Medical imaging services, grouped into six major modalities, use different types of imaging equipment and media for creating an image. Physicians bill for providing these services under the Medicare physician fee schedule, which, for payment purposes, divides an imaging service into two components: the technical component, which pays for the performance of the imaging examination, and the professional component, which pays for the physician’s interpretation of the image. Recently, CMS implemented two payment changes in 2006 and 2007 that reduce physician payments for certain imaging services. Medical imaging is a noninvasive process used to obtain pictures of the internal anatomy or function of the anatomy using one of many different types of imaging equipment and media for creating the image. Imaging tests fall into six modalities: CT, MRI, nuclear medicine, ultrasound, X-ray and other standard imaging, and procedures that use imaging. Depending on the service, imaging equipment uses radiation, sound waves, or magnets to create images. X-rays and other standard imaging services, CT, and certain nuclear medicine services, such as positron emission tomography (PET), use radiation; ultrasound uses sound waves; MRI uses magnets and radio waves. For certain X-rays, CTs, and MRIs, contrast agents, such as barium or iodine solutions, are administered to patients orally or intravenously. By using contrast, sometimes referred to as “dye,” as part of the imaging examination, physicians can view soft tissue and organ function more clearly. Table 1 provides further details on each imaging modality. Imaging equipment using radiation poses more potential risk to patients than other imaging mediums. The amount of radiation patients are exposed to varies based on whether the image is obtained by X-ray or CT. CTs emit the largest amount of radiation, but estimates of the radiation dose—or the amount of radiation absorbed—from a diagnostic CT procedure can vary by a factor of 10 or more, depending on the type of CT procedure, patient size, and the CT system and its operating technique. For example, the typical dose in a CT of the abdomen is about five times that of the head, and about eight times that of an X-ray of the spine. Medicare generally covers medically necessary services provided by physicians operating within the scope of practice allowed by their state licensure, without regard to their specialty or specific qualifications. All diagnostic tests are required to be provided under at least general physician supervision—that is, a physician is responsible for the training of the technical staff performing the test, and the maintenance of the necessary equipment and supplies. Medicare’s physician fee schedule in 2006 included more than 7,000 services—together with their corresponding payment rates. About 900 of these services are associated with imaging. Each imaging service on the fee schedule has three relative value units (RVU), which correspond to the three components of physician payment: (1) physician work—the financial value of physicians’ time, skill, and effort that are associated with providing the service, (2) practice expense—the costs incurred by physicians in employing office staff, renting office space, and buying supplies and equipment, and (3) malpractice expense—the premiums paid by physicians for professional liability insurance. Each RVU measures the relative costliness of providing a particular service. For example, in 2006, the three RVUs for performing and interpreting a standard chest X-ray summed to .74. In contrast, the RVUs for CT of the head/brain without dye summed to 6.15, indicating that this service, on average nationally, consumed more than eight times more resources than the standard chest X-ray. To determine Medicare payment for a particular service, the sum of the RVUs is multiplied by a conversion factor, which is a dollar amount that translates each service’s RVUs into a payment rate. For example, in 2006, Medicare paid $233, on average nationally, for physicians performing and interpreting a CT of the head/brain without dye (6.15 multiplied by a conversion factor of $37.8975). Some items paid under the physician fee schedule that are used in the provision of imaging services—such as radiopharmaceuticals—do not have RVUs associated with them. Instead, these items are priced locally by Medicare’s Part B contractors and billed separately from the imaging services paid for under the Medicare physician fee schedule. Physicians under the Medicare physician fee schedule can be paid for performing the imaging examination—the technical component—and interpreting the image examination—the professional component. The payment for the technical component is intended to cover the cost of the equipment, supplies, and nonphysician staff and is generally significantly higher than the payment for the professional component, which is intended to cover the physician’s time in interpreting the image and writing a report on the findings. Medicare allows physicians to bill for these services separately because performing and interpreting the examination could be done by different physicians and in different settings. If the same physician performs and interprets the examination, the physician can submit a global bill to Medicare. The same rules apply under the physician fee schedule if the imaging services are completed by radiologists in independent diagnostic testing facilities (IDTF)—facilities that are independent of a hospital and physician office or “free-standing” and only provide outpatient diagnostic services. When the imaging examination is performed in an institutional setting, such as a hospital or skilled nursing facility, the physician can bill Medicare only for the professional component, while payment for the technical component is covered under a different Medicare payment system, according to the setting in which the service is provided. For example, the technical component of an imaging examination in a hospital inpatient setting is bundled into a facility payment paid under Medicare Part A, whereas the technical component of an examination in a hospital outpatient department is paid under Medicare’s hospital outpatient payment system, which is financed through Part B. In recent years, CMS has implemented two payment changes to the way Medicare pays for imaging services under the physician fee schedule. Starting January 1, 2006, CMS reduced physician payments when multiple images are taken on contiguous body parts during the same visit. CMS adopted a recommendation made by MedPAC in 2005 as a way to ensure that fee schedule payments took into account efficiencies, such as savings from technical preparation and supplies, which occur when multiple imaging services are furnished sequentially. Physicians receive the full fee for the highest paid imaging service in a visit, but fees for additional imaging services are reduced by 25 percent. The reduction is applied only to the technical component. Beginning January 1, 2007, CMS implemented two provisions in the DRA: it (1) established a cap on the physician fee schedule payments for certain imaging services at the payment levels established in Medicare’s OPPS and (2) in certain cases, eliminated the Medicare budget neutrality requirement, which is designed to ensure that the result of specific payment changes neither increase nor decrease the total amount of Medicare payments to physicians beyond a specified amount. The first provision, in practice, requires that payment for the technical component of an image in the physician office does not exceed what Medicare pays for the technical component of the same service performed in a hospital outpatient department. For example, in 2006, Medicare paid $903 under the physician fee schedule for an MRI of the brain, yet paid $506 for the same test under OPPS. Under the DRA payment change, in 2007, Medicare paid the lesser amount for this examination, regardless of whether it was performed in a hospital outpatient department or in a physician’s office. The second provision, excluding the two imaging payment reductions from the calculation of budget neutrality, results in Medicare savings as a practical matter. Savings attributed to the 25 percent multiple payment reduction and the capping of certain payments at the OPPS levels are not offset by increases for other services under the physician fee schedule. From 2000 through 2006, Medicare spending on imaging services paid for under the Part B physician fee schedule more than doubled. About 80 percent of the spending growth was associated with growth in the volume and complexity of imaging services. Compared with 2000, in 2006 more beneficiaries obtained imaging services, and average use per beneficiary also increased. Medicare spending on imaging services paid for under the Part B physician fee schedule more than doubled from 2000 through 2006, increasing to about $14 billion. (See fig. 1.) This increase represents a growth rate of 13 percent a year on average, compared to 8.2 percent for all Medicare physician-billed services during that period. Although spending increased each year since 2000, the rate of growth slowed in 2006. In that year, CMS implemented a payment change for imaging that reduced physician fees by 25 percent for additional imaging services involving contiguous body parts imaged during the same session. (See app. II for total expenditures for imaging services paid for under the physician fee schedule and expenditures by imaging modality for each year from 2000 through 2006.) Advanced imaging services—CT, MRI, and nuclear medicine—saw the highest growth rates. Spending on these advanced imaging modalities increased almost twice as fast, at an average annual rate of 17 percent, as spending on services in the three other imaging modalities—ultrasounds, standard imaging (mostly X-rays), and procedures that use imaging. The faster-growing advanced imaging services are more complex and therefore more costly. Medicare pays physicians more for both the technical component and the professional component for these services, on average, than it pays for other imaging services. (See table 2.) The payment is higher, in part, because advanced imaging equipment is more costly to obtain and requires more skilled technicians to operate. For example, in 2006, Medicare paid $1,118 for the most commonly physician- billed MRI imaging test—an “MRI brain without and with dye”—of which $995 was for performing the examination. In contrast, Medicare paid $28 for the most commonly performed standard imaging service, a chest X-ray. As a result of faster growth in the more expensive services, advanced imaging accounted for 54 percent of total imaging expenditures, up from 43 percent in 2000.