Practice expenses under the Medicare fee schedule : a resource-based approach

116 Pages·1992·6.6 MB·English

by  United States. Physician Payment Review Commission

PPRC PPRC PPRC
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PHYSICIAN
PAYMENT
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REVIEW
COMMISSION
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PRACTICE EXPENSES
UNDER THE MEDICARE
FEE SCHEDULE:
A RESOURCE-BASED
PPRC APPROACH PPRC
1992 1992
No. 92-1
PPRC PPRC
1992 1992
PPRC PPRC PPRC
1992 1992 1992
PPRC PPRC PPRC
1992 1992 1992
PPRC PPRC PPRC
1992 1992 1992

PHYSICIAN
PAYMENT
REVIEW
COMMISSION
PRACTICE EXPENSES
UNDER THE MEDICARE
FEE SCHEDULE:
A RESOURCE-BASED
APPROACH
NO. 92-1
NW
2120 L Street,
Suite 510
DC
Washington, 20037
[phone]
FAX [phone]

PREFACE
This report describes the Commission's research on a resource-based alternative to
calculating practice expense relative values under the Medicare Fee Schedule. It is the
culmination ofnearly three years' work on this topic. The estimates are based on limited data
and would not be appropriate for payment purposes. Despite the report's limitations,
however, the Commission hopes that it will help stimulate research into refining elements of
a resource-based method for calculating practice expense relative values.
Katie Merrell is the Commission staff member responsible for this report. Curt Mueller, a
former staff member, did much of the Commission's research on this topic. William
Koprowski, a former Robert Wood Johnson Faculty Finance Fellow with the Commission,
contributed his expertise as a certified management accountant to the development of the
resource-based approach. Jennifer Finneran, Annette Hennessey, Jack Hoadley, and Joyce
Malones ofthe Commission staffalso assisted in the publication ofthis report.
This research has benefitted from the contribution of physicians, practice managers,
administrators, and researchers from government agencies, academia, and the private sector.
In particular, the Commission would like to acknowledge those people who have been most
helpful with providing information or data: Marc Berk, William Crawford, Jansen Davis,
David Gans, Thomas Girton, Terrance Kay, Jesse Levy, Laura Mueller, Greg Nycz, Ron
Pfannerstill, Jack Pollard, Roger Reynolds, James Rogers, Steven S. Lazarus, Julie
Schoenman, Claudia Schur, Arlene Turner, Frederick Wenzel, and Donald Zais.
It is also grateful to those who participated in the three meetings on practice expenses under
the fee schedule that the Commission held over the past two years: Frank Ashburn, Kenneth
Bash, Robert Berenson, George Block, Richard Board, Joseph Boyle, Phyllis Brown, Dierdre
Byrne, John Curry, Joseph M. Davis, Charles P. Duvall, Paul Ebert, Patricia Finkelman,
Richard Furman, Kurt Gillis, Robert Graham, James Haug, David Helms, Paul Kantrowitz,
George Knaysi, William Maloney, Ernest Neighbor, William Nelligan, Thomas Nelson, Mark
Pauly, Edgar Pedon, Cynthia Root, Emmett O. Templeton, James Weber, Gerald Wedig, and
William L. Winters.
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CONTENTS
Preface iii
Executive Summary vii
Chapters
1 Background 1
2 Practice Expense Relative Values and Payments 5
3 Data Sources and Calculation ofTotal Payment Levels 1
4 Analysis 21
5 Variation in Direct Costs Across Practices 37
6 The Next Step: Considerations forFuture Research 43
Appendixes
A Calculation ofPractice Expense Values for HCFA's New
Evaluation and Management Codes 5
B Resource-Based and OBRA89 Practice Expense and
Total Payment Levels 55
Tables
2-1 Estimates ofComponents ofPractice Expense, 1989 5
2-2 Assignment ofCosts to Office and Non-Office Services 8
2-3 Development ofResource-Based Practice Expense Payments in a
Hypothetical Three-Service Health Care System 12
3-1 Distribution ofPart B Payments, by Service Family 14
3-2 Sample Time and Supplies Log for a Hypothetical Service 16
3-3 Sample Equipment/Service Matrix 17
4-1 Payment underthe Resource-Based and OBRA89 Method for
Five Services 22
4-2 Distribution ofPractice Expense and Total Payment Ratios:
Resource-Based and OBRA89 Methods 24
4-3 Payments underthe Resource-Based and OBRA89 Methods,
by Service Family 25
4-4 Payments underthe Resource-Based and OBRA89 Methods,
by Physician Specialty 26
4-5 Distribution ofPractice Expense and Total Payment Ratios:
Office and Non-Office 27
4-6 Payments underthe Hybrid Methods and OBRA89 Methods,
by Service Family 28
4-7 Payments underthe Hybrid and OBRA89 Methods,
by Physician Specialty 29
4-8 Distribution ofPractice Expense Payment and Total Payment Ratios,
Categorical Direct Input Measures and Resource-Based Baseline 32
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4-9 Distribution ofPractice Expense Payment and Total Payment Ratios,
Work-Based Indirect Costs and Resource-Based Baseline 34
5-1 Relative Labor Rankings of26 Services by Three Practices 42
A-l New Visit Codes 52
B-l Resource-Based and OBRA89 Practice Expense and Total
Payment Levels 57
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EXECUTIVE SUMMARY
The new Medicare Fee Schedule for physician payment is based on the principle that
physician payment levels for different services should reflect the relative use of physician
time and effort, staff time, supplies, equipment, and so forth. The physician work relative
value component of the fee schedule has been designed around this principle. However, the
practice expense and malpractice expense components are determined largely by historical
average allowed charges and therefore may not reflect relative input use.
The Commission has been concerned about the two charge-based components of the new fee
schedule and has been working to develop resource-based measures of these inputs. In short,
the resource-based practice expense method relies on common accounting practices to split
practice expenses into two groups: direct costs, which are attributable to a specific service;
and indirect costs, which are common to many or all services. Under this approach, direct
costs are determined by data on resource use across services while indirect costs are allocated
through a formula.
This report describes the Commission's work on three key issues: the types of data required
to develop resource-based relative values; the difficulty in collecting these data; and the
decisions and issues that arise throughout the data collection and relative value calculation
process. The estimates analyzed in this report are based on very limited data and therefore
should be interpreted as suggestive of the implications of a resource-based approach rather
than as a starting point for such a system.
The analysis shows that the estimated resource-based payment levels vary from those
obtained under the approach specified in the Omnibus Budget Reconciliation Act of 1989.
Therefore, payments by service family and across physician specialties are not the same
under the two approaches. The estimates also show that there is some variation in the site-of-
service differential across services that are performed in both office and non-office settings.
The analyses presented show that the estimates are not particularly sensitive to several key
assumptions, such as the wage level, fringe rate, and billing costs, or to compression of the
direct cost data into gross categories. The formula used to allocate indirect costs has a
moderate effect on the resulting payment estimates, while changes in the share of costs
classified as indirect have a smaller impact.
The Commission plans to develop a productive research agenda to advance the development
of resource-based practice expense relative values. It has learned some important lessons
about the data collection process and issues that should be addressed as this research
progresses.
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