Allocating practice expense under the Medicare fee schedule

Health Care Financing Review, Spring, 1993 by Gregory C. Pope, Russel T. Burge

In contrast to office services, the SRBFS fees for services typically performed in the hospital are usually significantly larger than PPRC's fees. Hospital visit fees, for example, range from 19 to 27 percent larger, and many surgical fees are 10 to 20 percent higher. The reason for the similarity of the office service fees, but dissimilarity of the hospital service fees, appears to be PPRC's office or non-office site-of-service differential. PPRC does not allocate clinical labor or medical equipment and supplies costs to non-office services (except partially to global surgical services). These direct costs account for about one-third of total practice expense, for all specialties. With about 40 percent of the Medicare fee paying for practice costs, PPRC's site-of-service differential implies about a 13-percent reduction in non-office fees, on average.

With a site-of-service differential of this magnitude, the SRBFS hospital surgery or visit fees would be much more similar to the PPRC fees.(6) As discussed earlier, we propose an off ice or non-office site-of-service differential for the SRBFS using information on the proportion of direct costs in total practice expense by specialty. Table 1 suggests that with an office or non-office site-of-service differential, the SRBFS and the PPRC resource-based fee schedule are similar for many services. Some implications of this similarity have been previously discussed.

As shown in Table 1, the SRBFS and the AMFS radiology fees are quite similar to the MFS fees. This occurs because of the way the MFS radiology fees were calculated from the pre-existing radiology fee schedule (Federal Register, 1991) and the! method we used to compute the SRBFS.(7) If resource-based malpractice RVUs are incorporated into the SRBFS, it will be impossible to compute SRBFS fees for the technical component of services which have no work RVUs.

Medicare Income Impacts by Specialty

Table 2 shows simulated changes in Medicare, income by specialty when historical allowed charges are replaced by the MFS, AMFS, or SRBFS. The impacts are graphed for selected specialties in Figure 1. (PUF does not contain information for anesthesia services. Therefore, the income redistributions for anesthesiologists reported in Tables 2 and 3 and Figures 1 and 2 pertain to income from non-anesthesia services billed by anesthesiologists.) It is important to remember that the simulations incorporate the MFS's 6.5-percent baseline adjustment reduction relative to historical allowed charges, and that they assume no volume response by physicians or patients to changes in relative fees. If there is a volume response, the impacts can still be interpreted as the change in payments per service (for the historical mix of services), but they will not accurately indicate the change in total Medicare income.

[TABULAR DATA 2 OMITTED]

The AMFS and SRBFS amplify the income redistributions of the MFS. Specialties oriented toward visits and consultations gain, and procedure-oriented specialties lose. The income gain or loss from the SRBFS is roughly 50 percent greater than the income change from the MFS. The income redistribution from the AMFS is approximately halfway between the MFS and SRBFS. The income redistributions are substantial. For example, general practice gains 29 percent from the MFS, 39 percent from the AMFS, and 47 percent from the SRBFS. Conversely, general surgery loses 14 percent from the MFS, 18 percent from the AMFS, and 20 percent f rom the SRBFS.