	Background

The Medicare physician fee schedule has three components. The resource-based payments were required to  be budget neutral with respect to the former payment method, meaning  that Medicare’s aggregate payments to physicians could not change as a  result of the implementation of the new methodology. Oncology’s  practice expense payments in 2001 are 8 percent higher than they would  have been had the charge-based fee schedule continued in 2001. Medicare payments to oncologists equal about the same share of estimated  practice expenses as the average for all specialties. As a result, payments for some physician services  increased. Recommendations for Executive Action

To ensure that practice expense payments for all services under the fee  schedule better reflect the costs of providing services, we are  recommending that the Administrator of CMS:    examine the effects of adjustments made to the basic methodology across  specialties and types of services and validate the appropriateness of these  adjustments, including the adjustment made to oncologists’ reported  medical supply expenses, giving priority to those having larger impacts on  payment levels;    change the allocation of indirect expenses so that all services are allocated  the appropriate share of indirect expenses; and    calculate payments for all services without direct physician involvement  under the basic method, using information on the resources required for  each service, and, if deemed necessary, validate the underlying resource- based estimates of direct practice expenses required to provide each  service. Appendix II: Overview of Medicare’s Basic Practice Expense Method and Adjustments

This appendix details how the Health Care Financing Administration  (HCFA) developed resource-based practice expense payments.
What GAO Found

Medicare's physician fee schedule establishes payments for more than 7,000 different services, such as office visits, surgical procedures, and treatments. Before 1992, fees were based on charges physicians billed for these services. Since then, the Health Care Financing Administration (HCFA), which runs Medicare, has been phasing in a new fee schedule on the basis of the amount of resources used to provide that service relative to other services. The development of the resource-based practice expense component was a substantial undertaking. The implementation of the resource-based methodology has been the subject of considerable controversy, partly because of HCFA's adjustments to the underlying data and basic method and partly because payment changes were required to be budget-neutral--which means that total Medicare spending for physician services was to be the same under the new payment method as it was under the old one. As a result, Medicare payments to some specialties have increased while payments to other specialties have decreased. Oncologists claim that their practice expense payments are particularly inadequate for some office-based services, such as chemotherapy. Oncology practice expense payments in 2001 are eight percent higher than they would have been had charged-based payments continued. Oncology practice expense payments compared to their estimated practice expenses are about the same as the average for all physicians.