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Practice Expense Measures Were Collected Ten Years Ago, and Much Has Changed in the U.S. Health Care System Since Then

• There has been an overall shift away from physician ownership of practices, which emphasizes the importance of putting in place a system that can update PE valuation models to accommodate ongoing changes to the health care system.

Current Methodology May Not Accurately Capture Some Components of PE

• Services with extremely low levels of direct expenses may be allocated less PE than other types of services, relative to the resources typically required to furnish the service.
• Many physicians work almost entirely in a facility setting, and many services are typically performed by physicians who are facility-based. Physicians who work in non-facility settings incur certain practice expenses that facility-based physicians typically do not; the current system does not fully account for these differences.
• There is no established mechanism for regularly updating the direct and indirect cost estimates for each service.

Payment Differentials Across Ambulatory Settings Create Payment Incentives That Are Inconsistent with Furnishing Medical Care in the Medically Appropriate Setting

• It is feasible to use hospital outpatient costs to inform or replace the PE valuation process. Moving toward a system that uses the same underlying data to establish relative values across site of service could reduce payment differentials or allow for any explicit payment differentials to be transparent to policymakers, providers, and patients.

This report addresses concerns that aspects of the practice expense (PE) valuation methodology used to determine the Medicare Physician Fee Schedule (MPFS) contribute to misvalued payment rates. The fee for each service is denominated in relative value units (RVUs). The report proposes potential improvements in the current methodology used to allocate indirect practice costs in determining PE RVUs for a service and assesses alternative data sources that could be used to regularly update indirect practice cost estimates. A number of potential policy changes are recommended for improving the rate setting of PE. The most sweeping change would be to adopt relative values for total PE based on the Outpatient Prospective Payment System (OPPS), which is used to value outpatient hospital visits. Potentially, OPPS-based costs could be used to inform or replace the MPFS PE valuations. This change would reduce site of service payment differentials, simplify Medicare payment policy, and improve returns from rate-setting resources since cost information would be shared between the two Medicare payment systems. There are a number of methodological issues that would need to be resolved before this change could be implemented, but the potential benefits are great enough to justify investments to further develop this option. Alternatively, new data could be collected to update PE valuations using the current framework. The report proposes survey processes that could minimize survey burden in order to facilitate on-going data collection. Improving payment accuracy would support improved payment policies in many other areas of the country's health care system.

• Chapter One

  Introduction

• Chapter Two

  Updating Data Sources for Physician Practice Expense

• Chapter Three

  Valuing Practice Expense Using Practice Characteristics

• Chapter Four

  Developing Alternative Indirect Cost Allocation Bases

• Chapter Five

  Changes to Specialty Adjustments

• Chapter Six

  Valuing Indirect PE for Services Provided in Facility Settings

• Chapter Seven

  Using OPPS Costs to Determine PE Values

• Chapter Eight

  Summary, Policy Recommendations, Conclusions

• Appendix A

  Summary of the Current Algorithm Used in the PE Valuation Process

• Appendix B

  Defining Place of Service, Type of Practice, and Ownership

• Appendix C

  Supplemental Information for the OPPS Analyses

• Appendix D

  MGMA Specialty and PPIS Specialty Crosswalk