Medicare Physician Fee Schedule: Practice Expense Payments to Oncologists Indicate Need For Overall Refinements
Published: 2001-10-31T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: Medicare's physician fee schedule establishes payments for more than 7,000 different services, such as office visits, surgical procedures, and treatments. Before 1992, fees were based on charges physicians billed for these services. Since then, the Health Care Financing Administration (HCFA), which runs Medicare, has been phasing in a new fee schedule on the basis of the amount of resources used to provide that service relative to other services. The development of the resource-based practice expense component was a substantial undertaking. The implementation of the resource-based methodology has been the subject of considerable controversy, partly because of HCFA's adjustments to the underlying data and basic method and partly because payment changes were required to be budget-neutral--which means that total Medicare spending for physician services was to be the same under the new payment method as it was under the old one. As a result, Medicare payments to some specialties have increased while payments to other specialties have decreased. Oncologists claim that their practice expense payments are particularly inadequate for some office-based services, such as chemotherapy. Oncology practice expense payments in 2001 are eight percent higher than they would have been had charged-based payments continued. Oncology practice expense payments compared to their estimated practice expenses are about the same as the average for all physicians.

section_title: Letter
paragraphs: Medicare’s physician fee schedule establishes payments for more than  7,000 different services, such as office visits, surgical procedures, and  treatments. Prior to 1992, fees were based on charges physicians billed for  these services. Since then, in accord with a statutory requirement, the  Health Care Financing Administration (HCFA), which administers the  Medicare program, has been phasing in a new fee schedule that bases the  payment for each service on the amount of resources used to provide that  service relative to all other services. The first part of the resource-based  fee schedule, implemented in 1992, was the physician work component,  the payment for the physician’s time and effort to provide the service.  Beginning in January 1999, resource-based payments were incorporated  for the practice expense component, which compensates physicians for  the costs incurred in operating their practices.
The development of the resource-based practice expense component was  a substantial undertaking. It began with an estimate of each physician  specialty’s total practice expenses and then used information gathered  from expert panels to allocate those expenses to individual services.  Because of limitations in the available data and concerns about the  payment rates established for some services, HCFA made adjustments to  the data and the basic methodology. In an earlier report, we noted that the  basic methodology was reasonable and a good starting point in  establishing resource-based practice expense payments. Although each of  the data sources used in the basic methodology has limitations, the data  remain the best available for deriving service-specific practice expense  estimates. However, we recommended that HCFA conduct sensitivity  analyses to identify issues with the methodology that have the greatest  effect on payments and that it target additional data collection and  analysis efforts to address these issues.
The implementation of the resource-based methodology has been the  subject of considerable controversy, partly because of HCFA’s  adjustments to the underlying data and basic method and partly because  payment changes were required to be budget-neutral—which means that  total Medicare spending for physician services was to be the same under  the new payment method as it was under the old one. As a result, if  Medicare payments to some specialties increased, payments to other  specialties had to decrease. In fact, such redistributions have occurred,  prompting concern from various specialties that their revised practice  expense payments are too low. Oncologists (cancer specialists) claim that  their practice expense payments are particularly inadequate for certain  office-based services, such as chemotherapy administration.
For several years, considerable attention has been focused on Medicare  payments for covered drugs related to a physician’s services, such as  cancer chemotherapy. HCFA initiated steps in September 2000 to lower  these payments based on investigations that revealed that Medicare’s  payments were much higher than the actual acquisition costs of these  drugs. This would have substantially reduced revenues to oncologists.  Although in November 2000 HCFA suspended its efforts to reduce  Medicare’s drug payments, there continues to be interest in lowering  Medicare’s payments for covered drugs, including chemotherapy drugs.
In light of these concerns, the Congress directed us to conduct three  studies. A report on one study, issued in September 2001, examined  Medicare’s payments for drugs. We concluded that Medicare’s method for  establishing drug payments is flawed and that Medicare payments far  exceed widely available prices to providers. The other studies focus on  Medicare payments under the physician fee schedule, one related  specifically to oncology services and one related to the data used to  establish payments for all specialties. In this report, we have examined  the practice expense component of the Medicare fee schedule, and in  particular payments for oncology services. Specifically, we have analyzed  (1) the effects of HCFA’s application of the practice expense payment  methodology on overall payments to oncologists and other specialties and  (2) how adjustments that HCFA made to the basic practice expense  payment methodology affected payments for specific services provided by  oncologists. The third study, which is underway, will examine issues  related to the adequacy of the data used to establish practice expense  payments under Medicare’s physician fee schedule for all specialties and  ways the Centers for Medicare and Medicaid Services (CMS) can improve  the data.
To conduct the work for this report, we reviewed the methodology that  HCFA used in computing resource-based payments and had extensive  discussions with its staff. We also met with representatives from the  American Society of Clinical Oncology (ASCO) and oncology practices to  obtain their views on the practice expense methodology and interviewed  oncology researchers to discuss current chemotherapy administration  practices. We estimated the effect of various adjustments HCFA made in  computing payment amounts, and we estimated the effect of potential  adjustments using the data that HCFA had used. We did not test the  validity of these data or gather new data on physician practice expenses.  Because the fee schedule methodology is such that changes in the  payment rate for a single service affects the payment rates for all other  services, we examined the impact of the adjustments on the payment rates  for all services provided by all specialties. (For a more complete  discussion of our scope and methodology, see appendix I.) We performed  our work from September 2000 through September 2001 in accordance  with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: The Medicare physician fee schedule has three components. The first, the  physician work component, provides payment for the physician’s time,  skill, and training required to provide a given service. The second, the  practice expense component, reflects the expenses incurred in operating a  practice, such as rent; utilities; equipment; supplies; and the salaries of  nurses, technicians, and administrative staff. Finally, the malpractice  component establishes payments for the costs of obtaining professional  liability coverage. In 1999, the three components accounted for  approximately 55 percent, 42 percent, and 3 percent, respectively, of the  average fee.
Payments for the physician work component were the first to be  converted from being charge-based to resource-based, beginning in 1992.  Using specialty-specific physician expert panels, physician time and effort  in providing various services were estimated and used to establish  payments for this component. In 1999, the practice expense component  began to be paid under a resource-based methodology. Resource-based  payments for the third component, malpractice expenses, were  implemented a year later. The resource-based payments were required to  be budget neutral with respect to the former payment method, meaning  that Medicare’s aggregate payments to physicians could not change as a  result of the implementation of the new methodology.
Medicare’s physician payment system ranks services on a common scale  based on the relative amount of resources needed to provide each service,  and then makes payments for each service proportional to those  resources. The need to estimate and rank practice expenses for thousands  of medical services presents enormous challenges. Most physicians’  practices have readily available data on their costs, such as wages for  administrative and clinical staff and the costs associated with rent,  electricity, and heat. However, Medicare pays physicians by service, such  as for a skin biopsy or a stress test, so CMS needs to estimate the portion  of total practice expenses associated with each service—data that are not  readily available.
The task of estimating practice expenses is made more difficult because  there is considerable variation in practice expenses among specialties.  This variation is likely due to historical differences in practice styles, the  mix of services provided, and the setting in which services are provided.  For example, physicians in some specialties may provide almost all  services in their offices, thus incurring all of the expenses associated with  providing the service, including medical equipment, technicians, and  medical supplies. Physicians in other specialties may deliver most of their  services at a hospital, thus incurring only expenses such as rent,  administrative labor, and general office equipment. A physician in a solo  practice is also likely to have practice costs different from those of a  physician in a group practice. As a result, practice expenses, even for the  same service, can vary considerably by specialty or by physician practice.
The effect of both problems—the difficulty in allocating practice expenses  to services and the variation in expenses across practices—is mitigated  somewhat because Medicare’s fee schedule payment for each service is  based on the service’s cost relative to all other services. Even though the  actual expenses associated with a service cannot be precisely measured  and vary across physicians’ practices, the cost of one service relative to  another is easier to estimate and is likely to vary less across practices.
Medicare recognizes over 65 different physician specialty groups, such as  internal medicine, cardiology, and oncology. Specialties differ in the types  of services they provide. Most specialties provide evaluation and  management (E&M) services (for example, an office visit for an  established patient) that make up almost half of physician services  provided to Medicare beneficiaries. However, only certain specialties  generally provide each of the remaining physician servicesfor example,  cardiologists, general internists, and family practitioners provide the  majority of electrocardiogram services. A small share (5 percent) of  services, though billed by physicians, do not involve a physician’s time  because they are performed by nurses or other cliniciansservices such  as the drawing of blood or administration of certain chemotherapy  treatments. These services are referred to in this report as nonphysician  services.
subsections: section_title: Basic Method for Determining Resource- Based Practice Expense Payments
paragraphs: The basic methodology for developing resource-based payments for  practice expenses has three steps. First, each specialty’s total practice  expense pool—that is, the total costs that physicians in that specialty incur  to operate their practices—is estimated. Second, this practice expense  pool is allocated to the services provided by that specialty, based on  estimates of the resources required to deliver each service. This results in  an estimate of practice expenses for each service provided within each  specialty. Third, when the same service is provided by more than one  specialty, an average of those specialties’ expenses for the service is  computed. A final adjustment is made so that total physician payments are  budget neutral—that is, the same as they would have been under the  previous payment system. (See appendix II for a more complete  discussion of the basic methodology).
Each specialty’s total practice expense pool was derived from 1995- through-1998 practice expense data collected by the AMA’s  Socioeconomic Monitoring System (SMS) survey and from Medicare  physician billing data. From the SMS survey, the average expense per hour  of physician time were calculated for each of six expense categories,  clinical labor (nurses and medical technicians), medical equipment,  medical supplies, administrative labor (such as an office manager or  billing clerk), office expenses (such as rent and utilities), and other  expenses. These hourly expense estimates were multiplied by the total  hours spent by all physicians in each specialty treating Medicare  beneficiaries (information obtained from Medicare billing data) to  estimate each specialty’s total practice expense pool.
HCFA convened 15 expert panels comprising physicians, nurses, and  practice administrators to estimate the practice expense resources needed  for specific services. Based on these service-specific resource estimates,  practice expenses that are regarded as directclinical labor, medical  equipment, and medical suppliesare allocated to particular services  based on estimates of the quantity and cost of these resources required to  provide each service. The indirect expenses, or overheadadministrative  labor, office expenses, and other expensesare allocated to specific  services in proportion to the direct expenses and physician work involved  in providing each service. Thus, a service that requires high direct costs  (such as the use of an expensive, dedicated piece of equipment) or that  has a high physician work value, indicating that it is a time-consuming or  complex service, would have relatively high indirect costs.
As required by law, the Medicare physician fee schedule must establish a  single value or fee for each service, regardless of which specialty provides  it. Consequently, when more than one specialty provides a service, an  average is computed based on the frequency with which each specialty  provides that service. As a result, specialties that perform a service more  frequently have more influence over establishing the fee for that service  than specialties that rarely perform it.
section_title: Adjustments to Basic Resource-Based Method
paragraphs: To compensate for potential shortcomings in the basic methodology and  limitations in the data used to establish payments, HCFA made several  adjustments to the specialties’ practice expense pools and the method for  calculating the payment rates for individual services. In response to  concerns from various specialties regarding perceived low payments for  nonphysician services, such as certain chemotherapy administration  services, HCFA developed an alternative method to calculate payments for  these services. The alternative method creates a separate practice expense  pool for all nonphysician services and then allocates the practice expense  pool using historical charges rather than the expert panels’ estimates of  the resources required for each service. Recognizing that this alternative  method did not always increase payments for the targeted services, HCFA  allowed all specialties (in the second year of implementation of the  resource-based practice expense payments) to identify individual  nonphysician services that would “opt-out” of the alternative methodology  and have payments determined using the basic methodology for all  physician services. Several specialty societies requested that HCFA  calculate payments for some or all of their specialties’ nonphysician  services under the basic method, and all such requests were granted. (See  appendix III for a discussion of the alternative method for estimating  practice expenses for nonphysician services.)
An adjustment specific to oncologists’ practice expense estimates  substituted the average medical supply expenses reported by all  physicians for those expenses oncologists reported in the SMS survey. An  adjustment was necessary because the oncologists’ reported supply  expenses included the costs of drugs administered in physicians’ offices,  most notably chemotherapy drugs, which are reimbursed separately. In  the first year, the adjustment reduced the supply expense reported by  oncologists from $87.20 per physician hour to $7.20the supply expense  of the average physician specialtyto avoid paying twice for drugs.
In its ongoing efforts to improve payments, CMS receives  recommendations from the Practice Expense Advisory Committee (PEAC)  for refinements to direct practice expense estimates for specific services,  and it has implemented many of these refinements. The agency has also  made changes to its estimates of specialties’ practice expense pools based  on supplemental practice expense survey data submitted by some  specialties. In accordance with recent legislation, all physician specialties  may submit supplemental data to CMS, and the agency is required to  consider these data in updating the physician fee schedule. As of August  2001, three specialty societies have done so.
section_title: Oncology Fares As Well As the Average Specialty, Although Data Concerns Remain
paragraphs: The implementation of the resource-based practice expense payments did,  as expected, result in a redistribution of payments across specialties with  some specialties’ payments increasing and others decreasing. Oncology’s  practice expense payments in 2001 are 8 percent higher than they would  have been had the charge-based fee schedule continued in 2001. Oncology  has fared at least as well as the average specialty under the new fee  schedule, in that its payments equal about the same share of estimated  practice expenses as the average for all specialties. Nonetheless,  oncologists have expressed concern that their payments are too low  because of certain adjustments HCFA made to the basic methodology and  inadequacies in the survey data used to estimate practice expenses.  However using higher estimates of oncology’s medical supply expenses  would have only a modest impact on oncology payments because the  alternative method is used to calculate payments for nonphysician  services. Potential future improvements in the practice expense data may  affect estimated expenses for other specialties as well. Because the fees  are established to reflect the relative costs of services across specialties, it  is not clear whether payments to oncologists would increase, decrease, or  stay the same with changes to the underlying data.
subsections: section_title: Resource-Based Practice Expenses Increased Oncologists’ Payments
paragraphs: Oncology is among the specialties that benefit from resource-based  practice expense payments. Its practice expense payments are 8 percent  more than they would have been had the charge-based fee schedule  continued in 2001 (see table 1). Although other specialties’ payments are  also higher than they would have been had the previous system remained  in effect, many specialties’ practice expense payments are lower. For  example, dermatology’s resource-based practice expense payments are 46  percent higher than what they would have been under the charge-based  system. Other specialties’ practice expense payments decreased, ranging  from 9 percent to 35 percent less than what their practice expense  payments would have been under the charge-based system. Total  payments calculated with resource-based practice expenses ranged from  20 percent higher than total payments calculated with charge-based  practice expenses to 17 percent lower.
The budget neutrality requirement results in practice expense payments  on average equaling approximately 70 percent of estimated practice  expenses. However, payments equal different shares of estimated practice  expenses for different specialties (see table 2). Payments are a smaller  share of practice expenses for those specialties with higher-than-average  hourly practice expenses and a larger share of expenses for specialties  with below-average hourly expenses. This is primarily because of the  statutory requirement that there be a single fee for each service regardless  of which specialty provides it. A single fee for each service is calculated by  averaging the service-specific practice expense estimates of the specialties  that perform the service. This requirement has a substantial impact on  many specialties’ payments, in part because E&M services, which are  provided by most specialties, constitute a large share of many specialties’  services.
Medicare payments to oncologists equal about the same share of estimated  practice expenses as the average for all specialties. Compared to oncology,  6 specialties had practice expense payments that equaled a larger share of  their estimated practice expenses, while 15 specialties had practice  expense payments that equaled a smaller share. Payments to two  specialties, radiology and allergy and immunology, equaled a much larger  share of their estimated practice expenses compared to other specialties.
section_title: Oncologists Express Concerns About Practice Expense Method and Data
paragraphs: Oncology representatives have raised several concerns about HCFA’s  estimate of their total practice expenses. HCFA reduced oncology’s  practice expense pool to account for the costs of drugs that are  reimbursed separately. Oncology representatives acknowledge that a  reduction is appropriate but state that the all-physician average supply  expense that HCFA substituted understates oncology’s supply expenses.  In our earlier report, we noted this concern and recommended that HCFA  assess the validity of using the all-physician average. To date, CMS has  not developed an independent estimate of oncologists’ supply expenses.  An alternative estimate of supply expenses based on a methodology  proposed by ASCO yields an estimate almost twice as high ($13.25) as the  2001 all-physician average ($7.30). Using this higher estimate, oncology’s  practice expenses would increase 6 percent and practice expense  payments based on this estimate would increase 1 percent.
Some oncologists we spoke with have raised other issues that they believe  caused their practice expense pool to be underestimated. The first is that  only physician time is used to estimate the practice expense pools. HCFA  estimated the practice expense pools by multiplying the number of  physician hours spent serving Medicare patients by the estimated practice  expense per physician hour. The method HCFA used to calculate the  practice expense per physician hour, however, results in an estimate that  captures the expenses associated with both physician and nonphysician  services rather than just the expenses associated with physician services.  Therefore, what some oncologists believe to be understated hours are  used with expenses associated with physician plus nonphysician services  to estimate the total practice expense pool. As a result, the pool may not  be understated.
Some oncology representatives believe that their practice expense  estimates are too low because they do not account for certain expenses  incurred in operating a practice, such as the time spent providing  uncompensated care and extended periods of patient monitoring. Some  also believe Medicare patients are more expensive to treat than the  average patient due to their age and the increased presence of multiple  medical conditions, implying that a higher share of expenses should be  allocated to Medicare. Finally, some oncology representatives believe that  their current expenses are higher than those included in the 1995-through- 1998 SMS survey data due to changes in the delivery of outpatient  chemotherapy services. Although clinical time spent on non-billable  activities, more expensive-than-average patients, or changing practice  patterns could affect oncologists’ practice expenses, accounting for these  factors would not necessarily raise payments to oncologists. This is  because these factors are likely to affect the total practice expenses of  other specialties as well. Payments to oncologists would only change if  their costs increased or decreased relative to the costs of all other  specialties.
Some oncology representatives also state that the SMS survey does not  accurately reflect the mix of oncology practices and, as a result, their  practice expense pool is underestimated. They contend that the 34  oncology respondents to the SMS survey are not representative of the  typical practice because the survey respondents were disproportionately  in practices that do not provide chemotherapy services in their offices.  Because these practices do not incur the direct costs (such as nursing,  equipment, and supplies) associated with these services, they argue that a  disproportionate share of these practices in the sample led to an  underestimation of oncology practice expenses. They also assert that the  survey respondents included some surgical oncologists, a subspecialty  that provides little or no office-based chemotherapy—again leading to an  understatement of the practice expenses incurred by the typical practice.  Although the AMA weights the sample responses to adjust the survey  results so they are representative of an entire specialty, ASCO contends  these adjustments are inadequate.
The effect on payments to oncologists of using updated or more accurate  data to estimate practice expenses is uncertain, but potentially modest.  This is because the estimates of the practice expenses for other specialties  and other services may change as well. Payment levels change when the  estimated practice expenses of one specialty change relative to the overall  average. Thus, the change in oncologists’ payments will depend on how  much estimated practice expenses for oncology increase or decrease  compared to practice expenses for other specialties. In addition, the use of  the alternative method to calculate practice expense payments for  nonphysician services mitigates the impact of any change in the data on  the resulting payments. Our analysis indicates that if estimated practice  expenses for oncologists were increased or decreased 10 percent from  their current estimates, their practice expense payments would only  increase or decrease by 1 percent. The change in payments is less than the  change in estimated expenses because under the alternative practice  expense method, which determines payments for a large share of oncology  services, oncology’s actual practice expense estimates do not determine  the payment.
section_title: Alternative Method Results in Large Changes in Payments for Many Oncology Services
paragraphs: To correct for perceived low payments for services that do not involve  direct physician participation (such as many chemotherapy administration  services), HCFA created an alternative method to establish practice  expense payments for these services. Contrary to the intended purpose,  payments for over 40 percent of nonphysician services provided by all  specialties actually decrease after the alternative method is applied, and  payments for many physician services increase. Payments for some  chemotherapy administration services decline, and oncology’s average  payments are actually lower than they would be if payments for all  services were calculated under the basic method. Other specialties fare  differentlyfor example, payments to radiation oncology are considerably  higher as a result of the alternative method. This alternative method does  not address the more fundamental issue affecting payments for  nonphysician services, the allocation of indirect expenses to all services.
subsections: section_title: Alternative Method for Calculating Payments for Nonphysician Services Alters Resource-Based Fees
paragraphs: Four elements of the alternative method developed by HCFA to correct for  perceived underpayments for nonphysician services (including  chemotherapy administration) affect the relative payments for oncologists  as well as other specialties. First, the alternative method involves creating  a single practice expense pool for all nonphysician services provided by all  specialties, so differences in practice expenses across specialties are not  recognized, as they are under the basic method. Thus, payments for  services, such as chemotherapy administration, that are provided  predominately by higher-cost specialties are lower than they would be if  specialty-specific expenses were used to estimate payments for these  services. Second, the expense pool is allocated to individual nonphysician  services based on average historical charges for each service, rather than  on the expert panels’ estimates of the resources needed for each service.  For some services, the charge-based allocations are higher than the expert  panels’ estimates; for others, they are lower. Third, HCFA subsequently  allowed any specialty to choose whether or not the alternative method  would be used for their particular nonphysician services. As specialties  choose to have payments for certain nonphysician services computed  using the basic method, the fees for all the other nonphysician services  may increase or decrease. Finally, the expenses associated with the  nonphysician services are double counted because they were not taken  out of the specialty-specific practice expense pools when the nonphysician  practice expense pool was established. The resulting specialty-specific  practice expense pools were too high because they included expenses for  physician and nonphysician services, yet they were allocated only to the  physician services. As a result, payments for some physician services  increased.
While intended to counter perceived low payments for nonphysician  services under the basic method, the alternative method resulted in higher  payments for only 58 percent of nonphysician services, compared to  payments under the basic method. For example, the practice expense fee  for one chemotherapy service (billing code 96400) would be $59.60 under  the basic method, but decreases to $5.07 under the alternative method (see  table 3). In contrast, the practice expense fee for a chemotherapy infusion  service (billing code 96412) increases from $31.32 to $43.11. The use of the  alternative method also has a dramatic effect on payments for some  physician services due to the double counting problem. For example,  payment for chemotherapy intracavitary service (billing code 96445),  which involves a physician’s direct time, increases from $148 to $316.
Payments for oncology’s nonphysician services are 15 percent lower when  calculated under the alternative method than when calculated under the  basic method, while payments for its physician services are 1 percent  higher (see table 4). Across all oncology services, payments are 6 percent  lower when the alternative method is used. Payments to other specialties  that have a large share of nonphysician services are affected differently.  For example, payments for the nonphysician services provided by allergy  and immunology specialists are 13 percent lower when using the  alternative method, while payments for nonphysician services of radiation  oncologists are 14 percent higher. Payments for the physician services of  both specialties increase considerably as a result of the alternative  methodby 16 percent for allergy and immunology and 20 percent for  radiation oncology.
Recognizing the potential need to modify its practice expense  methodology, HCFA contracted with The Lewin Group to examine  practice expense payments and suggest improvements to the payment  method. The contractor raised concerns that the expense pools of  specialties with nonphysician services may be understated for two  reasons. First, it stated that the practice expense estimates based on the  SMS survey may underreport expenses for nonphysician services because  practices that provide only nonphysician services (such as independent  laboratories and radiology centers) were not included in the survey and  may have higher practice expenses. Second, it believed that the use of  physician time in estimating the total practice expense pools could  understate the estimate for specialties with nonphysician services,  although it acknowledged that hourly practice expense estimates that  include expenses related to nonphysician services may offset this. It also  determined that indirect expenses are not appropriately allocated to  nonphysician services.
The Lewin Group discussed the option of establishing payments for  nonphysician services under the basic method after correcting the  allocation of indirect expense for these services. It also stated that if CMS  retains the alternative methodology, it should consider the option of  establishing specialty-specific practice expense pools for nonphysician  services, instead of the single pool, to account for the differing costs  across specialties. However, the report did not consider the double  counting issue, nor did it address the fact that payments for nonphysician  services would continue to reflect historical charges rather than relative  resources, as required by Congress. CMS said that it plans to evaluate  these options and consider changes to its method for calculating  nonphysician services.
section_title: Payments Relative to Estimated Practice Expenses Vary Considerably Across Oncology Services and Practices
paragraphs: While oncologists’ average payments equal approximately the same share  of estimated practice expenses as the average for all specialties, the  relationship between payments and estimated practice expenses for  different types of oncology services varies considerably (see table 5). The  use of the alternative method for determining nonphysician service  payments and the requirement for a single payment for each type of  service across all specialties contribute to this variation. Payments for  E&M services, which make up about two-thirds of oncologists’ services,  are much higher relative to estimated practice expenses than are payments  for other services. In contrast, payments for nonphysician administered  chemotherapy, which comprises about one-third of oncology services, are  a significantly lower than average share of estimated expenses.
These variations in payments relative to expenses across types of services  have implications for different practices and could affect the mix of  services an oncology practice would provide. The practices of individual  oncologists vary considerably in the mix of services they provide (see  table 6). While E&M services composed 67 percent of oncology services in  1999, they made up 84 percent of the services provided by oncologists with  small Medicare practices. Nonphysician services (predominantly  chemotherapy administration) made up more than three times the share of  total services for oncologists with large Medicare practices, compared  with oncologists who had small practices.
section_title: Underlying Problem With Allocation of Indirect Expenses Needs Correction
paragraphs: HCFA developed the alternative method for nonphysician services  because it believed the practice expense payments for these services were  too low, and they attributed this to possible inaccuracies in the expert  panels’ estimates of resources needed for these services. Regardless of  the accuracy of the panels’ expense estimates, the basic method for  allocating indirect expenses for all services, which relies partly on  physician work as the basis for allocation, does not adequately account for  the indirect costs associated with nonphysician services. Because  nonphysician services have no physician work associated with them, they  are allocated a lower share of indirect expenses compared with services  that are performed by physicians.
Methods for allocating indirect expenses, other than the current use of  physician work plus direct expenses, could assign these costs more  appropriately across all services. As we noted in a 1999 report, indirect  expenses such as rent, utilities, and office space are more likely to vary  with the time required to perform a service than with the physician’s work,  which also measures the level of skill required to perform the service. For  nonphysician services, clinical time could be substituted for physician  work to allocate overhead expenses more appropriately. Using only direct  practice expenses to allocate indirect costs is another option, but under  the current fee schedule methodology this option would result in  understating the indirect cost estimates for services provided in hospital  settings and overstating the expenses for office-based services.
In its study of the practice expense methodology, The Lewin Group also  examined the method of allocating indirect expenses. It compared  practice expense estimates using different indirect cost allocation  methods across broad groups of services and specialties. Its analyses  showed that for these groups of services and specialties, practice  expenses in most cases did not change much when the indirect allocation  method was changed. Therefore, it concluded there is no consensus on an  appropriate method for allocating indirect practice expenses and that  CMS’s current approach is reasonable. However, the comparisons did not  consistently consider the effect of averaging the specialty-specific practice  expense estimates to determine a single payment rate. Further, its  comparisons indicated how much practice expense estimates changed  relative to expenses estimated with the current indirect allocation method,  which may not be an appropriate benchmark because it underallocates  indirect expenses to nonphysician services and overallocates them to  physician services. The effect of different allocation methods on  nonphysician services was not assessed, even though the current method  is problematic for them as well. Finally, it did not examine the effects of  different allocation methods across individual specialties and services,  even though the effects may have varied considerably.
section_title: Conclusions
paragraphs: The basic method for determining practice expense payments under the  fee schedule establishes payments for individual services that are  resource-based and reflect the relative costs of all services provided by all  specialties. Practice expenses for most services are estimated using the  best information available, including national data and expert assessments  of the resources required to perform services. As we have reported before,  because of limitations in the fee schedule methodology and the underlying  data used to establish payments, the payment system needs to be analyzed  thoroughly to determine how it can be improved.
Our analysis of oncologists’ estimated practice expenses and their  payments indicates that oncology has fared as well under the resource- based fee schedule as it did under the former charge-based system and  compared to other specialties. Yet oncology was disproportionately  affected by the alternative method HCFA used to calculate payments for  nonphysician services, which failed to address the underlying problem  with the allocation of indirect expenses to all services. Further, the use of  the all-physician average supply expenses in estimating oncology practice  expenses is inappropriate without evidence regarding oncologists’ actual  supply expenses. Addressing these two problems is likely to increase  practice expense payments to oncologists.
Other concerns oncology representatives raise about the adequacy of the  practice expense data used to establish payments should also be dealt  with. Addressing these underlying data issues, however, is likely to affect  the practice expense estimates of other specialties as well, so the resulting  effect on payments to oncologists is unclear. This is because payments  reflect relative resource use across all specialties and services and  payments must be budget neutral, meaning that increases and decreases  are balanced so that total payments do not change from these kinds of  adjustments. To ensure appropriate payments across all specialties and  services, CMS needs to use current and accurate practice expense data for  all specialties and refined service-specific expense estimates. The  approach to obtaining these data needs to balance the need for valid,  verifiable information with the administrative resources and provider  burdens that collecting it may entail.
Just as more current and accurate data will affect payments for all  services, refinements to the current practice expense methodology will  also affect payments across all specialties and services. The widely varying  effects of elements of the current fee schedule methodology on specialties  and services underscore the importance of examining the effect of future  refinements on payments in the aggregate, for individual specialties, and  for individual services.
section_title: Recommendations for Executive Action
paragraphs: To ensure that practice expense payments for all services under the fee  schedule better reflect the costs of providing services, we are  recommending that the Administrator of CMS:    examine the effects of adjustments made to the basic methodology across  specialties and types of services and validate the appropriateness of these  adjustments, including the adjustment made to oncologists’ reported  medical supply expenses, giving priority to those having larger impacts on  payment levels;    change the allocation of indirect expenses so that all services are allocated  the appropriate share of indirect expenses; and    calculate payments for all services without direct physician involvement  under the basic method, using information on the resources required for  each service, and, if deemed necessary, validate the underlying resource- based estimates of direct practice expenses required to provide each  service.
section_title: Comments From CMS and Others
paragraphs: We received comments from CMS, the AMA and ASCO on a draft of this  report. The comments and our discussion are presented below.
subsections: section_title: CMS Comments
paragraphs: In comments on a draft of this report, CMS agreed with our general  findings (see Appendix IV). CMS agreed that a better estimate of actual  oncology supply expenses is needed and acknowledged the usefulness of  reviewing indirect cost allocation methods and the importance of this  allocation for practice expense payments. It also noted that the studies  conducted by The Lewin Group to evaluate several different allocation  options found no reason to change the current methodology. CMS also  agreed that the alternative methodology used to calculate payments for  nonphysician services needs further evaluation. It stated, however, that as  an interim policy, the alternative methodology is serving its intended  purpose and that changing it would redistribute payments across  specialties. CMS did not indicate that it plans to implement our  recommendations. It also provided a summary of its ongoing efforts to  refine practice expense payments.
In agreeing that a better estimate of oncology supply expenses is needed,  CMS indicated that it has suggested changes to the AMA’s SMS survey  instrument to improve the SMS data, with particular suggestions about  supply expenses. A modified survey instrument is an appropriate step in  improving the data, but there are no assurances that the AMA will  implement these changes. Further, CMS has not indicated that it has any  plans to examine the effects of all of the adjustments made to the basic  methodology on payments across specialties and types of services. We  believe this type of systematic evaluation, followed by targeted  refinements to areas with a greater impact on payments, is necessary to  improve practice expense payments.
In its comments, CMS said it would be useful to review the allocation of  indirect expenses in establishing practice expense payments, and it asked  The Lewin Group to do the review. The Lewin Group confirmed the  problem with the current indirect allocation method. As two alternatives  to improve the practice expense payment calculations, it proposed that  CMS examine specialty-specific nonphysician practice expense pools or  correct the indirect allocation method for nonphysician services and then  return these services to the basic method. It acknowledged that any  changes to practice expense payment calculations would result in higher  payments for some specialties and lower payments for others, and it urged  caution in implementing any changes. However, indirect costs are  systematically under-allocated to nonphysician services and over-allocated  to physician services. Further, the alternative method, which was intended  to increase payments for nonphysician services, does not consistently do  so and it inflates payments for some physician services. We believe that  CMS should address these issues consistently across all services. We have  added discussion of The Lewin Group studies to the body of our report.
CMS indicated that it does not intend to eliminate the alternative method  for nonphysician services until it can identify and propose a better  approach. Yet our analysis indicates that this interim approach violates  congressional intent that payments be resource-based and significantly  changes payments for some services. Oncology is one of the specialties  that is disproportionately affected by the interim approach. An improved  indirect allocation method—one that allocates an appropriate share of  indirect expenses to all services, including nonphysician services,  combined with calculating payments for all services under the basic  method—would result in resource-based practice expense payments  under Medicare’s physician fee schedule that reflect the relative costs of  providing each service. We believe that these improvements should be  made, even though they will cause payment redistributions. CMS also  made technical comments, which we incorporated as appropriate.
section_title: AMA Comments
paragraphs: In its comments, the AMA expressed concern about the scope of the  report, questioning whether it provided enough information to the  Congress regarding the adequacy of payments for outpatient cancer  therapy. In this context, it had concerns about the range of physician  groups we consulted and whether we had reviewed all relevant studies  conducted for CMS. The AMA said it would have liked us to conduct a  survey of oncologists’ supply costs. The AMA also said that our discussion  about how oncology has fared under the fee schedule relative to other  specialties is inconsistent with our conclusion that oncology’s concerns  about the data and methods underlying their payments should be  addressed. The AMA also stated that it had “significant concerns” about  our recommendations. Regarding our first recommendation that CMS  examine the effects of all adjustments, the AMA pointed out that CMS had  already simulated the effects of adjustments made to the basic method.  With respect to our recommendation that the allocation of indirect  expenses be changed, the AMA referred us to The Lewin Group studies.  Finally, the AMA said that the nonphysician practice expense pool and  ongoing refinement process precluded the need for other refinement  efforts, as we discussed in our third recommendation.
To address the AMA’s concerns about the scope of our report, we have  added language to the report to make it clear that we were directed to  conduct three related studies. The report on Medicare payments for drugs  was issued in September 2001. A forthcoming report will examine issues  related to the adequacy of the data underlying the practice expense  payments and ways that CMS could improve these data. That study will  necessarily involve discussions with and input from a variety of physician  organizations as the AMA suggests. In the current report, we addressed the  adequacy of Medicare practice expense payments for outpatient  chemotherapy services using national data on practice expenses to reach  our conclusions.
Our analysis and recommendations stress the need for ongoing  examination and refinements to the data and methods underlying  Medicare’s practice expense payments, but this is not inconsistent with  our conclusion that oncologists have fared as well as other specialties  under the Medicare fee schedule. We agree with the AMA, that CMS has  simulated adjustments to their basic methodology, but we believe these  simulations should be used to focus on-going refinement efforts. As  discussed earlier, we did consider the work conducted by The Lewin  Group in our analysis and have added a more complete discussion of its  work. We believe that all payments should be calculated under the basic  method because this ensures that, as the Congress has directed, payments  reflect the resource use of each service relative to all other services rather  than historical charges. Finally, we agree that CMS’ ongoing refinement  process utilizing information supplied by the AMA is an appropriate way to  identify refinements to service-specific resource estimates. Using this  refinement process will be particularly important if payments for  nonphysician services are established under the basic method because  CMS has indicated that these resource estimates for nonphysician services  need refinement.
section_title: ASCO Comments
paragraphs: In its comments, ASCO expressed concern about the scope of this report.  ASCO’s other comments fall into three broad categories. One set of  concerns focuses on the quality, representativeness, and accuracy of the  data used to establish practice expense payments and our use of these  data in our analysis. A second set has to do with payments for  nonphysician services, which ASCO acknowledges are problematic.  Finally, ASCO is concerned that practice expense payments for  nonphysician services do not fully cover their reported practice expense  costs. It states that payments for physician work and drugs are needed to  cover the practice expense payment shortfalls and that without payments  that fully cover costs, oncologists may not provide chemotherapy services  in office settings.
We have added language to the report to make it clear that we were asked  to conduct three related studies, as noted in our response to the AMA’s  comments above. This report addresses the issues raised by the Congress  regarding the adequacy of Medicare practice expense payments for  outpatient chemotherapy services. Our report discusses the data concerns  raised by ASCO and others. To illustrate the possible impact of underlying  data limitations, we simulated the impact on payments of increased  medical supply expenses and a 10 percent increase or decrease in practice  expenses. Our conclusions and recommendations emphasize the  importance of representative and reliable SMS data. Our analyses indicate  that the alternative method of establishing practice expense payments for  nonphysician services significantly changes payments for some services  and that indirect expenses are not appropriately allocated across all  services. The report includes a discussion of two ways of allocating  indirect expenses, and we recommend changes to address the problems  with the current method of calculating payments for nonphysician  services. We also note that it is important to assess the effect of any  refinements by examining changes in payments across all services and  specialties. Finally, as we have noted, our prior work indicates that  Medicare’s payments to physicians for drugs far exceed the reduction in  payments that result from the use of the alternative method used to  calculate payments for nonphysician services.
We are sending copies of this report to the Administrator of CMS and  interested congressional committees. We will also make copies available  to others upon request.
If you have any questions about this report, please call me at (202) 512- 7119 or Carol Carter, Assistant Director, at (312) 220-7711. Major  contributors include Gerardine Brennan and Iola D’Souza.
section_title: Appendix I: Scope and Methodology
paragraphs: To conduct this work, we recreated the practice expense component of  the fee schedule for 1999 and 2001 and analyzed the impact of the fee  schedule on aggregate practice expense payments to all specialties and for  individual services. Even though this report focuses on payments to  oncologists, a thorough analysis must consider the entire practice expense  payment approach because payments are intended to reflect relative cost  differences across all services and specialties. We examined payments in  1999 because this was the first year of the transition from charge-based to  resource-based practice expense values. We analyzed payments in 2001  because they reflect the most current fee schedule and include the most  up-to-date refinements to the resource-based methodology. We also  modeled payments under various other scenarios, which included: (1)  assuming that the supply cost estimate for oncology was nearly double the  current estimate ($13.25 vs. $7.30), (2) assuming that total practice  expense cost estimates for oncology services were 10 percent higher or  lower than current estimates for oncology, and (3) eliminating the  separate methodology developed for nonphysician services.
To model practice expense payments we used several data sources,  including the American Medical Association’s Socioeconomic Monitoring  System (SMS) survey and several data files required to calculate these  payments for each of the years identified. To estimate practice expense  payments, the following files were used: the SMS survey results from 1995  through 1998; the Health Care Financing Administration’s (HCFA) public- use utilization files based on 1997 and 1999 claims; HCFA’s public-use  physician-time files for 1999 and 2001; HCFA’s public-use clinical practice  expert panel (CPEP) summary file for 1999 and 2001; the published  physician fee schedules for 1998, 1999, 2000, and 2001; and files provided  to us by HCFA that included imputed physician fee schedule values for  anesthesia codes for 1998 through 2001. Consistent with the method used  by HCFA as detailed in the Federal Register, several adjustments were  made to the SMS data.
To estimate each service’s practice expense in table 5, we used the  Centers for Medicare and Medicaid Services’(CMS) basic methodology for  calculating resource-based practice expense payments with two  variations. These variations were intended to account for weaknesses we  identified in the current nonphysician services payment approach. First,  we did not use the alternative method to calculate payments for the  nonphysician services—all services were calculated using the basic  method. Second, to allocate indirect costs we used time—physician time  for physician services and clinical time for nonphysician services—instead  of physician work. As we noted in a 1999 report, indirect expenses such  as rent, utilities, and office space are more likely to vary with the time  required to perform a service than with the physician’s work. Because the  alternative methodology uses the all-physician average hourly expenses, it  may not be a good estimate of the expenses incurred by oncologists.
The medical supply expense estimate of $13.25 per physician hour was  derived using a methodology suggested by the American Society of  Clinical Oncology (ASCO). Using Medicare claims data, it estimated total  drug costs for oncology of $441 million and medical supply costs of $79  million. These estimates suggest that medical supplies represent 15  percent of total supply costs for oncologists. Supply costs (including drugs  and medical supplies) were estimated to be $87.20 per physician hour  using SMS data from 1995 through 1997. The medical supply portion would  be equal to 15 percent of that, or $13.25.
We estimated what 2001 charge-based practice expense payments would  have been by using 1998 charge-based payment rates inflated to the 2001  spending levels.
To analyze the variation in the mix of chemotherapy and physician  services provided by oncologists, we used 1999 Medicare physician claims  data. We based our analysis on each physician’s billing identification  number, which is unique to each site where a physician provides services.  This analysis allowed us to examine the mix of services for each physician  billing from each practice site, but it did not tell us the mix of services for  a given practice in which multiple oncologists provide services. Large  physician practices were defined as the top quartile of service providers,  by Medicare volume, and small physician practices were defined as the  bottom quartile.
Throughout this process we held discussions with CMS staff to clarify and  confirm our understanding of their methodology. In addition, we met with  representatives from ASCO and oncology practices to obtain their views  on the practice expense methodology and interviewed oncology  researchers to discuss current chemotherapy administration practices.
section_title: Appendix II: Overview of Medicare’s Basic Practice Expense Method and Adjustments
paragraphs: This appendix details how the Health Care Financing Administration  (HCFA) developed resource-based practice expense payments. Additional  details on earlier proposals and refinements can be found in our earlier  reports.
The Social Security Act Amendments of 1994 mandated that Medicare pay  for physicians’ practice expenses based on the cost of required resources.  HCFA’s method included three basic steps (see figure 1):  1.  Estimating practice expense costs for specialties. Data collected  in the American Medical Association’s (AMA) Socioeconomic  Monitoring System (SMS) survey were used to estimate specific  practice expense costs for each specialty per physician hour.  Estimates were made in three direct cost categories (clinical labor,  medical equipment, and medical supplies) and three indirect cost  categories (administrative labor, office expenses, and other expenses).  The per hour estimates for each category were multiplied by the total  number of hours in a year spent by physicians in that specialty on  treating Medicare patients. The resulting total expenses for each cost  category were added together to estimate each specialty’s aggregate  annual practice expenses, or “cost pool.”  2.  Allocating total expenses to individual services. The estimated  total practice expense cost pool for each specialty was allocated to  individual services that specialty performs. For direct costs, this  allocation was done with estimates made by clinical practice expert  panels (CPEP) convened by HCFA. These panels enumerated the  direct resources (such as nursing time or medical supplies) that were  used to deliver each service. The panel estimates were calibrated to  the direct expense pools estimated with the SMS data.
The total indirect cost estimates were allocated to individual services  based on (1) the direct cost estimate for each service and (2) a  measure of physician work involved in the service. These estimates  were also calibrated to the total expense from the SMS data. Finally,  direct and indirect cost estimates were added together to determine  total practice expense values per service for a specialty.  3.  Averaging different estimates for services performed by  multiple specialties. Because different specialties often provide the  same services, the specialty-specific practice expense payment  estimates had to be combined to produce one payment per service. To  do so, HCFA calculated a weighted average of the various estimates.  Each specialty’s practice expense estimate for a service was multiplied  by the total number of times that specialty performed the service in a  year. The results for all specialties were then added together. The sum  was divided by the total volume of the services in a year by all  specialties, and the result determined the final practice expense  amount. In this way, specialties that perform a given service frequently  have more influence over the payment than specialties that rarely  perform it.
subsections: section_title: Adjustments to the Resource-Based Methodology
paragraphs: HCFA made several adjustments to the underlying data and modifications  to the basic method to compensate for shortcomings in the basic  methodology and limitations in the data used to establish payments and to  update payments.  1.  The physician specialty groups reflected in the SMS data were not the  same as the physician specialty groups used by HCFA in establishing  payments. The SMS reports practice expense estimates for 26  specialties, while HCFA used over 65 specialty categories. To create  practice expenses for all 65-plus specialties, HCFA matched AMA data  to its own specialty categories based on judgments about the best fit.  2.  To address perceived low payments for nonphysician services, HCFA  developed an alternative method to calculate payments for these  services, using historical charge-based cost estimates, which it  implemented in the first year of resource-based practice expense  payments (see appendix III for a description of this alternative  method). Recognizing that this alternative method did not always  increase payments for the targeted services, HCFA allowed specialties  (in the second year of resource-based practice expense payments) to  identify individual nonphysician services that would “opt-out” of the  separate methodology and revert to having these services’ payments  set using the basic methodology for all physician services.  3.  HCFA adjusted the payment rates for services that include both  physician and nonphysician services in performing them. For example,  an x-ray includes a nonphysician activity (taking and developing the  film) and a physician activity (interpreting the film). These services  can be billed together if both are performed in the same office, or  separately, if each is performed at separate locations. To ensure that  payments were equal, regardless of billing, it set the payment for the  total service equal to the sum of the payments when billed individually.  4.  In an ongoing effort to improve payments, HCFA receives from the  Practice Expense Advisory Committee (PEAC) recommendations for  refinements to direct practice expense estimates for specific services,  many of which have been implemented.  5.  HCFA has made changes to its estimates of specialties’ total expenses  based on supplemental practice expense survey data submitted by the  specialties, in accordance with the provisions of the Balanced Budget  Refinement Act of 1999.
section_title: Appendix III: Overview of Medicare’s Alternative Method for Calculating Practice Expenses for Nonphysician Services
paragraphs: Physicians bill for services that involve little or no physician work and are  performed by other staff. For example, many chemotherapy services are  provided in a physician’s office by a nurse or other health care  professional and billed for by the physician. In response to provider  concerns that payments for these nonphysician services were too low,  HCFA developed an alternative method of calculating payments.
In the alternative methodology, the costs of nonphysician services were  aggregated into what was called a “zero work” pool for all specialties.  This, in effect created a new zero work specialty. The specialty-specific  cost pools, however, were not reduced by the costs associated with the  nonphysician services. Practice expense payments were then calculated  for each of the nonphysician services, as they were for the other services,  but with these notable deviations from the basic methodology:    SMS data on average practice expenses for all physicians were used,  instead of specialty-specific practice expense data, to calculate the  nonphysician specialty’s practice expense pool.
Clinical time (including the time of nurses and other clinical personnel)  was substituted for physician time in establishing the cost pool for these  services.
Direct costs were allocated across services based on historical charges,  rather than the expert panels’ estimates of service-specific resource  requirements.  Indirect cost allocations were based solely on charge-based direct cost  estimates.
There was no need to average payments across specialties for the  nonphysician services because only one payment is estimated for each  nonphysician service.
section_title: Appendix IV: Comments From the Centers for Medicare and Medicaid Services
section_title: Related GAO Products
paragraphs: Medicare: HCFA Can Improve Methods for Revising Physician Practice  Expense Payments (GAO/HEHS-98-79, Feb. 27, 1998).
Medicare: HCFA Can Improve Methods for Revising Physician Practice  Expense Payments (GAO/T-HEHS-98-105 March 3, 1998).
Medicare Physician Payments: Need to Refine Practice Expense Values  During Transition and Long Term (GAO/HEHS-99-30, Feb. 24, 1999).
Medicare Part B Drugs: Program Payments Should Reflect Market Prices  (GAO-01-1142T, Sept. 21, 2001).
Medicare: Payments for Covered Outpatient Drugs Exceed Providers’  Cost (GAO-01-1118, Sept. 21, 2001).