Practice expense proposal stirs protest among hospital-intensive surgeons

Some docs see data flaws

The Health Care Financing Administration’s June 18 release of the long-anticipated revision to its proposed practice expense rule has ignited an uproar among surgeons and other facility-intensive specialties, who are in store for a dramatic cut in their Medicare rates if this proposed resource-based reimbursement system is implemented. (See a reprint of Physician Payment Update’s June 17 fax bulletin explaining these changes on p. 115.)

While some physicians say they are willing to accept slight cuts, others argue the sea change in payments HCFA is suggesting can only come from a major flaw in its data. They say the whole project should be delayed, re-examined, and possibly started over from scratch.

"The magnitude of the changes being proposed by HCFA are totally out of proportion to anything we could have imagined. This in turn raises serious concerns about the the face validity of the data on which it is based," stresses Anthony DeMaria, MD, director of cardiology at the University of California-San Diego Medical Center.

"We obtained data about the direct resource inputs from the physician community," Kathleen Buto, associate administrator for policy at HCFA, told Congress shortly after its recommendations were published.

Also, HCFA "believes that the methodology we have used is fundamentally sound and that the data are not fundamentally flawed. We believe that our results are the best that can be achieved, given the information that is, or would likely become, available," said Buto.

Conceding the report is not perfect, Buto says HCFA will "refine the proposed values" in response to the information it receives over the proposed rule’s 60-day comment period.

Proposal stems from physician complaints

For years, physician groups and government leaders have argued that HCFA’s practice expense data should not be based on the historical data used in current calculations. The new proposal is a result of a 1993 report to Congress by the Physician Payment Review Commission that recommended changing the current practice expense formula to a relative value unit (RVU) basis, while also raising the reimbursement value of physician evaluation and management services, which HCFA contends are generally underpaid compared to surgical procedures.

"Physicians practicing in an office have to do about 100 office visits to receive the same amount of practice expense overhead payments as a surgeon gets for performing one bypass in a hospital. We think reasonable people would agree that’s out of line," notes a HCFA spokesperson. "Our analysis shows that a ratio of about 18 visits to one heart bypass procedure is more appropriate."

That’s one reason why specialties that provide more office-based services remain the big winners—and hospital-intensive practices the big losers—under HCFA’s revised resource-based practice expense formula.

The range of magnitude between losers and winners, however, was compressed somewhat compared to HCFA’s original January practice expense proposal.

For instance, cardiologists were projected to have cuts ranging from 20% to 25%, according to a preliminary report released by the Washington, DC-based American Society for Internal Medicine. In contrast, the June HCFA recommendation only cut projected cardiology payments by 17%.

Representing 41% of a physician’s Medicare fee schedule, practice expense is one of the three components of Medicare RBRVS payments. The other two components are physician work (54%) and malpractice costs (5%).

According to HCFA sources, office-oriented specialties like optometry, podiatry, dermatology, and family practice would see their estimated annual Medicare income jump between 12% and 24 % under its revised practice expense criteria.

Meanwhile, hospital-intensive physicians such as surgeons, cardiologists, and gastroenterologists could see their expected Medicare income plummet between 9% and 20 % if this proposal is implemented.

And that isn’t the only income hit hospital-intensive physicians will see. HCFA plans to eliminate its current policy of systematically reducing practice expense RVUs by 50% for physician services routinely furnished in a doctor’s office when they are provided in a hospital setting in favor of a new set of two-tier site-of-service-based practice expense RVUs—office and facility — affecting some 7000 procedure codes (see stories on this issue, pp. 125-126).

Cost allocation proves tough

One of the most difficult and controversial aspects of developing a resource-based practice expense formula has been allocation of indirect costs such as depreciation and employee benefits, especially when comparing office-based and hospital-based services. As HCFA’s proposed regulation acknowledges, "there is not a single, universally accepted approach for allocating indirect practice costs to individual procedure codes."

After evaluating several options, HCFA finally decided to allocate indirect costs based on direct practice expenses: cost of nonphysician administration and clinical labor, medical equipment, and medical supplies. "From a cost accounting standpoint, this method is appealing because it allocates indirect costs based on the variables that are expected to drive indirect costs," argues HCFA.

By law, these new practice expense regulations must be implemented by Jan. 1, 1998. However, word in Washington is that Congress will probably delay official implementation to 1999. Also, rather than institute these changes all at once, Congress is expected to instruct HCFA to design a multiyear phase-in to reduce the financial trauma for those physician specialties taking the hardest hits.

Beyond this, there is little else competing surgical and primary care physician groups seem to agree on when it comes to the practice expense proposal. An upcoming House-Senate conference committee is expected to face significant difficulty in reaching a compromise between their respective versions of implementation legislation. (See related story on p. 123 for details.)