Anesthesia services are generally administered by anesthesia practitioners, such as anesthesiologists and CRNAs. In 2004, there were approximately 42,000 anesthesiologists and 30,000 CRNAs in the United States. Anesthesiologists are physicians who have completed a bachelor’s degree, medical school, and an anesthesiology residency, typically 4 years in length. CRNAs are licensed as registered professional nurses and have completed a bachelor’s degree and a 2- or 3-year nurse anesthesia graduate program. In our prior work, we showed that physician specialists, who include anesthesiologists, tend to locate in metropolitan areas. Anesthesia services can be provided in several ways. Anesthesia services can be provided by anesthesiologists alone, by anesthesiologists working with CRNAs or other practitioners, or by CRNAs alone. In 2004, proportionally more anesthesia services provided to Medicare beneficiaries were provided by anesthesiologists working as the sole anesthesia practitioner and by anesthesiologists working with another practitioner, such as a CRNA, compared to the proportion of anesthesia services provided by CRNAs as the sole anesthesia practitioner. CRNAs can directly bill Medicare for the provision of anesthesia services. In order to receive Medicare payment for anesthesia services, CRNAs generally are required to practice under the supervision of a physician or an anesthesiologist, except in states that have obtained an exemption from this requirement from CMS. As of May 2007, CMS reports that 14 states had requested and obtained this exemption, which would allow CRNAs to practice independently without physician supervision in a variety of inpatient and outpatient settings. Anesthesiologists derive approximately 28 percent of their income from Medicare. CRNAs derive approximately 35 percent of their patient mix from Medicare. In the Omnibus Budget Reconciliation Act of 1989, Congress required the establishment of a national Medicare physician fee schedule which sets payment rates for services provided by physicians and other practitioners. Under the Medicare physician fee schedule, Medicare payments for anesthesia services are generally the lesser of the actual charge for the service or the anesthesia fee schedule amount. Payments for anesthesia services are subject to the same annual updates as all other services paid under the physician fee schedule. However, Medicare payments for anesthesia services are calculated differently than payments for other services covered by the physician fee schedule. Specifically, Medicare fee schedule payments for anesthesia services are calculated using both “base” and “time” units. The relative complexity of an anesthesia service is measured by base units; the more activities that are involved, the more base units assigned by Medicare. The time spent performing an anesthesia service is measured continuously from when the anesthesia practitioner begins preparing the patient for services and ends when the patient may be safely placed in postoperative care and is measured by 15-minute units of time with portions of time units rounded to one decimal place. The sum of the base and time units are converted into a dollar payment amount by multiplying the sum by an anesthesia service-specific conversion factor, which also accounts for regional differences in the cost of providing services. As such, each Medicare payment locality has a unique anesthesia conversion factor assigned by CMS. The calculation of the Medicare payment for an anesthesia service associated with a lens surgery—the most common anesthesia service provided to Medicare beneficiaries in 2004—performed by an anesthesiologist or a CRNA working without another anesthesia practitioner is shown in figure 1. Subject to certain exceptions, Medicare payments for anesthesia services provided by anesthesiologists and CRNAs are equal in most situations. For illustrative purposes, we assumed that the service was provided in the Connecticut payment locality and took 21 minutes to perform. In 2004, the total Medicare payment for this service would have been $99.31, which was equal to the product of the anesthesia service conversion factor specific to the locality ($18.39) and the sum of the base and time units associated with the anesthesia service (5.4 total units). In contrast, Medicare payments for other physician services are calculated using relative value units (RVUs) that correspond to the different resources required to provide physician services. The RVUs are each adjusted to account for geographic differences in the cost of providing services, summed, and then multiplied by a general fee schedule conversion factor, which is applicable across all Medicare payment localities. Physicians who bill Medicare for services can accept Medicare’s payment as payment in full (with the exception of the ability to bill a Medicare beneficiary for 20 percent coinsurance plus any unmet deductible). This is known as accepting assignment. Or they may exercise an option to bill a Medicare beneficiary for the difference between Medicare’s payment and its limiting charge. This is known as balance billing. High rates of assignment may serve as an indicator of physicians’ willingness to serve Medicare beneficiaries. In April 2004, 99.4 percent of the anesthesia services provided by anesthesiologists to Medicare beneficiaries were provided by anesthesiologists who accepted Medicare payment as payment in full. The anesthesiologists’ assignment rate for anesthesia services was comparable to rates for other hospital-based specialists, such as pathologists (99.4 percent) and radiologists (99.6 percent), and was higher than the rate for all other physicians (98.8 percent). In addition to anesthesia services, anesthesiologists and CRNAs can also provide other nonanesthesia types of physician services covered by Medicare. Payments for these other physician services—which can include medical services such as office visits, and procedures such as pain management services—represented approximately 31 percent of anesthesiologists’ and 2 percent of CRNAs’ revenue from Medicare in 2004. Because payment for these services is determined by a different formula than anesthesia services, a significant portion of these Medicare payments are closer to private payments levels for the same services, in contrast to the difference in payments for anesthesia services. According to a MedPAC-sponsored analysis, the average difference between Medicare and private payments for medical services such as office visits and for procedures provided in 2001 was 5 percent and 25 percent, respectively. Most private payers, like Medicare, determine payments for anesthesia services using base units, time units, and anesthesia-specific conversion factors. Unlike the Medicare program, however, private payers can set their fees in response to market forces such as managed care prevalence and the extent of competition among providers. For example, private anesthesia conversion factors are generally negotiated between payers and anesthesia practitioners. In addition, some private payers use different methods to determine time units, such as rounding up fractional time units to the next whole number or using 10-minute increments for each time unit, which can result in higher anesthesia payments. When setting payment rates, some private payers also allow higher payments for certain patient-related factors such as extremes in age. In our prior work we found that private payments for physician services, excluding anesthesia and some other services, differed by about 100 percent between the lowest- and the highest-priced metropolitan areas and were responsive to market forces, such as regional differences in the extent of competition among hospitals and health maintenance organizations’ (HMOs) ability to leverage prices. For example, we found that areas with less competition and lower levels of HMO price leverage had higher payments than areas with more competition and greater levels of HMO price leverage. We have also reported that because private payers can adjust their payment levels to account for market forces, their payment levels vary more than Medicare payments across geographic areas. We found that average Medicare payments for a set of seven anesthesia services provided by anesthesiologists alone were lower than average private payments in 41 Medicare payment localities in 2004, and ranged, on average, from 51 percent lower to 77 percent lower than private payments (see fig. 2). For all 41 payment localities, Medicare payments were lower than private payments by an average of 67 percent. In 2004, the average Medicare payment for a set of seven anesthesia services was $216, and the average private payment for the same set of anesthesia services was $658. Medicare payments varied less than private payments across the 41 payment localities. In 2004, average Medicare payments for the set of seven anesthesia services ranged from $177 to $303 across the 41 payment localities, a range of 71 percent. In contrast, average private payments for the same set of seven anesthesia services in that same year ranged from $472 to over $1,300 across these localities, a range of 177 percent. In 2004, there was no correlation between the overall supply of anesthesia practitioners—that is, the total number of both anesthesiologists and CRNAs per 100,000 people—and either the difference between Medicare and private payments for anesthesia services or the concentration of Medicare beneficiaries in the Medicare payment localities included in our analyses. However, when we examined the supply of anesthesiologists and CRNAs separately, we found correlations between practitioner supply and payment differences and practitioner supply and beneficiary concentration. Specifically, we found that in 2004, the supply of CRNAs tended to decrease as the difference between Medicare and private payments for anesthesia services increased in 41 Medicare payment localities. We also found that in 2004, the supply of anesthesiologists tended to decrease as the concentration of Medicare beneficiaries increased across 87 Medicare payment localities, while the supply of CRNAs tended to increase as the concentration of Medicare beneficiaries increased across these Medicare payment localities. We found no correlation between the overall supply of anesthesia practitioners per 100,000 people and the difference in Medicare and private payments for anesthesia services across 41 of Medicare’s payment localities in 2004. The supply of anesthesia practitioners varied across the 41 localities independent of the payment differences in these localities and the payment differences varied independently of the supply of anesthesia practitioners in the localities. When we considered anesthesiologists and CRNAs separately, we found a relationship between the supply of CRNAs and the payment differences for anesthesia services across the 41 Medicare payment localities in 2004. Specifically, there tended to be fewer CRNAs in the localities with the larger differences between Medicare and private payments for anesthesia service.