How do Medicare physician fees compare with private payers?

Health Care Financing Review, Spring, 1993 by Mark E. Miller, Stephen Zuckerman, Michael Gates

INTRODUCTION

To address the problem of rising Medicare physician expenditures, Congress reformed Medicare physician payments as part of the Omnibus Budget Reconciliation Act (OBRA) of 1989 (Public Law 101-293). The reform has three parts: a fee schedule based on relative values, volume performance standards, and limits on the amount physicians can bill patients above the Medicare fee schedule (MFS). The MFS, the focus of this article, is a major departure from the customary, prevailing, and reasonable (CPR) reimbursement methodology it replaced. Most importantly, the MFS is intended to reduce the difference in reimbursement for cognitive services relative to procedural services that recent research efforts have found to be unjustified (Hsiao et al., 1992), by granting greater weight to the former in the fee schedule. The MFS is also designed to correct geographic distortions in charging practices thought to be fueled by the CPR methodology.(1)

The regulatory impact analysis estimated a 6-percent reduction in Medicare payments per service nationally relative to the CPR reimbursement methods by 1996 when the MFS is fully implemented with varying effects by specialty and State (Federal Register, 1991). The regulatory impact analysis focused only on the Medicare program (i.e., the impact of the MFS relative to CPR), and left the question of how physician payments under the MFS compare with private insurance physician fees unanswered.

This question has two important policy implications. Assuming the MFS is used only for Medicare, there is widespread consensus that publicly insured beneficiaries' access can be curtailed when payment rates fall well below those in the private sector. This has been particularly well documented for the Medicaid program (Sloan, Mitchell, and Cromwell, 1978; Mitchell and Schurman, 1984; Held and Holahan, 1985; Long, Settle, and Stuart, 1986). In addition, higher Medicare fees, holding private rates constant, have been found to be positively related to decisions to formally participate and accept assignment (Mitchell, Rosenbach, and Cromwell, 1988; Mitchell and Cromwell, 1982; Paringer, 1980; Rice, 1984; Rice and McCall, 1982; Rodgers and Musacchio, 1983).(2) Private fees, on the other hand, are negatively related to decisions to participate and accept assignment.(3) Of course, physicians' ability to leave the Medicare program altogether is presumably more limited than their ability to leave Medicaid--Medicare beneficiaries are high utilizers of physician services, and the program represents approximately 24 percent of physician revenues.

Another reason for analyzing the relationship between Medicare fees and private fees relates to the growing interest in replacing the current payment methodologies used by private payers thought to result in inappropriate pricing patterns with a more rational approach. One possible approach is the adoption of Medicare payment rules by private payers as part of a broad-based health financing reform. For example, if private payers adopted the MFS, including the conversion factor and geographic adjusters, to set their reasonable charge screens, then the difference between the private and Medicare levels of payments would provide some guide as to how physicians' revenues might be affected. If earlier studies that show the MFS has fees below those in the private sector are correct (Pope et al., 1991), then adoption of the MFS by private payers would suggest that physician revenues could fall. This would mean that payments by private payers would fall and, at the same time, copayments by private patients would be lower. Depending on private sector arrangements, balance billing could offset all or part of this reduction in copayments.

The purpose of this article is to examine the relationship between physician fees under the MFS and private physician fees.($) This relationship will be examined by type of service (e.g., do fees for visits compare more favorably than fees for imaging?) and by Medicare payment locality. Although the MFS establishes fee levels designed to address the service type and geographic distortions noted earlier, significant variations in this relationship between Medicare and private fees can still exist by type of service and across localities. Analyzing the relationship between Medicare and private fees by type of service and by locality provides insight into those services and areas of the country that might be most affected by the move to the MFS and by the use of Medicare payment methodologies to establish private fees. A second step in the analysis will explore the underlying variation in Medicare and private fees--i.e., is the variation in Medicare and private fees across the United States comparable?

The next section of this article contains our methods for constructing the fee indexes. In the Results section, we analyze the relationship of Medicare fees to private fees overall and by type of service. Comparison between Medicare and private fees are made nationally and for groups of localities (i.e., classified into quartiles based on the ratio of Medicare to private fees). We also analyze the underlying variation driving the relationship between Medicare and private fees. The Discussion section discusses implications of the analysis.