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Background The Medicare program fundamentally changed its system of payment for physicians' services in 1992. Controversy over the new Medicare fee schedule has focused on three issues: the adequacy of the conversion factor used to translate resource-based relative-value units into fees; the ability of the new payment system to capture differences in work between surgeons and physicians in other specialties; and the allocation of practice expenses across services.
Methods Using a standard service in each specialty, we developed simulation methods to assess the implementation of physician-payment reform. With these methods we calculated the potential net income for each specialty, as generated by different payment scenarios, including the Medicare fee schedule.
Results We found that Medicare's current monetary-conversion factor yields an unreasonably low level of income for most specialties. Furthermore, the Medicare fee schedule misallocates practice expenses; invasive services are reimbursed for more than actual expenses, and medical services are reimbursed for less. Thus, physicians continue to be paid more generously for invasive services. Finally, the Medicare fee schedule does recognize the wide differences in the intensity of work performed by physicians in various specialties.
Conclusions The misallocation of practice expenses in the Medicare fee schedule results in serious underpayment for medical services. We think it likely that physicians compensate by performing more lucrative services, such as diagnostic tests. Even if legislation is passed to deal with the misallocation of expenses, the current conversion factor still produces unreasonably low levels of payment overall, which could dissuade those considering a career in medicine from entering the field. Finally, the simulation method we developed can be used as a tool for fee negotiations.
In addition to controversy over the conversion factor, physicians in many surgical specialties allege that the resource-based relative-value scale does not adequately acknowledge the difficulty and risk entailed in performing surgical procedures as compared with medical services6. They argue that underpayment for their services may prompt many surgeons to stop accepting Medicare patients.
There is a third controversy regarding the Medicare fee schedule. The Physician Payment Review Commission and others have charged that the fee schedule incorrectly allocates practice costs (overhead plus liability premiums) to specific services7,8. Practice costs are assigned to particular services on the basis of historical charges instead of resource costs. As a result, the Medicare fee schedule undercompensates in some specialties and overcompensates in others. A systematic evaluation of the effects of these misallocations on income has not been performed.
The methods we developed to address these three issues can be used to calculate the net income for each specialty generated under different payment scenarios, including the Medicare fee schedule. These methods can be used to decide on a reasonable conversion factor and to judge whether the resource-based relative-value scale has adequately captured differences among specialties in physicians' work. Our method can also be used to determine the degree of distortion in fees that results from the misallocation of practice expenses.
There is no absolute right answer when we ask what the dollar amount of the monetary-conversion factor -- and thus physicians' incomes -- ought to be. In the United States a process of political negotiation between payers and physicians is used to arrive at such an amount. However, empirical information could help the key players make such political decisions.
Methods
Simulation
A physician's net income is the difference between practice revenue and expenses. Information on expenses is readily available from surveys conducted annually by the American Medical Association and Medical Economics magazine and periodically by the federal government. The central question in simulating net income is therefore, How do we estimate practice revenue when physicians are paid varying fees?
The potential annual gross revenue of physicians in private practice is the product of service fees and the volume of services that can be performed in a year. Information on fees is readily available. The annual volume of services can be determined from actual service profiles for each specialty. Establishing a profile of services for a representative physician is a difficult task, however. Individual physicians differ markedly in the mix of services they provide, age, sex, specialization, type of practice (solo vs. group), setting (teaching vs. nonteaching), and other variables. Using insurance-claims data from a number of companies to construct such a profile is problematic because it would represent the practice of only some physicians, and most physicians might differ from it substantially. More important, the claim files represent the actual rather than the potential mix of services a typical physician provides. For instance, the supply of physicians in several surgical specialties is excessive, and many surgeons therefore devote considerable time to nonsurgical rather than surgical services9,10. Practice profiles based on claims data thus do not accurately represent what surgeons could earn if there were sufficient demand for their specialized services.
We wanted to assess the adequacy of the monetary-conversion factor by comparing what physicians practicing full time in various specialties could earn under a fee schedule, rather than what they actually earn. For this purpose, the preferred method was to simulate the annual volume of services for each specialty with a standard-service equivalent. That is, we selected the most commonly performed specialized service in each specialty and designated it the standard service. This method assumes that on average the intensities of work of all services performed are close to the intensity of work of the standard service. Standard services for 15 major medical and surgical specialties are shown in Table 1. Since many cardiologists and dermatologists practice as either medical or invasive specialists, we included both a medical and an invasive standard service for these specialties. We then calculated the number of standard services full-time specialists can perform in a year. This yielded the potential volume of services (in standard-service equivalents), given sufficient demand. The formula we used to estimate this volume was as follows:
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Vs = (PT - FL) / ts,
where Vs is the total annual volume of services that a physician can render, assuming that the physician performs only the specialty's standard service; PT is the total time a typical physician spends in caring for patients per year; FL is the "frictional" time lost per year (because of missed appointments, scheduling problems, and so forth; estimated as 10 percent of physicians' patient-care time); ts is the total time a physician requires to perform the standard service; and s indexes the specialty.
We multiplied the total annual volume of services by the fee for the standard service to simulate gross revenue. We then derived net income by subtracting practice expenses from gross revenue.
Different sets of fees can be used to simulate gross revenue. For this analysis, we used two sets: the Medicare fee schedule and physicians' actual submitted charges. The first scenario simulates gross revenue if physicians are paid according to the Medicare fee schedule exclusively, and the second simulates revenue based solely on submitted charges. We developed the second scenario to serve as a contrast to the revenues provided by the Medicare fee schedule.
Finally, to evaluate whether the fee schedule accounts adequately for the greater difficulty and risk involved in surgery and whether the practice-cost portion of the fee schedule is appropriate, we computed total fee-schedule payments for physicians' work and practice costs in each specialty. The Medicare schedule subdivides fees into three components: physicians' work, overhead, and professional-liability premiums. To simulate annual specialty-specific payments according to component, we multiplied each component of the fee for the standard service by the total volume of services. We then compared payments for physicians' work among specialties. We also compared practice-cost payments under the fee schedule with estimates of actual expenses incurred.
Data
Our data came from various sources. The total time required to perform the standard service was obtained from the resource-based relative-value scale study12. It consists of all time devoted to the service, including time before and after the service itself is performed.
For surgical procedures, the before-service period covers related services performed within 24 hours before the procedure. The service period itself is the "skin to skin" time of the procedure. The after-service period includes postoperative care and follow-up hospital and office visits within 90 days. We also assumed that for each standard procedure performed, the surgeon provides two consultations and determines that only one of the two patients needs surgery., and we assumed that the surgeon -- not a surgical resident -- performs all services, including the work before and after the procedure. We found (as Table 1 shows) that surgeons spend 20 to 25 percent of their patient-care time performing procedures and the remaining time in preoperative and postoperative care, which consists largely of evaluation and management.
For medical services or evaluation and management, the service time is the period of face-to-face encounter between the physician and patient. The before and after periods encompass time spent reviewing and writing charts, following up on laboratory tests, and talking with patients or professionals by telephone.
Total patient-care time was estimated from data collected annually by the American Medical Association and Medical Economics13,14. These surveys find some variation among specialties in the number of hours per week spent in professional activities and in the number of weeks worked per year. In the interests of focusing on the effect of fees on incomes, we assumed uniform working hours and weeks in all specialties.
Drawing on the survey information, we assumed that full-time physicians devote 60 hours a week to their professional practice, of which 50 hours are spent on the care of patients. Of these hours, 10 percent is frictional time lost, leaving 45 hours of direct patient care per week. Finally, we assumed that physicians spend 46 weeks a year on the care of patients.
The number of standard services that a specialist can perform per week is shown in Table 1. Services per week vary from four coronary-artery bypass grafts by thoracic and cardiovascular surgeons to 129 office visits in five medical specialties. Using a 15-minute visit (face-to-face encounter time) as the standard service for family physicians, pediatricians, and general internists, we estimated that these specialists see 129 patients per week. This result is consistent with survey data, which show that family physicians see an average of 144 patients per week, and pediatricians 134; surveys reveal that general internists see an average of 111 patients per week, suggesting that they probably schedule patients for lengthier visits than those of the standard service13. Because the relative values and fees for evaluation and management services are roughly proportional to the duration of each visit, this discrepancy should not have distorted our analysis.
Data on practice costs according to specialty were obtained from American Medical Association surveys13. Since the most recent data were for 1990, we estimated 1992 expenses using the consumer price index (4.2 percent for 1990-1991 and 2.6 percent for 1991-1992)15. The expense data used for the simulation appear in Table 2.
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Table 4 shows the simulated net income that physicians would have earned in 1992 if all payers had paid in accordance with physicians' submitted charges. These charges, which approximate the fees that private insurance companies pay, represent the higher end of the fee range. Under this scenario, pediatricians would have earned $71,000, family physicians $81,000, general internists $127,000, and psychiatrists $187,000. On the high end, ophthalmologists would have earned $794,000, invasive cardiologists $930,000, and thoracic surgeons $934,000. These results clearly demonstrate that, as expected, current submitted charges favor invasive procedures over evaluation and management.
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Discussion
The Monetary-Conversion Factor and Physicians' Compensation
To evaluate the reasonableness of physicians' incomes, one must consider the special nature of the medical profession. Physicians are talented and highly trained people. Medical schools typically consider only the top 10 percent of college graduates. Medical education lasts four years, and three to seven years of postgraduate residency training are required to become a specialist. Physicians rarely enter professional practice until they are 30 or older, making their working lifetimes shorter than those of other professionals. Medical education is expensive, and many physicians incur large educational debts. Finally, physicians work long hours; physicians in private practice typically work close to 60 hours a week. As compared with other professionals, physicians incur higher training costs and work longer hours18,19.
Our simulation results show that the net annual incomes for family practice and general surgery would be around $40,000 and $170,000, respectively, if all payers used the Medicare fee schedule. The specialists with the highest incomes, thoracic surgeons, would earn $241,000 because of the intensity of the work and because the Medicare fee schedule favors invasive services in allocating practice expenses. Even if practice expenses were equitably allocated and income redistributed to compensate evaluation and management services more generously, the annual earnings of medical specialists would not approach $100,000 unless total Medicare payments to all physicians were increased. (Medical specialties account for approximately half of Medicare payments to physicians, whereas highly specialized surgical specialties represent only 15 percent of the total.) We therefore concluded that the monetary-conversion factor established by Medicare is low. The income levels it produces are moderate as compared with those of other professionals and business executives. If all payers reimbursed physicians at this level, the United States could not maintain a supply of highly competent physicians. If the conversion factor remains at its current level (in real terms), continued access to physicians' services can only be maintained for the elderly by, in effect, asking private insurers to subsidize the services used by Medicare beneficiaries.
Reimbursement of Practice Costs under the Medicare Fee Schedule
The low net income the Medicare fee schedule generates for some specialties is due largely to its inadequate reimbursement of practice costs. Table 5 subdivides the payments into two parts: physicians' work (which generates physicians' net income) and practice costs. We found that many specialties are inadequately reimbursed for practice costs. In general, these shortfalls are greatest for primary care specialties.
Our findings suggest that Medicare's practice-cost payments understate actual expenses. Furthermore, because practice expenses are allocated in accordance with historical physicians' charges rather than the cost of resources, the allocation formula systematically favors invasive services. Since surgical procedures have historically involved more generous compensation than other services, charge-based allocation favors these services and reimburses more for expenses than is actually spent.
Intensity of Work as Measured by the Resource-Based Relative-Value Scale
In our earlier work on the resource-based relative-value scale, we found most invasive procedures to involve more intense work -- greater effort for each minute of time spent -- than evaluation and management services. When two physicians work the same number of hours, their incomes should differ according to the relative intensity of the services they perform. The physicians'-work portion of the Medicare fee schedule reflects these differences in intensity.
Using the standard-service equivalent, we simulated total annual payments provided by the Medicare fee schedule for physicians' work (Table 5). Family physicians' work payment was calculated as $106,000, general surgeons' as $161,000, and thoracic surgeons' as $175,000. In other words, the work of the surgeons is 50 to 65 percent more intense than that of family physicians. This greater intensity is attributable to the 20 to 25 percent of a surgeon's patient-care time spent performing the service portion of invasive procedures, which the resource-based relative-value scale study found to be three to four times more intense than evaluation and management services12.
Accuracy and Sensitivity of the Simulation Results
According to national surveys, surgeons' net incomes are lower than the simulated results we estimated using submitted charges13,14. There are several reasons for this discrepancy. First, physicians' income comes from various payers: primarily Medicare, Medicaid, and private insurers. The charges submitted by physicians closely approximate what private insurers pay, but Medicare and Medicaid pay much less. Second, we assumed that demand is sufficiently high to allow physicians to practice in their specialties on a full-time basis. In many surgical specialties, however, this is the case only for physicians with well-established reputations or practices based in medical centers. We know that most surgeons supplement surgical procedures with nonsurgical services, partly because of insufficient demand for surgery6,7. Thus, the average income for all surgeons in a given specialty, as determined by survey, represents averages of many different practice profiles.
For medical specialties, surveys show that family physicians and general internists earn net incomes that are closer to $100,000 than to the lower amounts suggested by our simulation. One explanation is that primary care physicians provide other services, such as x-ray interpretations, electrocardiography, office-based laboratory tests, other diagnostic tests, and minor procedures, that yield more generous fees relative to the time involved than do patients' visits.
For the purposes of comparison, we performed a sensitivity analysis using a profile of each specialty's services based on national Medicare claims data and data from a large Blue Cross-Blue Shield program. Using the assumptions about patient-care hours described above and data on service time from the resource-based relative-value scale study, we simulated an average annual profile of the services each specialty provides for Medicare and for Blue Cross-Blue Shield. We then combined the two profiles, using national specialty-specific data on the share of patient-care revenues derived from each payer. Finally, we used submitted charges and the Medicare fee schedule to compute payments to each specialty.
With these service profiles, we found gross revenues and practice-cost payments to be generally within 20 percent of our standard-service simulation results. The congruence between the two approaches was particularly marked for the payment amounts based on the Medicare fee schedule in Table 5. Two exceptions were ophthalmology and orthopedics, whose service profiles produced much lower revenues than the standard-service approach. Perhaps physicians in these specialties perform more evaluation and management services than our standard-service method suggests.
We also found systematic differences in payments between the service-profile and standard-service approaches. With a service profile, both gross revenues and practice-cost payments increased for medical specialties and decreased for surgery. This is to be expected. We have shown that work and practice-cost payments are highest for surgical procedures. Surgeons who perform primarily evaluation and management services will find their incomes closer to those of internists than to the incomes for their own specialties simulated with the standard-service approach. The differences we found between invasive and medical cardiology and invasive and medical dermatology illustrate this point. Conversely, physicians who can perform a larger number of invasive procedures than we have estimated will earn higher incomes than we predicted. For instance, clinical professors of surgery, for whom residents perform much preoperative and postoperative care, can perform many more procedures than we have calculated for the typical surgeon in private practice. Their net revenues could thus be much greater than our simulated estimates ($5 million, in one reported case)20. We therefore emphasize that our simulated incomes pertain only to physicians who provide the specialized services they were trained to perform.
Finally, our simulation used practice-expense data from the American Medical Association's annual survey. The surveys conducted by Medical Economics produced lower estimates of practice expenses, by about 10 percent. This discrepancy raises a critical question about the relative accuracy of data from different sources. If the Medical Economics figures are more accurate, then Medicare payments for practice expenses are more adequate than is reported here, although the practice-cost expenses are still misallocated among specialties.
In sum, this simulation method can determine the approximate net incomes generated by various levels of payment and can test their reasonableness. It can be used as a tool for negotiating an appropriate monetary-conversion factor. Moreover, it can determine the reasonableness of our measurements of the intensity of services performed by different specialties.
Our simulation method provides evidence that the practice-expense component of the Medicare fee schedule was incorrectly legislated. Because it is not based on the principle of resource cost, the Medicare fee schedule continues to provide an overly generous rate of payment for invasive services.
The current Medicare fee schedule yields too little net income to most physicians. In the long run, the Medicare level of payments would not attract an adequate supply of qualified people to medical careers unless private insurers continued to subsidize the services used by Medicare beneficiaries. It is clear that legislation is needed to correct these deficiencies.
Source Information
From the Department of Health Policy and Management, Harvard School of Public Health, 1350 Massachusetts Ave., Cambridge, MA 02138, where reprint requests should be addressed to Dr. Hsiao.
References
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Related Letters:
Physician-Payment Reform
Miller J. J., Kaufman J. L., Ginsburg P. B., Hogan C., Glaser D., Von Gunten C. F., Hsiao W., Dunn D., Verrilli D., Schroeder S. A., Sandy L. G.
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Full Text
N Engl J Med 1993;
329:808-810, Sep 9, 1993.
Correspondence
This article has been cited by other articles:
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