New directions for Medicare payment systems - Medicare Payment Systems: Moving Toward the Future

Health Care Financing Review, Winter, 1994 by Brigid Goody, Maria A. Friedman, William Sobaski

The MFS was implemented with one CF for all types of services. Since OBRA 1989 specified that VPSs be set separately for medical and surgical services, separate update factors were established for these services resulting in two CFs in FY 1993. As a result of this process, surgical services received a higher update factor than medical services. Since one of the MFS objectives was to increase compensation for cognitive services, OBRA 1993 (Public Law 103-66) created a third service category that separated primary care services from other medical services.

Geographic Adjustment Factors

MFS payments for individual services differ across MFS payment areas called localities according to locality-specific GAFs. The GAF is a weighted average of three geographic practice cost indexes (GPCIs) that measure geographic variations in the cost of physician work, practice, and malpractice expenses. For physician work, the index was based on geographic variation in hourly earnings for non-physician professions with 5 or more years of college. For practice expenses, the index was based on geographic variation in housing rents and in the hourly earnings of nurses, technicians, and clerical workers. For malpractice expenses, the index was based on geographic variation in malpractice premiums (Levy and Borowitz, 1992).

Since the implementation of MFS, these indexes have been criticized for several reasons. These include the age of the 1980 census data underlying many components of the indexes and the use of residential rents as a proxy for commercial rents. For 1996, the GPCIs will be based on more recent data: 1990 census data, 1994 Department of Housing and Urban Development data on fair market rent and a 3-year average (1990-92) of malpractice premium data. The transition to these update GPCIs begins in 1995. The use of residential rents as a proxy has been supported by studies showing a high correlation with indexes of commercial rents (Dayhoff and Pope, 1994; Gillis, Reynolds, and Willke, 1991).

Relative Values for Practice and Malpractice Expenses

OBRA 1989 specified that relative values for practice and malpractice expenses be calculated based on historical Medicare charge data. While OBRA 1993 imposed some constraints on the relative values for practice expenses, HCFA has initiated a more extensive effort to acquire data and develop methodologies needed to generate cost-based relative values for both practice costs and malpractice expenses. The Social Security Amendments of 1994 (Public Law 103-432) require that cost-based relative values for practice expenses be implemented in 1998.

Impact Studies

Although MFS will not be fully implemented until 1996, impact studies prepared by DHHS and the Physician Payment Review Commission (1994) suggest that the MFS has already been successful in achieving the objectives of narrowing the disparity in compensation between medical and procedural services and among geographic areas. These studies have also assessed preliminary physician response. So far, physician participation and assignment rates have increased since MFS implementation (Health Care Financing Administration, 1994b).