However, Medicare pays physicians by procedure, such as a skin biopsy. The key aspects of HCFA’s approach were the use of (1) expert panels to estimate direct costs, (2) a series of HCFA’s own methods to adjust the direct cost estimates, and (3) another HCFA method to allocate indirect expenses to procedures. After considering this option and the limitations of survey data already gathered by other organizations, HCFA decided to use expert panels to estimate the relative resources associated with medical procedures. Various medical specialty and physician groups, however, have criticized this methodology. Other Methods for Estimating Direct Expenses Have Limitations

Several medical specialty groups have recommended that HCFA use actual practice expense data, rather than the CPEP process, as the basis for estimating direct expenses and calculating RVUs. Given HCFA’s time and resource constraints, using surveys and on-site data gathering methodologies as the primary means to estimate the direct expenses associated with procedures is not practicable. Gathering some direct expense data through either surveys or on-site reviews would enable HCFA to identify any egregious problems with the direct expense relative rankings and help focus its efforts on correcting those problems. CPEP Estimates Need Adjustment, but One of HCFA’s Adjustments Raises Questions

HCFA staff believed that each of the CPEPs developed reasonable relative rankings of its assigned procedures but found that for some procedures the labor estimates often varied considerably across CPEPs for the same procedures. III provides more detailed information regarding HCFA’s linking methodology and its limitations.) While beneficiary access to care has remained very good since implementation of the fee schedule in 1992, the cumulative effect of prior and proposed changes to the fee schedule will need to be monitored to ensure that Medicare beneficiaries are not denied access to needed care because of lower payment levels. Not only is this method supported by medical researchers and PPRC, but other options for developing these estimates have practical limitations that preclude their use as reasonable alternatives. Collecting actual data on key procedures from a limited number of physician practices through surveys or on-site reviews during the 3-year phase-in period would enable HCFA to check the reliability of the CPEP data and test the assumptions HCFA used for its adjustments. Information supplied by some physician groups indicates, however, that there may have been a shift in hospital and physician practices that Medicare has not recognized in its methods for reimbursing nonphysician clinical labor expenses. HCFA’s use of physician work, direct practice expense, and malpractice expense RVUs is an acceptable option for assigning indirect expenses to procedures since these factors likely reflect the drivers of indirect expenses. For example, HCFA could use specialty-specific indirect expense ratios, based on the SMS survey data. The potential impact of the proposed new fee schedule allowances for physician practice expenses on beneficiary access to care is unknown at this time. Since these three aspects of HCFA’s methodology are interrelated, HCFA should determine how changes in one aspect of the methodology, such as reclassifying some labor from direct to indirect expenses, affect other aspects of the methodology, such as the specification of the regression model to link the panels’ estimates of administrative labor and the method used to allocate indirect expenses. The Practice Expense Coalition said that the fee schedule revisions may cause other changes in medical practice. 2. HCFA found that the panel estimates for a redundant code often differed. 1.
Why GAO Did This Study

Pursuant to a legislative requirement, GAO reviewed the Health Care Financing Administration's (HCFA) proposed practice expense revisions and its ongoing efforts to refine its data and methodologies, focusing on: (1) HCFA's approach for estimating the practice expenses directly associated with each medical service or procedure; (2) two methodologies HCFA used to adjust the direct expense estimates; (3) practice expenses excluded or limited by HCFA; (4) HCFA's method for assigning indirect practice expenses to each medical service or procedure; and (5) the potential impact of the new fee schedule allowances on beneficiary access to care.

What GAO Found

GAO noted that: (1) HCFA used expert panels--consisting of physicians, administrators, and nonphysician clinicians--to estimate the direct labor and other direct practice expenses associated with medical service or procedures; (2) GAO explored alternative primary data gathering methods, such as mailing out surveys, using existing survey data, and gathering data on-site; (3) GAO concluded that each of those methods has practical limitations that preclude its use as a reasonable alternative to HCFA's use of expert panels; (4) gathering data directly from a limited number of physician practices would, however, be a useful external validity check on HCFA's practice expense rankings and would also help HCFA identify refinements needed during phase-in of the fee schedule revision; (5) the panels' estimates of direct practice expenses needed several types of adjustment; (6) GAO found problems, however, with one of HCFA's adjustment methods, which substantially altered the practice expense rankings; (7) specifically, HCFA used a statistical model to reconcile significant differences among various panels' estimates for the same procedure; (8) GAO identified technical weaknesses in the model that may have biased the estimates; (9) HCFA excluded some physician practice expenses from the panels' estimates because it believes that Medicare pays for those expenses through other mechanisms; (10) physician groups, however, argue that shifts in medical practices have resulted in physicians absorbing these expenses; (11) HCFA also placed upper limits on the panels' administrative and clinical labor estimates, and although these limits seem reasonable to HCFA, they are not supported by any data or analysis; (12) HCFA's method for assessing indirect expenses to medical procedures is acceptable--there is no single best way on the basis of each procedure's total relative value units (RVU) for physician work, direct practice expenses, and malpractice expenses, factors that likely reflect some of the variation on the ratio between direct and indirect expenses among physician specialties; (13) however, the survey data collected by a physician organization might provide more straightforward estimates of specialty--specific indirect cost ratios, and that organization is willing to expand its survey for HCFA's use; and (14) the 1992 implementation of the fee schedule resulted in lower Medicare payments to some medical specialties, but subsequent studies found that Medicare beneficiaries' access to care remained very good.