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Medicare's physician payment form.

Medicare's Physician Payment Reform

Numerous unsuccessful attempts to control Medicare Part B cost have led to an understanding [1,2,3,4] that if health care expenditures are to be constrained indirectly, both the price and the quatity of services must be addressed. The alternative, and more direct, mechanism of directly limiting expenditures via explicit budgetary caps has heretofore proven impossible politically. The Physician Payment Review Commission (PPRC) demonstrated its understanding of these concepts in its 1990 annual report to Congress. "To rationalize the pattern of payments by Medicare, the Commission proposes a Medicare Fee Schedule based primarily on resource costs. To limit beneficiary financial liability, it recommends limits on balance billing. To control the growth in expenditures, the Commission proposes the use of expenditure targets, increased research on the effectiveness of medical services, and development of practice guidelines." [5]

The 1989 budget reconciliation process produced a set of reforms in the payment of Medicare Part B expenses that parallels closely the PPRC's recommendations. The Resource-Based Relative Value Scale (RBRVS) was adopted and will eventually serve as the basis of physician payments. Transition to RBRVS began in 1990 with decreases in "overvalued procedures." A four-year "phase-in" of RBRVS will begin in 1992, with blending of customary charges and RBRVS fees. The final fee schedule will value each procedure, in each geographic region, on the basis of: work, practice expenses, and malpractice costs. The proportional weight of each component in determining the fee varies among procedures and geographic areas. The geographic adjustments will be applied to the practice expense and malpractice cost components of the fee calculation, but only one fourth of the work component will be adjusted for geographic variations. Fee differentials for the same procedure across specialties will be eliminated by 1992, [6] but the bonus will increase to 10 percent in 1991 for services in rural and inner-city under-served areas, [7] and a bonus of 5 percent to participating physicians will continue. [8]

In adopting this new fee schedule based on resources consumed rather than historical charges, Congress recognized the limitations of RBRVS. Although payments for certain "high-priced" procedural services would be decreased by the new fee schedule, RBRVS itself includes no mechanism for containment of the quality of services lrovided or for direct control of total expenditures. The Secretary of Health and Human Services (HHS) is admonished on several occasions in OBRA '89 to study any changes in volume resulting from laws, regulations, or other causes.

To address expenditures directly, Congress adopted Volume Performance Standards (VPS), in lieu of Expenditure Targets. The VPS system is designed to control total expenditure growth and not, as the name might suggest, the volume of services consumed. Percentage increases in the Medicare actual expenditures will be compared annually to a budgeted growth rate, the "Performance Standard Rate." This target growth rate will be established by Congress with advice from the Secretary of HHS and the PPRC. Absent congressional action, the target will default to a growth rate established by a formula that considers actual changes in the prior year, population changes, five-year moving average volume changes, and changes in expenditures related to fee and regulation changes. This target rate, or Performance Standard Rate, is then reduced by a "Performance Standard Factor."

The Performance Standard Rate for 1990 is the Secretary's estimate of actual increases, reduced by 1/2 percent (the Performance Standard Factor for 1990). The Performance Standard Factor is 1 percent for 1991, 1.5 percent for 1992, and 2 percent thereafter. [9] Physician fee increases and/or volume increases that cause expenditure growth rates to exceed the targeted Performance Standard Rate would lead to a mandatory reduction of the following year's physician fee increase by the same percentage amount by which the target was exceeded, barring specific congressional action. [10] Limits are established for the percentage decrease in fee schedule updates at 2 percent for 1992 and 1993, 2.5 percent for 1994 and 1995, and 3 percent thereafter. [11] Volume Performance Standards are therefore considerably more complex than the originally proposed Expenditure Targets. However, they retain the decrement in fee schedule updates, dictated by prior actual expenditure increases exceeding targeted growth rates. [12]

To protect Medicare participants, Congress adopted limits, Balance Billing Caps (BBC), on the maximum amount a provider can balance bill. For Part B enrollees also eligible for title XIX benefits, assignment is mandated for services rendered after April 1, 1990. [13] For nonpoor Medicare enrollees, balance billing will be limited to 125 percent of the Medicare amount allowed to nonparticipating physicians in 1991, 120 percent in 1992, and 115 percent thereafter. [14] Therefore, BBC will eventually provide a two-tiered fee schedule consisting of either the RBRVS allowance (for participating physicians) or 115 percent of 95 percent of the RBRVS allowance (for nonparticipating physicians). This will limit nonparticipating physicians to collecting a total of 109.25 percent of the participating physician's fee (115 percent of 95 percent of participating fee amount).

Effect on Payers

VPS will allow Congress to budget Medicare Part B expenditures effectively with minimal new administrative costs and will establish limits on the expenditure growth rate. Rather than cut off expenditures after budgeted amounts have been exceeded, any excess in growth above the budgeted amounts will be recaptured in the subsequent year's process of budgeting allowed fee increases. Despite the mandated recommendations by the HHS Secretary, some blexibility still exists in this process at the congressional level. But Congress is unlikely to prevent decreases in fees (based on prior year excesses) when such action would increase the national debt.

While BBC is budget neutral, it has significant economic effect on consumers and providers and may eventually have an effect on Congress. RBRVS is also ostensibly budget neutral, but OBRA '89 allows the HHS Secretary to retain as much as $20 million from the decreases in fees for "overvalued" procedures by increasing the fees for primary care services less than the budget neutral amount.

Congress understandbly opposed BBC and RBRVS alone, as neither program would have controlled physician service volumes. In combination, these programs may promote increases in volume, as some providers attempt to recoup revenues lost to mandated decreases in fees and decreased balance billings. When combined with VPS, BBC and RBRVS provide Congress with claims of victory in its efforts to control Medicare costs. The VPS portion of payment reform could be applied to the current fee schedule, without incorporating RBRVS, and would clearly control Medicare' costs without any need for BBC. BBC is supported therefore only because of its benefit to consumers and RBRVS because of its benefit to the numerical majority of providers and because of the theoretical benefit to consumers in promoting preventive care.

The budgetary constraints of the federal government are paralleled in state governments. All states would benefit from any Medicare program that is successful in restraining costs and is later incorporated into the Medicaid program. State governments are likely, therefore, to follow the lead of federal lawmakers in favoring VPS, or some similar mechanism, because it adds to the states' armamentarium of techniques to limit Medicaid expenditure increases. State legislatures are also likely to share Congress' views on RBRVS and BBC because of the budget neutral nature of those programs when combined with the VPS, because of the possible increased expenditures due to volume increases without VPS, and because of the political benefit from banning most balance billing.

Employers and commercial insurance companies have a three-part stake in physician payment reform. Most obvious is that nongovernment payers will be interested in physician payment reform's effect on Medigap plans. The incorporation of BBC into the Medicare system might significantly decrease the financial exposure of employers who provide Medicare supplemental health insurance to elderly employees and retirees. At least some of these policies pay physician balance billings. Physicians report that 95 percent of balance billing decision are based on financial information about the patient, suggesting that Medicare enrollees with supplemental insurance (often through employment-related benefits) are the most frequent payers of full charges. [15] Similarly, an eight-state study of 1987 billings showed that over half (53 percent) of the $2 million balances billed in the study were attributable to 3 percent of patients. [15] These data suggest that physicians usually charge full price only to those who can afford it (or at least whose employment-based or other Medigap insurance program combined with Medicare coverage will shield the patient from much of the bill).

Somewhat less obvious, employers may see RBRVS as a stimulus for physicians to increase the volume of services provided to non-Medicare patients in an attempt to replace lost income. This concern might lead businesses to fear the entire physician payment reform package as a potential inflator of health care costs for younger workers.

Even more subtle is the potential that RBRVS and VPS have for incorporation into nonpublic health care programs. (BBC is essentially the same as the private sector's contracted discount arrangements.) VPS will be tempting to the private sector because it will allow these payers to more reliably project health care expenditures. An RBRVS-like system will likely be adopted by employment-based insurance lrograms because Medicare's fee increases for nonprocedural services will force up charges for these services, and cost constraints will force new limits on fees for procedural services. The VPS will be just as necessary to constrain costs for private payers, after lowering fees for procedures, as it was for government payers.

In summary, all government payers are relatively indifferent to BBC and RBRVS, but will support them because of their effects on political constituencies (BBC is supported by consumers and RBRVS is supported by the majority of physicians). All government and private payers have strong incentives to adopt VPS (and other forms of expenditure limitation), but government may be forced by political constituencies to reverse this initial support. Employers are more limited than government in their ability to impose spending limits on their own programs. They will be apprehensive regarding Medicare's use of VPS because of the short-term potential for these spending restraints to result in increased volumes of care to employees and dependents. Employment-based payers, although indifferent internally to RBRVS, will be forced by marketprices to incorporate the basic concepts of the RBRVS fee schedule into private indemnity plans.

Effect on Providers

VPS uses targeted expenditures to control Part B Medicare expenditures. When the reform package is in place, payments for services under Medicare will probably continue (at least initially) to average 70-75 percent of charges to non-Medicare patients. [15] With balance billing limited, it is reasonable to assume that physicians will have greater preference to deliver services to non-Medicare patients, whenever possible. This tendency to shift care to non-Medicare patients will result in access problems for the Medicare population. In specialties or areas where shifting is not possible (most medical subspecialties, hospital-based physicians, and most specialties in regions populated predominantly by Medicare enrollees), providers will endeavor to maintain their income through increases in work volume. If enough providers respond in this manner, the VPS portion of the reform package will adjust fee increases, generating further pressures for volume increases by providers. For specialties that are capable of erecting barriers to entry (such as sole provider contracts in predominantly hospital-based specialties), starting positions for graduating residents will become less financially rewarding and eventually less numerous. Radiologists, pathologists, and anesthesiologists may share in their colleagues "charge shifting" to non-Medicare patients through referrals, but they are unable to recruit their own patients or to prioritize the care of patients in queue for services. For providers unable to shift to non-Medicare patients or increases volume, income will fall more rapidly than that of colleagues who can make adjustments. If this process continues, it will tend to decrease the supply of providers willing to practice in these circumstances.

RBRVS, while budget neutral from the payer's perspective, is certainly not neutral to most physicians. Not only will fee schedules be based on the resources used in providing a service, but also geographic adjustments to these fees will exclude 75 percent of the work component of each service (about 40 percent of each fee), eliminating much of the geographic variation in physician fee schedules. [15] If we add the 10-30 percent cuts that proceduralists may suffer under the RBRVS system to the geographic adjustments loss that will decrease payments to physicians in "very large metropolitan areas" by 14 percent, we can understand why surgeons in New York (faced with a 24-44 percent decrease in payments from Medicare) oppose RBRVS. [16] Rural physicians delivering primary care are, of course, the big winners under RBRVS. In the long run, these geographic adjustments, combined with the bonuses for medically underserved areas, will have the desired effect of moving some proceduralists to rural areas. Because surgeons are (and will continue to be) less than a third of U.S. physicians, the majority of physicians will continue to support RBRVS. [17] l

Physicians not currently accepting assignment on Medicare claims also face a mandatory decrease of their charges under BBC. Their new billing limit will be set at 115 percent of the 95 percent of Medicare allowance required for nonassigned claims (or 9.3 percent above the allowance for assigned claims). With the average Medicare allowance about 70 percent of the average charge, nonparticipating providers by 1992 will be required to discount their 1989 charges approximately 20 percent.

Physicians currently accepting assignment are unlikely to change to a nonassigned status in order to realize the 9.3 percent increase in billings (with the elimination of the Medicare contract allowance). The BBC is even less important than initially apparent, because only 20 percent of charges for covered services are currently balance billed. [16] Balance billings may also be overrepresented by specialties providing small proportions of total Medicare allowed charges. For example, anesthesia charges represent 13 percent of balance billed dollars but only 4 percent of Medicare allowed charges. [16] These statistics suggest that most physicians may be indifferent to BBC and that the minority of physicians who should be concerned about BBC may be hurt significantly by the limit. For procedure-oriented specialties with large Medicare patient loads and high balance billing amounts, income decreases may be enough to cause reductions in supplies of providers.

Providers are therefore likely to see VPS as arbitrarily constraining their charges. The VPS formula is complex enough, however, that physicians may not recognize for several years the source of their frustration. The majority of physicians will support RBRVS. BBC is more difficult to evaluate. Even with the limit set at 115 percent of the Medicare allowance (or 109.3 of the participating physician's Medicare allowance), this facet of the reform package will receive provider support in the short-term principally because most physicians have accepted assignment. [16]

VPS, RBRVS, and BBC will combine in the long term to decrease the incomes of some specialties, and of all specialties in some geographic areas. The supply of some providers in some practice settings, particularly those with barriers to the entry of young competitors because of near-monopoly contracts, such as anesthesia, pathology, and radiology may be affected. If price decreases are perceived by providers as severe, and a 20-40 percent drop in income will be significant for any provider, pressures will develop within those specialties for new limitations on training, licensure, and credentialing of potential competitors. Providers will oppose BBC in the long run (especially if VPS allows increases in fees below overall inflation), but will have difficulty having this consumer subsidy repealed.

Effect on Consumers

The Medicare-eligible consumer will have no difficulty in evaluating BBC. This part of the reform will increase the perceived Medicare subsidy to the consumer and will expand demand for services. Contrary to the limited effect of BBC on most providers, most enrollees are likely to view any limitation on billings as at least potentially beneficial.

The Medicare consumer can be predicted to oppose VPS in the long term if the provider argument of decreasing access to care and eventual rationing under a budgeted restriction on the growth of Medicare axlej itures is correct. BBC has a tendency to increase demand while VPS tends to decrease supply, worsening the shortage. If demand outstrips supply significantly in the long run, "black market" provider sources of some type will develop.

Medicare enrollees are likely to be indifferent to RBRVS initially. This portion of payment reform is budget neutral to the enrollee. Any lowered payment for procedures will be offset by increased payment for primary care services.

Working consumers are more sensitive than retirees to limitations of access and convenience. Workers are also almost totally "blind" to health care costs because health care benefits are not taxed. Workers insured through employment benefits are unlikely to appreciate the savings realized from an expenditure-limiting program in benefits packages. The detrimental effect on access and convenience will lead to opposition to any effort to incorporate expenditure limits in worker's health care programs. Additional efforts by indemnity plans to encourage limits to balance billings are likely to be favored by the worker, as this portion of their health care expense is visible.

Any cost (or volume) shifting toward the working consumer that might result from the Medicare payment reform package would also be hidden from the insured worker. Workers will remain indifferent to volume limits, billing caps, and new fee schedules established solely in the Medicare sector.

Consumers as a whole will oppose VPS because of the supply limits implied in expenditure limits. BBC will be supported by consumers, and the caps will be difficult to withdraw once this "subsidy" has benefited the consumer. Consumers, similar to payers, will initially be indifferent to RBRVS, but increases in payment for some services by Medicare will stimulate demand for similar coverage by worker's plans. A modified RBRVS will therefore eventually be demanded by the working consumer.


Payers' concern over rising health care costs is the driving force in Medicare physician payment reform. VPS, as beneficial as it would be in theory to payers, is not beneficial to consumers and certainly is not beneficial to providers. Furthermore, private health care systems (such as PPOs) that have endeavored to reward restrained volume have consistently failed because of the inability to control volume in the short term on an individual provider basis. When the negative effects on long-term global Medicare services supply are added to this picture, VPS (alone or in combination with other portions of the OBRA '89 actions) will succumb to consumer and provider opposition. Indeed, if the OBRA '89 package is not amended by Congress, unfulfilled demand will predictably be satisfied by services provided in such a way as to circumvent the expenditure limits. The increased demand effect of BBC will hasten and worsen this imbalance in supply and demand.

Payers and consumers will benefit from the use of BBC. Only a minority of providers will be affected by BBC in a significant way in the short-term, and providers, as a whole, are unlikely to initially oppose the caps. In the long-run, income decreases from VPS combined with BBC will lead to provider opposition to caps. BBC will survive, however, because of strong support by subsidized consumers.

Provider support for RBRVS, even though not universal, indicates that it, combined with BBC, will be most likely to succeed (at least in the short-term). RBRVS will cause limited economic effect (except for perhaps a shifting of physicians to rural areas) as long as BBC remains in effect. If these caps should be eliminated through some unforeseen process, RBRVS would fail because of the Medicare enrollees' exposure to a large "balance bill."

RBRVS will eventually result in an increased volume of some services, as procedure-oriented physicians attempt to recover lost income (and if the RBRVS converter is used to balance the federal budget, all services will show increases in volume). This effect will be buffered by payers' use of utilization monitoring techniques and by consumers' continued use of the tort system.

RBRVS and BBC are therefore the most likely parts of physician payment reform to be accepted by the payer-consumer-provider triumvirate and survive in the long run.


[1] Long, H. "Critics Ignore Volume in Their Assessment of Health Care Costs." Physician Executive 14(2):25-6, March-April 1988.

[2] Davis, K. "Why Expenditure Targets Would Work." The Internist 30(8):6-9, Sept. 1989.

[3] Relman, A. "Assessment and Accountability: The Third Revolution in Medical Care." New England Joumal of Medicine 319(18):1220-2, Nov. 3, 1988.

[4] Roper, W. "Perspectives on Physician-Payment Reform. The Resource-Based Relative Value Scale in Context." New England Journal of Medicine 319(13):865-7, Sept. 29, 1988.

[5] Lee, P., and others. "The Physician Payment Review Commission Report to Congress." JAMA 261(16):2382-5, April 28, 1989.

[6] "Physician Payment Reform." Omnibus Budget Reconciliation Act of 1989. Washington, D.C.: U.S. Congress, 1989, p. 73.

[7] op. cit., p. 84.

[8] op. cit., p. 69.

[9] op. cit., p. 79.

[10] op. cit., p. 79.

[11] op. cit., p. 76.

[12] op. cit., p. 79.

[13] op. cit., p. 81.

[14] op. cit., pp. 80-1.

[15] op. cit., p. 77.

[16] Mcllrath, S. "Three PPRC Surveys Examine Impact of Balance Billing." American Medical News 32(5):50-1 Feb. 3, 1989.

[17] Marder, W., and others. "Physician Supply and Utilization by Specialty: Trends and Projection." In The Environment of Medicine. Chicago, III.: American Medical Association, 1988, p. 54.

Richard M. Lauve, MD, is an Instructor, Department of Medicine, Medical School in New Orleans, Louisiana State University, and Medical Director, Charity Hospital at New Orleans-Medical Center. He is an associate member of the College's Societies on Hospitals and Academic Health Centers and its Forums on Bioethics and Quality Health Care.
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Title Annotation:includes bibliography
Author:Lauve, Richard M.
Publication:Physician Executive
Date:Sep 1, 1990
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