Fact Sheets

MEDICARE PHYSICIAN FEE SCHEDULE FOR 2003

MEDICARE PHYSICIAN FEE SCHEDULE FOR 2003

Overview:

The Medicare Physician Fee Schedule establishes payment policies and payment rates for over 7,000 procedures that are performed by physicians and by certain nonphysician practitioners such as nurse practitioners, physician assistants, and physical therapists. According to Medicare law, the fee schedule must be updated annually based on a formula defined in the law. This is done through a formal rulemaking proceeding, which leads to the publication of a final Medicare Physician Fee Schedule.

On December 31, 2002, the Centers for Medicare & Medicaid Services published a final rule, setting the update for 2003 at –4.4 percent. In developing the final rule, CMS did everything it could under existing law to reduce the potential effect of these payment reductions on physicians. However, the statutory formula allows little flexibility. One refinement to the fee schedule methodology had the effect of benefiting physicians– changing the measure of productivity in Medicare Economic Index (MEI), a factor in determining the sustainable growth rate (SGR).

CMS believed that the 2003 update would be more accurate if CMS had the legal authority to revisit the SGRs for 1998 and 1999, in light of actual data rather than projections. These revised SGRs would not be given retroactive effect but would be used in calculating the 2003 update. CMS estimated that the resulting update would be a positive 1.6 percent.

On February 13, 2003, the Congress included language in the Consolidated Appropriations Resolution (CAR), 2003, that would allow CMS to revise estimates of prior year SGRs, for purposes of calculating the current year’s update. President Bush signed the CAR into law on February 20, 2003. CMS is now issuing a second final rule establishing a 1.6 percent update to the conversion factor, effective for services on or after March 1, 2003.

CMS has already sent revised payment files to the Medicare carriers that will allow the new physician fee schedule rates to be used as soon as possible.

How The Medicare Physician Fee Schedule Works:

The law creating the physician fee schedule was enacted by Congress in 1991, and the fee schedule was implemented in 1992. The premise underlying the fee schedule is that if service A requires twice as many resources (in terms of physician work, practice expense, and malpractice expenses) as service B, service A should be paid twice as much as service B. The resources are quantified in terms of “relative value units” or RVUs. There are separate RVUs for physician work, practice expense and malpractice.  For each type of physician service, from the simplest office visit to complex surgical procedures, the fee schedule assigns a number of RVUs intended to reflect the resources involved in the service. The work and malpractice expense RVUs for any individual service do not generally change from year to year, except when CMS determines that the RVUs should be revised either on a case-by-case basis or as part of a statutorily required comprehensive five-year-review.  The practice expense RVUs have been undergoing substantial change annually because of ongoing refinements since 1999.  As this process nears completion, there has been less annual change in the practice expense RVUs.

To determine the payment rate for a particular service, CMS applies a conversion factor expressed in dollars. Currently, as a result of the Balanced Budget Act of 1997, the same conversion factor applies to all services paid under the fee schedule. Congress requires the agency to update the conversion factor annually according to a formula set by law.

Evolution Of The Update Formula

From 1992 through 1997, the physician fee schedule update was determined under the Medicare Volume Performance Standard (MVPS).  Under the MVPS, the upcoming year’s update was based on a comparison of the percentage increase in the previous year’s outlays for physician services to a percentage increase determined using a formula specified in statute.

In the Balanced Budget Act of 1997 (BBA), Congress replaced the MVPS with the Sustainable Growth Rate (SGR).  While the SGR differs in fundamental ways from the MVPS, it uses the same general concept of updating physician fee schedule rates by comparing target and actual expenditures.

The BBA directs CMS to set the SGR based on four factors:

a.  Medical inflation

b.  Growth in the number of Medicare fee-for-service beneficiaries

c.  Projected increase in Gross Domestic Product

d.  Change in expenditures resulting from new laws or regulations

The SGR was designed to adjust the update to make actual and target expenditures equal over time. If outlays under the fee schedule are higher than the target, the update is decreased. Conversely if outlays are lower than the target, the update is increased.

The SGR went into effect in 1998, and between 1998 and 2001, the formula yielded updates of 2.3 percent, 5.5 percent and 5.9 percent for physicians.  The update for 2002 was –4.8 percent and the update for 2003 is 1.6 percent.

Adjustments To The Fee Schedule

There are two other important adjustments to the fee schedule that have an impact on the payment individual providers will receive for a service. Both adjustments are required under the Medicare statute.

The first is the geographic adjustment, which is designed to recognize that the costs incurred by physicians vary depending on the location in which they practice. The geographic adjustment is applied separately to each component – work, practice, and malpractice expense – of each service. For most states, the geographic adjustment is made on a statewide basis. However, for some states, such as New York, California, and Florida, separate geographic adjustments are applied to large metropolitan areas.

The second is the budget neutrality adjustment. If RVU changes will cause an increase or decrease in outlays of $20 million or more compared with what the outlays would have been without the changes, the law requires CMS to apply an adjustment to maintain budget neutrality.  The adjustment may be applied to the RVUs themselves or the conversion factor must be increased or decreased.