Allocating Practice Expense Under the Medicare Fee Schedule

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Allocating Practice Expense Under the Medicare Fee Schedule

Transcript Of Allocating Practice Expense Under the Medicare Fee Schedule

Allocating Practice Expense Under the Medicare Fee Schedule
Gregory C. Pope, M.S., and Russel T. Burge, Ph.D.

Currently, relative value units tor prac­ tice expense are determined under the Medicare fee schedule (MFS) using his­ torical physician charges. This seems in­ consistent with the goal of a resource­ based fee schedule. A specialty resource­ based method of determining practice ex­ pense payments is presented and simu­ lated here. The method assumes that, for each service, the payment tor practice ex­ pense should be the same proportion of the total payment as actual physician practice expenses are of total practice revenues. A comparison with the ap­ proach developed by the Physician Pay­ ment Review Commission (PPRC) shows similar fees, but the specialty-based method proposed here requires no data
beyond what Is already employed in the
MFS.
INTRODUCTION AND BACKGROUND
Many believe that the physician fees that evolved under the customary, prevail­ ing, and reasonable (CPR) payment meth­ odology were distorted by insurance cov­ erage and other factors. Hlstorlcal CPR physician fees often greatly exceeded the
cost of providing services(including a rea­
sonable return to the physician's work), especially for invasive procedures. This
This research was supported by Cooperative Agreement Num­ ber 99-C-0025611-08 from the Health Care Financing Adminis­ tration. The authors are with the Center for Health Economics Research and the opinions expressed are those of the authors
and do not necessarily reflect The Health Care Financing Ad­ ministration'sviews or policy positions.
Health C8re Financing ReviewiSprlng 19931volume14, NUt11~3

gave Inappropriate Incentives for the over­ supply of services, especially tests and procedures, and in the long run, for over­ supply of specialized physicians relative to general practitioners. Historical physi­ cian fees have also been regarded as in­ equitable because the rate of compensa­ tion per unit of physician work varied so greatly among services and specialties. Recent reforms of physician payment have emphasized basing fees on re­ source costs with the twin goals of Im­ proving efficiency (i.e., lessening Incen­ tives to oversupply certain services) and equity.
A primary goal of the MFS is to bring payments for Medicare physician ser­ vices more In line with the relative re­ source cost of providing services. To this end, relative values for physician work were established through surveys of phy­ sicians (Becker, Dunn, and Hsalo, 1988). MFS payments for physician work, how­ ever, account for only about 54 percent of total MFS payments. The remainder are allocated to practice expenses and mal­ practice Insurance costs. Practice ex­ pense-non-physician labor costs, office rental, equipment, supplies, and miscella­ neous-accounts for about 41 percent of total payments, and malpractice insur­ ance expense for about 5 percent. The Omnibus Budget and Reconciliation Act of 1989 (OBRA 1989) required the calcula­ tion of separate relative value units
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(RVUs) for practice expense and malprac­ tice in addition to physician work.
Practice expense and mal practice RVUs are established by multiplying his­ torical Medicare allowed charges for ser­ vices by the percentage of total practice revenues accounted for by these costs. Thus, the MFS is a mixture of a resource­ based fee schedule (lor physician work) and a charge-based fee schedule (lor practice expense and malpractice costs). Any benefits from resource-based fees­ less Incentive to overprovlde some ser­ vices and underprovlde others, for exam­ ple-are attenuated in the MFS.
Recognition that roughly one-half of the MFS is charge-based has stimulated interest in developing resource-based methods for allocating practice expense and malpractice costs. The PPRC has de­ voted considerable attention to delineat­ ing the principles of resource-based allo· cation of non-physician costs. The PPRC has also evaluated the feasibility of col­ lecting the data necessary to implement a resource-based approach. A recently re· leased report describes the PPRC's ap­ proach and results of simulations of resource-based fees with data from one multlspeclalty clinic (Physician Payment Review Commission, 1992a). In addition, the Leonard Davis Institute at the Univer­
sity of Pennsylvania has suggested an ap­
proach to allocating practice expense that focuses on minimizing the Incentives facing physicians to provide unnecessary services (Pauly and Wedig, 1991).
Neither the PPRC nor the Pauly and Wedig approach is entirely satisfactory, however, mainly because the Information each requires is difficult or expensive to obtain. The PPRC approach requires data on the direct costs of each physician ser­ vice, which necessitates complex and ex­
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pensive surveys, or even time and motion studies, of physician practices. The Pauly and Wedig approach presumes that infor­ mation on the long-run marginal cost and the sensitivity of supply of physician ser­ vices to their price is available for each service or class of services.
The approach developed in this article has much lower data requirements than either the PPRC or Pauly and Wedig methods. In fact, it can be implemented using data sources already employed in the MFS. The lesser data requirements of this method mean that it can be devel­ oped more rapidly and more cheaply than the other methods, and can be validated and updated more easily. The tradeoffs for the lesser data requirements of the method are that resource costs are deter­ mined only at the specialty level, not at a service-specific level, and that prices re­ sulting from the method are not as eco­ nomically efficient as the Pauly and We­ dig approach.
The basic idea of the method is to set practice (and malpractice) expense pay­ ments so that they are the same propor­ tion of total payments as practice ex­ penses are of total practice revenues. The method is resource-based because It uti­ lizes cost data from actual physician prac­ tices, not historical charges, to determine the practice expense RVUs. Practice ex­ penses as a proportion of practice reve­ nues are readily available by specialty from physician surveys conducted by the American Medical Association or the Health Care Financing Administration (HCFA). This Information Is already used in the MFS to calculate the practice ex­ pense percentages (PEPs) for each ser­ vice.
The method proposed here Is similar to the multiplicative model originally devel-
Health Care FlnancJng Review/Spring 1993/volume 14, Numbera

oped by Hsaio and his collaborators to In· corporate practice expenses Into a resource-based fee schedule (Becker, Dunn, and Hsaio, 1988). Within specialty, the Hsaio method allocates practice ex­ penses in proportion to physician work. However, we incorporate elements of other approaches into the basic Hsalo framework. The service-specific PEPs employed in the MFS are used rather than specialty PEPs, so that our fees do not differ by specialty. In addition, a method is suggested for incorporating the office or non-office site-of-service differential advocated by the PPRC using specialty practice cost data only.
The multiplicative approach to allocat· ing practice expenses included in Hsaio's original resource-based relative value scale (RBRVS) was criticized by the PPRC, and discarded in favor of the addl· live approach now utilized. However, it is an empirical question whether the expen­ sive service-specific data collection pur· sued by the PPRC actually yields very dif· ferent fees for most services than the specialty-based multiplicative approach. The fact that two-thirds of practice ex· penses are indirect costs that the PPRC allocates in proportion to physician work and direct costs suggests that the multi· plicative method may be a good approxi· mation to the service-specific method for most services. We begin to answer the question of similarity of fees through slm· ulations of alternative fee schedules. It is also unclear whether the Pauly and Wedig approach would yield very different fees from the specialty-based multiplicative approach. There is some evidence (Pope and Burge, 1993) that relatively little over­ head remains to be allocated when physi· clan services are priced at long-run mar·
Health care Financing Review/Spring 1993/voiume 14, Numt>er 3

ginal cost. If so, the adjustment of fees for supply elasticities may have little impact.
In the remainder of this article we present approaches to allocating practice expenses In the MFS, we describe the proposed resource-based method of allo· eating practice expenses and how It com­ pares with other methods, we describe our simulation methods, we present re­ sults for fees and Medicare Income lm· pacts by specialty, we discuss refine­ ments to the method, in particular an office or non-office site-of-service differ· ential, we identify problems and limita­ tions of the method, and finally we dis­ cuss alternative uses for our method· ology.

METHODS FOR ALLOCATING PRACTICE EXPENSE

OBRA 1989 Method

The method for calculating the practice expense and malpractice RVUs that is currently employed in the MFS was speci· fled by OBRA 1989. The practice expense RVU for service i is:

RVUpe.l = (PEP1)•(AC1),

(1)

where

the practice expense per­ centage for service i, and the allowed charge for ser­ viceiin 1989aged to 1991.

The practice expense percentage is

PEP1

2.1(PEP1)•(PSu),

(2)

where

PEP1

the ratio of mean practice ex­ penses to mean total (gross) practice revenue for spe· cialty j, and

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_ the proportion of seovlce I pro­ vided by specialty j.
For 380 primarily office-based seovices defined by HCFA, a sit&Qf-seovice adjust­ ment Is made. When the place of seovice Is the hospital outpatient department, the practice expense RVUs are reduced by 50 percent.
PPRCMethod
The method PPRC has proposed for al­ locating practice expense relies on three basic concepts: direct costs, indirect costs, and a site-of-seovice differential. Di­ rect costs are costs directly attributable to specific seovices-clinicallabor, medi­ cal equipment and supplies, and a con­ stant billing cost. Indirect costs are over­ head costs that are difficult to assign to specific services-office space and equipment, administrative labor, and mis­ cellaneous.
PPRC has measured direct costs for specific seovices using data from a large multispeclalty clinic (Physician Payment Review Commission, 1992a). Direct cost relative values are calculated based on these data Actual MFS payments are de­ tennined by assuming that 32 percent of total MFS practice expense payments are to cover direct practice expenses. (The es­ timate that 32 percent of physician prac­ tice expenses are for direct costs is based on Medical Economics suovey data [Physician Payment Review Commission, 1992a).) Indirect costs-the remaining 68 percent of MFS practice expense pay­ ments-are allocated to seovlces In pro­ portion to the sum of physician work and direct costs.
Direct costs are assigned only to office seovlces and global surgical seovlces (with the exception of a constant cost of
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billing, which Is allocated to all seovices, and Is considered a direct cost). This cre­ ates a slte-of-seovlce differential-a ser­ vice Is paid at a higher rate when per­ fanned In the office than when pertonned outside the office (such as at a hospital or ambulatory surgery center). The rationale for the sit&Qf-seovlce differential Is that physicians Incur direct costs only when a seovice Is pertonned in their office. If it is pertonned elsewhere, the facility (e.g., hospital) Incurs the direct costs and Is compensated through Medicare's facility payment. Paying the physician direct costs for non-office seovices would there­ fore constitute double payment. The indi­ rect costs of maintaining an office, on the other hand, are incurred by the physician regardless of where seovices are per­ fanned and are therefore assigned pro­ portionately to all seovlces.
Ramsey Pricing
A method of allocating practice ex­ penses derived from the economic theory of Ramsey pricing has been proposed by Pauly and Wedig (1991). This method be­ gins by recognizing that physician fees must be greater than the direct costs of providing seovlces. Price must exceed di­ rect marginal cost because the overhead expenses of running a practice (such as office rent) must be met. It is also as­ sumed that physicians are responsive to financial incentives, and that they face fi­ nancial incentives to oversupply seovlces. Given this situation, the goal of Medicare or other third-party payers should be to al­ locate overhead costs among seovices so as to minimize physician oversupply of seovices.
This goal implies that more of overhead costs should be allocated to seovices
Health cate Financing RevlltW/Spring 1993/Votume 14, Numbef3

whose supply is relatively Insensitive to the price that physicians receive for them. Conversely, less of overhead expenses should be allocated to services where physicians may significantly increase supply in response to a higher price. For example, more overhead costs should be loaded onto non-discretionary services such as setting broken arms, and less onto services such as diagnostic and lab­ oratory tests where "inducement," or oversupply, may be a problem. By setting the price for the latter type of services closer to marginal cost, physicians will have less incentive to oversupply them. Although the basic idea of this method is relatively straightforward, its empirical implementation is not. Accurately esli· mating the long-run marginal cost of ser· vices and the sensitivity of physician sup­ ply of services to price is difficult.

Hsaio Method

As part of their work on the RBRVS, Hsaio and his collaborators proposed a method of accounting for practice ex· penses (Becker, Dunn, and Hsaio, 1988). The formula they proposed for resource­ based relative values (RBRV) was:
RBRV =(TW)(1 + RPC)(1 + AS7), (3)
where

TW - total physician work,

RPC

an index of relative specialty

practice costs, and

AST - an index of amortized value

for the opportunity cost of

specialty training.

The multiplicative term 1 + RPC = PCF
(practice cost factor) accounts for prac·

lice expenses in the original Hsalo

scheme. The practice cost factor, PCF, is

Health Care Financing Review/Spring 1993/Volume 14, Number3

the ratio of gross practice revenue to phy· slclan net income by specialty. The total payment is thus determined by marking up physician work, the analogue of net in· come, to yield the fees, the analogue of gross income. Within a specialty, practice costs are allocated in proportion to the to· tal physician work of a service.
The Hsaio multiplicative approach was criticized by the PPRC on several grounds (Physician Payment Review Commission, 1989). First, under the Hsaio approach to practice expense, fees vary by specialty, which the PPRC saw as contrary to the in­ tent of an RBRVS. Second, because prac­ tice expenses are not measured for each service, some inaccuracy in allocating ex­ penses across individual services occurs. That is, some services performed by a specialty require greater amounts of prac­ tice inputs, such as nurse time and medi­ cal supplies, than others. Third, the method imposes a rigid, proportional rela­ tionship between prac1ice expense and physician work. If the work RVUs change, then so will the practice expense RVUs. Since practice expense is not necessarily directly related to physician work, this proportional relationship between the two may not be desirable. For example, when the work of an overvalued service is reduced, practice expense payments are also reduced. When the work of an under­ valued service is raised, practice expense payments are raised. But actual practice expenses may not have changed.
PROPOSED SPECIALTY RESOURCE· BASED METHOD
The method proposed here starts from the observation that MFS physician fees are composed of two parts: a payment for physician work, and a payment for
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practice expense (including malpractice Insurance). The method assumes that the payment for practice expense should be the same proportion of the total payment as actual physician practice expenses are of total practice revenues. This Is a resource·based method because the practice expense percentage is derived from actual physician practice data on practice expenses as a proportion of total practice revenues. Practice expenses and revenues are calculated practice·wide by specialty, not on a service·specific basis. Thus, the method assumes that the rela­ tionship between physician work and practice expense is uniform for all ser· vices provided by a specialty.
Specifically, the method sets practice expense RVUs so that they are the same proportion of total RVUs as practice ex· penses are of total practice revenues:

RVU~jTRVU; = PEP,

(4)

where

TRVU; =

total relative value units for
service i = RVUw.t + RVU...1,
with RVUw,; denoting the phy· sician work RVU, and RVUpe,t
the practice expense RVU (in·
eluding malpractice) for ser·
vicei.

Equation (4) can be solved for RVU,.,,.

RVU,.,1 = [PEP/(1 - PEP1)]RVUw,;· (5)

Equation (5) states that If, for example, practice expenses account for one·half of physician revenues on average for the specialties performing a service (that is
PEP, = 0.5), then the practice expense
RVUs for that service equal the work RVUs.

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Substituting equation (5) into the ex· pression for total RVUs, we have:

TRVU; PEP1

== [1/(1 - PEP,)]RVUw,t· service fs practice expense

(6) per·

centage, that Is, the percentage

of practice expenses In total rev·

enues for each specialty provld·

ing service i, weighted by the

specialty's frequency of per·

forming service i.

Multiplied by an appropriate conversion factor and geographic adjustment factor, equation (6) gives the Medicare fee for service i under the proposed method. We call equation (6) a specialty resource· based relative value scale because it is
calculated from only RVUw,t and PEP,,
which are both derived from actual physi· cian resource costs by specialty. The per· centage markup over physician work for service /Implied by equation (6) is:

(TRVU, - RVUw,,)IRVUw,; = PEP/(1 - PEP1). (7)
If the practice expense percentage PEP
were the same for all services, equation (6) shows that the method would allocate practice expenses In proportion to physi· cian work. Also, the markup over work would be the same for all services (equa·
lion 7). However, PEP, does vary by ser·
vice, though only according to the mix of specialties performing a service. For ex· ample, fees for services performed by psychiatrists are marked up less over phy· slclan work than fees for services per· formed by general practitioners, because psychiatrists have lower practice ex· penses relative to revenues than do gen· eral practitioners. Within a specialty, though, the method presumes that physi· cian work and practice Inputs are comple-

Health Care Financing ReviewJSpring 1993/votume 14, Numb91'3

mentary; that is, services that require more physician work also require more
practice inputs. In the short run, practice expense per·
centages are necessarily based on hlstor· leal practice cost, Income, and revenue data that will be altered by the implemen· tation of the MFS. The MFS's revaluation of work will also revalue practice ex· penses, which was one of PPRC's criti· cisms of the multiplicative allocation of practice expense. To overcome this limi· tation, each specialty's historical practice expense percentage could be adjusted for the average percentage revaluation of physician work by the MFS. We have not done so in the simulations reported in this article. Eventually, the PEPs can be updated with new, post-MFS physician survey data. In the long run, the PEPs should reflect the realigned relationshiP between physician work (income) and practice expenses as the MFS and other resource-based fee schedules are
adopted. Within specialty, the proposed method
allocates practice expenses in proportion to physician work. An alternative is to allo­ cate In proportion to physician time. Time has the advantages of being more objec­ tive and less subject to physician manipu· lation (Latimer and Becker, 1992). We be­ lieve, however, that practice expenses are likely to be higher for those services char· acterlzed by greater work relative to time. The higher work services are generally procedural, and tend to require more sup­ plies, equipment, and aides. In any case, work and time are highly correlated, so the choice between the two should not have a major influence on simulated tees.
An important addition to the method proposed here is an office or non-office

site-of-service differential, which is dis· cussed in a later section.
Relationship to Hsaio and PPRC Methods
11 the PEP Is redefined from a service· specific to a specialty basis, the method proposed here is equivalent to the prac· lice expense allocation originally pro· posed by Hsaio. To see this, note that
PEP = PE!GR where PE = practice ex· pense, and GR = gross revenue. Then, 11(1-PEP) = GRIN/, where Nl = physician
net income. But GRIN/ = Hsaio's prac·
tice cost factor, PCF (as previously dis· cussed), so the two formulas are equiva·
lent. As noted In an earlier section, the
PPRC criticized Hsaio's original multlpli· catlve approach to allocating practice ex· penses, preferring the additive formula that Is now used In the MFS. However, one of PPRC's criticisms, that payments would vary by specialty, does not apply to the method simulated in this article. we use the service-specific practice expense percentages developed for the MFS to de­ termine tees, rather than the specialty· specific percentages proposed by Hsaio.
Another of PPRC's criticisms of the Hsaio method, that practice expenses are determined only on a specialty basis and not on a service-specific basis, applies to the method used in this article as well. However, the much greater data require· ments and expense of PPRC's service­ specific methodology must be weighed against Its potentially greater accuracy In measuring practice costs. It is an empirl· cal question whether specialty PEPs can provide an adequate approximation to service-specific costs. PPRC considers about two-thirds of practice expense to

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Health Care Financing RavlewiSprlng 1993/volume 14, Number3

be indirect costs. PPRC allocates indirect costs in proportion to the sum of physi­ cian work and direct costs, not unlike what is proposed here. This suggests that the specialty-based multiplicative method and PPRC's method may yield similar results tor many services.

Another Interpretation of the Method

There is another interesting interpreta­ tion of the method of calculating Medi­ care tees proposed in this article. It is the limit of a process in which the historical allowed charge used in the OBRA 1989 calculation of practice expense RVUs is Iteratively replaced by the MFS tee. The current additive formula for determining total RVUs is:

TRVU1 = RVUw_, + RVU...1 = RVUw,l + PEPAAC,), (8)

where

AC1 PEP1

- the historical allowed charge for

=

service/,
the practice

expense

percent·

age including malpractice ex­

pense.

Now replace allowed charges AC1in equa­ tion (8) with total relative value units TR­ VU1 to obtain:

TRVUA1) = RVUw,l + PEPATRVU,). (9)

Repeat, replacing TRVU1 with TRVU1(1) to
obtain TRVUA2).1n the limit L,' TRVU(n) =
TRVU(n -1), implying that
TRVUAL) =[1/(1 - PEP,))RVUw,i· (10)
But this is just equation (6), showing that the limit of replacing the historical al·

1The Iterative process will converge becaJse PEP < 1.
146

lowed charge with the MFS tee is the method proposed in this article.
In fact, a charge-based relative value scale (RVS), the current MFS RVS, and the specialty resource-based RVS pro­ posed In this article are all special cases
of the following formula, where n counts
the Iterations In replacing the historical charge with the MFS tee:
TRVUAn) = (1 - (PEP,) (PEP,)"'+'>AC1, (11)
When n = -1, TRVUA -1) = AC, which is a charge-based RVS. When n = 0,
TRVUAO) = (1- PEP,)TRVUAL) + (PEP1)AC1 = RVUw,l + (PEP1)AC1, which is the cur­
rentMFSRVS(equation[B]).Whenn = oo, TRVUAoo) = TRVUAL), which is the spe­
cialty resource-based method of calculat­ ing fees proposed in this article. As we it­ erate (n Increases), we get closer and closer to a specialty resource-based RVS.
The algebraic results of this section have several Implications. First, they clearly show that the current MFS is an average of a specialty resource-based and a charge-based RVS. By equation (11), the relative value scale underlying the current MFSequals
TRVUAO) = (1 - PEP1)TRVU(L) + PEPAAC1). (12)
This Is an average of the specialty resource-based RVS proposed in this artl· cle, TRVU,(L), and a charge-based RVS, AC1• The weight is the practice expense percentage, PEP,. Note that the greater is PEP,, the closer the MFS approaches a charge-based relative value tor a service. On average, PEP1 (including malpractice expense) equals about 46 percent. Thus, the current MFS is close to a simple (i.e., unweighted) average of a specialty
Health care Financing ReviewiSprtng 1993/votume l4, Nun'lbw3

resource-based and a charge-based fee schedule.
Second, the results of this section show that the additive and multiplicative formulas for calculating Medicare fees are not as unrelated as might be sup­ posed. The additive formula can be trans­ formed Into the multiplicative formula us­ ing the Iterative method proposed here. Third, the Iterative process provides natu­ ral intermediate, or blended, steps be­ tween the current MFS and the specialty resource-based fee schedule. In addition to simulating the specialty resource­ based fee schedule, we simulate the first Iteration of the process that defines it. That is, we simulate replacing the histori­ cal allowed charge with the current MFS fee in computation of the practice ex­ pense relative value units.
SIMULATION METHODS
To determine the Impact of the spe­ cialty resource-based method of calculat­ ing fees, we simulated Its effects on Medicare physician fees and Incomes. We used two standards of comparison: historical allowed charges and the fully­ phased-in MFS. HCFA's public use file (PUF) of physician services provided data for our simulations. Historical 1989 Medi­ care allowed charges "aged" to 1991, as well as historical service volumes, are available on the PUF. Also, the file con­ tains work, practice expense, and mal­ practice RVUs from which we calculated MFS fees. Using historical volumes, ag­
gregate payments under the MFS were re­
duced by 6.5 percent relative to estimated historical expenditures to reflect the 6.5-percent baseline adjustment that HCFA used In computing the MFS.
Health Care Financing Review/Spring 19931volume14, Number3

We calculated aspecialty fully resource­ based fee schedule (SRBFS) according to equation (6). We did not Incorporate mal­ practice costs into practice expenses, but retained malpractice RVUs based on his­ torical charges. Malpractice accounts for only 5 percent of total RVUs and it can easily be incorporated into the SRBFS In future work. Unfortunately, the PEP1 nec­ essary to compute the SRBFS are not on the PUF. We obtained the PEPs by Invert­ ing equation (1) because the PUF does contain practice expense RVUs and his­ torical allowed charges.> Using our esti­ mated PEPs and the work and malprac­ tice RVUs, we calculated the SRBFS.
We also calculated an adjusted MFS (AMFS) by replacing the historical al· lowed charge by the post-transition MFS fee in calculation of the practice expense RVU. This fee is given by equation (9) ex­ cept that malpractice expense is not In­ corporated into the PEP. The formula we used was:
AMFS, =
RVUw,l + RVUm,l + PEP~TRVU,), (13)
where TRVU1 = total RVUs under the MFS for service i. As previously dis­
cussed, the AM FS can be interpreted as the first iteration of a process beginning with the MFS that in the limit produces the SRBFS. We expect Its fees and spe­ cialty income redistributions to be inter­ mediate between the MFS and the SRBFS.
Conversion factors for both the SRBFS and the AMFS were determined to be budget neutral with respect to the fully phased-In MFS. Hence, they incorporate
2This procedure did not produce valid PEPs for all services. De­
tails on the specific edits we made to estimate the PEP when
our baseline method failed are in an appendix available from the authors.
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the MFS's 6.5·percent baseline adjust· ment from historical charges. No addi· tional volume response by physicians or patients was simulated; we made no at· tempt to model how physicians or pa· tients would change quantities in re· sponse to the fee changes in the SRBFS and the AMFS. HCFA's site-of·service modifier for 380 services was incorpo· rated into the SRBFS and AM FS fees.
In sum, four fee schedules were com· puled using data from HCFA's PUF: (1) An historical allowed charge fee schedule; (2) the post·transition MFS; (3) an adjusted MFS where the historical charge is replaced by the MFS fee In cal· culating the practice expense RVU; and (4) the SRBFS, in which practice ex· pense RVUs are the same percentage of total RVUs as physician practice costs are of total practice revenues. The latter three schedules are budget neutral with respect to each other, and 6.5 percent less expensive in aggregate than historl· cal charges assuming no physician or pa· tlent volume response to fee changes. Budget neutrality also assumes that all physicians are paid at the fee schedule amounts: No allowance was made for physicians who charge less than Medi· care allows, and thus receive less than the fee schedule. Geographic adjustments were ignored for all fee schedules: Only national fees and volumes were consld· ered. All fees were updated by the Medl· care update factor of 1.9 percent from 1991 to 1992. Also, all fee schedules are fully implemented (i.e., post·transition).
As a final comparison for fees, we In· eluded preliminary service·speclflc resource·based fees computed by the PPRC according to their method as previ­ ously explained (Physician Payment Re· view Commission, 1992a). The PPRC lists
148

fees for up to five different site-of·servlce adjustments.3 We report their fee for the slte-of·servlce that seems most relevant to the service (e.g., office for office visits and non-office for surgeries). Also, we up· date the 1991 fees they report by 1.9 per­ centto 1992.
SIMULATION RESULTS
Fees Under Alternative Fee Schedules
Table 1 shows 1992 fees for the 100 highest expenditure-< Medicare services under five alternative fee schedules. As is well known, compared with historical al· lowed charges the MFS raises fees for visits and consultations, while cutting fees for surgery and diagnostic tests. The AMFS and SRBFS amplify this change, as does PPRC's service-specific resource· based fee schedule. As expected, the AM FS fee Iies between the MFS fee and the SRBFS fee for (virtually) all services.' For example, an office visit, new patient, code 99203, has a historical allowed charge of $41, a fully implemented MFS fee of $53, an AMFS fee of $59, a SRBFS fee of $64, and a PPRC fee of $65. Con· versely, Medicare allowed $2,145 for a to­ tal hip replacement (procedure code 27130) historically, but the MFS fee is $1,638, the AM FS fee is $1,459, the SRBFS fee Is $1,305, and the PPRC fee is $1,025.
As is evident from these two services, the fee changes are quite large for many services. Percentage Increases or de·
3The five different site-of-seNice adjustments result from PPRC's office or non-office distinction versus HCFA's outpa­
tient department slte-ot-seNice adjustment, which do not to­ tally coincide. 4Based on 1989 volumes and 1989 charges "aged" to 1991.
5Because of the 6.S.percent baseline adjustment, the AMFS fee is not necessarily between the MFS tee and theSRBFS fee for every service.
Health Care Anancing Review/Spring 1993/Volume 14, Number3
MethodMfsServicesPprcCosts