These GPCIs adjust physician fees for variations  in physicians’ costs of providing care in different geographic areas. Physician Payment Localities Are Primarily Consolidations of the Carrier-Defined Localities That Were Established in 1966, Which CMS Has Since Revised Using Three Approaches That Were Not Uniformly Applied

The current 89 physician payment localities are primarily consolidations of  the payment localities that Medicare carriers first defined in 1966. 3). To facilitate this transition, CMS continued to use the 240  carrier-defined payment localities, but permitted state medical  associations to petition to consolidate their state into one statewide  payment locality. In revising the payment localities in 1997, CMS used two different  approaches. More Than Half of the Physician Payment Localities Had Counties within Them with Large Payment Differences

More than half of the physician payment localities we analyzed—47 of  87—had at least one county within them with a large payment difference— that is, there was a payment difference of 5 percent or more between  physicians’ costs and Medicare’s geographic adjustment for an area. However, a disproportionate number were located in five states. Specifically, 60 percent of counties with large payment differences were  located in California, Georgia, Minnesota, Ohio, and Virginia. Large payment differences occur because many payment localities  combine counties with very different costs. Large payment differences may also be due to the fact that although large  demographic changes have occurred in certain geographic areas, CMS has  not revised the payment localities in accordance with these changes. Several Alternative Approaches to the Physician Payment Localities Could Improve Payment Accuracy While Generally Imposing Minimal Additional Administrative Burden

Many alternative approaches could be used to revise the geographic  boundaries of the current payment localities. We examined five possible  approaches and found that three would improve payment accuracy while  generally imposing a minimal amount of additional administrative burden  on CMS, Medicare carriers, and physicians. Compared to the current  payment localities, four of the five alternative approaches would improve  payment accuracy, the extent to which each approach accurately  measures variations in physicians’ costs of providing care. 14). Currently, CMS has no mechanism in place to periodically update the  physician payment localities to ensure that the geographic boundaries of  the payment localities accurately address variations in the costs of  operating a private medical practice. These  states represent geographically diverse areas, as well as Medicare  physician payment localities that were established in 1966 using carrier  definitions, localities that were revised from 1992 through 1995 using a  physician overwhelming support approach for a statewide locality, and  localities that were revised in 1997 using a CMS approach designed to  consolidate carrier-defined localities. We  constructed a proxy measure of the costs physicians incur for providing  services in a particular county (the county-specific GAF) and compared  this measure with Medicare’s geographic adjustment for the locality to  which that county is assigned and is a proxy for physicians’ costs in a  locality (the locality GAF).
Why GAO Did This Study

The Centers for Medicare & Medicaid Services (CMS) adjusts Medicare physician fees for geographic differences in the costs of operating a medical practice. CMS uses 89 physician payment localities among which fees are adjusted. Concerns have been raised that the boundaries of some payment localities do not accurately address variations in physicians' costs. GAO was asked to examine how CMS has revised the localities; the extent to which they accurately reflect variations in physicians' costs; and alternative approaches to constructing the localities. To do so, GAO reviewed selected Federal Register documents; compared data on the costs physicians incur in different areas with the Medicare geographic adjustment; and used the physician cost data to construct and evaluate alternative approaches.

What GAO Found

The current 89 physician payment localities are primarily consolidations of the 240 localities that Medicare carriers--CMS contractors responsible for processing physician claims--established in 1966. Since then, CMS has revised the payment localities using three different approaches that were not uniformly applied. From 1992 through 1995, CMS permitted state medical associations to petition to consolidate into a statewide locality if the state's physicians demonstrated "overwhelming support" for the change. In 1997, CMS revised the 28 states with multiple payment localities using two approaches: CMS consolidated carrier-defined localities in 25 states and created entirely new localities in 3 states. More than half of the current physician payment localities had counties within them with a large payment difference--that is, a payment difference of 5 percent or more between GAO's measure of physicians' costs and Medicare's geographic adjustment for an area. These 447 counties--representing 14 percent of all counties--were located across the United States, but a disproportionate number were located in California, Georgia, Minnesota, Ohio, and Virginia. Large payment differences occur because certain localities combine counties with different costs, which may be due to several factors. For example, although substantial population growth has occurred in certain areas, potentially leading to increased costs, CMS has not revised the payment localities in accordance with these changes. Many alternative approaches could be used to revise the geographic boundaries of the current payment localities. GAO identified three possible approaches that would improve payment accuracy while generally imposing a minimal amount of additional administrative burden on CMS, Medicare carriers, and physicians. One approach, for example, would improve payment accuracy, the extent to which each approach accurately measures variations in physicians' costs, by 52 percent over the current localities.