Medicare’s physician fee schedule includes payments for over 7,000 services, such as office visits, surgical procedures, and tests. Most services are defined as discrete and stand-alone in that they may be furnished independently of other services, but a small number of services are defined as supplemental because they are commonly furnished along with other primary services. Services under the Medicare fee schedule are described and defined by the AMA’s Current Procedural Terminology (CPT) Editorial Panel, and each service is assigned a five-digit identifier, or code. The CPT Editorial Panel revises and modifies CPT codes based largely on suggestions from specialty societies and the CPT Editorial Panel’s Advisory Committee. Code revisions require research from both CPT staff and specialty society members who assist the CPT Editorial Panel in its work. According to AMA officials, the CPT process generally takes about 14 months from the time potential codes are first identified by specialty societies to the final revision or development of a new code. CMS relies on the AMA/Specialty Society Relative Value Scale Update Committee (RUC)—an expert panel that includes members from national physician specialty societies—to develop and update on an ongoing basis the resource estimates upon which fees are based. Specialty societies identify services for review, gather data on resource use, and make proposals to the RUC on resource estimates for services. Physician work estimates are developed using vignettes of each service furnished to a typical patient, where the specific physician activities are described for three phases—before, during, and after the service. Practice expense estimates considered direct—clinical labor (that is, the nurse’s or technician’s time), equipment, and supplies—are developed similarly for each of these phases. (App. II provides an example of a vignette and practice expense estimates for one service.) The RUC evaluates proposals submitted by the specialty societies and makes recommendations for final consideration by CMS. The RUC meets three times a year, and, on average, reviews approximately 300 codes annually. The RUC also assists CMS in the Five-Year Review process—a review of fees for all services that the agency is required by law to conduct at least every 5 years to account for changes in medical practice. While CMS may reject or modify the RUC’s recommendations, from 1993 through 2009, the agency accepted over 90 percent of the recommendations pertaining to 3,600 new and revised CPT codes. CMS may at times also make changes to fees for services independent of RUC recommendations. Efficiencies in multiple services that are furnished together may be factored into fees primarily in two ways. First, the RUC and specialty societies generally attempt to consider whether other services are typically furnished along with the service they are reviewing to avoid duplication of the resources associated with physician work and practice expenses that may be incurred only once. For example, certain activities included in the practice expense component, such as preparing the patient before a procedure and cleaning the room after the procedure, are performed only once when two services are furnished together. However, the RUC has not reviewed every service; therefore, estimates are outdated for a large portion of services and may no longer reflect current technology and medical practice. For example, resource estimates for certain image-guided surgeries were developed when a surgeon performed the surgery and a radiologist performed the related imaging, whereas in current medical practice, a single physician tends to do both tasks. Further, for supplemental services, the RUC ensures that the physician work and practice expense resources required before and after the service are not duplicated. Second, CMS has, independent of the RUC and specialty societies, implemented its own policies to recognize efficiencies occurring in certain services. CMS has a long-standing policy called a multiple procedure payment reduction (MPPR) to avoid duplicate payments for portions of practice expenses that are incurred only once when two or more surgical services are furnished together by the same physician during the same operating session. CMS expanded the MPPR to include certain diagnostic imaging services in 2006. Under the MPPR policy, the full fee is paid for the more expensive service, but a reduction is applied to the fees for each subsequent service. Generally, a 50 percent reduction is applied to fees for surgical services performed during the same operating session and a 25 percent reduction is applied to fees for certain imaging services that are furnished together. By law, updates to fees are required to be budget neutral—that is, they cannot cause Medicare’s aggregate payments to physicians to increase or decrease by more than $20 million. As a result, any “savings” realized from reducing the fees for particular services do not accrue to the Medicare program but are redistributed across all services, resulting in a slight increase to the fees for all other services. In some instances, Congress has overridden budget neutrality to ensure that payment changes result in savings to Medicare. For example, through the Deficit Reduction Act of 2005 (DRA), Congress mandated that savings resulting from the MPPR for certain imaging services that were furnished together be exempted from budget neutrality. As a result, annual savings of approximately $96 million were not redistributed across all services, but accrued as savings to the Medicare program in 2006. CMS has taken steps to recognize efficiencies for services commonly furnished together through the use of the RUC process and the MPPR, but has not targeted services with the greatest potential for savings, and the RUC process depends on specialty societies. The MPPR is limited in scope because it does not apply to a broad range of services, nor does it capture efficiencies occurring in the physician work component. CMS stated that it is reviewing the efforts of a workgroup recently created by the RUC to identify efficiencies in services that are commonly furnished together. In March 2006 MedPAC criticized the RUC for recommending more increases than decreases in resource estimates, largely because the RUC had focused on services that specialty societies believed were undervalued. In response, the RUC established the Five- Year Review Identification Workgroup in October 2006 to identify potentially misvalued services. The workgroup used several criteria to identify these services, one of which was to examine services commonly furnished together to determine if such services should be bundled to reduce duplication in the physician work component. The workgroup requested data from CMS on services commonly furnished together in 2007. CMS forwarded a list of over 2,200 service pairs that were furnished together more than 50 percent of the time, but did not tell the workgroup how to prioritize its review of the services. Instead, the workgroup developed its own methodology, targeting service pairs that were almost exclusively furnished together. While the methodology represents a reasonable first step to identify potentially misvalued services, and the workgroup has expended considerable effort and resources in implementing it, the methodology will likely result in limited savings to Medicare. This is because the group did not systematically focus on services that accounted for a large share of Medicare spending, nor did it exclude supplemental services with limited potential for savings. The workgroup focused on service pairs in which the two services were performed together at least 90 percent of the time. The workgroup classified service pairs into two types: type A, in which both services in the pair were performed together at least 90 percent of the time, and type B, in which one service was performed with another service at least 90 percent of the time in a unidirectional relationship (that is, when the first service was performed, the second service was also performed at least 90 percent of the time, but when the second service was performed, the first service was not performed at least 90 percent of the time). The workgroup identified 22 type A and 31 type B service pairs where possible duplication was occurring in physician work. However, these service pairs would likely result in limited savings. First, 19 of the 22 type A pairs and 20 of the 31 type B pairs included supplemental services for which further reductions in fees would likely be small. For example, in performing a three-dimensional heart wall imaging study (also known as a myocardial perfusion imaging study), physicians may take additional measurements of blood flow or heart wall function. These additional services are supplemental to the primary service and are therefore already priced to exclude overlap in practice expenses incurred before and after the service. Second, spending for the lower-priced service in the remaining pairs was minimal: $27 million for the remaining 3 type A services and $117 million for the remaining 11 type B services. Thus, potential savings from combining the remaining service pairs would likely be no more than half these respective amounts, assuming a 50 percent discount was applied to the lower-priced service—a generous assumption, since that is the maximum discount that CMS has applied to services under the MPPR. Another limitation of the workgroup’s review of services commonly furnished together is that its process is resource intensive. This element is inherent in a process based on input and consensus from specialty societies. The workgroup follows the RUC’s process in that it solicits proposals from specialty societies for potential revisions to the service pairs. The proposals must then be approved by the CPT Editorial Panel, the RUC, and CMS (see fig. 1). To date, the workgroup has identified only a limited number of misvalued services commonly furnished together. Since the review of service pairs that was started in 2007, the workgroup has identified three misvalued services; at the workgroup’s recommendation, these (echocardiography) services were combined into a single code in 2009. The earliest any additional changes might be implemented for the type A and B service pairs first identified in 2007 would be 2010. Finally, the workgroup is required to undertake other tasks, including reviewing services because of technological changes or because of high growth, utilization, or intensity. These reviews also require involvement from the specialty societies, in addition to their efforts to revise estimates of physician work and practice expenses an ongoing basis as well as for the Five-Year Reviews.