Allocating practice expense under the Medicare fee schedule

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

SIMULATION METHODS

To determine the impact of the specialty resource-based method of calculating fees, The simulated its effects on Medicare physician fees and incomes. We used two standards of comparison: historical allowed charges and the fully-phased-in MFS. HCFA's public use file (PUF) of physician services provided data for our simulations. Historical 1989 Medicare allowed charges "aged" to 1991, as well as historical service volumes, are available on the PUF. Also, the file contains work, practice expense, and malpractice RVUs from which we calculated MFS fees. Using historical volumes, aggregate payments under the MFS were reduced by 6.5 percent relative to estimated historical expenditures to reflect the (3.5-percent baseline adjustment that HCFA used in computing the MFS.

We calculated a specialty fully resource-based fee schedule (SRBFS) according to equation (6). We did not incorporate malpractice costs into practice expenses, but retained malpractice RVUs based on historical charges. Malpractice accounts for only 5 percent of total RVUs and it can easily be incorporated into the SRBFS in future work. Unfortunately, the [PEP.sub.i] necessary to compute the SRBFS are not on the PUF. We obtained the PEPS by inverting equation (1) because the PUF does contain practice expense RVUs and historical allowed charges.(2) Using our estimated PEPS and the work and malpractice RVUs, we calculated the SRBFS.

We also calculated an adjusted MFS (AMFS) by replacing the historical allowed charge by the post-transition MFS fee in calculation of the practice expense RVU. This fee is given by equation (9) except that malpractice expense is not incorporated into the PEP. The formula we used was: [AMFS.sub.i] = (13) [RVU.sub.w,i] [RVU.sub.m,i] [PEP.sub.i]([TRVU.sub.i]), where [TRVU.sub.i] = total RVUs under the MFS for service i. As previously discussed, the AMFS can be interpreted as the first iteration of a process beginning with the MFS that in the limit produces the SRBFS. We expect its fees and specialty income redistributions to be intermediate between the MFS and the SRBFS.

Conversion factors for both the SRBFS and the AMFS were determined to be budget neutral with respect to the fully phased-in MFS. Hence, they incorporate the MFS's 6.5-percent baseline adjustment from historical charges. No additional volume response by physicians or patients was simulated; we made no attempt to model how physicians or patients would change quantities in response to the fee changes in the SRBFS and the AMFS. HCFA's site-of-service modifier for 380 services was incorporated into the SRBFS and AMFS fees.

In sum, four fee schedules were computed using data from HCFA's PUF: (1) An historical allowed charge fee schedule; (2) the post-transition MFS; (3) an adjusted MFS where the historical charge is replaced by the MFS fee in calculating the practice expense RVU; and (4) the SRBFS, in which practice expense RVUs are the same percentage of total RVUs as physician practice costs are of total practice revenues. The latter three schedules are budget neutral with respect to each other, and 6.5 percent less expensive in aggregate than historical charges assuming no physician or patient volume response to fee changes. Budget neutrality also assumes that all physicians are paid at the fee schedule amounts: No allowance was made for physicians who charge less than Medicare allows, and thus receive less than the fee schedule. Geographic adjustments were ignored for all fee schedules: Only national fees and volumes were considered. All fees were updated by the Medicare update factor of 1.9 percent from 1991 to 1992. Also, all fee schedules are fully implemented (i.e., post-transition).