic Adjustment of Medicare Fees

for the same services, Medicaid fees as a proportion of Medicare fees 

varied widely across states, ranging in 1998 from 34 percent in New 

Jersey to 126 percent in Alaska.44

3. AMA maintained that rural physicians and certain specialists, such as 

internists and cardiologists, derive more of their income from Medicare 

than the 25 percent average we cited. We agree that various specialties 

have had an average Medicare share of practice income of more than 40 

percent, including ophthalmology, cardiovascular disease, urological 

surgery, and general internal medicine.45 Our analysis showed that the 

GPCIs’ effect on the income of physicians who derive 40 percent of 

their income from Medicare was still relatively modest.

AMA also disagreed with our finding that basing the work GPCI on 

measures of earnings of nonphysicians has advantages, compared to 

relying on direct measures of physician earnings from the decennial 

census. AMA suggested three alternative measures on which to base the 

work GPCI: (1) salaries of employed physicians, which in AMA’s view 

would permit CMS to bypass the circularity issue associated with the direct 

use of physician earnings; (2) surveys of physician income conducted by 

physician recruitment firms; and (3) salary data from the Medical Group 

Management Association’s Physician Compensation and Production 

Survey. We do not consider any of these alternatives to be preferable to 

nonphysician earnings as a basis for the work GPCI. In the case of 

employed physicians’ salaries, circularity is obscured but not avoided. 

Neither the MGMA survey nor physician recruitment firm surveys are 

statistically representative and therefore are not adequate as data sources 

for the work GPCI. 

44Stephen Norton and Stephen Zuckerman, “Trends in Medicaid Physician Fees, 1993 to 

1998,” Health Affairs, vol. 19, no. 4 (2000), 222-232.

45The Medicare proportion of practice income is based on 1999 data, the most recent year 

for which data are available, and is from the American Medical Association Physician 

Socioeconomic Statistics 2000-2002 Edition. Specialist groups that derive more than 40 

percent of their revenue from Medicare include ophthalmologists (49 percent), 

cardiovascular disease (46.6 percent), and urological surgeons (44.2 percent). Groups of 

internists with Medicare shares between 37 percent and 47 percent include general 

internists and internists in the cardiovascular and gastroenterology subspecialties. Florida 

is the only area where revenue from Medicare averages more than 40 percent (40.3 percent) 

for all physicians, regardless of specialty. 
Page 36 GAO-05-119 Geographic Adjustment of Medicare Fees

AAFP commented on the draft report’s discussion of the work GPCI and its 

validity. AAFP’s policy is that identical physician services should be 

reimbursed the same, regardless of location. AAFP stated that no 

geographic adjustment should be applied unless it addresses a specific 

policy concern, such as physician shortages. Consistent with the MMA’s 

mandate to us, we examined the GPCIs to determine whether they were 

valid in their fundamental design and appropriate in the data and methods 

used to measure cost differences. Our research on this issue led us to 

conclude that adjusting Medicare physician fees for geographic cost 

differences is essential to achieving Medicare’s goal of ensuring that fees 

are adequate and appropriate in all areas.

We are sending copies of this report to the Secretary of Health and Human 

Services, the Administrator of CMS, and appropriate congressional 

committees. We will also make copies available to others upon request. 

The report is available at no charge on the GAO Web site at 

http://www.gao.gov. 

If you or your staffs have questions about this report, please call me at 

(202) 512-7119. Another contact and staff acknowledgments are listed in 

appendix IV.

A. Bruce Steinwald

Director, Health Care—Economic 

and Payment Issues
Page 37 GAO-05-119 Geographic Adjustment of Medicare Fees

Appendix I

Data and Methods ApApenednxidexiIs

This appendix describes the data and methods we used to assess the 

GPCIs’ data and methods, to compare fees paid by private insurers to 

geographically adjusted Medicare physician fees, and to assess the effect of 

GPCIs on physicians’ incomes.

Construction of the GPCIs We reviewed the data and methods used by CMS to construct the GPCIs. 

To analyze the GPCI methodology, we examined reports of the Health Care 

Financing Administration (HCFA) and the HCFA and CMS contractors that 

had produced and updated the GPCIs. We relied most on information in 

the report on the fourth GPCI update, which CMS used to develop the 2005 

indexes.1

 The data described in that report are drawn from government 

sources (see table 5). We did not independently establish the reliability of 

data used in the GPCIs. 

Table 5: Data Sources Used in CMS’s Construction of GPCIs

1

Shannon Slawter, Jim Moser, and Shihki Barcheck, Fourth Update to the Geographic 

Practice Cost Index: Final Report (McLean, Va.: BearingPoint, Jan. 15, 2004).

Index Purpose Data 

All GPCIs Weight variables used in constructing GPCI 

by county total of RVUs for each component 

(work, practice expense, malpractice)

2002 work, practice expense, and malpractice components of RVUs by 

county 

Crosswalk counties to Medicare payment 

localities

List of U.S. counties, list of payment localities 

Crosswalk Census Bureau’s 545 work 

areas—consolidated metropolitan statistical 

areas (CMSA), metropolitan statistical areas 

(MSA), New England county metropolitan 

areas (NECMA), and rural balances—to U.S. 

counties

List of CMSAs, MSAs, and rural state balances; list of U.S. counties 

Work GPCI Construct index of 6 professions’ earnings 2000 decennial census data on earnings of 6 professional categories for 

545 work areas 

Weight earnings of each professional 

category by its share of employees

Share of employees in each of 6 professional categories
Appendix I

Data and Methods

Page 38 GAO-05-119 Geographic Adjustment of Medicare Fees

Source: GAO analysis of CMS documents.

Comparing Geographically 

Adjusted Medicare and 

Private Insurance Physician 

Fees

To compare the geographic variation in Medicare physician fees with the 

geographic variation in fees paid by private insurers, we obtained analyses 

of a sample of private plans’ physician fee schedules obtained in 2002.2

 

These analyses were commissioned by MedPAC and carried out by 

Dyckman & Associates—referred to here as Dyckman. For this analysis, 

Dyckman 

• mapped fee schedules from private plans in its sample to Medicare fee 

schedules for the same localities and determined that its sample had 68 

usable fee schedules for 36 Medicare payment localities,3

 

Practice 

expense GPCI

Construct employee wage index of 4 

nonphysician occupations

Decennial census data on wages of 4 occupations for 545 work areas 

Weight earnings of each of 4 nonphysician 

occupations by its share of employees

2000 decennial census data on share of employees in each of 4 

nonphysician categories 

Obtain rent index 2004 HUD fair market rent (FMR) Index for two-bedroom apartments for 

all counties in the United States 

Combine components of practice expense 

into the practice expense index, using the 

cost shares of these components

Cost shares of these components 

Malpractice 

GPCI

Construct malpractice premium price index Malpractice premiums and premiums as adjusted by CMS contractor for 

20 specialty groups for at least 2 carriers per state for 1999-2001 and 1 

carrier per state for 2002 

Crosswalk insurers’ rate area to counties List of each insurer’s rating territories, list of U.S. counties 

Weight each insurer’s premiums by market 

share

Market share for each insurer for which 2001 premiums were obtained, 

except 14 states where 2001 market share was unavailable—8 states 

provided BearingPoint their 2000 market shares as the most current 

market shares data available, and BearingPoint used National 

Association of Insurance Commissioners (NAIC) 2000 market share 

data to identify insurers for the remaining 6 states 

(Continued From Previous Page)

Index Purpose Data 

2

These fee schedules had been collected for a study commissioned by MedPAC in 2003. 

Details of the sample can be found in Zachary Dyckman and Peggy Hess, Survey of Health 

Plans Concerning Physician Fees and Payment Methodology (Washington, D.C.: Dyckman 

& Associates, August 2003). 

3

Based on the Fisher’s exact test—a statistical test that is used to determine if there is a 

nonrandom association between two categorical variables—we concluded that the 

distribution of the GPCIs in the 36 payment localities for which we had fee schedules did not 

differ significantly from the distribution of the GPCIs in the other localities. Dyckman 

subsequently eliminated one plan’s fee schedule from the analysis because it was an outlier.
Appendix I

Data and Methods

Page 39 GAO-05-119 Geographic Adjustment of Medicare Fees

• calculated for each fee schedule a private fee index—the ratio of the 

average private fee to the national average, and

• compared the private fee index to the weighted average of the three 

GPCIs in that Medicare payment locality. 

In calculating the average private fee, Dyckman 

• classified 89 commonly used Medicare procedures into 6 types of 

services; 

• calculated the mean of private plans’ fees that operate in each one of the 

36 Medicare payment localities;4

 and

• calculated the national mean of private plans’ fees, weighting the mean 

of private plans’ fees in each Medicare payment locality by its total 

RVUs.

Factors Affecting 

Geographic Difference in 

Physicians’ Income

To determine the effect of GPCIs and other factors on physicians’ income, 

we estimated a model of average physician income in 513 geographic 

areas.5

 We controlled for factors that affect physicians’ income, such as 

physicians’ location, their hours of work, their specialties,6 the extent of 

their competition, as measured by the relative number of physicians to the 

population in an area, and the availability of nurses.7

 Table 6 presents our 

4

For each type of five services—surgery, laboratory and pathology, radiology, assorted 

medical and diagnostic services, and other evaluation and management—Dyckman 

calculated the unweighted average private fee for services in that category. For the sixth 

type—office visits—Dyckman calculated a weighted average, using frequency of each 

individual service (such as a specific type of office visit) as the weight. The six type-ofservice categories were then weighted by each category’s total service use. 

5

The 513 geographic areas are a subset of the 545 work areas (consolidated metropolitan 

statistical areas (CMSA), metropolitan statistical areas (MSA), New England county 

metropolitan areas (NECMA), and rural state balances in a state) for which complete data 

were available. 

6

The specialties are cardiovascular surgery, orthopedic surgery, dermatology, 

ophthalmology, neurosurgery, neurology, pulmonary disease, plastic surgery, 

gastroenterology, obstetrics/gynecology, and colon/rectal surgery. 

7

These factors had a significant effect on geographic difference in physicians’ income. Data 

on these factors were obtained from the 2002 Area Resource File and the 2000 decennial 

census. Information on physician income was also taken from the 2000 decennial census. 
Appendix I

Data and Methods

Page 40 GAO-05-119 Geographic Adjustment of Medicare Fees

analysis showing that most factors, but not GPCIs, are statistically 

significant. 

Table 6: Factors Explaining Variation in Physicians’ Average Annual Income for 513 

Geographic Areas

Source: GAO analysis of the 2002 Area Resource File, the 2000 decennial census, and the 5 percent sample of 2002 Medicare 

physician claims.

Note: The 513 areas are a subset of the 545 work areas (consolidated metropolitan statistical areas 

(CMSA), metropolitan statistical areas (MSA), New England county metropolitan areas (NECMA), and 

rural state balances in a state) for which complete data were available. The adjusted R2 for the 

estimated model is .41.

a

Factor is not statistically significant: p-value greater than .05.

b

These specialties are cardiovascular surgery, orthopedic surgery, dermatology, ophthalmology, 

neurosurgery, neurology, pulmonary disease, plastic surgery, gastroenterology, obstetrics/gynecology, 

and colon/rectal surgery.

c

The proportion of an area’s population enrolled in a managed care organization.

d

Patient-care physicians include office-based physicians, hospital residents, and hospital full-time staff 

physicians.

e

Non-patient-care physicians include those whose major professional activity is research, medical 

education, or administration.

f

Nurses include registered nurses, licensed practical nurses, and nurse practitioners.

Factors Coefficient p < |t|

GPCI—weighted average of work, practice expense, and 

malpractice GPCIsa -3,414.99 0.92

Average Medicare payment for physicians’ services per 

beneficiary (2002)a 7.26 0.19

Located in metropolitan statistical area (MSA) 17,471.71 0.00

Average weekly work hours for physicians in the area 1,521.77 0.00

Percentage of physicians who belong to selected specialty 

categoriesb 2,032.36 0.00

Average managed care penetrationc (%) -505.42 0.00

Number of patient-care physicians per 1,000 populationd -4,625.12 0.00

Percentage of physicians who are non-patient-care physicians e -1,580.44 0.00

Number of nursesf per 1,000 population 2,239.46 0.00

Average annual income for all civilians in the area 1.81 0.00

Constanta 4,299.85 0.89
Page 41 GAO-05-119 Geographic Adjustment of Medicare Fees

Appendix II

Rent Indexes and the Practice Expense GPCI ApendxiI

We reviewed the FMR, the rent index used in the 2004 practice expense 

GPCI. The FMR was developed to serve a specific purpose in the HUD 

Housing Choice Voucher program: setting the amounts in different parts of 

the country of rent vouchers that aid lower income families in renting 

housing. The use of different sources in different areas for developing and 

updating this special purpose index, as well as the process for requesting 

changes to it, raises questions about its suitability as a component of the 

practice expense GPCI. Specifically, the FMR uses decennial census data, 

supplemented with data from the American Housing Surveys for the largest 

metropolitan areas and from telephone surveys (conducted using random 

digit dialing) for other areas to establish base-year estimates. Changes may 

be made to the proposed rates if localities are dissatisfied with these rates 

and submit supporting data. The FMR is updated from two sources: 

regional random digit dialing surveys in some areas and the Consumer 

Price Index (CPI) for rents and utilities data where available. 

We wanted to identify a commercial rent index—on its face, a more 

appropriate proxy for physician office rent. We found only one source of 

commercial rent that was available nationally for both urban and rural 

areas. The USPS has data on rent of post offices throughout the country 

and has sponsored work by Anthony M. Yezer, Professor of Economics at 

George Washington University, to create a rent index with national 

coverage.1

 To construct a county-level rent index for a property with 

standardized characteristics, Professor Yezer estimated a statistical model. 

The model controlled for differences in physical characteristics of the 

property such as interior space, setting of the building, parking provision, 

and provisions of the lease, including length and terms. The model’s 

predicted level of rent for property used as post office space, holding 

constant these physical characteristics and lease terms, was used to 

calculate an index of rent in a county or group of counties relative to the 

average. Our preliminary exploration of this commercial rent index 

suggests that, potentially, it could be an improvement on the residential 

rent index used currently for the practice expense GPCI. In order to use 

these data, CMS would have to assure itself of the data’s credibility and 

technical merits and their availability to CMS on a periodic basis. 

1

See Direct Testimony of Anthony M. Yezer Before the Postal Rate Commission: Postal 

Rate and Fee Changes, Docket No. R2000-1 (Washington, D.C.: Jan. 12, 2000). The USPS 

agreed to permit Professor Yezer to use these data to develop an index designed to meet the 

requirements of the practice expense GPCI.
Page 42 GAO-05-119 Geographic Adjustment of Medicare Fees

Appendix III

Comments from the Department of Health and 

Human Services ApendxiI
Appendix III

Comments from the Department of Health 

and Human Services

Page 43 GAO-05-119 Geographic Adjustment of Medicare Fees
Appendix III

Comments from the Department of Health 

and Human Services

Page 44 GAO-05-119 Geographic Adjustment of Medicare Fees
Appendix III

Comments from the Department of Health 

and Human Services

Page 45 GAO-05-119 Geographic Adjustment of Medicare Fees
Appendix III

Comments from the Department of Health 

and Human Services

Page 46 GAO-05-119 Geographic Adjustment of Medicare Fees
Appendix III

Comments from the Department of Health 

and Human Services

Page 47 GAO-05-119 Geographic Adjustment of Medicare Fees
Page 48 GAO-05-119 Geographic Adjustment of Medicare Fees

Appendix IV

GAO Contact and Staff Acknowledgments ApendxiIV

GAO Contact Jonathan Ratner, (202) 512-7107

Acknowledgments In addition to the person named above, key contributors to this report were 

Dae Park, Phyllis Thorburn, Bobbi Buckner Bentz, Hannah Fein, Ba Lin, 

and Mary Reich.

(290266) 
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