Medicare Physician Fee Schedule: CMS Needs a Plan for Updating Practice Expense Component
Published: 2004-12-13T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Medicare's payments for the costs physicians incur in operating their practices are based on two sets of estimates: total practice expenses and resource estimates for individual services. Total practice expense estimates were derived from American Medical Association (AMA) physician surveys, which the Centers for Medicare & Medicaid Services (CMS) refines with supplemental data submitted by medical specialty societies. Resource estimates for individual services were developed by expert panels and refined by CMS with recommendations from another expert panel. In response to a mandate in the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000, GAO evaluated CMS's processes for updating total practice expense and resource estimates and whether CMS will have the data necessary to update the fee schedule at least every 5 years as mandated by law.
section_title: What GAO Found
paragraphs: CMS reviews supplemental data from medical specialties on total practice expenses to determine whether it should use the data, but aspects of CMS's review may result in its not utilizing the best data. CMS's review is necessary because it helps protect against perceived or actual bias in the estimates. Risk of bias exists because only specialties that believe their Medicare fees are too low are likely to submit supplemental data, and the data are not audited. CMS, however, may still use certain data submissions that are not representative of physician practices within a specialty. CMS also may reject some data that are more representative of a specialty's total practice expenses than the data currently used for that specialty. In addition, CMS reviewed a 2002 data submission for accuracy, which is an important additional check, yet when the data did not meet the accuracy test, CMS did not reject the data. CMS has not stated whether it will review the accuracy of all supplemental data submissions. Stakeholders such as specialty societies and AMA said the expert panel improved resource estimates for individual services because of the rigor of its evaluation process. CMS and specialty societies generally accepted the panel's estimates because the panel represented a broad range of specialties and its collaborative evaluation process became increasingly systematic. CMS implemented almost all of the panel's estimates but appropriately changed some estimates that conflicted with Medicare coverage rules and changed others to make them consistent across services. In modifying other estimates, however, CMS did not always rely on adequate data or explain its rationale. Certain physician groups told GAO that this had diminished their confidence in the process for updating Medicare's fees, and physicians' confidence in the process is important to ensure their continued participation in Medicare. CMS does not have a plan for developing and using appropriate data for the mandated review of the fee schedule. CMS reported that it is in the process of obtaining a contract to collect practice expense data from the major physician and nonphysician specialties but did not provide specifics. A plan for the data collection is important for several reasons. Data sources that had been used no longer exist or are insufficient. The AMA physician survey that provided total practice expense data was last conducted in 1999 and was modified in 2000 such that it no longer collected the necessary data. Data submitted voluntarily by specialties to update these estimates are not an appropriate substitute for a systematic data collection effort. In addition, the expert panel that reviewed resource estimates for individual services completed its work in its final meeting in March 2004. CMS indicated that an ongoing AMA committee would continue to develop estimates for new and revised services. While CMS officials told GAO they believe CMS can complete the review of the fee schedule as required by 2007, without a specific plan CMS cannot ensure that it will be able to collect the data and update the fee schedule in a timely manner.

section_title: Letter
paragraphs: Medicare pays for physician services using a fee schedule based on the  resources required to deliver each service. Under this fee schedule, a  single fee is paid for each of the more than 7,000 services (such as office  visits, surgical procedures, and tests) delivered by physicians and certain  other health professionals, regardless of the medical specialty performing  the service. The fee is made up of three parts that recognize different types  of resources required to provide each service. The physician work  component provides payment for the physician’s time, skill, and training to  perform the service. The malpractice component provides payment for the  expenses of obtaining professional liability insurance. The practice  expense component provides payment for the expenses incurred in  operating a practice, such as nurses’ salaries, space, and equipment.  Almost half of the approximately $53 billion Medicare paid for services  under the physician fee schedule in 2003 compensated physicians for  practice expenses. The Centers for Medicare & Medicaid Services (CMS),  the agency within the Department of Health and Human Services (HHS)  that administers Medicare, is required to review and adjust the fees for all  physician services at least every 5 years to account for a number of  factors, including changes in medical practice.
Some medical specialty societies have raised concerns that Medicare’s  practice expense payments do not cover their physicians’ practice  expenses, in part because of inadequacies in the data used to establish the  payments. We previously reported that although the data used were the  best available at the time resource-based practice expense payments were  developed, they needed refinements to correct potential weaknesses.
Practice expense payments are developed with (1) estimates of the total  practice expenses that physicians in each specialty incur to operate their  practices and (2) estimates of the resources required to perform each of  the individual services provided by the physicians in each specialty. Total  practice expenses were estimated originally using data from American  Medical Association (AMA) surveys of physicians. To refine total practice  expense estimates, CMS was required to establish a review process to  accept data submitted voluntarily by medical specialty societies that were  collected through a survey of physicians practicing in that specialty to  supplement the AMA survey data. As of June 2004, six specialties had  submitted supplemental data, and CMS had accepted three submissions.  The resources required to perform individual services originally were  estimated by panels of clinicians convened by the Health Care Financing  Administration (HCFA). To refine these estimates, CMS made its own  changes but largely relied on recommendations from the AMA-sponsored  Practice Expense Advisory Committee (PEAC), which comprised expert  panels of physicians and other clinicians that developed service-specific  resource estimates based on information from specialty societies.
The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection  Act of 2000 directed that we review the processes and data used to refine  practice expense payments for all specialties. As agreed with your offices,  we (1) evaluated CMS’s process for reviewing the supplemental data  submitted by specialty societies on total practice expenses, (2) evaluated  CMS’s process for updating estimates of resources required to perform  individual services, and (3) determined whether CMS will have the data  necessary to review and adjust the physician fee schedule at least every   5 years, as required by law.
To conduct this work, we invited 50 medical specialty societies to meet  with us to discuss their experiences with developing and submitting  supplemental practice expense data and their views of the PEAC process.  We met with representatives of the 32 specialty societies that responded  and reviewed written materials they gave us. (App. I lists the 32 medical  specialty societies that responded.) We evaluated CMS’s review of the  supplemental total practice expense data by examining specialty societies’  submissions and reports from the contractor CMS hired to provide  technical assistance to the specialty societies and CMS on the  supplemental data submission process. We also interviewed CMS officials  and the contractor about the process CMS uses to review submissions. To  evaluate CMS’s process for updating resource estimates for individual  services, we interviewed the specialties’ representatives, attended PEAC  meetings, and examined supporting materials that specialties provided to  the PEAC. To determine CMS’s decisions on PEAC recommendations and  CMS’s rationale for other changes to resource estimates for individual  services, we reviewed relevant documents published in the Federal  Register and an HHS Office of Inspector General (OIG) report. We also  discussed with CMS staff CMS’s rationale for decisions regarding the  refinement processes and its views about prospects for obtaining data to  perform the mandated reviews. We performed our work from November  2001 through December 2004 in accordance with generally accepted  government auditing standards. (App. II provides details of our scope and  methodology.)
subsections: section_title: Background
paragraphs: Practice expense payments under Medicare’s physician fee schedule are  based on estimates of total practice expenses for each specialty and  estimates of the resources required for individual services. The adequacy  and appropriateness of fees are important to ensure Medicare beneficiary  access to physician services. If fees for a particular service are too low,  physicians may choose not to provide this service, which may limit  Medicare beneficiary access. If fees are too high, the Medicare program  will be wasting scarce resources. Determining the appropriateness of  physician fees is particularly difficult with regard to practice expenses.  The total expenses of operating a practice vary significantly, depending on  the specialty, organization of the practice, and services provided. Further,  these total expenses must be allocated to over 7,000 individual services,  and the expenses associated with individual services cannot be easily  identified because a large share of practice expenses, such as rent and  office equipment, are not associated with the delivery of any given service  but are incurred across all services provided by the practice. In addition,  the resources involved in delivering certain services may be expected to  shift over time with technological innovations or as wages change for  clinical staff. Every year, approximately 200 to 300 service codes are  added to the fee schedule, which could change resource allocations for  other services. The uncertainty of these considerations underscores the  importance of the method CMS employs to refine and update the estimates  underlying practice expense payments.
subsections: section_title: SMS Survey Used to Estimate Specialties’ Total Practice Expenses
paragraphs: HCFA derived its original estimates of total practice expenses for each  specialty using data from AMA’s annual SMS surveys from 1995 through  1997. The SMS survey, which was not specifically designed for this  purpose, gathered a broad range of information about economic and other  characteristics of physician practices and included questions on the  number of patient visits, medical practice revenues, and professional  expenses. The survey sample was randomly drawn from the AMA  Physician Masterfile, the most comprehensive available listing of  physicians practicing in the United States. Other health care professionals  (such as physical therapists or optometrists) paid under the physician fee  schedule were not included in the survey sample.
We have previously noted several potential problems with using SMS data  to estimate total practice expenses across all specialties. First, the  reported practice expenses may not have been representative of all  physicians in some specialties because of a limited number of  respondents. Even though AMA adjusted the survey results to minimize  the effects of responding physicians who may not have been  representative of all physicians in a specialty, the number of respondents  may have been too small to ensure representative estimates. For  instance, the 1995 through 1997 SMS data HCFA used for oncologists were  based on 27 respondents, and the data for allergists/immunologists were  based on 31 respondents. Second, the SMS survey only distinguished  among 26 major physician specialties, while Medicare recognizes over 65  physician and other health care professional specialties. Thus, HCFA had  to use the practice expenses of the major physician specialties as proxies  to represent the expenses of smaller specialties or other health care  professionals, even though their practice expenses might not have been  similar. Third, the reported expenses in the SMS survey included items  that were not in Medicare’s definition of practice expenses. For example,  some oncology practice respondents included chemotherapy drugs in their  supply expenses. Such expenses need to be excluded from estimates of  practice expenses in setting Medicare fees because Medicare pays for  them outside of the physician fee schedule; however, there was no way for  CMS to do this accurately with available data.
section_title: Physician Specialty Societies May Submit Supplemental Data on Total Practice Expense Estimates
paragraphs: As the physician fee schedule was implemented, Congress required CMS  to establish a process to accept specialty-supplied total practice expense  data that could supplement the SMS survey data. Any specialty society  may submit data for CMS to consider in refining the physician fee  schedule. CMS evaluates the supplemental data collection method and the  survey respondents to ensure that they meet the criteria used in its review  process for acceptance. If CMS accepts a specialty society’s submission,  the data are blended with the existing SMS data used to estimate that  specialty’s practice expense payments, although for some nonphysician  specialties that were not represented in the original AMA survey, the  supplemental data replace the existing SMS data. To be considered for  changes to the following year’s fee schedule, supplemental data must be  submitted by March 1 of the preceding year. The last year that CMS will  accept such submissions is 2005.
CMS’s criteria for acceptance of supplemental data govern the data  collection method and the survey respondents (see table 1). To collect the  data, a contractor experienced with the SMS survey (or other national  survey of physicians) must use an instrument based on the SMS survey  instrument and protocols. The surveyed physicians must be randomly  selected from the AMA Masterfile or, for nonphysician specialties, from a  nationally representative listing of practitioners. The names of the  physicians contacted for the survey must be kept confidential so no  interested parties can contact them about the survey.
The supplemental data survey respondents must be representative of the  entire specialty, as demonstrated by a high response rate or by the  respondents’ having the same characteristics as all physicians in the  specialty. The number of respondents must be sufficient so that the  estimated expenses comply with a precision criterion. Specifically, the  estimates must have an error rate of no more than plus or minus   15 percent. The supplemental data from a typical specialty need about  140 usable responses for the estimates to meet the precision criterion.
Six specialties have submitted supplemental data, and CMS accepted three  of these submissions (see table 2). The data from vascular surgery met  the criteria and were accepted for use in establishing the practice expense  payments. The data from physical therapy were initially rejected because  they did not meet the precision criterion. That criterion was relaxed,  however, in June 2002, and the physical therapy submission was accepted  because the data met the new requirements. CMS deferred acceptance of  data submitted by oncology in 2002. After the agency resolved its concerns  about the accuracy of the data, it accepted the submission.
section_title: Expert Panels Establish and Refine Resource Estimates for Individual Services
paragraphs: To develop the original estimates of the resources required for individual  services, HCFA convened 15 specialty panels composed of physicians,  nurses, and practice administrators. These clinical practice expert panels  (CPEP) estimated the amount of direct expenses, such as clinical labor,  medical equipment, and medical supplies, associated with providing each  service to the typical patient. In general, the panel for a particular  specialty included clinicians from that specialty who reviewed the services  that its physicians typically provided. AMA, some specialty societies, and  some researchers who specialize in physician reimbursement issues  supported using the panels’ estimates of service-specific resources to  establish the practice expense payments, but other specialty societies  noted some concerns. They stated that panel members did not represent  a cross section of physician practices (by size or urban and rural location)  or all types of physicians who provided a particular service. They also  stated that the panels used differing assumptions about and definitions of  the resources required for providing similar services, resulting in  inconsistent estimates across panels.
In 1999, AMA convened the PEAC as an expert panel to refine the resource  estimates for individual services. The PEAC had representation from all  major medical specialties and rotating membership for smaller  subspecialties. CMS representatives also participated, as observers, in the  PEAC meetings. The PEAC reviewed the resource estimates for  approximately 6,500 services from 1999 through March 2004, which  account for close to 90 percent of total Medicare physician payments. It  initially focused on high-volume services for each specialty, “families” of  similar services (for example, an endoscopy procedure without biopsy,  with biopsy, with removal of a single tumor, or with removal of multiple  tumors are considered a family of endoscopy services), and services that  specialty societies believed had inaccurate estimates. After completing its  review, the PEAC made recommendations to CMS, through AMA’s ongoing  physician payment review committee, about modifications to service  resource estimates.
The PEAC review relied on data from specialties on the resources required  to provide the specialties’ services. Once a service or family of related  services was identified for refinement by the PEAC, specialties that  normally provide these services gathered data on the resources needed to  furnish each service to a typical patient, such as the time a nurse spends  with a patient and the supplies and equipment used. AMA provided the  specialty societies with background materials, such as the current  resource estimates for the service and any estimates the PEAC had  previously approved for individual tasks or supplies involved in  performing the service. The specialty society then presented the PEAC  with its proposed resource estimate for a service, a description of how the  estimate was developed, and a list of the tasks included in the estimate.
The PEAC reviewed the resource estimate in a two-step process. First, a  subgroup of the PEAC examined the data gathered by the specialty,  assessed whether the resource estimate for a service was reasonable and  comparable to those for similar services, and voted on whether to endorse  the resource estimate. The subgroup recommended that the full PEAC  approve the estimate, consider modifying it, or request additional data.  Second, the full PEAC made its decision, either approving the specialty’s  estimate or a modified version of it or delaying its decision until it received  additional data. Official recommendations to CMS required the approval of  two-thirds of the PEAC members.
CMS made all final decisions about changes to the resource estimates that  were used in calculating physician fees, including its own changes to  original or existing resource estimates and those recommended by the  PEAC. Its approach to reviewing PEAC recommendations varied: CMS  staff made site visits to observe services being performed or consulted the  medical directors of insurance companies to learn how other payers  established payments for a service. CMS modified estimates for different  reasons, including to make them consistent with estimates for other  services and to remove expenses that were accounted for in other  Medicare payments. For example, CMS changed the PEAC-recommended  time spent by a nurse providing patient education and counseling for one  service to be consistent with the time for this task already assigned to a  comparable service. In the earlier years of the process, HCFA rejected or  modified certain recommendations. In 2003, CMS accepted all of the  PEAC’s recommendations. AMA stated that the PEAC process was  concluded in March 2004 because the PEAC had completed its work of  reviewing most services. In May 2004, a representative from AMA told us  that although the PEAC had been officially discontinued, a committee  would be appointed to refine the resource estimates for the approximately  200 services that had not been reviewed by the PEAC.
section_title: Certain Aspects of CMS’s Review Are Problematic
paragraphs: Although a review of specialty-provided supplemental data from surveys  on total practice expenses is necessary to protect against the risk of bias  inherent in a voluntary submission process, because of certain aspects of  its review, CMS may not be accepting the best available supplemental  practice expense data. In assessing whether the respondents to the survey  for supplemental data are representative of all physician practices within a  specialty, CMS may not be examining practice characteristics that  adequately reflect the range of practice expenses within a specialty, such  as whether a practice is single- or multispecialty or hospital-based. In  addition, CMS’s precision requirement for estimates based on the  submitted data has led the agency to reject some supplemental  submissions that could improve upon the information it currently uses to  establish estimates. CMS also elected to assess the accuracy, or  reasonableness, of a recent submission by comparing it with data from  other sources but has not indicated whether it will consistently assess the  accuracy of all supplemental data submissions. Moreover, CMS ultimately  accepted practice expense data in this submission that were much higher  than comparable benchmark data, which is problematic. The data were  deemed representative, yet were influenced by high-cost practices, raising  concerns about CMS’s test for representativeness.
subsections: section_title: Review of Supplemental Data Is Necessary
paragraphs: A review of supplemental data submissions is necessary because medical  specialty societies voluntarily gather and submit these data, and the data  are not audited or verified before being used to establish fees. In addition,  because the specialty societies have an incentive to engage in this  endeavor only if they believe the practice expense estimates used to  establish their Medicare fees are too low, the supplemental submission  could be biased if a disproportionate share of those who complete the  survey represent high-cost practices. CMS has established review criteria  regarding the data collection method and the respondents to help guard  against any perceived or actual bias in the estimates based on these data.
CMS’s review of the data collection method—the survey instrument,  survey administration, and sample selection—helps ensure that  supplemental data can be used to update practice expense estimates. For  example, by requiring that the survey instrument be based on the SMS  survey instrument, CMS ensures that the definitions of the various  categories of expenses between supplemental and previously used data  are consistent. CMS’s requirement that the supplemental data  submissions be based on the same survey administration protocols as the  SMS survey increases the comparability of the supplemental data to the  SMS data.
CMS’s review of respondent characteristics is necessary to ensure that the  data are representative of the average practice expenses within a specialty  and are not distorted by a disproportionate share of respondents of one  type or another. If the response rate is high, and the sample is randomly  drawn from a nationwide listing of the physician specialty, the  submissions are assumed to be representative of the entire specialty. If the  response rate is low, CMS evaluates whether the respondents are  representative of the specialty by comparing respondent characteristics  with characteristics of the entire specialty. In 2002, CMS also reviewed a  data submission to determine whether the reported values were  reasonable, as a test for accuracy. Assessing the accuracy of the data, by  comparing them with other benchmarks or norms, is important because  establishing the representativeness of the respondents and the precision of  the data do not guarantee that the responses themselves are accurate.
section_title: Certain Aspects of Review Process Are Problematic
paragraphs: In evaluating whether supplemental data submissions are representative of  the entire specialty, CMS examines practice characteristics of the  respondents that do not necessarily reflect the variation in the specialty’s  practice expenses. CMS compares its survey respondents with all  physician practices within a specialty using characteristics that AMA used,  such as physician gender, years in practice, and membership in a medical  specialty organization, to adjust responses to produce published reports  on the nation’s physicians. CMS uses these characteristics to ensure that  supplemental data submissions are consistent with SMS data already  collected, but other characteristics may better reflect the potential range  and distribution of practice expenses for the specialty. For example,  hospital-based practices may have lower practice expenses than  independent practices because hospitals may pay for clinical staff,  supplies, and equipment needed to provide a service, while in an  independent practice the physician bears these expenses. For some  specialties, expenses for practices that are independent can be as much as  50 percent higher than those for practices that are hospital-based. If a  supplemental data submission includes a disproportionate share of  hospital-based practices compared to the specialty as a whole, then the  total practice expense estimates for the specialty may be too low; if the  submission includes a disproportionate share of independent practices,  the total practice expense estimates for the specialty may be too high.  Thus, practice expense payments, which are based in part on these total  practice expense estimates, may also be correspondingly either too low or  too high.
In addition, CMS may be rejecting data that could improve estimates. In  rejecting data that do not meet the agency’s precision criterion, even  though they are deemed representative, CMS ignores data that could  provide a better estimate of the specialty’s practice expense data than the  data it currently uses, particularly the proxy data used for nonphysician  specialties. For example, in 2001, the American Optometric Association  (AOA) collected supplemental practice expense information from  optometrists. CMS rejected the data because they did not meet the  precision criterion, although its contractor recommended that the data be  accepted because they were valid and the best available information on  practice expenses of optometry practices. Optometrists’ practice  expenses were originally established with the practice expenses of the  average physician because optometrists were not included in the SMS  survey. Supplemental data submitted by the specialty would be likely to  improve the estimates because they are specific to the specialty, whereas  the practice expenses of the average physician would be less likely to  closely match optometrists’ practice expenses. Supplemental data also  could improve the estimates for those specialties with few respondents in  the SMS survey, as long as the data were from a representative sample of  practices.
In addition to assessing representativeness and precision, CMS assessed  the accuracy of a 2002 submission, although it has not indicated whether it  will consistently assess the accuracy of all submissions. CMS delayed  accepting the 2002 submission from the American Society of Clinical  Oncology (ASCO) because ASCO’s estimates appeared to be too high. CMS  assessed the accuracy of this submission by comparing the supplemental  data with data for similar specialties and from other sources to see  whether the submitted data appeared reasonable. The comparison with  benchmark data enabled CMS to evaluate aberrant data that had passed  the representativeness and precision tests. Salaries in the supplemental  data were more than four times higher for clerical staff than salaries  reported in Bureau of Labor Statistics data; and salaries for clerical staff in  the oncology submission were even higher than some of the salaries for  clinical staff that ASCO reported. These comparisons indicated that the  supplemental data might not accurately represent oncologists’ practice  expenses. CMS later accepted the submission for use in setting 2004  payments without revisions after ASCO explained that the differences  were due to certain high-cost practices among the respondents in the  sample.
CMS’s acceptance of the ASCO data raises concerns about the review  process. First, the respondents in the ASCO survey were deemed  representative, yet the reported costs were much higher than benchmark  data, underscoring the concern that CMS’s assessment of  representativeness is problematic. Second, the basis on which CMS  accepted the ASCO data after assessing its accuracy is problematic  because the explanation that the estimates were influenced by high-cost  practices should have increased, not alleviated, CMS’s concerns about the  representativeness of the data. Our replication of the hourly practice  expense calculations and discussions with CMS’s contractor led us to  conclude that the average hourly practice expense estimates were higher  when the few practices with high costs were included.
section_title: Updating Process Improved Resource Estimates for Individual Services, Although Certain CMS Changes Were Made without Adequate Justification
paragraphs: Stakeholders agree that the PEAC improved resource estimates for  individual services, and although CMS used almost all of the PEAC- recommended estimates, it at times used estimates that differed from  PEAC recommendations and made other changes to estimates without  adequate justification. CMS relied on the PEAC’s recommendations to  update the estimates. The PEAC’s process for developing estimates  became increasingly systematic from its inception in 1999, and its  recommendations were widely accepted by specialty societies and AMA as  leading to improved resource estimates for individual services. This  acceptance stemmed in part from the broad representation on the PEAC  of multiple specialties and a cross section of physicians and from the  PEAC’s standardization of estimates for tasks that are common to many  services. CMS implemented almost all of the PEAC-recommended  estimates, but it has modified certain original estimates and PEAC- recommended estimates. However, CMS did not always use adequate  supporting data or explain the rationale for its changes, which has reduced  some physician specialties’ confidence in the PEAC process and the  resulting estimates.
subsections: section_title: Stakeholders Agree that PEAC Improved Estimates
paragraphs: AMA and CMS officials, as well as representatives from specialties told us  that they believe the PEAC improved the estimates of the resources  required to furnish individual services. These stakeholders said the PEAC  process for developing estimates became more systematic from its  inception in 1999. The PEAC established standard estimates for the  clinical staff time, equipment, and supplies needed to perform certain  activities or tasks common to many services, such as taking vital signs,  whereas previously estimates for the same task may have varied by type of  service or specialty. The PEAC’s multispecialty representation further  standardized estimates because many of the tasks, such as administration  of an injection, are performed by multiple specialties. A specialty could  receive PEAC approval to deviate from an estimate for a service only if the  specialty satisfied the PEAC that the existing estimate was not appropriate  for that service because the service the specialty provided was different  from other services that appeared comparable. In addition, the PEAC  adopted rules about how estimates were to be established. For example,  the PEAC provided guidance to specialty societies on how to gather data,  such as through expert panels or a survey, and on the information that had  to accompany any recommendation to change a resource estimate, such as  a detailed listing of tasks performed by nurses in providing a service. As a  result of these changes in the PEAC process, CMS accepted most of the  PEAC’s recommended estimates without modification in recent years.
section_title: CMS Changed Certain Estimates without Adequate Justification
paragraphs: Although CMS implemented almost all of the PEAC’s recommended  resource estimates for individual services, it at times made changes to  PEAC-recommended estimates and to the original physician panel  estimates. Some of these changes were to estimates that conflicted with  Medicare coverage rules or to make estimates consistent across services.  For other changes, however, CMS did not always use adequate supporting  evidence. For example, CMS removed from the original resource estimates  the cost of clinical staff time associated with certain procedures  performed by specific surgical specialties, basing its decision to do so on  inadequate data. Certain surgical specialties, primarily thoracic surgeons,  provided CMS data showing that they routinely bring their own clinical  staff to the hospital to help in the operating room and provide other  assistance on patient floors and stated that these expenses should be  reflected in their resource estimates for individual services. CMS rejected  these claims and removed the expense of clinical staff time from these  surgical specialties’ resource estimates for all services provided in the  hospital. CMS officials claimed that Medicare paid for these expenses  through other payment mechanisms. CMS also stated that it removed this  expense on the basis of evidence that most physicians across all  specialties combined did not bring staff with them to the hospital.  Although CMS later asked the HHS OIG to assess whether specific  specialties typically brought clinical staff to the hospital, it did not reverse  its decision in the meantime. The OIG subsequently issued a report  indicating that it was a typical practice for certain surgical specialties to  bring clinical staff to the hospital. However, the OIG did not analyze  whether other Medicare payments account for the expenses associated  with clinical staff accompanying physicians in the hospital setting.
In addition, CMS did not always make public its reasons for making  changes to PEAC recommendations. In our meetings with specialty  representatives, some noted that CMS did not provide adequate  explanations for some of its changes to PEAC recommendations. For  example, in reducing the time established by the PEAC for radiation  therapists to deliver a specific radiation therapy, CMS stated that the  service commonly takes less than the recommended time and requires  fewer therapists to perform. CMS officials told us that they based their  conclusion on interviews with practicing physicians and a site visit to  witness the procedure being performed, neither of which was mentioned  in the public notice. Physicians told us that they did not understand why  CMS did not explain these decisions, since CMS representatives  participated in all of the PEAC meetings and had the opportunity to raise  concerns there. Moreover, they said that CMS’s inadequate explanation for  certain decisions lessened their confidence in the process used to develop  the estimates.
section_title: CMS Has Not Specified a Plan for Developing Appropriate Data to Update the Fee Schedule
paragraphs: CMS has not outlined a plan for obtaining and using the necessary data to  update practice expense resource estimates for all specialties. Such a plan  would include data collection, evaluation, and incorporation. CMS officials  told us they are in the process of obtaining a contract to collect total  practice expense data from the major physician and nonphysician  specialties, although it has not provided specifics. CMS has indicated that  the ongoing AMA committee—the RUC—will develop resource estimates  for new and revised services. Although CMS officials told us that they  believe they can complete data collection and review by 2007 as required,  they did not identify nor outline a plan to implement the actions needed to  ensure that CMS will be able to comply with the mandate to update the fee  schedule at least every 5 years.
CMS cannot rely on its previous approaches to complete this review. Data  sources CMS used to refine the fee schedule no longer exist or are  insufficient. The SMS survey, which was the source of total practice  expense data for all major specialties, was last conducted in 1999, and a  modified version of that survey fielded in 2001, called the Patient Care  Physician Survey, did not collect data detailed enough for this purpose.  Data submissions from specialty societies are voluntary and therefore  unlikely to be comprehensive. In March 2004, AMA discontinued its  sponsorship of PEAC after it had concluded its review of over 6,500  physician services. AMA told us that the RUC would review resource  estimates for new and revised services and that there would be no need  for a detailed review of the services that had been reviewed by the PEAC.
Updating estimates of total practice expenses and resource estimates for  individual services is increasingly important given the ongoing  introduction of new medical services and technologies, and changes in  wages. The attendant resource requirements for individual services can  change significantly when, for example, a new procedure augments or  replaces a traditional procedure, resulting in changes to the staff or  equipment needed to provide the service. Similarly, a new pharmaceutical  can change the treatment for a condition, resulting in different resource  requirements for caring for the typical patient.
section_title: Conclusions
paragraphs: CMS’s collaboration with physician specialty societies to update total  practice expense estimates and resource estimates for individual services  has helped ensure the appropriateness of fees and physician acceptance of  Medicare’s payment approach. However, CMS’s updates to estimates of  total practice expenses using supplemental survey data that do not always  represent the range of practices within a specialty may result in Medicare  payments that either overcompensate practices for their costs or  undercompensate practices, which could discourage physician  participation. In addition, CMS’s deviation from its own process in  evaluating resource estimates for individual services has caused some  physician and specialty societies to question the soundness of the process  and CMS’s decision making.
Congress recognized the importance of continually updating the fee  schedule by mandating that CMS review the fee schedule at least every 5  years. The processes CMS had in place to update total practice expense  estimates and estimates of the resources required for individual services  were not suitable for the comprehensive update required for this review.  While CMS has taken a first step at collecting data for this review, without  a detailed plan, CMS may not be able to gather and refine representative  data necessary to update the fee schedule in a timely manner and ensure  its integrity over time.
section_title: Recommendations for Executive Action
paragraphs: To improve and update the physician fee schedule, we recommend that  the CMS Administrator take the following three actions:    Consistently assess the accuracy of all supplemental data submissions on  total practice expenses, modify the assessment of representativeness such  that the data submitted by specialties better reflect the variation in  practice expenses within a specialty, and adjust the precision requirement  so that supplemental data submissions that would improve the  information currently used to set fees are accepted.
Base any revisions to the resource estimates for individual services on  sufficient data analysis and a documented and transparent rationale.    Develop and implement a plan to update the fee schedule in a timely  manner with representative data on total practice expenses and the  resources for individual services so that the fees appropriately reflect  changes in medical services and the costs of their delivery.
section_title: Agency and Industry Comments and Our Evaluation
paragraphs: We received comments on a draft of our report from CMS and AMA. CMS  indicated that it routinely conducted, or was in the process of conducting,  most of the actions we recommended. However, it stated that it had  substantial concerns with our report. AMA agreed in general with our  findings but took issue with some of our conclusions. AMA also conveyed  comments from ASCO, which disagreed with our conclusion regarding  CMS’s acceptance of ASCO’s supplemental survey data. CMS and AMA  also provided technical comments, which we incorporated as appropriate.  (We have reprinted CMS’s comments in app. III but have not included the  attachment pages reprinting statements from specialty societies and  detailing technical comments, nor have we reprinted the technical  comments submitted by AMA.)
To address our first recommendation, that CMS make revisions to its  assessment of supplemental data submissions, CMS responded that its  contractor consistently assessed the representativeness of supplemental  data submissions. CMS noted that its contractor’s assessments of surveys  submitted in 2004 from three specialties included as “a fundamental  feature” a review of whether a physician practice was hospital- or office- based. The contractor’s report was made available on CMS’s Web site after  our report went to CMS for comment. While we applaud CMS’s use of the  practice location characteristic in its assessment of recent surveys, we  believe that CMS should conduct an analysis to determine whether there  are other characteristics that could be used to better describe the potential  variation in practice expenses within a specialty.
CMS said it rejected AOA’s data on the basis of the precision requirement,  noting that (1) the data’s representativeness was questionable because the  data did not include responses from non-AOA members and (2) the  inclusion of the data would have made little difference to the final practice  expenses because the AOA per hour data were very similar to the data  currently used. We note that CMS’s contractor had recommended that  CMS accept the AOA data because they were “valid and the best available  information on practice expenses for optometry practices,” and we have  added this information to the report. We believe that including the data  from the specialty, rather than relying on the use of proxy data, would  improve the estimates. Our concern with the precision requirement is that  in applying it CMS may reject data that are more representative than data  it currently uses. If data were deemed representative on the basis of  characteristics that describe the variation in practice expenses across  practices, a precision requirement might not be needed.
In assessing ASCO’s 2002 submission for accuracy, CMS stated that its  acceptance of the data complied with requirements in the Medicare  Prescription Drug, Improvement, and Modernization Act of 2003 that CMS  use supplemental survey data meeting certain requirements, which CMS  says these data met. CMS added that it was satisfied with ASCO’s  explanation that the anomalous results were caused by a few extreme  survey responses and that elimination of these extreme responses had  little effect on the hourly practice expense estimates. We were able to  obtain the ASCO survey data only after our draft report went to CMS and  AMA for comment. Our own analysis of the ASCO data and discussions  with CMS’s contractor led us to conclude that elimination of the extreme  values would have had a significant effect on the hourly practice expense  calculations, and we have revised the report to reflect this. Although CMS  considered the data “anomalous,” CMS accepted them because they met  the representativeness criterion as required by law. CMS’s acceptance of  these data raises issues about the review process. We are concerned that  the practice characteristics CMS uses to assess representativeness may  not describe the range and distribution of practice expenses. CMS was  silent regarding our recommendation that it consistently assess  supplemental data submissions for accuracy.
In response to our second recommendation, that CMS base revisions to  resource estimates for individual services on sufficient data analysis and a  documented and transparent rationale, CMS stated that the vast majority  of these revisions had been based on PEAC recommendations and that on  the rare occasions when it disagreed with the PEAC, CMS documented its  rationale in the proposed or final rules. As we noted in the draft report,  CMS implemented almost all of the PEAC-recommended estimates  without change and it generally documented its rationale in instances in  which it did make changes to PEAC-recommended or original estimates.  Also as noted in the draft report, however, CMS did not always use  adequate justification when it made changes. For example, CMS based its  decision to remove from the original estimates the cost of clinical staff for  all services provided in the hospital on data from the American Hospital  Association survey pertaining to all specialties, rather than on evidence  pertaining to certain surgical specialties that claim that they routinely  bring their own staff to the hospital. CMS took issue with our statement  that its lack of supporting data or rationale in these cases has reduced  physician confidence in the PEAC process and in the resulting estimates,  and provided comments from six specialty organizations as evidence of  support for CMS’s decision making regarding PEAC data revisions. As we  noted in the draft report, specialty societies and AMA told us they  supported the PEAC process. Nevertheless, other specialties conveyed  their concerns to us regarding the PEAC process.
CMS agreed with our recommendation that it needs to develop and  implement a plan to acquire representative data on an ongoing basis to  update the fee schedule. CMS indicated that it was in the process of  obtaining a contract to collect data for future updates to the practice  expense portion of the physician fee schedule and that the RUC would  continue to be involved in developing practice expense resource estimates  for new or revised individual services. We are encouraged by this new  information from CMS and have revised our finding and recommendation  accordingly. However, contracting for data collection, collecting and  reviewing the data, using the data in developing the fees, and addressing  public comments take time, making it imperative that CMS expedite these  actions. CMS needs to develop a plan to ensure that it can comply with the  congressional mandate to update the physician fee schedule at least every  5 years.
In its other comments, CMS took issue with our draft report’s reference to  updating estimates of total practice expenses with data that are not  representative of the range of practices within a specialty, which, as we  stated in the draft report, either “overcompensate practices for their costs  and waste taxpayer dollars or undercompensate practices and discourage  physician participation.” CMS stated that because the system is budget  neutral, any alternative would reduce payments to the overcompensated  specialty and raise payments to all other specialties. Even within a budget  neutral system it is wasteful to overcompensate for some services.  However, it was not our intention to imply that the system was not budget  neutral, and we have revised the report to avoid misinterpretation.
AMA’s comments covered the method for establishing total practice  expense estimates and resource estimates for individual services and  included specific comments it had received from ASCO. AMA commented  that it had advised CMS in the past that CMS’s criteria for supplemental  practice expense data appeared to be appropriate. AMA also stated that it  would be inappropriate to use supplemental data that were significantly  less reliable and valid than the original SMS data. We concur with this  statement. AMA agreed with our conclusion that the PEAC process has  improved resource estimates for individual services. It objected to the  draft report’s statement that AMA had discontinued sponsoring the PEAC  as a result of resource constraints and stated rather that the PEAC process  had concluded in March 2004 because it had successfully completed its  work. It also reported that it would continue to review, through the RUC,  the resource estimates for new or revised codes. Although AMA  representatives of the PEAC had told us that resource constraints had  contributed to their decision to discontinue the PEAC, we have modified  the report to indicate that the PEAC concluded its initial review of the  codes as of March 2004 and that the RUC will continue this review for new  or revised codes. AMA also objected to our conclusion that certain CMS  revisions to the PEAC recommendations were made without adequate  information, stating that this was unfair criticism of the process. As we  noted in the draft report, CMS accepted the majority of PEAC  recommendations, although there were instances in which it modified  earlier resource recommendations without using adequate information or  providing adequate explanation. Finally, AMA noted that CMS’s  collaboration with physician specialty societies to update the practice  expense estimates does not help ensure the appropriateness of the fees  because the level of Medicare payments largely depends on other  components of the payment methodology. While it is true that other parts  of the payment method affect the final payment amounts, the practice  expense estimates remain an important determinant.
ASCO disagreed with our concerns about its supplemental survey data. It  reiterated that it had discussions with CMS regarding the few practices  with high costs for certain items that had no significant effect on the  average hourly practice expense estimates used in CMS’s methodology. As  noted earlier, our replication of the hourly practice expense calculations  and discussions with CMS’s contractor led us to conclude that including  the few practices with high costs did in fact raise the average hourly  practice expense estimates. We have revised the report to include this  information.
We are sending copies of this report to the Administrator of CMS and  other interested parties. We will make copies available to others upon  request. This report also is available at no charge on GAO’s Web site at  http://www.gao.gov.
Please call me at (202) 512-7119 if you or your staffs have any questions.  Major contributors to this report are listed in appendix IV.
section_title: Appendix I: Medical Specialty Societies Interviewed for This Report
section_title: Appendix II: Scope and Methodology
paragraphs: To evaluate the process that CMS uses to review specialty-submitted  supplemental practice expense data, we interviewed representatives from  medical specialty societies. We identified 50 medical specialty societies by  searching the Internet using AMA’s categories of major specialties. We  contacted each group and met with representatives from the 32 specialty  societies that responded (listed in app. I). Using structured interviews, we  asked the specialty society representatives whether they were satisfied  that AMA Socioeconomic Monitoring System (SMS) survey data used to  estimate their specialty’s total practice expenses were representative. We  obtained their views about whether the supplemental data submissions  improved the practice expense estimates and about CMS’s process for  evaluating the data. We reviewed written materials provided by specialty  societies and followed up by telephone when necessary. We reviewed  relevant Federal Register documents to determine how CMS evaluated the  supplemental data submissions and reviewed CMS’s decisions about  whether to accept the data. We interviewed CMS staff about the  supplemental data submission process and interviewed the contractor that  CMS hired to provide technical assistance to the specialty societies. We  also reviewed the contractor’s report on the oncology data submitted by  the American Society of Clinical Oncology.
To evaluate the process that CMS uses to update resource estimates for  individual services, we asked the specialty society representatives about  the resource estimates developed by the clinical practice expert panels  (CPEP) and the refinement process used by the Practice Expense  Advisory Committee (PEAC). We asked for their views about the role CMS  played in the PEAC and any changes CMS made to the estimates. We also  met with representatives of AMA to determine AMA’s views on the PEAC  process. We attended PEAC meetings and reviewed supporting materials  provided by specialties. To better understand the issue of physicians’ use  of clinical staff in the inpatient hospital setting, we reviewed survey data  and other materials provided by the Society of Thoracic Surgeons. To  determine whether clinical staff time was included in the physician work  component, we analyzed detailed estimates from AMA’s RVS Update  Committee (RUC). We reviewed the Department of Health and Human  Services Office of Inspector General (OIG) report, Medicare Payment for  Nonphysician Clinical Staff in Cardiothoracic Surgery, including  analyzing the raw survey data upon which the report was based, and  discussed it with OIG staff. OIG indicated that its data reliability checks  were performed in accordance with generally accepted government  auditing standards. We interviewed CMS staff about the bases for their  decisions relating to changes to PEAC resource estimates. We attended  CMS’s “Open Door Forum Meetings,” during which physicians and other  clinicians discussed their concerns about fees and other issues related to  services provided to Medicare beneficiaries. We conducted a review of  relevant Federal Register documents to identify any decisions CMS had  made with regard to resource estimates.
To determine whether CMS will have the data needed for the mandated  review of the physician fee schedule at least every 5 years, we held  discussions with CMS staff.
We performed our work from November 2001 through December 2004 in  accordance with generally accepted government auditing standards.
section_title: Appendix III: Comments from the Centers for Medicare & Medicaid Services
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: Major contributors were Iola D’Souza, Elizabeth T. Morrison, and  Gerardine Brennan.