Medicare: Payments to Physicians

Medicare: Payments to Physicians
Updated July 25, 2008
Jennifer O’Sullivan
Specialist in Health Care Financing
Domestic Social Policy Division

Medicare: Payments to Physicians
Summary
Medicare law specifies a formula for calculating the annual update in payments
for physicians’ services. The formula resulted in an actual negative update in
payments per service for 2002. Additional reductions were slated to go into effect
again beginning in 2003; however, congressional action has prevented these
reductions for 2003-2009. Many Members have been concerned about the impact of
potential payment reductions on patients’ access to services.
Medicare payments for services of physicians and certain nonphysician
practitioners are made on the basis of a fee schedule. The fee schedule, in place since
1992, is intended to relate payments for a given service to the actual resources used
in providing that service. Payments under the fee schedule were estimated at $56.4
billion in FY2008 (about 12.5% of total benefit payments, including those made
under the new prescription drug program). The fee schedule assigns relative values
to services that reflect physician work (i.e., the time, skill, and intensity it takes to
provide the service), practice expenses, and malpractice costs. The relative values
are adjusted for geographic variations in costs. The adjusted relative values are then
converted into a dollar payment amount by a conversion factor. The conversion
factor for 2008 is $38.0870, 0.5% above the 2007 level.
The fee schedule places a limit on payment per service but not on the overall
volume of services. The formula for calculating the annual update to the conversion
factor responds to changes in volume. If the overall volume of services increases, the
update is lower; if the overall volume is reduced, the update is higher. The intent of
the formula is to place a restraint on overall increases in Medicare spending for
physicians’ services. Several factors enter into the calculation. These include (1) the
Medicare economic index (MEI), which measures inflation in the inputs needed to
produce physicians’ services; (2) the sustainable growth rate (SGR), which is
essentially a target for Medicare spending growth for physicians’ services; and (3) an
adjustment that modifies the update, which would otherwise be allowed by the MEI,
to bring spending in line with the SGR target. The SGR target is not a limit on
expenditures. Rather, the fee schedule update reflects the success or failure in
meeting the target. If expenditures exceed the target, the update for a future year is
reduced. This is what occurred for 2002. It was also slated to occur in subsequent
years. However, several times legislation has prevented this from occurring — most
recently through 2009.
By law, the conversion factor was slated to be cut 10.6% on July 1, 2008.
However, on July 15, 2008, the Medicare Improvements for Patients and Providers
Act of 2008 (MIPPA) became law (P.L.110-275). This law freezes physician fees
at the June 2008 level until January 2009. In January 2009, the fees will increase by

1.1%. This report will be updated as events warrant.

Contents
Introduction: The Medicare Fee Schedule...............................1
Why the Fee Schedule Was Enacted...............................2
Calculation of the Fee Schedule...................................3
Relative Value............................................3
Geographic Adjustment.....................................3
Conversion Factor.........................................4
Bonus Payments — Services in Any Rural or Urban Health
Professional Shortage Area (HPSA).......................4
Publication of Fee Schedule..................................5
Beneficiary Protections; Participation Agreements....................5
Submission of Claims..........................................7
Refinements in Relative Value Units...............................8
Sustainable Growth Rate (SGR) System................................9
Conversion Factor Calculation...................................9
Update Adjustment Factor......................................10
Recent Experience........................................10
Sustainable Growth Rate (SGR).................................11
Major Changes in Update Calculation.............................12
Recent Updates..........................................12
Other Considerations......................................13
Criticisms of Current System....................................14
Suggested Modifications.......................................14
Medicare Payment Advisory Commission (MedPAC)............15
Government Accountability Office (GAO).....................16
Congressional Budget Office (CBO)..........................16
House-Passed Children’s Health and Medicare Protection Act of
2007 (CHAMP, H.R. 3162).............................16
Recent Actions...............................................17
Evidence-Based Medicine; TRHCA..........................17
Other Issues.....................................................18
2007 and 2008 Fee Schedules...................................18
Imaging Services.............................................19
Impact of Spending Increases on Part B Premiums...................19
Access to Care...............................................20
Access .................................................20
Physician Supply.........................................20
Physicians’ Willingness to See New Beneficiaries...............20
GAO Study..............................................21
Future Prospects..........................................21
Geographic Variation in Payments...............................21
Medicare Versus Private Payment Rates...........................23
Payments for Oncology Services.................................23
Concierge Care...............................................24
Recent Legislation................................................25

Legislation in the First Session of the 110^th Congress.................25
Children’s Health and Medicare Protection Act of 2007 (CHAMP,
H.R. 3162), as Passed by the House......................26
Legislation in the Second Session of the 110^th Congress: MIPPA.......26
Appendix A. Calculation of the Physician Fee Schedule Update............30
Calculation of the Physician Fee Schedule.........................30
General Formula.........................................30
2008 Calculation.........................................30
Calculation of the Update to the Conversion Factor (CF)..............30
General Formula.........................................30
2008 Calculation.........................................31
Calculation of the Update Adjustment Factor (UAF).................31
Appendix B. MMA, DRA, TRCHA, and MMSEA Provisions Relating
to Physicians................................................32
MMA ......................................................32
DRA .......................................................33
TRHCA ....................................................33
MMSEA ...................................................34
Appendix C. Geographic Adjustments to the Physician Fee Schedule.......35
Legislative Background........................................35
Calculation ..................................................37
Work Component.........................................37
Practice Expense Component...............................38
Malpractice component....................................38
Appendix D. Development of Practice Expense Payment Methodology......39
Practice Expenses.............................................39
Background .............................................39
BBA 97................................................39
Subsequent Modifications..................................40
2007 Fee Schedule........................................40
Appendix E. Private Contracting Rules...............................42
How Private Contracting Works.................................42
Issues ......................................................44
List of Tables
Table 1. Medicare and Physicians.....................................7
Table 2. Annual and Cumulative Allowed and Actual Expenditures for
Physicians Services, 2007......................................10
Table 3. SGR Calculations..........................................11
Table 4. Conversion Factors, 2000-2008..............................13

Medicare: Payments to Physicians
Introduction: The Medicare Fee Schedule
Medicare is a nationwide program which offers health insurance protection for
43 million aged and disabled persons. Currently, 80% of beneficiaries obtain
covered services through the “original Medicare” program (also referred to as “fee-
for-service Medicare”). Under this program, beneficiaries obtain services through
providers of their choice, and Medicare makes payments for each service rendered
(i.e., fee-for-service) or for each episode of care. Approximately 20% of
beneficiaries are enrolled in managed care organizations, under the Medicare
Advantage program. These entities assume the risk for providing all covered services
in return for a fixed monthly per capita payment.
Medicare law and regulations contain very detailed rules governing payments
to physicians and other providers under the fee-for-service system. Payments for
physicians’ services under fee-for-service Medicare are made on the basis of a fee
schedule. The fee schedule also applies to services provided by certain nonphysician
practitioners such as physician assistants and nurse practitioners as well as the limited
number of Medicare-covered services provided by limited licensed practitioners
(chiropractors, podiatrists, and optometrists). Payments under the fee schedule are¹
estimated at $56.4 billion in FY2008 (12.5% of total Medicare benefits.)
The law specifies a formula for the annual update to the physician fee schedule.
Part of this update is based on whether spending in a prior year has exceeded or fallen
below a spending target. The target (calculated using the sustainable growth rate
(SGR)) is essentially a cumulative target for Medicare spending growth over time.
If spending is in excess of the target, the update for a future year is reduced; the goal
is to bring spending back in line with the target. Application of the update formula
would have led to a negative update for each year beginning in 2002. The update for
2002 was a negative 5.4%. However, Congress overrode the application of the
formula for 2003, 2004, and 2005; each of these years saw a slight increase. The
Deficit Reduction Act of 2005 (DRA, P.L. 109-171, enacted February 8, 2006) froze
the 2006 conversion factor at the 2005 level. The Tax Relief and Health Care Act
of 2006 (TRHCA, P.L. 109-432, enacted December 20, 2006) froze the 2007
conversion factor at the same level for an additional year. Further, for the six-month
period beginning July 1, 2007, physicians who voluntarily reported certain quality
measures could receive bonus payments of 1.5%. The Medicare, Medicaid, and

¹ Congressional Budget Office, March 2008 baseline. Note that these figures do not include
spending by managed care plans for physicians’ services; such plans are paid on a capitated
basis for all services provided to Medicare beneficiaries. The physician spending figure
reflects the statutory reduction in the conversion factor beginning July 1, 2008, as discussed
in subsequent sections of this report.

SCHIP Extension Act of 2007 (MMSEA, P.L. 110-173, enacted December 29,

2007) provided for a 0.5% increase for the six-month period beginning January 1,

2008. It also extended the quality reporting program though 2009.

By law, the conversion factor was slated to be cut 10.6% on July 1, 2008.
However, on July 15, 2008, the Medicare Improvements for Patients and Providers
Act of 2008 (MIPPA) became law (P.L.110-275). This law freezes physician fees
at the June 2008 level until January 2009. In January 2009, the fees will increase by

1.1%. In 2010, fees will revert back to current law levels, resulting in a 21%

reduction to Medicare physician fee levels, according to CBO.²
On June 27, 2008, prior to passage of MIPPA, the Centers for Medicare and
Medicaid Services (CMS) announced plans to instruct its contractors not to process
any physician and non-physician practitioner claims for the first 10 business days of
July. According to existing law, electronic claims are not to be paid any sooner than
14 days (29 days for paper claims) and not later than the 30^th day they are submitted
(otherwise, CMS must pay interest on those claims). CMS stated that by holding
claims for services that were delivered on or after July 1, it would not be making any
payments on the 10.6% reduction until July 15, at the earliest. It was hoped that prior
to that date, Congress would be able to take final action on a measure addressing the
physician payment issue. On July 18, 2008, after enactment of MIPPA, CMS
notified payment contractors that the fee levels should be corrected within 10
business days; any claims processed at the lower levels would automatically be
reprocessed. CMS also notified physicians and other practitioners that they can
waive retroactive higher beneficiary cost-sharing amounts that would have applied
if the claims had been processed at the higher payment levels.
MIPPA also extends the quality reporting program through 2010, establishes a
physician feedback program to provide confidential reports to physicians, and
establishes incentives for electronic prescribing in the Medicare program.³
Why the Fee Schedule Was Enacted
The fee schedule, established by the Omnibus Budget Reconciliation Act of
1989 (OBRA 1989, P.L. 101-239), went into effect January 1, 1992. The physician
fee schedule replaced the reasonable charge payment method which, with minor
changes, had been in place since the implementation of Medicare in 1966. Observers
of the reasonable charge system cited a number of concerns including the rapid rise
in program payments and the fact that payments frequently did not reflect the
resources used. They noted the wide variations in fees by geographic region; they
also noted that physicians in different specialties could receive different payments for
the same service. The reasonable charge system was also criticized for the fact that
while a high price might initially be justified for a new procedure, prices did not

² The CBO cost estimate is available at [http://www.cbo.gov/ftpdocs/95xx/doc9595/hr6331
pgo.pdf].
³ For a summary of MIPPA, see CRS Report RL34592, P.L. 110-275: The Medicare
Improvements for Patients and Providers Act of 2008, by Hinda Chaikind et al.

decline over time even when the procedure became part of the usual pattern of care.
Further, it was suggested that differentials between recognized charges for physicians
visits and other primary care services versus those for procedural and other technical
services were in excess of those justified by the overall resources used.
The fee schedule was intended to respond to these concerns by beginning to
relate payments for a given service to the actual resources used in providing that
service. The design of the fee schedule reflected many of the recommendations made
by the Physician Payment Review Commission (PPRC), a congressionally
established advisory body. The PPRC was replaced by the Medicare Payment
Advisory Commission (MedPAC) on September 30, 1997; it is responsible for
advising the Congress on the full range of Medicare payment issues.
Calculation of the Fee Schedule
The fee schedule has three components: the relative value for the service; a
geographic adjustment, and a national dollar conversion factor.
Relative Value. The relative value for a service compares the relative
physician work involved in performing one service with the work involved in
providing other physicians’ services. It also reflects average practice expenses and
malpractice expenses associated with the particular service. Each of the
approximately 7,500 physician service codes is assigned its own relative value. The
scale used to compare the value of one service with another is known as a resource-
based relative value scale (RBRVS).
The relative value for each service is the sum of three components:
^!Physician work component, which measures physician time, skill,
and intensity in providing a service;
^!Practice expense component, which measures average practice
expenses such as office rents and employee wages (which, for
certain services can vary depending on whether the service is
performed in a facility, such as an ambulatory surgical facility, or in
a non-facility setting⁴); and
^!Malpractice expense component, which reflects average insurance
costs.
Geographic Adjustment. The geographic adjustment is designed to account
for variations in the costs of practicing medicine. A separate geographic practice cost
index (GPCI) adjustment is made to each of the three components of the relative
value unit, namely a work adjustment, a practice expense adjustment, and a

⁴ The lower facility-based payment reflects the fact that the facility itself receives a separate
payment for its costs of providing the service, while the non-facility-based payment to the
physician encompasses all practice costs.

malpractice adjustment.⁵ These are added together to produce an indexed relative
value unit for the service for the locality.⁶ There are 89 service localities nationwide.
Conversion Factor. The conversion factor is a dollar figure that converts the
geographically adjusted relative value for a service into a dollar payment amount.
The conversion factor is updated each year.⁷
The conversion factor for 2008 is $38.0870. Thus, the payment for a service⁸
with an adjusted relative value of 2.3 is $87.60. Anesthesiologists are paid under a
separate fee schedule, which uses base and time units; a separate conversion factor
($17.8482 for 2008) applies.
Bonus Payments — Services in Any Rural or Urban Health
Professional Shortage Area (HPSA). Physicians who provide covered services
in any rural or urban HPSA are entitled to an incentive payment. This is a 10%
bonus over the amount which would otherwise be paid under the fee schedule. The

⁵ The law requires the publication of a Geographic Adjustment Factor (GAF) for each
payment locality. The GAF is not actually used in the payment formula. It does, however,
present the weighted average impact for the locality of the three locality GPCIs (namely
work GPCI, practice expense GPCI, and malpractice expense GPCI). The geographic
adjustments are indexes that reflect cost differences among areas compared to the national
average in a “market basket” of goods. The work adjustment is based on a sample of median
hourly earnings of workers in six professional specialty occupation categories. The practice
expense adjustment is based on employee wages, office rents, medical equipment and
supplies, and other miscellaneous expenses. The malpractice adjustment reflects
malpractice insurance costs. The law specifies that the practice expense and malpractice
indices reflect the full relative differences. However, the work index must reflect only
one-quarter of the difference. Using only one-quarter of the difference generally means that
rural and small urban areas receive higher payments and large urban areas lower payments
than if the full difference were used. A value of 1.00 represents an average across all areas.
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA, P.L.
108-173) placed a floor of 1.00 on the work adjustment for the 2004-2006 period; the Tax
Relief and Health Care Act of 2006 (P.L. 109-432) extended the provision through 2007.
MMSEA extended the provision through June 2008. MIPPA extends it through 2009. Areas
that would otherwise have a value below 1.0 (primarily rural areas) receive higher payments
over the period.
⁶ For a detailed description of how the geographic adjustments are calculated, see Appendix
B.
⁷ Initially there was one conversion factor. By 1997, there were three factors: one for
surgical services; one for primary care services; and one for all other services. The
Balanced Budget Act of 1997 (BBA 97, P.L. 105-33) provided for the use of a single
conversion factor beginning in 1998.
⁸ The law requires that changes to the relative value units under the fee schedule can not
cause expenditures to increase or decrease by more than $20 million from the amount of
expenditures that would have otherwise been made. This “budget neutrality” requirement
was implemented through an adjustment to the conversion factor. However, beginning in
2007, it has been implemented through an adjustment to work relative values. MIPPA
requires that it again be implemented through the conversion factor beginning in 2009. (See
Appendix A.)

bonus is paid only if the services are actually provided in the HPSA, as designated
under the Public Health Service Act. The Medicare Prescription Drug, Improvement,
and Modernization Act of 2003 (MMA) required the Secretary to pay automatically
the bonus for services furnished in full county primary care geographic area HPSAs
rather than having the physician identify that the services were furnished in such
area.⁹
Quality Reporting. TRHCA provided that, for the six-month period
beginning July 1, 2007, physicians who voluntarily reported certain quality measures
could receive a bonus payment of 1.5%; a single consolidated payment would be
made in 2008. MMSEA extended the bonus payments for quality reporting occurring
in 2008 with the payment for 2008 to be made in 2009. MIPPA extends the quality
reporting provision through 2010.
Publication of Fee Schedule. Medicare is administered by the Centers for
Medicare and Medicaid Services (CMS). Each fall, CMS publishes in the Federal
Register the relative values and conversion factor that will apply for the following
calendar year. Updates to the geographic adjustment are published at least every
three years.
The final fee schedule for 2008 was announced November 1, 2007, and
published in the Federal Register on November 27, 2007.¹⁰ With the exception of
the conversion factor, which was subsequently modified by MMSEA (and later,
MIPPA), other changes incorporated in the regulation remain in place for 2008. This
includes changes in relative values and the continued phase-in of a new methodology
for calculating practice expenses.
Beneficiary Protections; Participation Agreements
Medicare pays 80% of the fee schedule amount for physicians’ services after
beneficiaries have met the annual Part B deductible ($135 in 2008). Beneficiaries are
responsible for the remaining 20%, known as coinsurance. A physician may choose
whether to accept assignment on a claim.¹¹ In the case of an assigned claim,
Medicare pays the physician 80% of the approved amount. The physician can only
bill the beneficiary the 20% coinsurance plus any unmet deductible.
When a physician agrees to accept assignment on all Medicare claims in a given
year, the physician is referred to as a participating physician. Physicians who do

⁹ MMA provided for an additional 5% in payments for certain physicians in scarcity areas
for the period January 1, 2005, through December 31, 2007. MMSEA extended the
provision through June 30, 2008. The provision no longer applies.
¹⁰ U.S. Department of Health and Human Services, Centers for Medicare and Medicaid
Services, Medicare Program; Revision to Payment Policies Under the Physician Fee
Schedule, etc; Final Rule, 72 Federal Register 66222, November 27, 2007.
¹¹ Nonphysician practitioners (such as nurse practitioners and physician assistants) paid
under the fee schedule are required to accept assignment on all claims. These practitioners
are different from limited licensed practitioners (such as podiatrists and chiropractors), who
have the option of whether or not to accept assignment.

not agree to accept assignment on all Medicare claims in a given year are referred to
as nonparticipating physicians. It should be noted that the term “nonparticipating
physician” does not mean that the physician doesn’t deal with Medicare.
Nonparticipating physicians can still treat Medicare patients and receive Medicare
payments for providing covered services.
There are a number of incentives for physicians to participate, chief of which
is that the fee schedule payment amount for nonparticipating physicians is only 95%
of the recognized amount for participating physicians, regardless of whether they
accept assignment for the particular service or not. Generally, physicians are required
to make any changes in their participation status prior to the beginning of the
calendar year.
Nonparticipating physicians may charge beneficiaries more than the fee
schedule amount on nonassigned claims; these balance billing charges are subject
to certain limits. The limit is 115% of the fee schedule amount for nonparticipating
physicians (which is only 9.25% higher than the amount recognized for participating
physicians, i.e., 115% x .95 = 1.0925). (See Table 1.)
In 2007, 93.3% of physicians (and limited licensed practitioners) billing
Medicare were participating physicians. Approximately 99.4% of Medicare-allowed¹²

charges for physicians’ services were assigned in 2006.
¹² MedPAC, Medicare Payment Policy, Report to the Congress, March 2008. (Hereafter
cited as MedPAC, March 2008.)

Table 1. Medicare and Physicians
Type of physicianMedicare paysBeneficiary paysBalance billing
and claimcharges
Participating
physician — Must
take ALL claims on80% of fee20% of fee schedule
assignment during theschedule amountamount (plus anyNone permitted
calendar year. (Signsunmet deductible)
a participation
agreement)
Nonparticipating physician — May take or not take assignment on a claim-by-claim
basis
80% of fee
schedule amount20% of fee schedule
(A) Takes(recognized feeschedule amount =amount recognized
assignment on a95% of recognizedfor nonparticipatingNone permitted
claimamount forphysicians (plus any
participatingunmet deductible)
physicians)
Total bill cannot
80% of fee(a) 20% of feeexceed 115% of
schedule amountschedule amountrecognized fee
(B) Does not take(recognized feeschedule amount =recognized fornonparticipatingschedule amount(actually 109.25%
assignment on a95% of recognizedphysicians (plus anyof amount
claimamount forunmet deductible);recognized for
participatingplus (b) any balanceparticipating
physicians)billing charges.physicians, i.e.,

115% x 95%)

Submission of Claims
Physicians and practitioners are required to submit all claims for covered
services to Medicare carriers. These claims must be submitted within one year of the
service date. An exception is permitted if a beneficiary requests that the claim not
be submitted. This situation is most likely to occur when a beneficiary does not want
to disclose sensitive information (for example, treatment for mental illness or AIDS).
In these cases, the physician may not bill more than the limiting charge. The
beneficiary is fully liable for the bill. If the beneficiary subsequently requests that the
claim be submitted to Medicare, the physician must comply. Such exceptions should
occur in only a very limited number of cases.

A physician or practitioner may furnish a service that Medicare may cover under
some circumstances but which the physician or practitioner anticipates would not be
covered in the particular case (for example, multiple nursing home visits). In this
case, the physician or practitioner should give the beneficiary an “Advance
Beneficiary Notice” (ABN) that the service may not be covered. If the claim is
subsequently denied by Medicare, there are no limits on what may be charged for the
service. If, however, the physician or practitioner does not give the beneficiary an
ABN, and the claim is denied because the service does not meet coverage criteria, the
physician cannot bill the patient.
There is another condition under which physicians and practitioners do not
submit claims for services which would otherwise be covered by Medicare. This
occurs if the physician or practitioner is under a private contacting arrangement (see
discussion under Appendix E). In this case, physicians are precluded from billing
Medicare or receiving any payment from Medicare for two years.
Refinements in Relative Value Units
On average, the work component represents 52.5% of a service’s relative value,
the practice expense component represents 43.6%, and the malpractice component
represents 3.9%.¹³ The law provides for refinements in relative value units.
The work relative value units incorporated in the initial fee schedule were
developed after extensive input from the physician community. Refinements in
existing values and establishment of values for new services have been included in
the annual fee schedule updates. This refinement and update process is based in part
on recommendations made by the American Medical Association’s Specialty Society
Relative Value Update Committee (RUC) which receives input from 100 specialty
societies. The law requires a review every five years. The 1997 fee schedule update
reflected the results of the first five-year review. The 2002 fee schedule reflected the
results of the second five-year review. The 2007 fee schedule reflected the results
of the third five-year review.
While the calculation of work relative value units has always been based on
resources used in providing a service, the values for the practice expense components
and malpractice expense components were initially based on historical charges. The
Social Security Amendments of 1994 (P.L. 103-432) required the Secretary to
develop a methodology for a resource-based system for practice expenses which
would be implemented in 1998. Subsequently, the Secretary developed a system.
The Balanced Budget Act of 1997 (BBA 97, P.L. 105-33) delayed its
implementation. It provided for a limited adjustment in practice expense values for
certain services in 1998. It further provided for implementation of a new resource-
based methodology to be phased-in beginning in 1999. The system was fully phased
in by 2002. The 2007 fee schedule adopted a new methodology for determining
practice expenses; this change is being phased-in over four years. (See Appendix
D.)

¹³ MedPAC, March 2008.

BBA 97 also directed CMS to develop and implement a resource-based
methodology for the malpractice expense component. CMS developed the
methodology based on malpractice premium data. Malpractice premiums were used
because they represent actual expenses to physicians and are widely available. The
system was incorporated into the fee schedule beginning in 2000.
Sustainable Growth Rate (SGR) System
The conversion factor is a dollar figure that is the same for all services. It is
updated each year according to a complicated formula specified in law. Application
of the formula would have resulted in a reduction in the conversion factor for several
years. Most recently, Congress overrode the formula through 2009. However, the
statutory formula remains in place.
The final physician fee schedule for 2008 (issued before enactment of MMSEA)
shows how the update calculation was to be made for 2008. The following discussion
provides an overview of this calculation. (For more detail, see Appendix A.)
The statutory formula is based on the sustainable growth rate (SGR) system.
The SGR system was established because of the concern that the fee schedule itself
would not adequately constrain overall increases in spending for physicians’ services.
While the fee schedule specifies a limit on payments per service, it does not place a
limit on the volume or mix of services. The use of the SGR is intended to serve as
a restraint on aggregate spending. The SGR targets are not limits on expenditures.
Rather the SGR represents a glide path for desired cumulative spending from April
1996 forward. The fee schedule update reflects the success or failure in meeting the
goal. If spending over the period is above the cumulative spending target for the
period, the update for a future year is reduced. If expenditures are less than the
target, the update is increased.
Conversion Factor Calculation
The annual update to the conversion factor calculation is based on the following
measures:
^!Medicare Economic Index (MEI) — measures the weighted average
annual price changes in the inputs needed to produce services.
^!Update Adjustment Factor — used to make actual expenditures and
target (allowed ) expenditures equal.
^!Allowed expenditures = actual expenditures updated by the SGR.
Under the formula, if expenditures are in line with the target, the update equals
the MEI. That is, payments would increase for all services at a rate equal to the
changes in input prices. However, in recent years, expenditures have been
significantly above the target; therefore, using the defined statutory update would
have resulted in an update below the MEI. The higher expenditures reflect a number

of factors, chief of which is that volume and intensity of services are growing at a
rate much faster than allowed under the formula.
Update Adjustment Factor
The update adjustment sets the conversion factor at a level so that projected
spending for the year will meet allowed spending by the end of the year. Allowed
spending for the year is calculated using the SGR. The adjustment factor is the sum
of (1) the prior year adjustment component; and (2) the cumulative adjustment
component. Use of both the prior year adjustment component and the cumulative
adjustment component allows any deviation between cumulative actual expenditures
and cumulative allowed expenditures to be corrected over several years rather than
a single year.
In no case can the adjustment factor be less than minus 7% or more than plus
3%. Thus, despite calculations which would have led to larger reductions, the UAF
adjustment has been minus 7% for the last several years.
Recent Experience. Table 2 shows the annual and cumulative allowed
expenditures for calendar year 2007. These are the expenditures that, in the absence
of MMSEA, would have been used to calculate the update for 2008 (see Appendix
A). As can be seen from the table, there is a significant difference between the
targets and actual spending, both in cumulative spending and annual spending.
Under the formula, the UAF would have been minus 26.7% for 2008; however, the
formula limited the reduction to minus 7%.
The caps on the adjustment limit the annual reduction or increase. This means
that the gap between cumulative actual spending and cumulative allowed spending
grows larger each year. This effect is further magnified by the fact that when
Congress has overridden the reduction, it has not raised the targets.
Table 2. Annual and Cumulative Allowed and Actual
Expenditures for Physicians Services, 2007
(in billions)
Annual allowed expenditures$83.9
Annual actual expenditures94.6
Cumulative allowed expenditures776.6
Cumulative actual expenditures828.8
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Sustainable Growth Rate (SGR)
The SGR sets both the cumulative and allowed expenditures under the UAF
formula. The SGR is based on the best data available in September of each year. It
is estimated and revised twice, with appropriate changes made to allowable
expenditures. The November 2007 rule included the preliminary 2008 SGR, a
revised 2007 SGR, and the final revision to the 2006 SGR.
The SGR is the product of
^!estimated percentage changes in physicians fees,
^!estimated percentage changes in the number of fee-for-service
beneficiaries,
^!estimated percentage growth in real gross domestic product (GDP)
per capita (10-year moving average), and
^!estimated percentage changes resulting from changes in laws and
regulations.
Table 3 shows the SGR calculations as announced in the November 2007 fee
schedule regulation.
Table 3. SGR Calculations
FactorsPreliminary 2008Revised 2007Final 2006
Fees1.9% (1.019)1.9% (1.019)2.1% (1.021)
Fee-For-Service
Enrollment-0.7% (0.993)-2.6% (0.974)-2.6% (0.974)
Real Per Capita
GDP1.7% (1.017)1.9% (1.019)2.1% (1.021)
Law and
Regulations-2.9% (0.971)2.0% (1.020)0.0% (1.000)
Total-0.1% (0.999)3.2% (1.032)1.5% (1.015)
^So^ur^c^e^:^{U.S. Dep}^a^rtm^eⁿ^t^o^f^Health^an^d^Hu^m^aⁿ^Serv^ices^{, C}^eⁿ^t^ers^f^o^{r Medicare an}^{d Medicaid}
^Serv^ices^,^M^e^di^car^e^Pr^ogr^am^{; Revi}^sⁱ^{on t}^o^Paym^ent^Polⁱ^cⁱ^e^s^U^nder^t^h^{e Phys}ⁱ^cⁱ^an^Fee^Schedul^{e, et}^c^;
^Fin^a^{l Ru}^{le, 7}²^Feder^a^{l Regis}^t^er^{66379, N}^o^v^e^m^b^{er 27, 2007.}
^No^te:^Facto^r^{s (}ⁿ^u^m^b^e^r^sⁱⁿ^p^a^r^eⁿ^t^h^e^ses)^ar^{e m}^u^ltip^lied^to^p^r^o^d^u^{ce to}^{tals; t}^o^t^a^l^s^m^a^yⁿ^o^{t ad}^d^d^u^{e to}
^r^o^undⁱ^ng.
Table 3 highlights a couple of items. First, the move from fee-for-service
enrollment to managed care enrollment results in a slightly lower SGR. Second, the
GDP is a measure of growth in the overall economy. The GDP measure was
selected, based on budgetary considerations, namely the underlying idea that
sustainable growth should be equivalent to growth in the economy.

Major Changes in Update Calculation
When the fee schedule was first implemented in 1992, the Medicare Volume
Performance Standard (MVPS) served as the expenditure target mechanism. Under
the MVPS, there was no cumulative goal. Rather, an annual target for physicians
services was established. Further, two and then three conversion factors were used
(surgical, primary care, and other nonsurgical). The Balanced Budget Act of 1997
(BBA97, P.L. 105-33) replaced the MVPS with the SGR. The key difference
between the MVPS and the SGR system is that the SGR system looks at cumulative
spending since April 1, 1996; this was intended to eliminate some of the year-to-year
fluctuations. However, the estimated $828.8 billion in actual spending from April
1, 1996, through December 31, 2007, far exceeds the cumulative $776.6 billion in
allowed expenditures over the period. Under the current system, it would be very
difficult to bring spending in below the cumulative target.
BBA 97 also incorporated the GDP into the SGR calculation and provided for
the use of a single conversion factor instead of three. The Balanced Budget
Refinement Act of 1999 (BBRA 99, P.L. 106-113) incorporated an adjustment for
the prior year into the UAF update calculation; it also moved from a fiscal year to a
calendar year system.
Recent Updates. The following outlines the update calculations, beginning
in 2002.¹⁴
^!2002 Update. The formula reduction of 5.4% went into effect.
^!2003 Update. The December 2002 fee schedule regulation would
have set the 2003 update at a negative 4.4%. Subsequently,
Congress enacted the Consolidated Appropriations Resolution of
2003 (CAR), which included provisions allowing some technical
recalculations. As a result of the CAR provision, the update for

2003 was 1.6%. It was effective March 1, 2003.

^!2004 Update. The November fee schedule regulation set the update
at minus 4.5%. However, MMA set the minimum update at 1.5% for

2004 and 2005.

^!2005 Update. The MMA provision applied with the update set at
1.5%. In the absence of the MMA provision the update would have
been minus 3.3%.
^!2006 Update. The fee schedule regulation set the update at minus

4.4%. However, the Deficit Reduction Act (DRA, P.L. 109-171)

froze the conversion factor at the 2005 level.
^!2007 Update. The 2007 update would have been minus 5%.
However, TRHCA froze the conversion factor for an additional year.
In addition, a physician who voluntarily reported on certain quality
measures for the period July 1, 2007-December 31, 2007, is eligible
for a bonus payment of 1.5% in 2008.

¹⁴ Note that in certain cases the announced conversion factor reduction reflected both the
negative update as well as some other adjustments.

^!January-June 2008 Update. The 2008 update would have been
minus 10.1%. However, MMSEA provided for a 0.5% increase for
January-June 2008. It further provided that a physician who
voluntarily reports on certain quality measures during 2008 is
eligible for a bonus payment of 1.5% in 2009.
^!July-December 2008 Update. On July 1, 2008, the conversion factor
was slated to revert to the level that would have otherwise applied
on January 1, 2008, except for the enactment of MMSEA (namely
a 10.1% reduction from the 2007 level and a 10.6% reduction from
the June 2008 level). MIPPA keeps the July-December 2008
conversion factor at the June 2008 level.
^!2009 Update. MIPPA specifies that the update for 2009 is 1.1%.
Table 4 shows the recent conversion factors.
Table 4. Conversion Factors, 2000-2008
2000$36.6137
200138.2581
200236.1992
2003^a 36.7856
200437.3374
200537.8975
200637.8975
200737.8975
200838.0870
Sources: CMS, Annual Fee Schedule Updates.
^{a. Ef}^f^ectⁱ^v^{e March}^{1, 2003}.
MMA set a floor on the work geographic adjustment level at 1.0 for 2004-2006,
thereby slightly increasing the payment amounts in some areas. TRHCA extended the
provision through 2007; MMSEA extended it through June 30, 2008. MIPPA
extends it through December 2009. In addition, beginning January 1,2009, it raises
the work geographic adjustment in Alaska to 1.5 if the index would otherwise be less
than 1.5
Other Considerations. Several other significant changes incorporated in the

2008 fee schedule regulation have an impact on individual physician payments.

These include any changes in work relative values, the second year of a four-year
phase-in of a revised methodology for calculating practice expenses, and DRA
mandated changes for payments for imaging services. The net impact of these
changes for an individual physician vary by the types and mix of services provided.

Criticisms of Current System
Most observers state that the SGR should either be revised or replaced. They
note that in the absence of legislation, negative updates will occur for the foreseeable
future. This reflects the fact that volume and intensity are growing at more than
double the rate allowed under the SGR system.¹⁵ Further, while legislation has
averted recent cuts, the targets have not been raised accordingly.
Many observers contend that the current SGR system has additional flaws. They
note that the target is a nationwide aggregate. Thus there is no direct link between
individual physician behavior and the targets. An individual physician who reduces
volume does not see a proportional increase in payments. A related concern is that
there is no distinction between appropriate volume increases and inappropriate
volume increases. Another concern is that the targets may not adequately reflect
scientific and technological innovations or site-of-service shifts.
Some persons state that actual increases in practice costs are in excess of those
allowed under the system. Other observers suggest that the impact of legislative and
regulatory changes may not be fully reflected in the SGR calculation. In addition,
some persons have stated that Part B drug spending should be excluded from the
calculation. However, CMS has consistently stated that it cannot make this change
retrospectively without legislation and that, even if it could, it would not yield a
positive update for the next several years.
A number of observers have expressed concerns regarding the implications of
continuing to use the current system. They state that over time, physicians may be
unable to absorb cuts if their marginal costs exceed the updates. They may respond
by refusing to see all Medicare patients or new Medicare patients. Quality of care
and patient access may be adversely affected. However, some suggest that physicians
might respond by becoming more efficient. There is also the concern that patients
may be forced to seek care in more costly settings.
Suggested Modifications
While there is general agreement that the SGR system needs to be replaced or
modified, a consensus has not developed on a long-term solution. Part of the
problem is that any permanent change is very costly. This reflects the fact that the
Congressional Budget Office (CBO) baseline (based on current law requirements)
assumes a reduction in the conversion factor will occur for the next several years.
Further, TRHCA specified that the override of the statutory formula was to be treated
as if it did not occur. Therefore, the starting base for the 2008 calculation was 5%
below the actual 2007 conversion factor. MMSEA overrode the reduction for the first
six months of 2008 and provided for a 0.5% increase for that period. However, the
legislation again specified that override of the statutory formula is to be treated as if

¹⁵ U.S. Government Accountability Office (GAO), Medicare Physician Payments: Trends
in Utilization, Spending and Fees Prompt Consideration of Alternative Payment
Approaches, testimony of Bruce Steinwald before House Energy and Commerce Committee,
July 25, 2006.

it did not occur. MIPPA again specifies that the override of the statutory formula is
to be treated as if it did not occur. As previously noted, CBO estimates that the
statutory formula will result in a reduction in the conversion factor of 21% in 2010.
In addition to its impact on federal outlays, any change in the update formula
will also have implications for beneficiaries. Because beneficiary premiums equal
25% of program costs, any overall increase in spending results in a proportional
increase in premiums.
Suggested modifications have ranged from modifying the current formula to
replacing the formula and linking updates to payment adequacy and/or quality
measures. While a change in the formula would require legislation, some observers
have suggested that there are things CMS could do administratively to ease the
impact of the current formula. Proponents argue that these changes, such as
removing Part B drugs from the calculation, could somewhat moderate the negative
updates that are predicted.
The following outlines recent alternatives to the current SGR calculation that
have been presented by the Medicare Payment Advisory Commission (MedPAC), the
Government Accountability Office (GAO) and CBO. Also noted are proposed
modifications contained in the House-passed Children’s Health and Medicare
Protection Act of 2007 (CHAMP, H.R. 3162).
Medicare Payment Advisory Commission (MedPAC). For several
years, MedPAC has recommended repealing the SGR system. It has recommended
updating payments for physicians’ services based on the estimated change in input
prices for the coming year less an adjustment for savings attributable to increased
productivity. Specifically, input prices would be measured using the MEI (without
regard to the CMS adjustment for productivity increases). The recommended
productivity adjustment would be that used across all provider services.¹⁶
DRA required MedPAC to submit a report to Congress on mechanisms that
could be used to replace the sustainable growth rate system. The report, issued
March 1, 2007, did not recommend one specific course of action but rather outlined
two broad approaches as follows:
The Congress, then, must decide between two paths. One path would repeal the
SGR and not replace it with a new expenditure target. Instead, the Congress
would accelerate development and adoption of approaches for improving
incentives for physicians and other providers to furnish higher quality care at a
lower cost. If it pursues this path, the Congress would need to make explicit
decisions about how to update physician payments. Alternatively, the Congress
could replace the SGR with a new expenditure target system. A new expenditure
target would not reduce the need, however, for a major investment in payment
reform. Regardless of the path chosen, Medicare should develop measures of
practice styles and report the information to individual physicians. Medicare
should also create opportunities for providers to collaborate to deliver high
quality care while restraining resource use.

¹⁶ MedPAC, Report to the Congress, Medicare Payment Policy, March 2008.

If the Congress chooses to use expenditure targets, the Commission has
concluded that such targets should not apply solely to physicians. Rather, they
should ultimately apply to all providers. Medicare has a total cost problem, not
just a physician cost problem. Moreover, producing the optimal mix of services¹⁷
requires that all types of providers work together, not at cross purposes.
Government Accountability Office (GAO). In its October 2004 report and
subsequent July 2006 testimony, GAO outlined two main approaches for addressing
current SGR issues. The first approach would retain the targets but modify the
current formula. Formula modifications could include ceasing recoupment from
prior periods, eliminating the cumulative target mechanism and returning to a system
of annual targets, modifying the allowance for volume and intensity growth to more
closely reflect technological innovation and changes in medical practice, and
removing drugs from the calculation.¹⁸
The second approach would end targets as an explicit measure for moderating
spending growth. Updates would be based on cost increases with the possibility of
specifically addressing high volume service categories such as medical imaging.
Congressional Budget Office (CBO). In March 2008, CBO issued cost
estimates for a variety of approaches for dealing with the physician payment issue.¹⁹
Proposals with modest costs assumed a freeze for the second half of 2008 (as
opposed to a 10.6% reduction), with reductions in future years to hold future rates at
current law levels. More costly alternatives would freeze or increase payments over
the 10-year budget window. For example, increasing payments by the MEI each year
through 2018 would increase federal spending by $288.1 billion for the FY2008-
2018 period. Coupling this with a provision excluding this change from beneficiary
premium calculations (“premium hold-harmless”) would increase federal spending
by $364.3 billion over the same period.
House-Passed Children’s Health and Medicare Protection Act of
2007 (CHAMP, H.R. 3162). The House-passed CHAMP bill, in addition to
averting near term cuts in the conversion factor, also contained several provisions
designed to modify the current SGR system. The bill would create six new categories
of physicians’ services: evaluation and management services for primary care and for
preventive services; other evaluation and management services; imaging services
and diagnostic tests; major procedures; anesthesia services; and minor procedures
and other services. The single conversion factor currently applied to all physician
services would be eliminated. Instead, a separate conversion factor would be
established for each of the six newly created service categories. The bill would

¹⁷ MedPAC. Assessing Alternatives to the Sustainable Growth Rate System, testimony before
Senate Committee on Finance, March 1, 2007.
¹⁸ (1) U.S. Government Accountability Office, Medicare Physician Payments: Concerns
About Spending Target System Prompt Interest in Considering Reforms, October 2004; and
(2) GAO, Medicare Physician Payments: Trends in Utilization, Spending and Fees Prompt
Consideration of Alternative Payment Approaches, testimony of Bruce Steinwald before
House Energy and Commerce Committee, July 25, 2006.
¹⁹ [http://www.cbo.gov/ftpdocs/90xx/doc9055/03-14-SGR_Options.pdf]

require the Secretary to establish an expert panel to identify misvalued RVUs for
physicians’ services, particularly those that are overvalued, and to assess whether
those misvalued services warrant review through existing processes. The Secretary
would be given the authority to reduce the work RVUs for a particular physicians’
service if the annual rate of growth in expenditures for the service provided under
Medicare for 2006 or a subsequent year exceeded the average annual rate of growth
in expenditures for all Medicare physicians’ services by more than 10 percentage
points. The bill would also require the Secretary to develop and implement a
physician feedback mechanism to measure resource use on a per capita and an
episode basis and create incentive payments under the Medicare program for
physicians practicing in an area identified as an efficient area.
Recent Actions
Evidence-Based Medicine; TRHCA. In recent years, increasing attention
has been focused on the rapid increase in volume and intensity of services. Attention
has also been directed toward the wide geographic variations in the number and
intensity of services provided, even among physicians in the same specialty.
Analyses of these geographic variations shows that increased service use does not
necessarily translate into increased quality or improved health outcomes.
Some observers recommended incorporating quality measurements into the
payment calculation. Quality measurements would be based on evidence-based
medicine. Physicians with higher quality performance would be paid more while
those with lower quality performance would be paid less. Some have labeled this²⁰
“pay for performance” (or “P4P”).
In January 2006, CMS launched the Physician Voluntary Reporting Program
(PVRP). Under this program, physicians who chose to participate reported on 16
evidence-based quality measures. The list of quality measures was subsequently
modified and expanded to 66. CMS replaced the PVRP program with the Physician
Quality Reporting Initiative (PQRI), as required by TRHCA.
TRHCA²¹ authorized a bonus payment for physicians who reported on quality
measures. Specifically, physicians and practitioners who voluntarily reported quality
information are eligible for a bonus incentive payment. For services furnished from
July 1, 2007 to December 31, 2007, the bonus is 1.5% of allowed charges (subject
to a limit) for services for which consensus-based quality measures were established.
The payments are to be made in mid-2008. The quality measures were those
identified under the PVRP, as published on the CMS website on December 20, 2006
(the date of enactment). The Secretary could modify such measures up until July 1,

2007. The final 2007 list included 74 measures.

TRHCA specified that for 2008, the quality measures would be those that were
adopted or endorsed by a consensus organization, that included measures submitted

²⁰ For a discussion of Medicare P4P initiatives and issues, see CRS Report RL33713,
Pay-for-Performance in Health Care, by Jim Hahn.
²¹ See Appendix B for further detail.

by a physician specialty, and the Secretary identified as having used a consensus-
based process for developing the measures. The final 2008 physician fee schedule
rule specified the 119 measures that CMS identified as appropriate for use by eligible
professionals to submit quality data under the PQRI in 2008.
TRHCA did not specifically link quality reporting to bonus payments for 2008.
However, MMSEA extended the bonus payments for quality reporting occurring in
2008, with the payment for 2008 to be made in 2009. The cap on bonus payments to
individual physicians was removed. MIPPA extends the provision through 2010,
with incentive payments equal to 1.5% in 2008 and 2.0% in 2009 and 2010.
Other Issues
2007 and 2008 Fee Schedules
When the 2007 fee schedule regulation was released in November 2006, it was
assumed that there would be a negative update in the conversion factor. Instead,
TRHCA froze the 2007 factor at the 2006 level. In addition, the law set the work
geographic adjustment level at a minimum of 1.0, thereby slightly increasing the
payment amounts in some areas.
However, the rest of the 2007 fee schedule regulation continued to apply. It
should be noted that this regulation incorporated several significant changes from

2006. First, it reflected the required five-year review of work relative values. Second,

it incorporated the first year of a four-year phase-in of a revised methodology for
calculating practice expenses. (See Appendix D.) Third, it included the impact of
the DRA mandated changes for payments for imaging services. (See discussion,
below.)
The net impact of these changes for an individual physician varied by the types
and mix of services provided. The final rule for 2007 included a table showing, by
specialty, the estimated impact of these changes. CMS released this table again
following enactment of TRHCA. Without any change in the conversion factor, CMS
estimated that five specialties would see an increase of 5% or more (emergency
medicine, endocrinology, family practice, infectious diseases, and pulmonary
diseases), while 10 specialties and practitioners would see a reduction of 5% or more
(anesthesiology, interventional radiology, pathology, radiology, vascular surgery,
chiropractors, clinical psychologists, clinical social workers, nurse anesthetists, and
physical and occupational therapists). The largest reduction (13%) was for diagnostic
testing facilities.
When CMS issued the final fee schedule for 2008, it was assumed there would
be a 10.1% drop in the conversion factor. As noted, there is a 0.5% increase for
2008. However, during that period, other factors will continue to have an impact on
payments to physicians, including any additional modifications to relative values for
services provided by individual physicians, the second year of the four-year phase-in
of revised methodology for calculating practice expenses, and the impact of DRA
changes for payments for imaging services.

Imaging Services
MedPAC and other observers have expressed concerns that sizeable volume
increases, particularly for imaging services, needed to be addressed. Part of the
increases in volume may be attributable to beneficial uses of new technology;
however, not all increases may be appropriate. DRA modified the payment rules for
certain imaging services. Specifically, the law capped the technical component of the
payment for services performed in a doctor’s office at the level paid to hospital
outpatient departments for such services. The limitation does not apply to the
professional component (i.e., the physician’s interpretation). Services subject to the
cap are: X-rays, ultrasound (including echocardiography), nuclear medicine
(including positron emission tomography), magnetic resonance imaging, computed
tomography, and fluoroscopy. Diagnostic and screening mammography are
excluded. The provision was effective January 1, 2007. A number of groups
objected to the payment cuts. They contend that the cuts could have unintended
consequences, including potentially diminishing access to imaging services outside
of the hospital setting.
MIPPA specifically addresses the imaging issue. It provides that, beginning
January 1, 2012, payment may only be made under the physician fee schedule for the
technical component of advanced diagnostic imaging services furnished by a supplier
if such supplier is accredited by an accreditation organization. The provision further
requires the Secretary to conduct a demonstration using specified models to collect
data regarding physician compliance with appropriateness criteria for advanced
diagnostic imaging services. The Secretary could focus the demonstration project,
such as on services that account for a large amount of Medicare expenditures,
services that have recently experienced a high rate of growth, or services for which
appropriateness criteria exist. (For further details, see Section 135 of MIPPA
summary, below).
Impact of Spending Increases on Part B Premiums
Payments for services paid under the physicians’ fee schedule account for about²²
one-third of Part B costs. Increased spending on physicians’ services therefore has
a considerable impact on overall Part B costs, and by extension on the amount
beneficiaries are required to pay in monthly Part B premiums.
By law, beneficiary premiums equal 25% of Part B program costs. (About 5%
of enrollees pay higher premiums based on their higher incomes.) The 2008 amount
($96.40) was computed prior to passage of the MMSEA and MIPPA provisions
providing for a 0.5% increase rather than a 10.1% decrease in the conversion factor
for 2008 and a 1.1% increase, rather than a decrease for 2009. These provisions have
the effect of increasing Part B costs for 2008 and 2009 and, by extension, the Part B
premium. The increase will first be reflected in the 2009 premium calculation.

²² For a discussion of Part B premiums, see CRS Report RL32582, Medicare: Part B
Premiums, by Jennifer O’Sullivan.

Access to Care
Questions have been raised about beneficiaries continued access to care. In
2002, the year the conversion factor was cut, press reports in many part of the country
documented many cases where beneficiaries were unable to find a physician because
physicians in their area were refusing to accept new Medicare patients. Despite slight
increases in the updates for 2003, 2004, and 2005, (and the freeze in 2006 and 2007),
some physicians claimed that program payments continued to fall significantly short
of expenses. They suggested that problems would be magnified if the cuts, scheduled
to begin in 2008, were allowed to go into effect. As noted, MMSEA delayed the cuts
for six months. Physicians continue to state that access problems will definitely occur
if Congress does not address the cut in the conversion factor slated to go into effect
for the second half of 2008.
Access to care can be measured by reviewing beneficiary ability to get an
appointment with a physician, the supply of physicians seeing Medicare patients, and
physicians’ willingness to see new patients.
Access. Periodic analyses by MedPAC show that beneficiary access to
physicians’ services is generally good. MedPAC’s 2008 report reviewed several
surveys conducted between 2005 and 2007.²³ The surveys compared access for
Medicare beneficiaries with that for privately insured persons age 50 to 64. It noted
that for both groups access to physicians was good and for some indicators was
slightly better for the Medicare population. The large majority of Medicare
beneficiaries (82%) had no problem or only a small problem in getting an
appointment with a new primary care physician, while 17% reported a big problem.
Among those with an appointment, 95% never or rarely had to wait longer than they
wanted to get an appointment for routine care and 96% never or rarely had to wait for
care to treat an illness or injury. However, MedPAC noted that in view of possible
negative updates in the second half of 2008 and in 2009, it planned to closely monitor
access over the next year.
Physician Supply. MedPAC reports that the growth in the number of
physicians regularly billing Medicare fee-for-service patients has kept pace with the
growth in the Medicare population. MedPAC reports that from 2001 to 2006, the
number of physicians with at least 15 Medicare patients grew 8.7% from 457,292 to
497,072; over the same period the number of such physicians per 1,000 beneficiaries
grew from 12.1 to 12.3. Further, the number of physicians with 200 or more
Medicare patients grew 12.9%.²⁴
Physicians’ Willingness to See New Beneficiaries. A related concern
is the possible decline in the percentage of physicians accepting new Medicare
patients. However, MedPAC reports that the large majority of physicians in the U.S.
are willing to accept new Medicare patients. It cites results from a 2006 MedPAC-

²³ MedPAC, March 2008.
²⁴ MedPAC, March 2008.

sponsored survey showing that most (97%) of physicians accept at least some new
Medicare fee-for-service patients, with a smaller share (80%) accepting all or most.
GAO Study. MMA required GAO to study and report to Congress on²⁵
beneficiary access to physicians’ services. The study was issued in July 2006. It
found that from 2000 through 2004, among beneficiaries who needed access to
physician services, the percentages reporting major difficulties in finding a provider
or being able to schedule an appointment remained relatively constant (about 7%
nationwide). Similar percentages were reported for urban and rural beneficiaries.
Beneficiaries who rated their health as poor, were under 65 and disabled, were not
white, and had no supplemental health insurance or had supplemental insurance from
Medicaid, were more likely to have experienced physician access difficulties. GAO
further noted that the proportion of beneficiaries who received services and the
number of services provided to beneficiaries who were treated suggested an increase
in access from April 2000 to April 2005.
Future Prospects. While access remains good for Medicare beneficiaries,
many observers are concerned that the situation could change if future cuts slated to
occur through application of the SGR methodology are allowed to occur. MedPAC
does not support the consecutive annual cuts called for in the law. It is concerned
that such cuts could threaten beneficiary access to physicians’ services over time,
particularly those provided by primary care physicians.
On June 26, 2008, the AMA issued a statement that, based on a physician
survey, if the cut in the conversion factor were allowed to go into effect July 1, 2008,
60% of physicians would limit the number of new Medicare patients they treat, more
than half would need to cut staff, and 14% would quit patient care altogether.²⁶
Geographic Variation in Payments
Geographic Cost Indices. Medicare makes a geographic adjustment to each
component of the physician fee schedule.²⁷ This adjustment is intended to reflect the
actual differences in the costs of providing services in various parts of the country.
Recently some observers, particularly those in states with lower than average
payment levels, have objected to the payment variation. In part, this may reflect the
concern with the overall reduction in payment rates in 2002, the small updates in
2003-2005, the freeze in 2006 and 2007, and the prospects of further reductions in
future years.
MMA made temporary changes to the geographic adjusters. It raised the
geographic adjustment for the work component of the fee schedule to 1.000 in any
area where the multiplier would otherwise be less. This provision applied from

2004-2006. TRHCA extended the provision for an additional year — through 2007.

²⁵ GAO, Medicare Physician Services: Use of Services Increasing Nationwide and
Relatively Few Beneficiaries Report Major Access Problems, GAO-06-704, July 21, 2006.
²⁶ [http://www.ama-assn.org/ama/pub/category/18733.html]
²⁷ See Appendix A for a discussion of how these adjustments are calculated.

MMSEA extended it for an additional six months — through June 30, 2008. MIPPA
extends it through 2009.
MMA further directed the GAO to conduct a study of the geographic adjusters.
A GAO report issued in March 2005 concluded that all three adjusters were valid in
their fundamental design, and appropriately reflected broad patterns of geographic
differences in running a practice. The report made several recommendations for
improving the data and methods used to construct the data. CMS stated that
implementing many of the recommendations was not feasible at that time.²⁸
State-by-State Variation. Some have also suggested that states with lower
than average per capita payments (excluding managed care payments) for all
Medicare services are being shortchanged. It should be noted that the variations
reflect a variety of factors, few of which can be easily quantified. These include
variations in practice patterns, size and age distribution of the beneficiary population,
variations in managed care penetration, the extent to which populations obtain
services in other states, and the extent to which other federal programs (such as those
operated by the Department of Defense or Veterans Affairs) are paying for
beneficiaries care. For these reasons, CMS considers state-by-state Medicare
spending data misleading and is therefore no longer publishing this data.
Payment Localities. Geographic adjustments are applied by payment
locality. There are currently 89 localities; some are statewide, while others are
substate areas. Some observers have recommended that changes be made to the
composition of some of the current localities; for example, they state that costs in a
particular community significantly exceed those in other parts of the same locality.
CMS has stated that it will consider requests for locality changes when there is
demonstrated consensus within the state medical association for the change. It
should be noted that any changes must be made in a budget-neutral fashion for the
state. Thus, if higher geographic practice cost indices (and thus payments) are
applied in one part of the state, they must be offset by lower indices (and payments)
in other parts of the state.
In June 2007, the GAO issued a report that stated that more than half of the
current payment localities had counties within them with a payment difference of at
least 5% between GAO’s measure of physicians’ costs and Medicare’s geographic
adjustment for the area. A disproportionate number of these counties were located
in five states. GAO recommended that CMS revise the localities using an approach
uniformly applied in all states and based on the most current data. It further
recommended that the localities be updated on a periodic basis. CMS stated that it
would consider the first recommendation but would continue its policy of updating²⁹

the localities when interested parties raised concerns or on its own initiative.
²⁸ U.S. GAO, Medicare Physician Fees: Geographic Adjustment Indices are Valid in
Design, but Data and Methods Need Refinement, GAO Report 05-119, March 2005.
²⁹ U.S. GAO, Geographic Areas Used to Adjust Physician Payments for Variation in
Practice Costs Should Be Revised, GAO Report 07-466, June 2007.

California Issues. Two counties in California (Santa Cruz and Sonoma) are
assigned to a larger payment locality (“rest of California”). As a result, they have
geographic payment adjusters that are much lower than would be in place if they had
county-specific adjusters. Their adjusters are also substantially lower than those
applicable in neighboring counties. In the August 8, 2005 proposed physician fee
schedule, CMS offered a proposal to address the problem. However, it failed to win
the support of the majority stakeholders because offsetting reductions would be
required in other areas in the state. The final regulation, therefore, included no
change for 2006.
The proposed 2008 fee schedule regulation issued July 12, 2007, identified three
options for possible locality reconfigurations in California. CMS stated that it was
soliciting comments and was considering possibly adopting one of the approaches in
the final rule. However, in view of the variety of comments received from interested
parties in both California and other states, it decided further study was needed.
Therefore, no change was made for 2008.
Medicare Versus Private Payment Rates
Some persons contend that Medicare payments lag behind those in the private
sector. MedPAC’s 2008 report notes that the difference between Medicare and
private rates narrowed in the late 1990s and has remained relatively stable in recent
years. Averaged across all services and areas, the 2006 rates were 81% of private
fees. The 2006 rate was lower than the 83% ratio for 2005; MedPAC stated that this
might be partially attributable to the 0% update in the conversion factor for 2006. It
should be noted that difference in fees can vary markedly within a market area and
for a given service.
Payments for Oncology Services
The level of payments for practice expenses became a major issue for
oncologists who frequently administer chemotherapy drugs in their offices. Prior to
the implementation of the new Medicare drug program under Part D, Medicare did
not cover most outpatient prescription drugs. However, certain categories of these
drugs have been and continue to be covered under Part B. Included are drugs that
cannot be self-administered and which are provided as incident to a physician’s
service, such as chemotherapy. Medicare Part B also covers certain oral cancer
drugs. Covered drugs are those that have the same active ingredients and are used
for the same indications as chemotherapy drugs which would be covered if they were
not self-administered and were administered as incident to a physician’s professional
service.
Prior to enactment of MMA, a number of reports, including those by the HHS
Office of Inspector General, the Department of Justice (DOJ), and GAO had found
that Medicare’s payments for some of these drugs were substantially in excess of
physicians’ and other providers’ costs of acquiring them. However, oncologists had
stated that the overpayments on the drug side were being used to offset
underpayments for practice expenses associated with administration of the
chemotherapy drugs.

MMA sought to rationalize program payments. It increased the payments
associated with drug administration services. At the same time, it revised the way
covered Part B drugs are paid.³⁰ Beginning in 2005, drugs are paid using the average
sales price (ASP) methodology; in general drug payments equal 106% of the
manufacturer reported ASP. Drug payments are less under the new system. A
transitional payment was authorized in 2004 and 2005 to ease the adjustment. In
addition, in 2005 and 2006, CMS authorized demonstration projects under which
oncologists who reported certain information received additional payments. These
demonstration projects are no longer in place.
Many observers suggested that changes to the drug payment methodology were
long overdue and that reductions were in order given the previous overpayments.
However, a number of industry groups stated that the revised payments did not
adequately cover the costs associated with administration and purchase of drugs. A
number of oncologists stated that they were unable to purchase drugs at or below the
MMA established rates.
In July 2007, the OIG for HHS issued a report³¹ examining these concerns. The
report reviewed 12 physician practices in the specialties of hematology,
hematology/oncology, and medical oncology. It noted that because 11 of the 12
practices did not have procedures to track, by procedure code, the costs associated
with administering drugs to cancer patients, it could not determine whether Medicare
reimbursement for each code was sufficient to cover the costs of providing the
services.
The OIG further noted that 9 of the 12 practices reviewed could generally
purchase drugs related to selected payment codes for treatment of cancer patients at
or below the MMA-established rates during the second quarter of 2005 (the report’s
review period). The remaining three practices paid prices above the reimbursement
rates for at least half of the selected codes related to the purchased drugs. The report
did not provide an explanation for the differences, but did state that, based on its
analysis, that there were no significant differences in results due to practice size or
location.
Concierge Care
In recent years, some physicians have altered their relationship with their
patients. Some doctors, in return for additional charges, offer their patients
additional services such as round the clock access to physicians, same-day
appointments, comprehensive care, additional preventive services, and more time
spent with individual patients. In return, patients are required to pay a fee or retainer.

³⁰ See CRS Report RL31419, Medicare: Payments for Covered Part B Drugs, by Jennifer
O’ Sullivan.
³¹ HHS, Office of Inspector General, Review of Selected Physician Practices’ Procedures
for Tracking Drug Administration Costs and Ability to Purchase Cancer Drugs at or Below
Medicare Reimbursement Rates, OIG Report A-09-05-00066, July 2007.
[http://www.oig.hhs.gov/oas /reports/region9/90500066.pdf].

This practice has been labeled “concierge care.” Patients who do not pay the
additional charges typically have to find another doctor.
Some physicians see concierge care as a way of permitting them to spend more
time with individual patients as well as a way to increase their income. However,
questions have been raised regarding the implications of concierge care for patients,
particularly Medicare beneficiaries. One concern is that while wealthier patients
might be able to afford the additional costs, other patients might find it more difficult
to gain access to needed services.
The Office of Inspector General (OIG) issued an OIG Alert on March 31, 2004.
The Alert reminded Medicare participating physicians about the potential liabilities
posed by billing for services already covered by Medicare. Participating physicians
can bill their patients for the requisite coinsurance and deductibles as well as for
uncovered services. However, the Alert noted that it had been brought to the OIG’s
attention that some concierge contract services, while described as uncovered
services, were actually services covered by Medicare. This would be in violation of
the physician’s assignment agreement and could subject the physician to civil
monetary penalties.
Recent Legislation
Changes Made by MMA, DRA, TRHCA
MMA included a number of provisions relating to physicians’ services. It
included changes in the calculations of the fee schedule, increased payments for the
administration of covered drugs, and included requirements for a number of reports
on physician payment issues. DRA revised the update calculation for 2006 and
modified payments for imaging services. TRHCA modified the calculation for 2007
and established a fund to promote payment stability and physician quality initiatives
in 2008. (For a summary of these provisions, see Appendix B.)
Legislation in the First Session of the 110^th Congress
On August 1, 2007, the House passed the Children’s Health and Medicare
Protection Act of 2007 (CHAMP). This legislation included a number of Medicare
provisions including several relating to payments under the physician fee schedule;
it also included provisions extending the State Children’s Insurance Program³²
(SCHIP). Subsequently, Congress passed, and the President vetoed, two bills
dealing only with SCHIP.
During the fall of 2007, Senate Finance Committee members attempted to come
to an agreement on a Medicare package. Of particular concern was the looming cut
in the 2008 conversion factor; the discussion was complicated by the cost associated

³² For a summary of CHAMP, see CRS Report RL34122, H.R. 3162: Provisions in the
Children’s Health and Medicare Protection Act of 2007.

with any potential payment “fix.” The committee members were unable to come to
an agreement, and no committee markup was held.
However, during the last days of the first session of the 110^th Congress, House-
Senate negotiators came to agreement on a narrowly focused bill addressing both the
Medicare physician payment issue and SCHIP. The Medicare, Medicaid, and SCHIP
Extension Act of 2007 (MMSEA, enacted December 29, 2007) provided for a
temporary 0.5% increase in the conversion factor for the six-month period beginning
January 1, 2008. It also extended, for the same six-month period, provisions setting
the geographic work adjustment at 1.0 and providing bonus payments in scarcity
areas. (See Appendix B.)
Children’s Health and Medicare Protection Act of 2007 (CHAMP,
H.R. 3162), as Passed by the House. MMSEA included a limited number of
Medicare provisions; a major focus was averting the cut in the conversion factor
slated to occur January 1, 2008. However, the House-passed CHAMP bill was still
considered the House approach on more long-term program revisions. Proposed
longer-term revisions included (1) creating six new categories of physicians’ services
(evaluation and management services for primary care and for preventive services;
other evaluation and management services; imaging services and diagnostic tests;
major procedures; anesthesia services; and minor procedures and other services); (2)
eliminating the single conversion factor currently applied to all physician services
and establishing a separate conversion factor for each of the six newly created service
categories; (3) improving the accuracy of relative values by requiring the Secretary
to establish an expert panel to identify misvalued physicians’ services, particularly
those that are overvalued, and assessing whether those misvalued services warrant
review through existing processes; (3) giving the Secretary the authority to reduce the
work RVUs for a particular physicians’ service if the annual rate of growth in
expenditures for the service provided under Medicare for 2006 or a subsequent year
exceeded the average annual rate of growth in expenditures for all Medicare
physicians’ services by more than 10 percentage points; (4) requiring the Secretary
to develop and implement a physician feedback mechanism to measure resource use
on a per capita and an episode basis; (5) creating incentive payments under the
Medicare program for physicians practicing in areas identified as an efficient area;
(6) requiring the Secretary to analyze and recommend ways to consolidate coding for
procedures and to increase use of bundled payments under the fee schedule; (7)
expanding the medical home demonstration project established by TRHCA; (8)
adjusting Medicare payment localities; and (9) extending the bonus payments for
physician scarcity areas.
For more detail on the CHAMP provisions, see CRS Report RL34122, H.R.

3162: Provisions in the Children’s Health and Medicare Protection Act of 2007.

Legislation in the Second Session of the 110^th Congress:
MIPPA
The major focus during the second session of the 110^th Congress was the
looming cut in the conversion factor, effective July 1, 2008. On June 6, 2008,
Senator Baucus, Chairman of the Senate Finance Committee, introduced S. 3101, the

Medicare Improvements for Patients and Providers Act of 2008. On June 24, 2008,
the House passed a modified version of the Baucus bill under suspension of the rules
by a vote of 355 to 59. On July 9, 2008, the Senate passed the bill without
amendment by unanimous consent and the bill was cleared for the White House. On
July 15, 2008, President Bush vetoed the bill, primarily because of provisions cutting
Medicare Advantage payments. On the same day, the House voted 383-41 to
override the veto, and the Senate later voted 70-26 to override the veto. MIPPA
became law as P.L. 110-275. The following is a brief summary of the bill’s
provisions dealing with physicians³³.
Section 131. Physician Payment, Efficiency, and Quality
Improvements. This provision freezes the conversion factor at the level in place
in June 2008 through the end of the year. In January 2009, the conversion factor
increases by 1.1%. In 2010, fees revert back to current law levels, resulting in a 21%
reduction in fee levels, according to CBO.
This provision modifies the physician assistance and quality initiative fund,
effectively eliminating monies from the fund in 2013 and 2014. As modified by the
Supplemental Appropriations Act, 2008 (P.L. 110-252), $4.96 billion are removed
from the fund in those years and returned to the Medicare Part A and Part B Trust
Funds, to be made available for other purposes.
The provision also (1) extends and modifies the physician quality reporting
system, which currently runs through 2009; (2) establishes a physician feedback
program, with the intent to improve efficiency and to control costs; and (3) requires
the Secretary to develop a plan to transition to a value-based purchasing program for
payment under the Medicare program for covered professional services.
Section 132. Incentives for Electronic Prescribing. The provision
establishes incentives for electronic prescribing in the Medicare program. For 2009
through 2013, Medicare professionals providing covered services to Medicare
beneficiaries and who are successful electronic prescribers will receive an incentive
payment of 2.0% for 2009 and 2010, 1.0% for 2011 and 2012, and 0.5% for 2013.
Providers who do not have a sufficient volume of qualifying services will be
excluded from the program, as well as those for whom the Secretary determines that
compliance would be a significant hardship, such as for an eligible professional who
practices in a rural area without sufficient Internet access. Not later than September
1, 2012, the GAO is required to submit a report to Congress on the implementation
of the incentives for electronic prescribing established by this section.
Section 133. Expanding Access to Primary Care Services. The
provision gives the Secretary the authority to expand the duration and scope of the
Medical Home Demonstration Project if the expansion would meet either of the
following conditions: (1) the expansion of the project is expected to improve the
quality of patient care without increasing spending under Medicare, or (2) the
expansion of the project is expected to reduce spending under the Medicare program

³³ For a summary of MIPPA, see CRS Report RL34592, P.L. 110-275: The Medicare
Improvements for Patients and Providers Act of 2008, by Hinda Chaikind et al.

without reducing the quality of patient care. To fund any potential expansion of the
demonstration project, $100 million would be made available from the Federal
Supplementary Medical Insurance Trust Fund.
Traditionally, the required “budget neutrality” requirement has been
implemented through an adjustment to the conversion factor. However, beginning in
2007, CMS made the adjustment to work relative values. The provision changes the
application of the adjustor back to the conversion factor, beginning with 2009.
Section 134. Extension of Floor on Medicare Work Geographic
Adjustment under the Medicare Physician Fee Schedule. The provision
extends the temporary floor of 1.00 on the geographic work adjustment through
December, 2009. In addition, beginning January 1, 2009, it raises the work
geographic adjustment to 1.5 in Alaska if the index would otherwise be less than 1.5.
Section 135. Imaging Provisions. The provision specifies that beginning
January 1, 2012, payment may only be made under the physician fee schedule for the
technical component of advanced diagnostic imaging services furnished by a supplier
if such supplier is accredited by an accreditation organization. Advanced diagnostic
imaging services are defined as including diagnostic magnetic resonance imaging,
computed tomography, and certain other services as specified by the Secretary in
consultation with physician specialty organizations and other stakeholders. The
accreditation organization would have to be designated by the Secretary, who is
required to consider specified factors both in designating an accreditation
organization and in reviewing and modifying the list of designated organizations.
The Secretary is required to establish procedures to ensure that the criteria used
by an accreditation organization to evaluate a supplier that furnishes the technical
component of advanced diagnostic imaging services is specific to each imaging
modality.
The provision requires the Secretary to establish a two-year demonstration
project using specified models to collect data regarding physician compliance with
appropriateness criteria for advanced diagnostic imaging services. The Secretary
could focus the demonstration project, such as on services that account for a large
amount of Medicare expenditures, services that have recently experienced a high rate
of growth, or services for which appropriateness criteria exist. The Secretary, in
consultation with medical specialty societies and other stakeholders, is to select
criteria with respect to the clinical appropriateness of advanced diagnostic imaging
for use in the demonstration. The Secretary will develop mechanisms to provide
feedback reports to physicians participating in the project. In addition, the Secretary
will be required to evaluate the demonstration project and to submit a report to
Congress containing the results of the evaluation together with recommendations for
legislative and administrative action.
The GAO is required to conduct a study by imaging modality of the new
accreditation requirement and any other relevant questions involving access to and
the value of advanced diagnostic imaging services for beneficiaries.

Section 136. Extension of Treatment of Certain Physician
Pathology Services under Medicare. Legislation enacted in 1997 specified
that independent labs that had agreements with hospitals on July 22, 1999, to bill
directly for the technical component of pathology services could continue to do so
in 2001 and 2002. The provision has been periodically extended, most recently
through June 30, 2008. The provision extends it through December 31, 2009.
Section 137. Accommodation of Physicians Ordered to Active Duty
in the Armed Services. Medicare payment may be made to a physician for
services furnished by a second physician to patients of the first physician provided
certain conditions are met. In general, the services cannot be provided by the second
physician for more than 60 days. The law had permitted, for services provided prior
to June 30, 2008, reciprocal billing over a longer period in cases where the first
physician was called or ordered to active duty as a member of a reserve component
of the Armed Forces. The provision makes the accommodation permanent.
Section 138. Adjustment for Medicare Mental Health Services.
Medicare pays for mental health services under the physician fee schedule. The
provision increases the fee schedule amount otherwise applicable for certain
specified mental health services by 5% for the period July 2008-December 2009.
Section 139. Improvements for Medicare Anesthesia Teaching
Programs. Anesthesia services may be personally performed by the
anesthesiologist, or the anesthesiologist may medically direct up to four concurrent
anesthesia cases. When the anesthesiologist medically directs a case, the payment for
the physician’s medical direction service is 50% of the amount otherwise recognized
if the anesthesiologist personally performed the service. The provision establishes a
special payment rule with respect to physicians’ services furnished on or after
January 1, 2010. In the case of teaching anesthesiologists involved in a single
anesthesia case or two concurrent anesthesia cases, the payment amount will be
100% of the fee schedule amount otherwise applicable if the anesthesia services were
personally performed by the teaching anesthesiologist alone. This payment provision
will apply only if (1) the teaching anesthesiologist is present during all critical or key
portions of the anesthesia service or procedure involved, and (2) the teaching
anesthesiologist (or another anesthesiologist with whom the teaching anesthesiologist
had entered into an arrangement) is immediately available to furnish anesthesia
services during the entire procedure. Further, the provision requires the Secretary to
make appropriate payment adjustments for items and services furnished by teaching
certified registered nurse anesthetists.

Appendix A. Calculation of the Physician Fee
Schedule Update
Calculation of the Physician Fee Schedule
General Formula. The following is the general payment formula for a
service under the physician fee schedule:
Payment = [(RVU^w x GPCI^w) + (RVU^pe x GPCI^pe) + (RVU^mal x GPCI^mal)] x CF
^W^h^{ere: R}^V^U^w^{= r}^e^lativ^{e v}^a^lu^{e u}ⁿ^{it f}^o^r^w^o^r^k
^RV^U^pe^{= relativ}^{e v}^a^lu^{e u}ⁿ^{it f}^o^{r practice ex}^pen^s^es
^RV^U^ma^l^{= r}^e^lativ^{e v}^a^lu^{e u}ⁿ^{it f}^o^r^m^a^lp^r^{actice ex}^p^eⁿ^s^es
^GP^C^I^w^{= g}^e^og^raphⁱ^c^practⁱ^{ce cos}^tⁱⁿ^dex^f^o^{r w}^o^rk
^GP^C^I^pe^{= g}^e^og^raph^{ic practice cos}^tⁱⁿ^dex^f^o^{r practice ex}^pen^s^es
^GP^C^I^ma^l^{= g}^e^og^raph^{ic practice cos}^tⁱⁿ^dex^f^o^{r m}^a^{lpractice ex}^pen^s^es
^{CF =}^c^o^nve^r^sⁱ^o^{n fa}^c^t^o^r
2008 Calculation. The law contains a budget neutrality provision, which
specifies that changes to relative value units under the fee schedule cannot cause
expenditures to increase or decrease by more than $20 million from the amount of
expenditures that would otherwise have been made. In the past, the budget neutrality
requirement was implemented through an adjustment to the conversion factor;
however, beginning in 2007, it is implemented through an adjustment to work
relative values. Therefore, the following is the formula applicable for 2008:
2008 Payment = [({RVU^w x BNA⁰⁸ - round product to 2 decimal places} x
GPCI^w) + (RVU^pe x GPCI^pe) + (RVU^mal x GPCI^mal)] x CF
^W^h^{ere: B}^N^A⁰⁸^{= bu}^dg^{et n}^e^u^t^rality^adj^u^s^t^{er f}^o^{r 2008 (0.8806)}
Note that the practice expense relative value for a service may vary by whether
the non-facility or facility pricing amount is used.
Calculation of the Update to the Conversion Factor (CF)
General Formula. The conversion factor is a dollar figure that converts the
geographically adjusted relative value for a service into a dollar payment amount.
The following is the general formula for the annual update to the conversion factor:
CF^cu^r^r^eⁿ^t^y^ear = CF^p^r^io^r^y^ear x CF update
CF update = (1 + MEI increase/100) x (1+ UAF)
^W^h^ere:^M^e^di^car^e^Economⁱ^c^{Index (}^M^EI)^{- m}^e^a^s^ur^e^s^t^h^e^w^eⁱ^g^h^t^e^d^a^v^e^r^a^g^e^a^nnua^l^p^rⁱ^c^e
^ch^an^g^e^sⁱⁿ^th^{e in}^pu^tsⁿ^{eeded to produ}^{ce s}^e^rv^ices
^U^pdat^{e Adj}^u^s^t^m^e^nt^Fact^or⁽^U^AF)^-^m^a^k^e^s^actu^a^{l ex}^p^eⁿ^d^itu^r^e^{s an}^d^tar^g^{et (}^a^llo^w^e^d⁾
^ex^pen^d^itu^res^equ^a^l

2008 Calculation. The calculation of the conversion factor for 2008 that
would have applied in the absence of MMSEA and MIPPA is more complicated than
the general formula because by law the 2007 update provided by TRHCA is assumed
not to have occurred. The following is the calculation for this 2008 calculation.
CF²⁰⁰⁸ = CF^2007pre^-^T^R^H^C^A x CF update
= CF^2007pre^-^T^R^H^C^A x (1 + MEI increase/100) x (1+ UAF)
= $35.9848 x (1 +1.8/100) x (1 + (-0.7))
=$35.9848 x (1.018 x .930)
= $35.9848 x -5.3% (0.94674)
= $34.0682
^W^h^ere:CF^2007pre^-^T^R^H^C^A^{= $35.9848}
^{MEI = 1.018%}
^UA^{F = -}⁷^.0^%
Note that the $34.0682 figure would have been a 10.1% reduction from the
$37.8975 CF that was in place for 2007 after enactment of TRHCA.
Calculation of the Update Adjustment Factor (UAF)
The SGR system is used to determine allowable expenses; these are compared
with actual expenditures to determine the UAF. The formula includes both a prior
year adjustment and a cumulative adjustment.
UAF = Prior Year Adjustment Component + Cumulative Adjustment Component
The formula for 2008 was calculated as follows:
UAF⁰⁸ =[(Target⁰⁷ - Actual⁰⁷) /Actual⁰⁷] x 0.75 +
[(Target^4/^96-^12/⁰⁷ - Actual^4/^{96 -}^12/⁰⁷) /(Actual⁰⁷ x SGR⁰⁸)] x 0.33
Where:Target⁰⁷ = $83.9B
Actual⁰⁷ = $94.6 B
Target^4/^{96 -}^12/⁰⁷= $776.6 B
Actual^4/^96-^12/⁰⁷ = $828.8 B
SGR⁰⁷ = - 0.1% (0.999)
UAF⁰⁸ =[($83.9B - $94.6B)/$94.6B x .75] +
[($776.6B - $828.8B/ ($94.6 x 0.999) x 0.33]
= (-0.113 x .75) + (-.552 x .33) = -0.267
However: UAF cannot be less than - 0.07 or greater than + 0.3; therefore:
UAF⁰⁸ = - 0.07

Appendix B. MMA, DRA, TRCHA, and MMSEA
Provisions Relating to Physicians
MMA
MMA made several changes in the calculation of the fee schedule. Over the
short term, generally 2004-2005, they were designed to increase program payments
to physicians. The following were the key changes:
^!The update to the conversion factor could be no less than 1.5% in

2004 and 2005. (Section 601(a) of MMA.)

^!The formula for calculating the sustainable growth rate (SGR) was
modified by replacing the existing GDP factor (which measured a
one year change from the preceding year) to a 10-year rolling
average. (Section 601(b) of MMA.)
^!The geographic index adjustments in Alaska for the work
component, practice expense component and malpractice component
were each raised to 1.67 for 2004 and 2005. This resulted in an
increase in payments to Alaska physicians in these years. (Section

602 of MMA.)

^!A floor of 1.00 was set on the geographic work adjustment for the

2004-2006 period. (Section 412 of MMA.)

^!An additional 5% in payments was provided for certain physicians
in scarcity areas for the period January 1, 2005-December 31, 2007.
The Secretary was required to identify those areas with the lowest
ratios of physicians to beneficiaries, which collectively represent

20% of the total Medicare beneficiary population in those areas.

The list of counties would be revised no less often than once every
three years unless there was no new data. (Section 413 of MMA.)
MMA also revised the way covered Part B drugs were paid under the program;³⁴
this had the effect of lowering program payments for the actual drugs. At the same
time, MMA increased the payments associated with drug administration services.
These provisions affected selected specialties, primarily oncologists.
MMA also required a number of studies and reports relating to physicians’
services. These were intended to provide Congress with additional information as
it considered revisions in the current payment formula.
MMA included a number of additional provisions relating to physicians’
services, including:
^!Podiatrists, dentists, and optometrists were permitted to enter into
private contracting arrangements. (Section 603 of MMA.)

³⁴ CRS Report RL31419, Medicare: Payments for Covered Part B Drugs, by Jennifer
O’ Sullivan.

^!Medicare payments could be made to an entity which has a
contractual relationship with the physician or other entity (namely a
staffing entity). The entity and the contractual arrangement would
have to meet program integrity and other standards specified by the
Secretary. (Section 952 of MMA.)
^!The Secretary was required to use a consultative process prior to
implementing any new documentation guidelines for evaluation and
management (i.e., visit) services. (Section 941 of MMA)
^!MMA contained a number of additional provisions designed to
address physicians’ concerns with regulatory burdens. (Title IX of
MMA.)
DRA
DRA froze the 2006 fee schedule at the 2005 level. It required MedPAC to
submit a report to Congress by March 1, 2007 on mechanisms that could be used to
replace the sustainable growth rate system.
DRA also modified payments for imaging services. It capped the technical
component of the payment for services performed in a doctor’s office. The cap is set
at the outpatient department (OPD) fee schedule amount (without regard to the
geographic wage adjustment factor) under the prospective payment system for
hospital outpatient departments. The law also included a technical provision
specifying that an earlier regulation change made by CMS for multiple imaging
procedures was not to be taken into account in making the budget neutrality
calculation for 2006 and 2007.
TRHCA
TRHCA froze the 2007 fee schedule at the 2006 level. It also provided a bonus
payment for physicians who report on quality measures. Specifically, physicians and
practitioners who voluntarily report quality information will be eligible for a bonus
incentive payment. For services furnished from July 1, 2007 - December 31, 2007,
the bonus is 1.5% of allowed charges for services for which consensus-based quality
measures have been established. The quality measures are those identified under the
Physician Voluntary Reporting Program (PVRP), as published on the CMS website
on December 20, 2006 (the date of enactment). The Secretary could modify these
quality measures if changes were based on the results of a consensus process meeting
in January 2007 and if such changes were published on the website by April 1, 2007.
The Secretary could refine such measures up until July 1, 2007.
If there are no more than 3 quality measures applicable to the services furnished,
the provider must report each measure for at least 80% of the cases. If there are 4 or
more quality measures, the provider must report at least 3 for at least 80% of the
cases. The Secretary would presume that if an eligible professional submits data for
a measure, then the measure is applicable to the professional. The Secretary may
validate this presumption by sampling or other means.

The Secretary is to estimate, based on submitted claims, an amount equal to
1.5% of allowed charges for services for which reports have been made. A single
consolidated bonus payment is to be made to the physician for the July 1, 2007 -
December 31, 2007 reporting period. No provider could receive payments in excess
of the product of the total number of quality measures for which data are submitted
and three times the average per measure payment amount. The average per measure
payment amount (as estimated by the Secretary) is the total amount of allowed
charges under Part B for all covered services furnished during the reporting period
on claims for which quality measures are reported divided by the total number of
quality measures for which data are reported during the reporting period.
In 2008, the quality measures are those that have been adopted or endorsed by
a consensus organization, that include measures submitted by a physician specialty,
and the Secretary identifies as having used a consensus-based process for developing
the measures. The measures are to include structural measures such as the use of
electronic health records and electronic prescribing technology. The proposed
measures for 2008 are to be published by August 15, 2007, with final measures
published by November 15, 2007.
The law authorized $1.35 billion for 2008 for a Physician Assistance and
Quality Initiative (PAQI) Fund which is to be available to the Secretary for physician
payment and quality improvement initiatives. The initiatives may include
adjustments to the conversion factor. The provision also required transfer of $60
million from the Part B trust fund to the CMS program management account for use
in implementing the fee schedule and reporting provisions for FY2007 - FY2009.
The law also extended for an additional year the MMA provision setting a floor
of 1.00 on the geographic component of the work adjustment.
MMSEA
MMSEA increased the conversion factor by 0.5% over the 2007 amount for the
six-month period beginning January 1, 2008. Also extended for six months were the
provisions setting the minimum geographic adjuster for the physician work
component at 1.0 and the provision providing bonus payments in physician scarcity
areas. The legislation also extended the TRHCA provision for bonus payments for
quality reporting through 2008.
MMSEA modified the amounts that will be available in the PAQI Fund and the
years in which the monies can be spent. However, there are provisions in the
Department of Labor, Health and Human Services, and Education and Related
Agencies Appropriations Act of 2008 (division G of the Consolidated Appropriations
Act of 2008), and P.L. 110-90 (TMA, Abstinence Education, and QI Programs
Extension Act of 2007), that also affect the PAQI Fund. The net effect of these three
laws was that no funds remain available in the PAQI Fund for the years 2008 through
2012, and $4.96 billion are available in 2013. (See further change made by MIPPA
in “Recent Legislation” section. ) A separate provision in P.L. 110-173 also required
that the amount available for expenditures during 2013 be available only for an
adjustment to the update of the conversion factor for that year.

Appendix C. Geographic Adjustments
to the Physician Fee Schedule
Section 1848(e) of the Social Security Act requires the Secretary of the
Department of Health and Human Services (HHS) to develop indices to measure
relative cost differences among fee schedule areas compared to the national average.
Three separate indices are required — one for physician work, one for practice
expenses and one for malpractice costs. The law specifies that the practice expense
and malpractice indices reflect the full relative differences. However, the work index
must reflect only one-quarter of the difference. Using only one-quarter of the
difference generally means that rural and small urban areas would receive higher
payments and large urban areas lower payments than if the full difference were used.
The indices are updated every three years and phased-in over two years.
Legislative Background
The physician fee schedule represented the culmination of several years of
examination by the Congress, HHS, and other interested parties on alternatives to the
then existing charge-based reimbursement system. In 1986, Congress enacted
legislation providing for the establishment of the Physician Payment Review
Commission (PPRC) to provide it with independent analytic advice on physician
payment issues. A key element of the Commission’s charge was to make
recommendations to the Secretary of HHS respecting the design of a relative value
scale for paying for physicians’ services. The Commission’s March 1989 report
presented the Commission’s proposal for a fee schedule based primarily on resource
costs. It recommended that the initial basis for the physician work component should
be the work done by William Hsiao and his colleagues at Harvard University.
The 1989 PPRC report examined issues related to geographic variations. It
noted that adjustments could be made to reflect nonphysician inputs (overhead costs
such as office space, medical equipment, salaries of nonphysician employees, and
malpractice insurance) and physician inputs of their own time and effort (which is
generally measured by comparing earnings data of nonphysicians). It concluded that:
Payments under the fee schedule should vary from one geographic locality to
another to reflect variation in physician costs of practice. The cost-of-living
practice index underlying the geographic multiplier should reflect variation only³⁵
in the prices of nonphysician inputs.
PPRC stated that the fee schedule should only reflect variation in overhead costs.
Other observers, however, suggested that since physicians, as well as other
professionals, compete in local markets, local market conditions should be reflected
in the payments.
Three congressional committees have jurisdiction over Medicare Part B (which
includes physicians’ services). These are the House Energy and Commerce, House
Ways and Means, and Senate Finance. Each of these committees considered

³⁵ Physician Payment Review Commission, Annual Report to Congress, 1989.

differing versions of the physician fee schedule as part of the budget reconciliation
process in 1989. Both the Ways and Means Committee measure and the Senate
Finance Committee measure included a geographic adjustment for the overhead and
malpractice components of the fee schedule, but not for the physician work
component. However, the Energy and Commerce Committee version provided for
an adjustment. The Committee noted:
The PPRC, in its annual report for 1989, recommended that the physician work
effort component of the fee schedule not be adjusted at all for geographic
variations, on the grounds that the physician’s time and effort should be given the
same valuation everywhere in the country. The Committee does not agree with
this recommendation. The Committee recognizes that the cost-of-living varies
around the country and that other professionals are compensated differently,
based on where they perform their services. The Committee is concerned that,
if no adjustment is made in the physician work effort component, fees in high
cost areas may be reduced to such an extent that physician services in such areas
would become inaccessible. The Committee is also concerned, however, that a
full adjustment of this component, in accord with the index developed by the
Urban Institute, would be disadvantageous to the low valuation areas and would
not serve the Committee’s policy goal of fostering a better distribution of
physician personnel. Fees in those areas might be too low to attract physicians
and to resolve problems of access that have occurred.
The index chosen by the Committee tries to balance these concerns. It makes the
adjustment in the physician work effort component, but cuts the impact of the³⁶
original Urban Institute index in half ....
The 1989 budget reconciliation bill passed by the House included both the Ways
and Means Committee and Energy and Commerce Committee versions of reform.
The Senate Finance Committee version was not in the Senate-passed version because
all Medicare and non-Medicare provisions which did not have specific impact on
outlays (and therefore could not withstand a point of order based on the “Byrd rule”)
were struck from the Senate bill. Since the physician payment reform provisions
were designed to be budget neutral they were not included. Therefore, the Senate
physician fee schedule provisions were not technically in conference.
After considerable deliberation, the conference committee approved a
reconciliation bill which included physician payment reform. The conference
agreement provided that one-quarter of the geographic differences in physician work
would be reflected in the fee schedule. The accompanying report described the
provision but contained no discussion of this issue.
MMA contained several provisions relating to the geographic calculations. The
law set a floor of 1.0 on the work adjustment for the 2004-2006 period. TRHCA
extended the provision through 2007; MMSEA extended it through the first six
months of 2008; and MIPPA extends it through 2009. MMA also raised the
adjustments in Alaska for the work component, practice expense component, and
malpractice component to 1.67 for the 2004-2005 period; this provision was not

³⁶ U.S. Congress, House Committee on the Budget, Omnibus Budget Reconciliation Act of

1989, report to accompany H.R. 3299, September 20, 1989.

extended. However, MIPPA specifies that beginning January 1, 2009, the work
geographic adjustment is raised to 1.5 in Alaska if the index would otherwise be less
than 1.5.
Calcul ation³⁷
Work Component. The law defines the physician work component as the
portion of resources used in furnishing the service that reflects physician time and
intensity. The geographic adjustment to the work component is measured by net
income. The data source used for making the geographic adjustment has remained
relatively unchanged since the fee schedule began in 1992. The original
methodology used median hourly earnings, based on a 20% sample of 1980 census
data of workers in six specialty occupation categories with five or more years of
college. (At the time, the 1980 census data were the latest available.) The specialty
categories were (1) engineers, surveyors, and architects; (2) natural scientists and
mathematicians; (3) teachers, counselors, and librarians; (4) social scientists, social
workers, and lawyers; (5) registered nurses and pharmacists; and (6) writers, artists,
and editors. Adjustments were made to produce a standard occupational mix in each
area. HHS has noted that the actual reported earnings of physicians were not used
to adjust geographical differences in fees, because these fees in large part are the
determinants of earnings. HHS further stated that they believed that the earnings of
physicians will vary among areas to the same degree that the earnings of other
professionals will vary.
Calculations for the 1995-1997 indices also used a 20% census sample of
median hourly earnings for the same six categories of professional specialty
occupations. However, the 1990 census no longer used a sample of earnings for
persons with five or more years of college. For 1990, data were available for all —
education and advanced degree samples. HHS selected the all education sample
because it felt the larger sample size made it more stable and accurate in the less
populous areas. The 1995-1997 indices also replaced metropolitan-wide earnings
with county-specific earnings for consolidated metropolitan statistical areas
(CMSAs) which are the largest metropolitan statistical areas.
Virtually no changes were made in the 1998-2000 work indices from the indices
in effect for 1995-1997. Similarly, virtually no changes were made in the 2001-2003
work indices.³⁸ This was because new census data were not available. HHS
examined using other sources (including the hospital wage index used for the hospital
prospective payment system); however, for a variety of reasons, it was unable to find
one that was acceptable. It felt that making no changes was preferable to making
unacceptable changes based on inaccurate data. It further noted that updating from

³⁷ Much of the discussion in this section is drawn from (1) “Medicare Program; Revisions
to Payment Polices Under the Physician Fee Schedule for Calendar Year 2001; Proposed
Rule,” 65 Federal Register 44189, July 17, 2000; and (2) “Medicare Program; Revisions to
Payment Polices Under the Physician Fee Schedule for Calendar Year 2001; Final Rule,”

65 Federal Register 65404, November 1, 2000.

³⁸ In both cases very slight, very technical adjustments were made.

the 1980 to 1990 census (for the 1995-1997 indices) had generally resulted in a small
magnitude of changes in payments.
It was expected that the 2004 update would reflect the 2000 census data.
However, CMS stated that the work and practice expense adjustments relied on
special tabulations which had not been completed in time for use in the 2004 fee
schedule. The 2000 data is being used for 2005-2008. The same data sources and
methodology used for the development of the 2001-2003 period were used for the
subsequent periods.
Practice Expense Component. The geographic adjustment to the practice
expense component is calculated by measuring variations for three categories:
employee wages, office rents, and miscellaneous.
Employee wages are measured using median hourly wages of clerical workers,
registered nurses, licensed practical nurses, and health technicians. As is the case for
calculating the work indices, the 2000 census is used for 2005-2008.
Office rents are measured by using residential fair market rental (FMR) data for
residential rents produced annually by the Department of Housing and Urban
Development (HUD). Commercial rent data has not been used because HHS has
been unable to find data on commercial rents across all fee schedule areas. HUD
publishes the data on a metropolitan area basis.
The costs of medical equipment, supplies, and miscellaneous expenses are
assumed not to vary much throughout the country. Therefore, this category has
always been assigned the national value of 1.000.
Malpractice component. Malpractice premiums are used for calculating the
geographic indices. Premiums are for a mature “claims made” policy (a policy that
covers malpractice claims made during the covered period) providing $1 million to
$3 million coverage. Adjustments are made to incorporate costs of mandatory patient
compensation funds. CMS updates the geographic adjuster based on the most recent
premiums information.

Appendix D. Development of
Practice Expense Payment Methodology
Practice Expenses
Background. The relative value for a service is the sum of three components:
physician work, practice expenses, and malpractice expenses. Practice expenses
include both direct costs (such as nurses and other nonphysician personnel time and
medical supplies used to provide a specific service to an individual patient) and
indirect costs (such as rent, utilities, and business costs associated with maintaining
a physician practice). When the fee schedule was first implemented in 1992, the
calculation of work relative value units was based on resource costs. At the time,
there was insufficient information to determine resource costs associated with
practice expenses (and malpractice costs). Therefore payment for these items
continued to be based on historical charges.
A number of observers felt that the use of historical charges provided an
inaccurate measure of actual resources used. The Social Security Act Amendments
of 1994 (P.L. 103-432) required the Secretary of Health and Human Services to
develop a methodology for a resource-based system which would be implemented
in CY1998. HCFA (now CMS) developed a proposed methodology which was
published as proposed rule-making June 18, 1997. Under the proposal, expert panels
would estimate the actual direct costs (such as equipment and supplies) by procedure;
HCFA then assigned indirect expenses (such as office rent and supplies) to each
procedure. This “bottom up” methodology proved quite controversial. A number of
observers suggested that sufficient accurate data had not been collected. They also
cited the potential large scale payment reductions that might result for some
physician specialties, particularly surgical specialties.
BBA 97. BBA 97 delayed implementation of the practice expense methodology
while a new methodology was developed and refined. BBA 97 provided that only
interim payment adjustments to existing historical charge-based practice expenses
would be made in 1998. It established a process for the development of new relative
values for practice expenses and provided that the new resource-based system would
be phased-in beginning in CY1999. In 1999, 75% of the payment would be based
on the 1998 charge-based relative value unit and 25% on the resource-based relative
value. In 2000, the percentages would be 50% charge-based and 50% resource-
based. For 2001, the percentages would be 25% charge-based and 75% resource-
based. Beginning in 2002, the values would be totally resource-based.
HCFA developed the required new methodology which was labeled the “top
down” approach. For each medical specialty, HCFA estimated aggregate spending
for six categories of direct and indirect practice expenses using the American
Medical Association’s (AMA’s) Socioeconomic Monitoring System (SMS) survey
data and Medicare claims data. Each of the direct expense totals (for clinical labor,
medical equipment, and medical supplies) were allocated to individual procedures
based on estimates from the specialty’s clinical practice expert panels (CPEPs).
Indirect costs (for office expenses, administrative labor, and other expenses) were
allocated to procedures based on a combination of the procedure’s work relative

value units and the direct practice expense estimates. If the procedure was performed
by more than one specialty, a weighted average was computed; this average was
based on the frequency with which each specialty performed the procedure on
Medicare patients. The final step was a budget neutrality adjustment to assure that
aggregate Medicare expenses were no more or less than they would be if the system
had not been implemented.
Subsequent Modifications. During the phase-in period, Congress and
others continued to evidence concern regarding the survey data being used. BBRA
99 required the Secretary to establish a process under which data collected or
developed outside HHS would be accepted and used to the maximum extent
practicable and consistent with sound data practices. These outside data would
supplement data normally developed by HHS for determining the practice expense
component. Under this authority, CMS has accepted supplemental data from seven
specialties.
CMS continued to refine practice expense relative value units on an ongoing
basis. Assisting in this process was a multispecialty subcommittee of the AMA’s
RUC. This subcommittee, the Practice Expense Advisory Committee (PEAC),
reviewed CPEP clinical staff, equipment, and supply data for physicians’ services.
It made recommendations to CMS based on this review. CMS implemented most of
the refinements recommended by the RUC and PEAC. Recently, the PEAC was
replaced by the Practice Expense Review Committee (PERC).
In its proposed rule-making for the 2006 fee schedule, CMS proposed to revise
the calculation used to determine practice expenses. This proposal was withdrawn
in the final rule, primarily because incorrect calculations were published in the
proposed fee schedule. A modified version is incorporated in the 2007 fee schedule.
2007 Fee Schedule. The 2007 fee schedule incorporated a major revision
in the way practice expenses are calculated. CMS stated that the revisions should
make the process more transparent and easier to understand. The following are the
major changes:
^!Use of a “bottom-up” method to calculate direct practice expenses.
CMS states that data refinements by the PEAC/PERC/RUC process
has enabled it to use this approach. The direct costs are to be
determined by adding the costs of the resources (clinical staff,
equipment and supplies) typically required to provide the service.
^!Use of practice expense survey data from eight specialties:
allergy/immunology, cardiology, dermatology, gastroenterology,
radiology, radiation oncology, urology and independent diagnostic
testing facilities.
^!Elimination of an exception to the previous methodology, the
“nonphysician work pool” which was used to calculate practice
expenses for service codes without a physician work component (i.e.
technical component codes and codes for services furnished by

nonphysicians). These services will now be priced using the standard
practice expense methodology.
^!Incorporate technical modifications in the calculation of indirect
practice expenses.
The changes are being phased-in over four years, 2007-2010.

Appendix E. Private Contracting Rules
Private contracting is the term used to describe situations where a physician and
a patient agree not to submit a claim for a service which would otherwise be covered
and paid for by Medicare. Under private contracting, physicians can bill patients at
their discretion without being subject to upper payment limits specified by Medicare.
HCFA (now CMS) had interpreted Medicare law to preclude such private contracts.
BBA 97 included language permitting a limited opportunity for private contracting,
effective January 1, 1998. However, if and when a physician decides to enter a
private contract with a Medicare patient, that physician must agree to forego any
reimbursement by Medicare for all Medicare beneficiaries for two years. The patient
is not subject to the two-year limit; the patient would continue to be able to see other
physicians who were not private contracting physicians and have Medicare pay for
the services.
How Private Contracting Works
HCFA issued regulations November 2, 1998 (as part of the 1999 physician fee
schedule regulations) which clarified private contracting requirements. The following
highlights the major features of private contracting arrangements.
^!Physicians and Practitioners. A private contract may be entered
into by a physician or practitioner. Physicians are doctors of
medicine and osteopathy. (BBA 97 did not include chiropractors,
podiatrists, dentists, and optometrists. MMA includes these limited
license practitioners, except for chiropractors who remain unable to
enter into private contracts). Practitioners are physician assistants,
nurse practitioners, clinical nurse specialists, certified registered
nurse anesthetists, certified nurse midwives, clinical psychologists,
and clinical social workers.
^!Beneficiaries. Private contracting rules apply only to persons who
have Medicare Part B.
^!Contract Terms. The contract between a physician and a patient
must: (1) be in writing and be signed by the beneficiary or the
beneficiary’s legal representative in advance of the first service
furnished under the arrangement; (2) indicate if the physician or
practitioner has been excluded from participation from Medicare
under the sanctions provisions; (3) indicate that by signing the
contract the beneficiary agrees not to submit a Medicare claim;
acknowledges that Medigap plans do not, and that other
supplemental insurance plans may choose not to, make payment for
services furnished under the contract; agrees to be responsible for
payments for services; acknowledges that no Medicare
reimbursement will be provided; and acknowledges that the
physician or practitioner is not limited in the amount he or she can
bill for services; and (4) state that the beneficiary has the right to
obtain Medicare-covered items and services from physicians and
practitioners who have not opted-out and that the beneficiary is not
compelled to enter into private contracts that apply to other services

provided by physicians and practitioners who have not opted-out.
A contract cannot be signed when the beneficiary is facing an
emergency or urgent health care situation.
^!Affidavit. A physician entering into a private contract with a
beneficiary must file an affidavit with the Medicare carrier within 10
days after the first contract is entered into. The affidavit must: (1)
provide that the physician or practitioner will not submit any claim
to Medicare for two years; (2) provide that the physician or
practitioner will not receive any Medicare payment for any services
provided to Medicare beneficiaries either directly or on a capitated
basis under Medicare Advantage; (3) acknowledge that during the
opt-out period services are not covered under Medicare and no
Medicare payment may be made to any entity for his or her services;
(4) identify the physician or practitioner (so that the carrier will not
make inappropriate payments during the opt out period); (5) be filed
with all carriers who have jurisdiction over claims which would
otherwise be filed with Medicare; (6) acknowledge that the
physician understands that a beneficiary (who has not entered a
private contract) who requires emergency or urgent care services
may not be asked to sign a private contract prior to the furnishing of
those services; and (7) be in writing and be signed by the
practitioner.
^!Effect on Non-Covered Services. A private contract is unnecessary
and private contracting rules do not apply for non-covered services.
Examples of non-covered services include cosmetic surgery and
routine physical exams.
^!Services Not Covered in Individual Case. A physician or
practitioner may furnish a service that Medicare may cover under
some circumstances but which the physician or practitioner
anticipates would not be considered “reasonable and necessary” in
the particular case (for example, multiple visits to a nursing home).
If the beneficiary receives an Advance Beneficiary Notice” (ABN)
that the service may not be covered, a private contract is not
necessary to bill the patient if the claim is subsequently denied by
Medicare. There are no limits on what may be charged for the non-
covered service.
^!Medicare Advantage and Private Contracting. A private contracting
physician may not receive payments from a Medicare Advantage
(formerly Medicare+Choice) organization for Medicare-covered
services provided to plan enrollees under a capitation arrangement.
^!Ordering of Services. Medicare will pay for services by one
physician which has been ordered by a physician who has entered a
private contract (unless such physician is excluded under the
sanctions provisions). The physician who has opted out may not be
paid directly or indirectly for the ordered services.
^!Timing of Opt-Out. Participating physicians can enter a private
contract (i.e., “opt out”) at the beginning of any calendar quarter,
provided the affidavit is submitted at least 30 days before the
beginning of the selected calendar quarter. Nonparticipating
physicians can opt out at any time.

^!Early Termination of Opt-Out. A physician or practitioner can
terminate an opt-out agreement within 90 days of the effective date
of the first opt out affidavit. To properly terminate an opt-out, the
individual must: (a) notify all carriers with which he or she has filed
an affidavit within 90 days of the effective date of the opt-out
period; (b) refund any amounts collected in excess of the limiting
charge (in the case of physicians) or the deductible and coinsurance
(in the case of practitioners); (c) inform patients of their right to have
their claims filed with Medicare for services furnished during the
period when the opt-out was in effect.
Issues
Prior to passage of the BBA provision, HCFA had interpreted Medicare law to
preclude private contracts. Proponents of private contracting argued that private
contracting is a basic freedom associated with private consumption decisions.
Patients should be allowed to get services from Medicare and not have Medicare
billed for the service. Advocates of private contracting generally object to
Medicare’s payment levels and balance billing limitations. They state that if
Medicare is not paying the bill, physicians who choose to private contract should not
be governed by Medicare’s rules.
Opponents of private contracting contend that the ability to enter into private
contracts benefits the pocketbooks of physicians and creates a “two-tiered system”
— one for the wealthy and one for other Medicare eligibles. The two-tiered system
would allow wealthier beneficiaries to seek care outside of Medicare and could
conceivably create a situation where only wealthier beneficiaries have access to the
Nation’s, or an area’s, leading specialists for a medical condition. A further concern
is that beneficiaries living in areas served by only private contracting specialists
would be unable to afford the bill (which could be any amount) and therefore forgo
needed care.
The BBA 97 provision provided a limited opportunity for private contracting.
However, the two-year exclusion proved very controversial. Proponents of private
contracting viewed the two-year exclusion as a disincentive to enter these
arrangements. They argued that physicians should not be excluded entirely from
Medicare because of their decision to contract in an individual case. Other observers
were concerned that removal of the two-year limit would place beneficiaries at risk.
They contended that more physicians would elect to private contract if they could do
it on a service-by-service basis. Beneficiaries might not know sufficiently in advance
whether a particular service would or would not be paid by Medicare. Following
enactment of the private contracting provision in 1997, some efforts were made to
eliminate the two-year exclusion. However, the provision has not been amended or
repealed, except for the MMA provision allowing podiatrists, dentists, and
optometrists to private contract.