HCFA goes back to the drawing board with proposed practice expense rule

New approach cuts potential gains coming to primary care practices

The roller-coaster campaign to institute a revamped practice expense formula for Medicare's physician fee schedules did another loop-the-loop last month when federal regulators proposed a fundamentally revised approach to formulating practice expense costs.

In a proposed rule published in the June 5 Federal Register, HCFA backed away from its previous so-called "bottom-up" method of determining practice expense costs based on data collected from specially created physician panels and extrapolated to overall estimated costs. The latest version being proposed is a "top down" accounting-oriented approach using actual practice expense cost data already being collected by regular American Medical Association surveys. (See chart below.)

"We believe the top-down methodology is more responsive than the bottom-up approach . . . [by] recognizing all of a specialty's costs, not just those linked with specific procedures," HCFA noted in the preamble to its proposed rule.

The practical intent of instituting a new resource-based relative value unit practice expense formula has always been simple: Shift more Medicare dollars to primary care and office-based procedures, which experts like the Physician Payment Review Commission argue have been undervalued and underpaid by the existing cost-based system. Accomplishing this goal, however, means cutting payments to surgical and hospital-intensive procedures proportionally.

Just how - and by how much - to shift these payments between specialties has been at the center of this entire practice expense process.

Based on initial reviews, primary care and typical office medical services still come out on the plus side under HCFA's new top-down way of calculating costs, but the gains are much less generous than those contained in the agency's 1997 proposal.

Under the practice expense guidelines floated by HCFA last year, office-oriented specialties like optometry, podiatry, dermatology, and family practice would have seen their estimated annual Medicare income jump between 12% and 24%.

In contrast, hospital-intensive physicians such as surgeons and cardiologists were looking at cuts between 9% and 20% in their potential Medicare income.

"Compared to 1997, just about all the specialties that could have taken a big cut do anywhere from 25% to 50% better under this latest proposal," says Randy Fenninger, co-chair of the Washington, DC-based Practice Expense Coalition, a lobbying group organized by mostly surgical and hospital specialties.

The total Medicare income potentially being transferred between specialties by changes in the practice expense formula is estimated at some $4 billion annually. This means HCFA's top-down approach could place between $1 billion and $2 billion in Medicare payments that would have been lost under the 1997 proposed rule back in the pockets of hospital-intensive practices.

A smaller potential loss for surgical specialties, however, also means punier gains for primary care physicians.

Except for office-based internists, who are expected to experience above-average gains, "on average, internal medicine as a specialty is projected to just break even or do slightly better under the top-down approach," says Alan R. Nelson, MD, executive vice president of the Washington, DC-based American Society of Internal Medicine (ASIM).

However, ASIM questions whether it can support this new approach because it seems to "allow inequities in payments to continue that exist under the current historical, charged-based methodology," says Nelson.

By contrast, the American Medical Association supports the idea. "The new method is consistent with our view that practice expense values should better reflect data on physicians' actual practice expenses," says AMA spokesman Timothy T. Flaherty, MD.

Congress mandated that a four-year transition to a completely new RVU-based practice expense formula start Jan. 1, 1999. A so-called "down payment" of $390 million in increased primary care payments took effect this year.

Theoretically, this leaves less than six months for these various competing specialties and HCFA to finalize a debate that has been raging since 1993 about how to redistribute billions in potential Medicare payments to physicians.

"While I expect some more oversight hearings, what Congress has basically told the parties involved is it is time for us to sit down and work out a resolution to this issue between each other, and hopefully, do it quickly, " says one provider group lobbyist.

HCFA said it turned to the top-down approach to practice expense relative values in an effort to respond to criticism from the General Accounting Office about its previous approach while also attempting to deal with the requirements placed on it by the Balanced Budget Act of 1997.

By using this new method, "we are recognizing all of a specialty's costs, not just those linked with a specific procedure," HCFA noted in the June 5 proposed rule. And by basing the redistributions of the practice expense system on physician-reported actual practice expense data (from the American Medical Association), as well as using a specialty-specific allocation method and treating administrative costs as indirect expenses, HCFA says it has shored up many of the mathematical and data weaknesses in its earlier approach.

Under this new method of calculating practice expense relative value units, HCFA will start with aggregate practice costs in each physician specialty derived from the American Medical Association's Socioeconomic Monitoring System.

These data will be used to calculate practice expenses generated for every hour a physician works. The average practice expense per hour is then multiplied by the number of hours worked by that specialty to treat Medicare patients.

The total would then be allocated to five cost pools: administrative, clinical labor, medical supplies, equipment costs and other. These costs are then reallocated down to specific procedures and codes performed by various provider specialities.

"By using aggregate specialty practice costs as the basis for establishing the practice expense pools, we are recognizing all of a specialty's costs, not just those linked with a specific procedure," HCFA said in the proposed rule.

HCFA's previously "bottom-up" approach had expert panels estimate the actual costs for each procedure of staff time, supplies, and equipment, and then used the estimates to build up to direct practice expense RVUs.