November 2, 1998 federal register · 2010-09-25 · 58814 Federal Register/Vol. 63, No. 211/Monday,...

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MondayNovember 2, 1998

Part II

Department ofHealth and HumanServicesHealth Care Financing Administration

42 CFR Part 405, et al.Medicare Program; Revisions to PaymentPolicies and Adjustments to the RelativeValue Units Under the Physician FeeSchedule for Calendar Year 1999; FinalRule and Notice

58814 Federal Register / Vol. 63, No. 211 / Monday, November 2, 1998 / Rules and Regulations

DEPARTMENT OF HEALTH ANDHUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 405, 410, 413, 414, 415,424, and 485

[HCFA–1006–FC]

RIN 0938–AI52

Medicare Program; Revisions toPayment Policies and Adjustments tothe Relative Value Units Under thePhysician Fee Schedule for CalendarYear 1999

AGENCY: Health Care FinancingAdministration (HCFA), HHS.ACTION: Final rule with comment period.

SUMMARY: This final rule makes severalpolicy changes affecting Medicare Part Bpayment. The changes that relate tophysicians’ services include: resource-based practice expense relative valueunits (RVUs), medical direction rules foranesthesia services, and payment forabnormal Pap smears. Also, we arerebasing the Medicare Economic Indexfrom a 1989 base year to a 1996 baseyear. Under the law, we are required todevelop a resource-based system fordetermining practice expense RVUs.The Balanced Budget Act of 1997 (BBA)delayed, for 1 year, implementation ofthe resource-based practice expenseRVUs until January 1, 1999. Also, BBArevised our payment policy fornonphysician practitioners, foroutpatient rehabilitation services, andfor drugs and biologicals not paid on acost or prospective payment basis. Inaddition, BBA permits certainphysicians and practitioners to opt outof Medicare and furnish coveredservices to Medicare beneficiariesthrough private contracts and permitspayment for professional consultationsvia interactive telecommunicationsystems. Furthermore, we are finalizingthe 1998 interim RVUs and are issuinginterim RVUs for new and revised codesfor 1999. This final rule also announcesthe calendar year 1999 Medicarephysician fee schedule conversionfactor under the MedicareSupplementary Medical Insurance (PartB) program as required by section1848(d) of the Social Security Act. The1999 Medicare physician fee scheduleconversion factor is $34.7315.DATES: Effective date: This rule this ruleis effective January 1, 1999.

Applicability date: Part 405 subpart Dis applicable for private contractaffidavits signed and private contractsentered into on or after January 1, 1999.

This rule is a major rule as defined inTitle 5, United States Code, section

804(2). Pursuant to 5 U.S.C. section801(a)(1)(A), we are submitting a reportto the Congress on this rule on October30, 1998.

Comment date: We will acceptcomments on interim RVUs for selectedprocedure codes identified inAddendum C and on interim practiceexpense RVUs for all codes as shown inAddendum B. Comments will beconsidered if we receive them at theappropriate address, as provided below,no later than 5 p.m. on January 4, 1999.ADDRESSES: Mail written comments (1original and 3 copies) to the followingaddress: Health Care FinancingAdministration, Department of Healthand Human Services, Attention: HCFA–1006–FC, P.O. Box 26688, Baltimore,MD 21207–0488.

If you prefer, you may deliver yourwritten comments (1 original and 3copies) to one of the followingaddresses:Room 443–G, Hubert H. Humphrey

Building, 200 Independence Avenue,SW., Washington, DC 20201, or

Room C5–14–03, 7500 SecurityBoulevard, Baltimore, MD 21244–1850.Because of staffing and resource

limitations, we cannot accept commentsby facsimile (FAX) transmission. Incommenting, please refer to file codeHCFA–1006–FC. Comments receivedtimely will be available for publicinspection as they are received,generally beginning approximately 3weeks after publication of a document,in Room 443–G of the Department’soffices at 200 Independence Avenue,SW., Washington, DC, on Mondaythrough Friday of each week from 8:30a.m. to 5 p.m. (phone: (202) 690–7890).FOR FURTHER INFORMATION CONTACT:Roberta Epps, (410) 786–4503 (for issues

related to outpatient rehabilitationservices).

Stephen Heffler, (410) 786–1211 (forissues related to the MedicareEconomic Index).

Anita Heygster, (410) 786–4486 (forissues related to private contracts).

Jim Menas, (410) 786–4507 (for issuesrelated to Pap smears and medicaldirection for anesthesia services).

Robert Niemann, (410) 786–4569 (forissues related to the drugs andbiologicals policy).

Regina Walker-Wren, (410) 786–9160(for issues related to physicianassistants, nurse practitioners, clinicalnurse specialists, and certified nurse-midwives).

Craig Dobyski, (410) 786–4584 (forissues related to teleconsultations).

Stanley Weintraub, (410) 786–4498 (forissues related to practice expense

relative value units and all otherissues).

SUPPLEMENTARY INFORMATION:Copies: To order copies of the Federal

Register containing this document, sendyour request to: New Orders,Superintendent of Documents, P.O. Box371954, Pittsburgh, PA 15250–7954.Please specify the date of the issuerequested, and enclose a check ormoney order payable to theSuperintendent of Documents, orenclose your Visa, Discover, or MasterCard number and expiration date. Creditcard orders can also be placed by callingthe order desk at (202) 512–1800 (or tollfree at 1–888–293–6498) or by faxing to(202) 512–2250. The cost for each copyis $8. As an alternative, you can viewand photocopy the Federal Registerdocument at most libraries designatedas Federal Depository Libraries and atmany other public and academiclibraries throughout the country thatreceive the Federal Register.

This Federal Register document isalso available from the Federal Registeronline database through GPO Access, aservice of the U.S. Government PrintingOffice. Free public access is available ona Wide Area Information Server (WAIS)through the Internet and viaasynchronous dial-in. Internet users canaccess the database by using the WorldWide Web; the Superintendent ofDocuments home page address is http://www.access.gpo.gov/nara/index.html,by using local WAIS client software, orby telnet to swais.access.gpo.gov, thenlogin as guest (no password required).Dial-in users should usecommunications software and modemto call 202–512–1661; type swais, thenlogin as guest (no password required).

To assist readers in referencingsections contained in this preamble, weare providing the following table ofcontents. Some of the issues discussedin this preamble affect the paymentpolicies but do not require changes tothe regulations in the Code of FederalRegulations. Information on theregulation’s impact appears throughoutthe preamble and not exclusively in partIX.

Table of Contents

I. BackgroundA. Legislative HistoryB. Published Changes to the Fee Schedule

II. Specific Proposals for Calendar Year 1998;Response to Comments

A. Resource-Based Practice ExpenseRelative Value Units

1. Resource-Based Practice ExpenseLegislation

2. Proposed Methodology for ComputingPractice Expense Relative Value Units

3. Other Practice Expense Policies

58815Federal Register / Vol. 63, No. 211 / Monday, November 2, 1998 / Rules and Regulations

4. Refinement of Practice Expense RelativeValue Units

5. Reductions in Practice Expense RelativeValue Units for Multiple Procedures

6. TransitionB. Medical Direction for Anesthesia

ServicesC. Separate Payment for a Physician’s

Interpretation of an AbnormalPapanicolaou Smear

D. Rebasing and Revising the MedicareEconomic Index

III. Implementation of the Balanced BudgetAct

A. Payment for Drugs and BiologicalsB. Private Contracting with Medicare

BeneficiariesC. Payment for Outpatient Rehabilitation

Services1. BBA 1997 Provisions Affecting Payment

for Outpatient Rehabilitation Servicesa. Reasonable Cost-Based Paymentsb. Prospective Payment System for

Outpatient Rehabilitation Services(1) Overview(2) Services Furnished by Skilled Nursing

Facilities(3) Services Furnished by Home Health

Agencies(4) Services Furnished by Comprehensive

Outpatient Rehabilitation Facilities(5) Site-of-Service Differential(6) Mandatory Assignment2. Uniform Procedure Codes for Outpatient

Rehabilitation Services3. Financial Limitationa. Overviewb. Use of Modifiers to Track the Financial

Limitationc. Treatment of Services Exceeding the

Financial Limitation4. Qualified Therapists5. Plan of TreatmentD. Payment for Services of Certain

Nonphysician Practitioners and ServicesFurnished Incident to their ProfessionalServices

E. Payment for Teleconsultations in RuralHealth Professional Shortage Areas

IV. Refinement of Relative Value Units forCalendar Year 1999 and Responses toPublic Comments on Interim RelativeValue Units for 1998

A. Summary of Issues Discussed Related tothe Adjustment of Relative Value Units

B. Process for Establishing Work RelativeValue Units for the 1999 Fee Schedule

V. Physician Fee Schedule Update andConversion Factor for Calendar Year1999

VI. Provisions of the Final RuleVII. Collection of Information RequirementsVIII. Regulatory Impact Analysis

A. Regulatory Flexibility ActB. Resource-Based Practice Expense

Relative Value UnitsC. Medical Direction for Anesthesia

ServicesD. Separate Payment for a Physician’s

Interpretation of an AbnormalPapanicolaou Smear

E. Rebasing and Revising the MedicareEconomic Index

F. Payment for Nurse Midwives’ ServicesG. BBA Provisions Included in This

Proposed Rule

H. Impact on BeneficiariesAddendum A—Explanation and Use of

Addenda B and CAddendum B—Relative Value Units (RVUs)

and Related InformationAddendum C—Codes with Interim RVUs

In addition, because of the manyorganizations and terms to which werefer by acronym in this final rule, weare listing these acronyms and theircorresponding terms in alphabeticalorder below:AANA: American Association of Nurse

AnesthetistsABC: Activity based costingABN: Advance Beneficiary NoticeAHE: Average hourly earningsAMA: American Medical AssociationANCC: American Nurses Credentialing

CenterASA: American Society of AnesthesiologistsASOPA: American Society of Orthopedic

Physician AssistantsAWP: Average wholesale priceBBA: Balanced Budget Act of 1997BLS: Bureau of Labor StatisticsCAAHEP: Commission on Accreditation of

Allied Health Education ProgramsCF: Conversion factorCFR: Code of Federal RegulationsCMSAs: Consolidated Metropolitan

Statistical AreasCORF: Comprehensive outpatient

rehabilitation facilityCPEPs: Clinical Practice Expert PanelsCPI: Consumer Price IndexCPI–U: Consumer Price Index for All Urban

ConsumersCPS: Current Population SurveyCPT: [Physicians’] Current Procedural

TerminologyCRNA: Certified Registered Nurse AnesthetistDME: Durable medical equipmentDMEPOS: Durable medical equipment,

prosthetics, orthotics, and suppliesDRG: Diagnosis-related groupEAC: Estimated acquisition costECI: Employment Cost IndexES–202 Data: Bureau of Labor Statistics from

State unemployment insurance agenciesESRD: End-stage renal diseaseFDA: Food and Drug AdministrationFMR: Fair market rentalFQHC: Federally qualified health centerGAAP: Generally accepted accounting

principlesGAF: Geographic adjustment factorGPCI: Geographic practice cost indexHCFA: Health Care Financing AdministrationHCPAC: Health Care Professionals Advisory

CommitteeHCPCS: HCFA Common Procedure Coding

SystemHHA: Home health agencyHHS: [Department of] Health and Human

ServicesHMO: Health maintenance organizationHPSA: Health professional shortage areaHRSA: Health Resources and Services

AdministrationHUD: [Department of] Housing and Urban

DevelopmentIPLs: Independent Physiologic LaboratoriesMedPAC: Medicare Payment Advisory

Commission

MEI: Medicare Economic IndexMGMA: Medical Group Management

AssociationMSA: Metropolitan Statistical AreaMSA: Medicare Supplemental InsuranceMVPS: Medicare volume performance

standardNAIC: National Association of Insurance

CommissionersNBCOPA: National Board on Certification for

Orthopedic Physician AssistantsNCCPA: National Council on Certification of

Physician AssistantsNPI: National provider identifierOBRA: Omnibus Budget Reconciliation ActOTIP: Occupational therapist in independent

practicePC: Professional componentPHS: Public Health ServicePMSA: Primary Metropolitan Statistical AreaPPI: Producer price indexPPS: Prospective payment systemPTIP: Physical therapist in independent

practiceRBRVS: Resource Based Relative Value ScaleRHC: Rural health clinicRUC: [AMA’s Specialty Society] Relative

[Value] Update CommitteeRN: Registered nurseRVU: Relative value unitSMS: Socioeconomic Monitoring SystemSNF: Skilled nursing facilityTC: Technical componentTEFRA: Tax Equity and Fiscal Responsibility

ActUPIN: Uniform provider identifier number

I. Background

A. Legislative History

Since January 1, 1992, Medicare haspaid for physicians’ services undersection 1848 of the Social Security Act(the Act), ‘‘Payment for Physicians’Services.’’ This section contains threemajor elements: (1) A fee schedule forthe payment of physicians’ services; (2)a sustainable growth rate for the rates ofincrease in Medicare expenditures forphysicians’ services; and (3) limits onthe amounts that nonparticipatingphysicians can charge beneficiaries. TheAct requires that payments under thefee schedule be based on nationaluniform relative value units (RVUs)based on the resources used infurnishing a service. Section 1848(c) ofthe Act requires that national RVUs beestablished for physician work, practiceexpense, and malpractice expense.

Section 1848(c)(2)(B)(ii)(II) of the Actprovides that adjustments in RVUsbecause of changes resulting from areview of those RVUs may not causetotal physician fee schedule paymentsto differ by more than $20 million fromwhat they would have been had theadjustments not been made. If thistolerance is exceeded, we must makeadjustments to the conversion factors(CFs) to preserve budget neutrality.


B. Published Changes to the FeeSchedule

In the June 5, 1998, proposed rule (63FR 30820), we listed all of the final rulespublished through October 31, 1997relating to the updates to the RVUs andrevisions to payment policies under thephysician fee schedule. In the June 5,1998 proposed rule (63 FR 30818), wediscussed several policy optionsaffecting Medicare payment forphysicians’ services including resource-based practice expense RVUs, medicaldirection rules for anesthesia services,and payment for abnormal Pap smears.Also, we discussed the rebasing of theMedicare Economic Index from a 1989base year to a 1996 base year. Further,based on BBA, we proposed revising ourpayment policy for nonphysicianpractitioners, for outpatientrehabilitation services, and for drugsand biologicals not paid on a cost orprospective payment basis. In addition,based on BBA, we discussedimplementing new payment policies forcertain physicians and practitionerswho opt out of Medicare and furnishcovered services to Medicarebeneficiaries through private contracts.And finally, based on BBA, wediscussed teleconsultation services.

This final rule affects the regulationsset forth at 42 CFR part 405, whichconsists of regulations on Federal healthinsurance for the aged and disabled;part 410, which consists of regulationson supplementary medical insurancebenefits; part 414, which consists ofregulations on the payment for Part Bmedical and other health services; part415, which pertains to servicesfurnished by physicians in providers,supervising physicians in teachingsettings, and residents in certainsettings; part 424, which pertains to theconditions for Medicare payment; andpart 485, which pertains to conditionsof participation: specialized providers.

II. Specific Proposals for Calendar Year1998; Response to Comments

In response to the publication of theJune 5, 1998 proposed rule, we receivedapproximately 14,000 comments. Wereceived comments from individualphysicians, health care workers, andprofessional associations and societies.The majority of the comments addressedthe proposal related to the resource-based practice expense policy.

The proposed rule discussed policiesthat affect the number of RVUs onwhich payment for certain serviceswould be based. Certain changesimplemented through this final rule aresubject to the $20 million limitation on

annual adjustments contained in section1848(c)(2)(B)(ii)(II) of the Act.

After reviewing the comments anddetermining the policies we willimplement, we have estimated the costsand savings of these policies and addedthose costs and savings to the estimatedcosts associated with any other changesin RVUs for 1999. We discuss in detailthe effects of these changes in theRegulatory Impact Analysis (section IX).

For the convenience of the reader, theheadings for the policy issues in thissection correspond to the headings usedin the June 5, 1998 proposed rule. Moredetailed background information foreach issue can be found in the June 5,1998 proposed rule.

A. Resource-Based Practice ExpenseRelative Value Units

1. Resource-Based Practice ExpenseLegislation

Section 121 of the Social Security ActAmendments of 1994 (Public Law 103–432), enacted on October 31, 1994,required us to develop a methodologyfor determining resource-based practiceexpense RVUs for each physician’sservice that would be effective forservices furnished in 1998. Indeveloping the methodology, we wererequired to consider the staff,equipment, and supplies used inproviding medical and surgical servicesin various settings.

The legislation specifically requiredthat, in implementing the new system ofpractice expense RVUs, we apply thesame budget-neutrality provisions thatwe apply to other adjustments under thephysician fee schedule.

On August 5, 1997, the Presidentsigned the BBA into law. Section4505(a) of BBA delayed the effectivedate of the resource-based practiceexpense RVU system until January 1,1999. In addition, BBA provided for thefollowing revisions in the requirementsto change from a charge-based practiceexpense RVU system to a resource-basedmethod.

Instead of paying for all servicesentirely under a resource-based systemin 1999, section 4505(b) of BBAprovided for a 4-year transition period.The practice expense RVUs for the year1999 will be the product of 75 percentof charge-based RVUs (1998) and 25percent of the resource-based RVUs. Forthe year 2000, the percentages will be 50percent charge-based and 50 percentresource-based. For the year 2001, thepercentages will be 25 percent charge-based and 75 percent resource-based.For subsequent years, the RVUs will betotally resource-based.

Section 4505(e) of BBA provided that,for 1998, the practice expense RVUs beadjusted for certain services inanticipation of the implementation ofresource-based practice expensesbeginning in 1999. Practice expenseRVUs for office visits were increased.

For other services whose practiceexpense RVUs (determined for 1998)exceeded 110 percent of the work RVUsand were provided less than 75 percentof the time in an office setting, the 1998practice expense RVUs were reduced toa number equal to 110 percent of thework RVUs. This limitation did notapply to services that had a proposedresource-based practice expense RVU inthe June 5, 1998 proposed rule that wasan increase from its 1997 practiceexpense RVU.

The total of the reductions under thisprovision was less than the statutorymaximum of $390 million. Theprocedure codes affected and the finalRVUs for 1998 were published in theOctober 31, 1997 final rule (62 FR59103).

Section 4505(d)(2) of BBA requiredthat the Secretary transmit a report tothe Congress by March 1, 1998,including a presentation of data to beused in developing the practice expenseRVUs and an explanation of themethodology. A report was submitted tothe Congress in early March 1998.Section 4505(d)(3) required that aproposed rule be published by May 1,1998, with a 90-day comment period.For the transition to begin on January 1,1999, a final rule must be published byOctober 30, 1998.

BBA also required that we developnew resource-based practice expenseRVUs. In developing these new practiceexpense RVUs, section 4505(d)(1)required us to—

• Utilize, to the maximum extentpracticable, generally acceptedaccounting principles that recognize allstaff, equipment, supplies, andexpenses, not just those that can be tiedto specific procedures, and use actualdata on equipment utilization and otherkey assumptions;

• Consult with organizationsrepresenting physicians regarding themethodology and data to be used; and

• Develop a refinement process to beused during each of the four years of thetransition period.

2. Proposed Methodology for ComputingPractice Expense Relative Value Units

(See Addendum B in the June 5, 1998proposed rule (63 FR 30888) for adetailed technical description of theproposed methodology.)

In the June 5, 1998 proposed rule (63FR 30827), we proposed a methodology


for computing resource-based practiceexpense RVUs that uses the twosignificant sources of actual practiceexpense data we have available: theClinical Practice Expert Panel (CPEP)data and the American MedicalAssociation’s (AMA’s) SocioeconomicMonitoring System (SMS) data. Thismethodology is based on an assumptionthat current aggregate specialty practicecosts are a reasonable way to establishinitial estimates of relative resourcecosts of physicians’ services acrossspecialties. It then allocates theseaggregate specialty practice costs tospecific procedures and, thus, can beseen as a ‘‘top-down’’ approach.

Practice Expense Cost PoolsWe used actual practice expense data

by specialty, derived from the 1995through 1997 SMS survey data, to createsix cost pools: administrative labor,clinical labor, medical supplies, medicalequipment, office supplies, and all otherexpenses. There were three steps in thecreation of the cost pools.

Step 1: We used the AMA’s SMSsurvey of actual cost data to determinepractice expenses per hour by costcategory. The practice expenses perhour for each physician respondent’spractice was calculated as the practiceexpenses for the practice divided by thetotal number of hours spent in patientcare activities by the physicians in thepractice. The practice expenses per hourfor the specialty are an average of thepractice expenses per hour for therespondent physicians in that specialty.

Step 2: We determined the totalnumber of physician hours, byspecialty, spent treating Medicarepatients. This was calculated fromphysician time data for each procedurecode and the Medicare claims data. Theprimary sources for the physician timedata were surveys submitted to theAMA’s Specialty Society Relative ValueUpdate Committee (RUC) and surveysdone by Harvard for the initialestablishment of the work RVUs.

Step 3: We then calculated thepractice expense pools by specialty andby cost category by multiplying thepractice expenses per hour for eachcategory by the total physician hours.

Cost Allocation MethodologyFor each specialty, we separated the

six practice expense pools into twogroups and used a different allocationbasis for each group.

• For group one, which includesclinical labor, medical supplies, andmedical equipment, we used the CPEPdata as the allocation basis. The CPEPdata for clinical labor, medical supplies,and medical equipment were used to

allocate the clinical labor, medicalsupplies, and medical equipment costpools, respectively.

• For group two, which includesadministrative labor, office expenses,and all other expenses, a combination ofthe group one cost allocations and thephysician fee schedule work RVUs wereused to allocate the cost pools.

• For procedures performed by morethan one specialty, the final procedurecode allocation was a weighted averageof allocations for the specialties thatperform the procedure, with the weightsbeing the frequency with which eachspecialty performs the procedure onMedicare patients.

Other Methodological Issues

Professional and Technical ComponentServices

Using the methodology describedabove, the professional and technicalcomponents of the resource-basedpractice expense RVUs do notnecessarily sum to the global resource-based practice expense RVUs sincespecialties with different practiceexpenses per hour provide thecomponents of these services indifferent proportions. We made twoadjustments to the methodology,depending on the specific HCFACommon Procedure Coding System(HCPCS) code, so that the professionaland technical component practiceexpense RVUs for a service sum to theglobal practice expense RVUs.

Practice Expenses per HourAdjustments and Specialty Crosswalks

Since many specialties identified inour claims data did not correspondexactly to the specialties included in thepractice expenses tables from the SMSsurvey data, it was necessary tocrosswalk these specialties to the mostappropriate SMS specialty category.(See Table 3 in the June 5, 1998proposed rule (63 FR 30833) for a listingof all proposed crosswalks.)

We also made the followingadjustments to the practice expense perhour data:

• We set the medical materials andsupplies practice expenses per hour forthe specialties of ‘‘Oncology’’ and‘‘Allergy and Immunology’’ equal to themedical materials and supplies practiceexpenses per hour for ‘‘All Physicians,’’stating that we make separate paymentfor the drugs furnished by thesespecialties.

• We based the administrativepayroll, office, and other practiceexpenses per hour for the specialties of‘‘Physical Therapy’’ and ‘‘OccupationalTherapy’’ on data used to develop the

salary equivalency guidelines for thesespecialties. We set the remainingpractice expense per hour categoriesequal to the ‘‘All Physicians’’ practiceexpenses per hour from the SMS surveydata.

• Due to uncertainty concerning theappropriate crosswalk and time data forthe nonphysician specialty‘‘Audiologist,’’ we derived the resource-based practice expense RVUs for codesperformed by audiologists from thepractice expenses per hour of the otherspecialties that perform these codes.

• Because we believed that the use ofthe average practice expenses per hourshould create the appropriate practiceexpense pool for radiology, we did notattempt to differentiate the practiceexpenses per hour for radiologistsaccording to who owned the equipment.

Time Associated With the WorkRelative Value Units

The time data resulting from therefinement of the work RVUs have been,on the average, 25 percent greater thanthe time data obtained by the Harvardstudy for the same services. Weincreased the Harvard time data in orderto ensure consistency between thesedata sources.

For services such as radiology,dialysis, and physical therapy, and formany procedures performed byindependent physiological laboratoriesand the nonphysician specialties ofclinical psychologist and psychologist(independent billing), we calculatedestimated total physician times for theseservices based on work RVUs,maximum clinical staff time for eachservice as shown in the CPEP data, orthe judgment of our clinical staff.

We calculated the time for CurrentProcedural Terminology (CPT) codes00100 through 01996 using the base andtime units from the anesthesia feeschedule and the Medicare allowedclaims data.

We received the following commentson our proposed methodology tocalculate resource-based practiceexpense RVUs:

Top-Down MethodologyComment: Most of the physician

specialty societies commenting on ourproposed general methodologysupported the use of the top-downapproach as the most reasonablemethodology for developing resource-based practice expense RVUs, and themost responsive approach to therequirements of BBA. This was echoedby comments from several nonphysicianorganizations, the Association ofAmerican Medical Colleges, and theMedical Group Management


Association, as well as several hundredindividual commenters.

These commenters supported the top-down method for a variety of reasons:

• It reflects the relative values ofphysicians’ actual practice expenses.

• It uses the best available sources ofaggregate practice expense data.

• It recognizes specialty-specificindirect costs.

• It does not rely upon arbitrary,distorting data adjustments such as‘‘linking’’ and ‘‘scaling.’’

• It is conducive to refinement.MedPAC also agreed that this

approach is necessary, because oflimitations in the CPEP process andbecause the top-down approach assuresthat all practice costs are reflected in theRVUs.

However, several organizations,mainly representing primary carephysicians and supported by commentsfrom individual physicians, opposed theuse of a top-down methodology todevelop practice expense RVUs. Theyargued that the top-down approach isnot resource-based but, rather, rewardshigher paid physicians who have spentmore in the past, regardless of the extentto which these expenditures contributedto patient care. Thus, the commentersclaimed that the top-down approachperpetuates the inequities in the currentcharge-based practice expense RVUsthat the implementation of a resource-based practice expense system wassupposed to correct.

One commenter also claimed that thetop-down approach is not responsive tothe requirements of BBA, as themethodology is not based on generallyaccepted accounting principles. Further,the commenter argued that this newproposal is not more responsive to theconcerns of the medical community ingeneral but, rather, only benefits thosespecialties whose income was projectedto decline under the bottom-upapproach.

A specialty society representingclinical oncology opposed the top-downmethodology because—

• It does not actually measureappropriate input resource costs andthus pays for inefficiencies;

• It overpays hospital-based andunderpays office-based services; and

• The RVUs for individual codescannot be refined because of the use ofmacro-specialty per hour costs.

There were several comments thatexpressed concern about the morespecific impacts of the methodology. Amajor primary care organization pointedout that, under the 1997 proposed rule,an internist would have had to provideonly 15 midlevel established patientoffice visits to obtain the practice

expense reimbursement of a singlecoronary triple-bypass graft, comparedto 40 visits under our current proposal.One organization opposed the use of thetop-down approach because of theestimated reduction in payments toradiology and radiation oncology.Another commenter, representingpathologists, expressed concern thatbecause pathology received small gainsunder the bottom-up method, but a 10percent reduction under the top-down,there are possible flaws in the top-downmethodology.

A few of the above commentsspecifically recommended that we adopta new bottom-up approach that isresponsive to the BBA, the GeneralAccounting Office (GAO), and theconcerns of the medical community.Another organization commented thatboth top-down and bottom-upmethodologies are inherently flawed,and that we should consider an entirelynew payment algorithm using type ofpractice. One of the major primary careorganizations concluded that the top-down methodology is only a reasonablestarting point that will need to beimproved during refinement in order tomeet the original intent of improvingpractice-expense payments forundervalued primary care and otheroffice-based services.

Response: As we stated in ourproposed rule, BBA requires us to‘‘utilize, to the maximum extentpracticable, generally accepted costaccounting principles which recognizeall staff, equipment, supplies, andexpenses, not just those which can betied to specific procedures****’’ Westill believe that the top-downmethodology is more responsive to thisBBA requirement. By using aggregatespecialty practice costs as the basis forestablishing the practice expense pools,the top-down method recognizes all ofa specialty’s costs, not just those linkedto specific procedures.

We also believe that the other reasonsoutlined in the proposed rule forpreferring the top-down method are stillvalid. It answers many of the criticismsand questions from the medicalcommunity and the GAO regarding thebottom-up method’s indirect practiceexpense allocation method, treatment ofadministrative costs, and use of capsand linking.

However, we agree that a possibleweakness of the top-down approach isthat it may perpetuate historicalinequities in the current charge-basedpractice expense RVUs. More highlypaid physicians would presumably havemore revenues that could subsequentlybe spent on their practices. We believe

this issue should be discussed duringthe refinement process.

Comment: One major organizationcommented that we will need todevelop an alternative method for newand revised codes that are not includedin the SMS data because havingmultiple methods would lead toquestionable validity.

Response: It will not be necessary todevelop an alternate methodology forrefinement of new and revised codes.Once direct inputs are assigned to thenew and revised codes, allocation tothese codes will follow the samemethodology used for all other services.(See Section II.A.4, Refinement ofPractice Expense RVUs.)

Comment: Two major primary careorganizations expressed concern that wedid not consult with the physiciancommunity about our intention toabandon, rather than refine, ouroriginally proposed bottom-upapproach, since they had assumed wewould only be modifying our originalmethodology. They commented that thisis of greater concern in light of BBA’srequirement that we consult withphysicians regarding our methodologyand of GAO’s recommendation that werefine, with no mention of replacing, thebottom-up method. One of thecomments stated, that as the GAO foundthe bottom-up method acceptable, theirsociety would like the GAO’s assurancethat the new method is sound.

Response: We believe we carried outthe BBA requirement to consult withphysician organizations. There wereextensive consultations with physicians,including the validation panels, thecross specialty panel, and the indirectcost symposium. During the course ofeach of these meetings, physicians andothers pointed out serious problemswith the bottom-up methodology. Wehave had two multispecialty meetingsthis year to explain our proposedmethodology and have also hadnumerous meetings and discussionswith many specialty societies. Duringall these meetings we carefully listenedto all points of view and to suggestionsfor developing the new proposal.Following this lengthy consultationprocess, we published our new proposalwith a 90-day comment period. Thisprovided further opportunities for allinterested groups to review andcomment on this proposal.

It is true that the GAO did notrecommend that we totally replace ourbottom-up approach. It is ourunderstanding that the GAO was notasked to review alternative methods. Inany case, their report did notrecommend against adopting a newmethodology. Their report did point out


several significant weaknesses in ouroriginal approach that we believed werebetter responded to by adopting a top-down methodology.

Comment: One organization urgedthat we publish the practice-expenseRVUs three ways, using a top-down, abottom-up, and a hybrid approach thatuses SMS data for indirect costs andCPEP data for direct costs. The bottom-up and hybrid approaches should reflectthe recommendations previouslyreceived relating to scaling, linking, andthe treatment of administrative costs.This could provide a basis fordeveloping comments that compare theinterim practice expense RVUs withthose derived from a modified bottom-up approach. The commenter stated thatwe should be open to consideringarguments for a change in the interimpractice expense RVUs based on agroup’s determination that the valuesunder the bottom-up approach weremore accurate.

Response: We believe that weproposed the methodology fordeveloping resource-based practiceexpense RVUs that best responds to therequirements of the Social Security ActAmendments of 1994 and BBA. From apractical standpoint, it would be verydifficult to deal with the inconsistenciesbetween RVUs for various services thathave been derived from totally differentmethodologies.

SMS DataComment: Almost all specialty society

commenters, and many individualcommenters, raised questionsconcerning shortcomings in the SMSdata, though several commented thatSMS is the most appropriate data sourceto use in developing specialty-specificpractice expense RVUs. As we noted inthe proposed rule, the AMA itselfpointed out that the survey had not beendesigned to support the development ofpractice expense RVUs. The AMA alsostated that the sample size, the responserate, and the fact that data was collectedon the physician level, rather than thepractice level, raised methodologicalissues. Many commenters echoed theseconcerns, and many raised what theysaw as further general methodologicalproblems:

• MedPAC expressed concern aboutthree types of potential errors in theSMS data: the sampling error andnonresponse error originally identifiedin our proposed rule and measurementerror. Some of this measurement errorcould occur because the surveymeasures physician-level rather thanpractice-level costs, as noted above. Inaddition, there could be measurementerror by using a self-reported survey if

no mechanism exists to verify theinformation provided.

MedPAC suggested that we couldreduce these errors through additionaldata collection, perhaps implementing asubsample of SMS survey participants,through an analysis of nonresponseerror that compares respondents withnonrespondents, through AMA’s plansto do a practice-level survey every otheryear, and through considering methods,other than actual audits, to verify surveyresponses.

• Several of the smaller specialties,such as maxillofacial, pediatric,vascular and thoracic surgeons,cardiology and gynecologysubspecialties, geriatricians, andpulmonologists expressed concern withthe validity and reliability of SMS datafor those specialty and subspecialtygroups not adequately represented inthe SMS survey. A commenter alsostated that academic and hospital-basedspecialties, such as critical care andneonatology, were not appropriatelyrepresented. Many specialty societiesrequested that we consider practiceexpense data obtained by under-represented specialty and subspecialtygroups.

• Several nonphysician specialties,though supporting the use of SMS data,raised the need to modify the survey toinclude nonphysicians in the future. Acommenter stated that, becausenonphysicians were not represented inthe SMS survey, we have been forced tomake an educated guess about whichspecialties they most resemble. Anothercommenter pointed out that the SMSdata contains no information aboutosteopathic physicians.

• Several specialties, regardless oftheir overall sample size, expressedconcerns about the combining togetherof subspecialties with differing practicecosts. For example, organizationsrepresenting cardiologists commentedthat it is not known how many in theirsample were providing evaluation andmanagement services, as opposed toperforming equipment intensiveprocedures that have much higher costs.Two specialty societies representingnuclear physicians, along with severalhundred individual commenters,objected to the small sample of thissubspecialty, with its high costs relatedto the use of radiopharmaceuticals,being combined with radiologists into asingle practice expense pool. Thecomments recommended that weincrease nuclear medicine’s practiceexpense RVUs by 20 percent.

Similarly, a vascular surgeryorganization objected to being combinedwith cardiothoracic surgeons, who madeup 75 percent of the sample and whose

practice style differs substantially fromvascular surgeons. An organizationrepresenting pediatrics expressedconcern that pediatric subspecialtieswere grouped together with their adultcounterparts, such as gastroenterology.The AMA commented on this point thatit plans refinements for future surveysto enhance the utility of the data.

• Several commenters noted that thesurvey consisted of physician-ownedpractices, despite the trend toward morephysicians working as employees,resulting in a possible bias toward soloor small group practices. For example,one commenter stated that the majorityof emergency room physicians nowwork as employees or under contract.Another commenter asserted that themajority of pediatricians list their statusas ‘‘employed.’’ The AMA commented,in this regard, that a key refinement tothe SMS survey will be the developmentof a practice-level survey to complementthe current process.

• One commenter questioned ourassumption that physician respondentsto SMS share practice expenses equallywith all other physician owners in thepractice, since there is no data to showthat this is the prevalent method.

• An organization representing nursescommented that issues related tochanges in acuity and case mix inambulatory care are not beingaddressed, particularly as they pertainto the increased professionalization ofclinical staff types. The organizationargued that there is a need toincorporate into the survey process aclearer distinction between the types ofclinical staff that are employed based onspecialty practice.

• Concerns were raised by somecommenters that the SMS data did notalways include the actual costs of agiven specialty. Several organizationsrepresenting radiologists, radiationoncologists, and cardiologistscommented that the methodologyemployed by the SMS surveyconsistently underestimated the actualcosts of equipment. Organizationsrepresenting emergency roomphysicians, supported by the commentfrom the AMA, argued that thesignificant costs of both stand-by timeand uncompensated care are notreflected in the SMS data and that thesecosts need to be recognized.

A gastroenterology specialty societyasserted that the SMS data grosslyunderstated actual expenses whencompared to its own study. Twocommenters stated that costs for homevisits, such as travel expenses andinsurance, are not adequatelyrepresented in the data. Oneorganization commented that the SMS


data fails to adequately incorporateresources, including billing, nursingtime, and transportation costs foraudiologists utilized in settings such asskilled nursing facilities.

One commenter stated that the addedcosts for compliance with federalinitiatives, such as anti-fraud and abuseefforts and the new evaluation andmanagement documentation guidelines,are not yet reflected in the SMS data.These costs should be recognized duringthe refinement process and included infuture surveys.

• On the other hand, severalcommenters argued that costs wereincluded in the SMS data that should beexcluded because they are paid forseparately from the physician feeschedule. One commenter pointed toseparately reimbursable supplies anddrugs, and another to the costs of takingphysician staff into the hospital, asexamples of costs included in SMS thatcould lead to a double payment byMedicare. A society representingvascular surgeons commented that thetechnical component of noninvasivevascular laboratory testing falls into this‘‘gray zone.’’

• A national specialty societycommented that the AMA analysis ofthe ‘‘zero’’ responses by specialty bycost categories (that is, those costcategories where respondents indicatedthere were no costs) shows that asignificant percentage of pathologists’responses for direct cost categories arezero as compared to the ‘‘zero’’ responserates for all physicians. The commentrequested that the SMS pathology databe cleared of all ‘‘zero’’ responses for allcost categories, not just for the total costcategory, prior to the calculation ofmean costs. For the purpose ofcalculating practice expense per hourfor pathology, the society said, weshould only use data from pathologistswho incur a particular cost.

• There were a number of commentsconcerning the SMS data on thespecialty-specific physician patient carehours, which is one of the variablesused to compute the practice expenseper hour for each specialty:

• Many specialty societies stated theirconcern that in the calculation of thespecialty-specific practice expense perhour, specialties working the longesthours are disadvantaged. Onecommenter pointed out that practiceexpense is not uniformly distributedover the course of a given day; there areless costs when patient care takes placeafter, rather than during, office hours.

Another commenter argued that ourapproach assumes that all of the patientcare hours in the SMS survey arereflected in our claims data. However,

the commenter stated, much time spentin patient care activities is not billable,such as the involvement of transplantsurgeons in patient care after the initialassessments but prior to the actualtransplants.

One specialty society stated thathospital-based physicians’ hours ofwork are probably overstated, as theywill include total time spent in thefacility and not just hours of providingpatient services. One commenterquestioned both the accuracy of theSMS data on hours worked per week, aswell as our assumption that the level ofpractice expense incurred increasesproportionally with the hours spent inpatient care. An organization stated thatphysician reports of number of hoursare less reliable than the reports of costsand are prone to overstatement. Forthese reasons, five specialty societiesrecommended using a standardizedwork week, usually a 40-hour week, forall specialties.

• Many other specialty groups arguedequally vehemently against anystandardization of the patient carehours. One group commented thatsubjective adjustments to the SMS data,especially those which reallocatepractice expenses among specialties,should be avoided. The comment addedthat suggestions that a standardized 40-hour work week be imposed on the datashould be rejected because the proposalis driven by an arbitrary, subjectivepresumption that cross-specialtypractice expense variations are ‘‘toolarge.’’

Another group argued that, as manyphysicians work more than a 40-hourweek, such an adjustment wouldintroduce additional error into the dataand distort the relationship betweendifferent specialties’ practice expensesper hour.

• Three organizations were concernedabout the advantage given to specialtiesthat use nonphysician practitioners whoare not reimbursable. In such cases, thephysician would incur practice expensecosts, but the time of practitionerswould not be included in the physicianpatient care hours in the denominator ofthe practice expense per hourcalculation.

On the other hand, anothercommenter stated that we should notadjust the SMS data for midlevelpractitioners, such as optometrists oraudiologists, as physician practicesemploying midlevel practitioners arelikely to be more complex than aphysician-only operation.

• One specialty society commentedthat the demographics of the SMSsurvey are not clear, as there are noassurances that the sample is not biased

towards one particular area of thecountry and does not exclude someareas.

Response: We believe that most of theabove comments identified importantareas for needed future improvement inour data collection efforts on aggregatespecialty-specific practice expense.However, although the SMS survey wasnot initially intended to be used todevelop practice expense RVUs, webelieve it is the best available source ofdata on actual multispecialty practicecosts that allows us to recognize allstaff, equipment, supplies, andexpenses, not just those that can be tiedto specific procedures. Many specialtiessupported this.

For example, a specialty societycommented, ‘‘As with any complexdatabase, the AMA SMS database is notperfect. It is, however, the best availablesource of data for aggregate practiceexpenses.’’ The Medical GroupManagement Association (MGMA)stated in its comment that, ‘‘The SMSsurvey data is the most appropriate andonly primary data set in existence todetermine specialty specific costspools.’’

We also need to point out that manyof the weaknesses in the SMS datacould well be found in any other survey,whether undertaken by us, some othernational group, or a medical specialtysociety. Problems with sample size andresponse rate have plagued otherprevious attempts to gather reliable dataon practice expenses. Problems withmeasurement error may be a seriousimpediment for survey data that iscollected with the purpose ofinfluencing the level of a givenspecialty’s practice expense pool. Infact, we believe one advantage of thecurrent SMS data is that they werecollected before the 1997 and 1998proposed rules were published.

We recognize that some specialties areunder-represented or not appropriatelyrepresented in the SMS data and someare not included at all. We alsoacknowledge that additional data mayneed to be obtained and someadjustments made. One of our mostimportant tasks during the immediaterefinement period will be to work withthe AMA and the medical community toconsider possible ways to improve therepresentativeness of the aggregatespecialty-specific data so that samplingerror is decreased. As part of therefinement, we will also need todevelop strategies to eliminate as manysources of nonresponse andmeasurement error as possible. (Forfurther information on our refinementefforts to improve the accuracy of our


data, see Section II.A.4, Refinement ofPractice Expense RVUs.)

As indicated earlier, we believe anadvantage of the SMS data we used isthat it was collected prior to theproposed rule. In fact, it was collectedprior to the original proposal in 1997that was delayed by BBA and thatwould have resulted in largeredistributions among specialties.

We are very concerned, though, aboutthe potential biases that may exist inany subsequent survey data collected bythe SMS process or other surveys. Weespecially believe there is a problem inusing data collected and submitted to usby individual specialties. We believe itis more appropriate to use data collectedat the same time by an independentsurveyor for a wide variety of specialtiesthat both gain and lose under theproposal.

Further, now that it is widely knownhow these survey data are being used,every specialty has an incentive toensure that their data are as high aspossible in future surveys. We agreewith MedPAC that it may not bepossible for Medicare to audit these dataand that it is essential that alternativesbe established by SMS and others.Perhaps specialty data that significantlychanges in a future survey should beselectively audited by SMS through anindependent auditor or otherappropriate entity before beingconsidered for use by us. We willconsult with physician groups andothers about this during the refinementprocess.

Comment: One national organizationsuggested the use of MGMA survey dataeither as a supplement or alternative toSMS in the future.

Response: We do not believe that theMGMA survey could currently be usedas an alternative to SMS. As we notedin our proposed rule, due to selectivesampling and low response rate, thissurvey is not representative of thepopulation of physicians and cannot beused to derive code-specific RVUs. Thisview is based on consultations withMGMA representatives. However, we dobelieve that this survey data can be usedas one way to validate the generalaccuracy of the SMS data. We haveanalyzed the MGMA data and haveconcluded that, in general, it supportsthe relative specialty-specific ranking ofthe practice expense per hour dataderived from the SMS survey.

Comment: One specialty societyrecommended using median, instead ofmean, values to calculate eachspecialty’s practice expense per hour.This comment argued that the use ofmedians would eliminate outliers and isstatistically more appropriate.

However, three other organizationsspecifically commented supporting ourdecision to use mean SMS data ratherthan median data. These commentsasserted that, particularly with a smallsample, use of the median wouldobscure any major differences inpractice costs within a specialty.

Response: We will continue tocalculate the practice expenses per hourby using the mean values for eachspecialty, at least for the purposes ofthis final rule. This is another issue thatcan be revisited during the refinementperiod.

Comment: Organizations representingemergency room physicians, as well asseveral hundred individualcommenters, claimed that the SMS dataseriously under-represented the truepractice costs of emergency care. Thecommenters stated that the SMS data, asnoted above, did not include costs ofuncompensated care, much of itmandated under the Federal EmergencyMedical Treatment and Active LaborAct (Public Law 99–272), nor stand-byexpenses.

In addition, the comments argued, theSMS data failed to capture arepresentative cross-section of theirtypes of practice arrangements; the SMSsurvey focused on physician owners,but the majority of emergency roomphysicians work as employees or undercontract. Therefore, one commenterasserted, SMS did not include thelargest single expense for mostemergency physicians: the costsassociated with employment by practicemanagement firms, which can totalbetween 30–40 percent of thephysician’s fee.

One of the specialty societiesincluded with its comments the resultsof a study it commissioned, whichshowed that the mean practice expenseper hour for emergency physicians was$27.33, more than double the $13 perhour based on SMS, even withoutincluding uncompensated care. If we arenot willing at this time to substitute thissurvey data for that from the SMS, theorganization recommended, withsupport from a comment from the AMA,that we crosswalk emergency medicineto the practice expense per hour for ‘‘AllPhysicians,’’ which is $67.50.

Response: Though many specialtiesmust deal with the issue ofuncompensated care, we do agree that itmay pose a particular problem foremergency physicians, who areobligated under law to treat any patientregardless of the patient’s ability orwillingness to pay for treatment.Therefore, the amount of patient carehours spent on uncompensated carecould be significantly higher for

emergency medicine than for any otherspecialty. These issues require furtherexamination. In the meantime, we willmake an adjustment in our calculationof the practice expense per hour foremergency medicine by using the ‘‘AllPhysicians’’ practice expense per hourto calculate the administrative labor andother expenses cost pool. We willcontinue to calculate the clinical labor,supply, equipment, and office cost poolsusing the SMS-derived data, as it seemsunlikely that, as a hospital-basedspecialty, emergency medicine’s costsfor these categories would approximatethose of the average physician.

Comment: Many commenters arguedthat the reductions published in theJune 5, 1998, NPRM for services withoutwork RVUs were inappropriate. Thecommenters represented a widespectrum of specialties includingradiology, radiation oncology,cardiology, independent physiologicaland other laboratories, psychology,audiology, dermatology, and others.These comments focused on the factthat AMA does not survey some of theentities that provide these services.They argued that the CPEP data areflawed and the indirect allocationmethodology is biased.

Response: Although it is true that theAMA does not survey the entities thatprovide some of these services, this doesnot necessarily mean that these servicesare inadequately represented in the SMSdata. If these services (or in the case oftechnical component services, theassociated global services) are providedin the practices of physician ownerssurveyed by the SMS in the sameproportion as they are reflected in ourclaims data, the practice expense perhour calculations and the practiceexpense pools are reasonable.

If the CPEP data accurately containthe direct cost inputs for these services,then the direct practice expense pool isbeing allocated appropriately. Withregard to the indirect allocationmethodology, we are modifying it toincrease the weight of the direct costs inthe allocation, as discussed elsewhere.

However, the possibility exists thatinaccuracies in the CPEP data for theseservices are causing the substantialreductions seen in the NPRM.Therefore, because we are not alteringthe CPEP at this time, as an interimsolution until the CPEP data for theseservices have been validated, we havecreated a practice expense pool for allservices without work RVUs regardlessof the specialty that provides them. Weallocated this practice expense pool toprocedure codes using the currentpractice expense relative value units.


While we are not convinced by thecomments that were received to dateregarding a bias in the SMS survey dataagainst these services, we acknowledgethose concerns and will examine thisissue during the refinement process.

Comment: The College of AmericanPathologists (CAP) requested thatpatient care time included in the SMSdata that is spent in autopsies andsupervision of technicians andparaprofessionals be excluded from thepatient care hours used to calculate thepractice expense per hour for pathologyservices. The commenter stated thatthese are Part A services for whichpathologists rarely incur any directcosts. The AMA supported theseadjustments and estimated thepercentage of total pathology patientcare hours attributable to autopsy andsupervision services at 6 and 15 percent,respectively.

CAP also asked that some portion ofthe patient care hours category of‘‘personally performing nonsurgicallaboratory procedures includingreports’’ be eliminated for 1999 whendetermining pathologists’ total patientcare hours, as the SMS data includesboth Part A and Part B services. CAPstated that we should work with theCAP and the AMA to determine theappropriate adjustment.

Response: Since pathologists havemore Part A reimbursement than anyother specialty, we will decrease thenumber of patient care hours by 6percent for autopsies and 15 percent forsupervision services. However, until wehave more information about theappropriate adjustment for ‘‘personallyperforming non-surgical laboratoryprocedures including reports,’’ thehours for those services cannot beeliminated from our calculations. Thispoint, as well as the general issue ofnonbillable hours, should be revisitedduring refinement.

Comment: Many specialty societieshave commented on specific problemswith the SMS data that affect their ownspecialty and have requested that wesupplement or replace the SMS datawith data provided with theircomments.

Response: There is not sufficient timebefore publication of the final rule tobegin to validate either the methodologyor findings of the submitted data. Sincechanges in any specialty’s practiceexpense per hour would have an impacton other specialties, we do not believeit would be equitable to make anysweeping changes without the adequatereview that the refinement process canachieve. In addition, we stated in ourproposed rule that, for those largerspecialties included in the SMS survey,

‘‘we are unlikely to make any changesin the final rule****’’ Therefore, we willcontinue to use the SMS-derivedpractice expense per hour for thesespecialties, but will ensure that all ofthe submitted data will be consideredduring the refinement process.

CPEP DataComment: Though one major

specialty society commented that theCPEP data, in general, is relativelysound, many comments pointed outproblems with the CPEP process andwith the data derived from that process:

• One group commented that theCPEPs did not have adequaterepresentation from practice managers;that there was no uniform policydealing with issues such as duplicationof time or efficiencies that might resultfrom performing more than one task ata time; and that there was inadequatetime allotted for CPEPs to meet.

• Several subspecialties pointed outthat they were not included in the CPEPprocess and that this could have led tothe undervaluing of their services.

• Several commenters recommendedthat we use the CPEP data as validatedand refined by the validation panels.

• One organization commented thatthe CPEP data are flawed since only 200codes were reviewed by validationpanels.

• One primary care group argued thatwe should not abandon edits andmodifications to raw CPEP data, asmany codes are performed by more thanone specialty, and inaccuracies in theCPEP data can affect several specialties.

• Two organizations commented thatthe CPEPs used what is now obsoletesalary and benefits data, at least forsonographers and vasculartechnologists. One of these commentspointed out that for some codes, adifferent cost was computed for thesame equipment. Another specialtysociety recommended that a review ofprices and quantities for supplies andequipment be included as part of therefinement process.

• Two commenters were concernedthat the CPEP data include expensesthat can be billed separately. A primarycare specialty society argued that weshould edit out all direct inputs forservices to hospital patients. Thecomment mentioned that since theseservices are paid for outside of thepractice expense RVUs, failure toexclude these inputs can distortrelativity across categories of servicessuch as surgical services and officevisits.

• One commenter clarified that thecosts of therapy aides are a part ofpractice expense and should be

reflected in the CPEP data, while theservices of therapy assistants areincluded in the work RVUs.

Response: We are aware that the rawCPEP data we have used in ourproposed methodology need furtherreview. We also share many of theconcerns raised by those commentingon the issue. However, we believe thatthe CPEP resource estimates, whichwere developed by practitionersrepresenting all the major specialties,are the best procedure level dataavailable at this time.

Under our top-down methodology,the CPEP inputs are used solely toallocate each specialty’s practiceexpense pool to the proceduresperformed by that specialty. We havealways believed that the relative inputestimates within families of codes foreach specialty’s CPEP data weregenerally appropriate. In addition, themost contentious CPEP values were thevarying estimates for the administrativestaff times, and these values are notutilized in our top-down approach.

We chose not to apply the edits, caps,or linking that had originally beenproposed in our 1997 proposed rule aspart of our bottom-up methodology.These edits had met with severecriticism from the medical communityand were questioned by the GAO. Wealso did not use the revised inputs fromthe validation panels we held inOctober 1997, as these panels only cameto consensus on about 200 codes, andwe were not convinced that all of therevised values were correct. However,we know that there is much neededimprovement in the CPEP data, and theidentification and correction of anyCPEP errors whether in staff times,supplies, equipment, or pricing will bea major focus of our refinement process.

Comment: One specialty societycommented that we erred in notincorporating increases in staff timerecommended by validation panels.Partly as a result, the practice expenseRVUs for gastroenterologists’ out-of-office billing, scheduling, and recordkeeping are inadequate.

Another commenter stated that therewere discrepancies in the administrativedata for skilled nursing facility services,with subsequent visit codes beingassigned only half of the billing time ofinitial visits. A third commenterrequested that we standardize theadministrative staff types according tothe validation panels’recommendations. Three commentersstated that we do not account for thecosts of maintaining an office full-timewhen the physician is providingservices out of the office.


Response: As stated above, under ourproposed methodology, CPEPadministrative staff times have no effecton the practice expense RVUscalculated for any code. The costs ofmaintaining an office while thephysician is providing services in afacility should be captured in the SMScost data and, thus, are a part of eachspecialty’s practice expense pool. Asthese would be indirect costs, theywould be included in the practiceexpense for each service by use of ourallocation methodology, which utilizesboth directs costs and the physicianwork RVUs.

Comment: Almost 30 specialtysocieties submitted specific CPT code-level changes for the CPEP input datafor clinical and administrative labortime, supplies, and equipment for justunder 3000 CPT codes. In addition,many commenters included lists ofcodes with practice expense RVUs thatwere considered anomalous, eitherwithin a code family, or in relation tocomparable codes. We also receivedcomments from several organizationswith recommendations for revisedcrosswalks for those codes not valuedby the CPEPs, as well as recommendedin-office inputs for some codes that arenow being done in the office, but wereonly given practice expense RVUs forthe facility setting.

Response: We had intended to makethe CPEP revisions requested by a givenspecialty as part of the final rule if therecommendations appeared reasonableand if there would be no significantimpact on any other specialty. However,given the huge volume of recommendedrevisions—over a third of the codes inthe fee schedule would be affected—acceptance of the recommendedchanges across the board would almostcertainly have a spill-over impact onmany subspecialties and between sites-of-service.

We believe it would be moreresponsible and fair to allow themedical specialties to participatecollectively in the needed revisions aspart of the refinement process. Thedeferral of the CPEP revisions is in noway a reflection on the effort andthought that the commenters obviouslyexpended in arriving at theirrecommendations. All the code-specificcomments referred to above will beconsidered at the start of the refinementperiod. (See Section II.A.4, Refinementof Practice Expense RVUs)

Comment: Many organizations,representing both surgical and primarycare specialties, expressed concern thatwe averaged CPEP data for the sameprocedures valued by more than one

CPEP. Different rationales were offeredfor this concern:

• Averaging could have disturbed therelative rankings of codes within CPEPs.

• Straight averaging significantlyoverstated the costs of evaluation andmanagement services.

• Averaging CPEP costs alteredpractice expense relationships withinthe evaluation and management familyof services, particularly with respect toemergency department evaluation andmanagement codes.

• The inclusion of estimates fromthose not performing the procedures,including nonphysicians, could havedistorted the values for those services.

Likewise, different solutions wereoffered to answer the concerns:

• One specialty society recommendedthat we link the CPEP data rather thanrelying on straight averages.

• Two organizations recommendedusing frequency-weighted averages.

• Five groups recommended that theCPEP costs for redundant codes bebased on the inputs from the dominantspecialty’s CPEP panel.

Response: As we are making no otherchanges in the CPEP data for this finalrule, we will continue to use straightaveraging for the redundant CPEP codesfor the purposes of this final rule. Thisissue will be considered further duringrefinement.

Comment: Two commenters requestedthe inclusion in practice expense of theprocedure-related supplies which arebrought into a skilled nursing facility(SNF). One of these commenters madethe same request for home visits.

Response: Home visits are to be paidusing the non-facility RVUs. Therefore,any supplies that would be used arealready included in the payment. As forthe SNF setting, this is an issue forrefinement. We would need moreinformation about the supplies and whythe SNF is not responsible for providingthem.

Comment: The American College ofSurgeons sent a list of new crosswalkedcodes where CPEP data hadinadvertently been duplicated in ourdatabase.

Response: We thank the commenterfor pointing out this discrepancy, andthese duplications have been deleted.

Physician Time

Comment: One major specialty societyrecommended that efforts be undertakento move toward greater consistency inphysician time data. The commenterwas concerned that since these data arederived from eight different sourcesusing different methodologies, ourinflation of the Harvard time data raiseseven more concern about consistency.

Three major organizations, tworepresenting primary care and the othera surgical specialty, recommended thatwe use the unadjusted Harvard and RUCsurvey data. One reason given was theimplication for the work RVUs of anyproposed revisions to the time data. TheRUC commented that, while the RUCphysician time data may be greater thanHarvard time data for the same codes, itmay be incorrect to assume that allHarvard time data should be increased.The RUC and several otherorganizations requested that we providea description of the methodology weused to make adjustments to the data inboth the RUC and Harvard physiciantime databases so they can comment onthe validity of the changes.

Response: The physician time dataused for the development of the practiceexpense pools are based on the Harvardresource-based RVUs study and RUCsurvey data that were developed as partof the refinement of the work RVUs.Both sets of data were based onphysician surveys. However, the RUCdata, gathered in the process of refiningthe work values of many CPT codes, aremore current and, on average, exceededthe original Harvard values by 25percent. As a matter of consistency andfairness to those services not yet refinedby the RUC, we increased the Harvardtime data in proportion to the increasesfor related services. A detaileddescription of the methodology weemployed to make all adjustments inphysician time will be placed on theHCFA Homepage.

We still believe this adjustment isappropriate and we will continue to usethe adjusted values in our calculationsfor this final rule. However, as the timevalues attributed to each procedure playan important role in the determinationof each specialty’s practice expensepool, we believe that ensuring theincreased accuracy and consistency ofphysician time data should beaddressed as part of the refinement ofthe practice expense RVUs.

Comment: Three surgical specialtysocieties commented that evaluationand management times have beenartificially inflated due to rounding. Asmall increase in time woulddisproportionately inflate high volumeprocedures that take little time.

Response: In our proposed rule, weexpressed concern that imprecision inthe time estimates for any high volumeservices that have relatively little timeassociated with them may potentiallybias the practice expense methodologyin favor of the specialties that performthese services. We stated at that timethat this issue should be examined as


part of the refinement of the resource-based practice expense RVUs.

Comment: There were several othercomments regarding the accuracy of thephysician time data:

• The RUC acknowledged that someof the RUC physician time data may notbe absolutely precise.

• One specialty society, as well as theAMA, pointed out that there are someproblems with the accuracy of thephysician time data for psychotherapyservices. For example, the timesassigned to psychotherapy codes thatinclude evaluation and managementservices are equal to and, in some cases,less than the psychotherapy codes thatdo not include these services.

• One commenter stated that thephysician time data, as computed in theHarvard studies, are not current and arelikely to be inappropriate for use incomputing practice expense RVUs.

• The American College of Surgeonscommented that physician time forpediatric surgery codes is based onerroneously low physician time datafrom the original Harvard study, ratherthan the time data from the specialstudy of pediatric services performed bythe same Harvard study team for theAmerican Pediatric Surgical Associationin 1992. The latter data were used as thebasis for the work RVUs assigned to 48pediatric surgical services.

• A surgical specialty societycommented that the physician time doesnot compensate its members for longerhours and cited examples of nonbillabletime, such as standby time for cardiaccatheterization and supervision ofresidents and interns. The societysuggested that this be considered duringrefinement.

• One commenter stated that traveltime for home visits is not included ineither the work or practice expenseRVUs. The commenter suggested thattravel time for house calls should beequal to the work equivalent of thelowest office service times 3, for anaverage of 15 minutes. Further, amodifier should be used to coverinstances where travel exceeds theaverage.

• The American Society of TransplantSurgeons identified physician times forseveral services that it believes areinaccurate and recommended adjustedtimes for these services.

Response: As stated above, we willensure that all identified anomalies andinaccuracies in the physician time dataare considered as part of the refinementprocess.

Comment: The American College ofRadiology commented that for our top-down approach we had used a levelthree office visit (99213) as a benchmark

for estimating physician time forradiology codes. They suggested that itwould be more appropriate to use theintravenous pyelography procedure(CPT 74400) instead of the office visitused in our methodology.

Response: Although we agree that99213 may be an inappropriatebenchmark since it is not oftenperformed by radiologists, we are notconvinced that the average work perunit time of codes on the radiology feeschedule is equivalent to CPT 74400.Instead, we are using the weightedaverage work per unit time for CPT71010 and 71020 as the benchmark.These two services represent overapproximately one-third of the totalallowed services in the radiology feeschedule, while CPT 74400 representsless than two-tenths of one percent. Wewill work with the medical communityto develop time estimates for radiologyprocedures that will make theimputation of time from the workestimates unnecessary.

Comments: The AmericanOccupational Therapy Associationcommented that the practice expensepool for occupational therapy codes wasunderstated because the time values of15 minutes that we arbitrarily assignedwere too low. They included a list oftime values we should use for eachcode.

The American Hospital Associationalso objected to the reductions in timesfor outpatient rehabilitation codes andurged the use of the actual surveyedtimes for all procedure codes in therange 97001 through 97770.

Response: We believe that the time of15 minutes we assigned to these codesis appropriate and does not lead to anunderestimation of the practice expensepool for outpatient rehabilitationservices. The outpatient rehabilitationcodes in this range are timed codes andare billed in 15 minute increments.Also, we have been told by somephysical therapy associations that attimes, some of the 15 minute periodtime may be performed by therapy aidesor assistants. (Note: We plan to reviewthis issue during a future five-yearreview of work RVUs.) Finally, it iscommon for these timed codes to bebilled in multiple units during onetherapy session. Thus, any therapist’swork prior to or after the visit is spreadacross more than one unit, rather thanapplied to each unit.

Crosswalk IssuesComment: The American Academy of

Maxillofacial Prosthetics (AAMP) andthe American College of Prosthodontistscommented that crosswalking is notvalid for maxillofacial prosthetic codes

since this specialty does not correspondto any other medical specialty includedin the SMS data and its practice expensevalues are much higher than othermedical specialties in the SMS survey.AAMP submitted several studies fromits own organization and from theAmerican Dental Association, as well astwo studies published in professionaljournals that report the results of pollsof prosthodontic practitioners,including information on overheadexpenses. The AAMP recommendedthat this data be used to calculate itspractice expense per hour.

Response: We agree that maxillofacialprosthetics does not correspond closelywith any other medical specialty. It alsois not a separately-identified specialtyin either the SMS survey or theMedicare claims database.

Though the AAMP submitted surveydata compiled by both its ownorganization and the American DentalAssociation, the format, definitions, andmethodology of these surveys were notconsistent with those of the SMSsurvey. For example, the 1993 AAMPsurvey did not survey practice expense,but rather the ‘‘percent overhead ofgross collections for 1992.’’ TheAmerican Dental Association surveyscounted dentist shareholder andemployee dentist income as practiceexpense in many tabulations.

Because of these methodologicaldifferences from the SMS data, we arenot able at this time to use theinformation in the submitted surveys tocalculate a comparable practice expenseper hour for maxillofacial prosthetics.

For this final rule we will create apractice expense pool for themaxillofacial prosthetic codes (CPT21076 through 21087) and crosswalkthis pool to the practice expense perhour for ‘‘All Physicians.’’ We hadimputed physician times for theseservices in our proposed rule. However,we are now using the physician timesutilized in calculating the work RVUsfor the same services. In addition, untilthe CPEP data for these codes can bevalidated, we will allocate the practiceexpense pool to the specific servicesusing the current RVUs. We hope towork with the specialty society as partof the refinement process in order todevelop a reliable method of derivingaccurate practice expense RVUs formaxillofacial prosthetics.

Comment: The American OptometricAssociation (AOA) disagreed with ourcrosswalk of optometry to the averagepractice expense per hour for ‘‘AllPhysicians,’’ that results in a practiceexpense per hour of $67.50. Thecommenter stated that AOAunderstands that the crosswalk decision


was based, at least in part, on the 1997survey conducted by AOA which hadbeen provided to us. This survey hasbeen conducted regularly since 1990and was included with the comment,along with a study commissioned by theAOA entitled ‘‘Results of the FirstNational Census of Optometrists.’’ Usingdata from this survey and study, AOAcomputed an $89.53 practice expenseper hour for optometry, significantlyhigher than the average for ‘‘AllPhysicians.’’

Response: As in the above request, thedata submitted by AOA are not easilycomparable to the SMS data. Forexample, the AOA calculation usedmedians rather than means, andretirement and fringe benefits were notcounted as median net income, butrather as practice expense. It is thereforenot possible, without furtherinformation, consultation, and analysis,for us to calculate a practice expense perhour that would be comparable withthat of other specialties. During therefinement period we will be workingwith specialties not represented in theSMS survey to identify the data neededto enable us to determine accuratepractice expense RVUs for theirservices.

Comment: Although generallysupporting the crosswalk to GeneralInternal Medicine, the AmericanChiropractic Association (ACA)submitted data from the 1997 surveyresults of ACA’s biannual survey of thechiropractic profession. This surveyshows considerably lower direct patientcare hours than SMS shows for GeneralInternists. Therefore, the ACA requestedthat we use its data to calculate thepractice expense per hour for Doctors ofChiropractic, stating that we shouldaccept specialty societies’ data overSMS data if they were collected in acomparable manner.

Response: The survey submitted bythe commenter indicated that thepatient care hours worked bychiropractors are significantly lowerthan those of general internists to whomchiropractors’ practice expense per houris crosswalked. However, the hours ofdirect patient care a week shown in thesurvey were defined more narrowlythan in the SMS data. For example, the29 hours of patient care a weekcalculated in the submitted survey didnot include the hours spent fordocumentation, administration, andbilling, activities that we haveconsidered to be included in the directpatient care hours for other specialties.In addition, there are insufficient detailsin the survey for us to determine itscomparability to the SMS data and wewill maintain the crosswalk for

chiropractors for this final rule. We dointend, however, to revisit this issueduring the refinement process.

Comment: The American PodiatricMedical Association, Inc. (APMA)objected to its crosswalk to generalsurgery because it believes that there islittle similarity between the twospecialties based on site-of-service andtypes of services provided. Generalsurgery services are typically performedin the facility setting, while the highvolume podiatry services are almostentirely done in the office. In addition,the comment stated that podiatristswork fewer hours than general surgeons.

The comment also included theresults from APMA’s 1996 and 1998surveys of podiatric practice, as wellcopies of the surveys themselves.According to the comment, thesesurveys show that the actual practiceexpense per hour for podiatry is $91.50and APMA recommends that we usethis data in place of our proposedcrosswalk.

The American Academy ofOrthopaedic Surgeons also disagreedwith the crosswalk for podiatry, butrecommended that podiatry becrosswalked to orthopaedic surgery inthe short run, as 70 percent of the codesbilled by podiatrists are those that areshared with orthopaedic surgery.

Response: Because of significantmethodological differences between thesubmitted surveys and the SMS data (forexample, only gross and net incomes aresurveyed) we are not able at this timeto calculate a practice expense per hourin total, let alone for each of thedifferent cost pools.

However, we are persuaded that thecrosswalk to general surgery is notappropriate for the reasons cited in thecomment, and we are changing thecrosswalk to ‘‘All Physicians.’’ We willbe working with all specialties notrepresented in the SMS data to ensurethat we obtain comparable informationto calculate their practice expenses perhour.

Comment: The Joint Council ofAllergy, Asthma, and Immunologystated that, in calculating the allergists’practice expense per hour, we reducedthe supply category practice expenseper hour to that of ‘‘All Physicians,’’because we believed that we made aseparate payment for the drugs used.However, this is not true forimmunotherapy drugs provided byallergists, as the cost of these drugs isincluded in the practice expense RVUs.Therefore an adjustment needs to bemade.

Response: The commenter is correctand the adjustment has been made to

the medical supplies practice expenseper hour.

Comment: The American Society ofClinical Oncology commented that sincethe SMS supply cost data forchemotherapy codes included the costsof expensive chemotherapy drugs,which are paid for separately, we usedthe lower supply costs for ‘‘AllPhysicians’’ for their supply cost pool.The commenter argued that this fails torecognize that, in addition to the cost ofthe drugs, chemotherapy administrationhas extra supply costs in excess of thatfor ‘‘All Physicians.’’ Also, althoughchemotherapy drugs are generallyamong the costliest drugs, the cost ofdrugs was probably included in otherspecialties’ supply costs as well, and allspecialties should be treated in the samemanner.

The Association of CommunityCancer Centers, the Society ofGynecologic Oncologists, and theAmerican Society of Hematology alsodisagreed with our adjustment for drugcosts, as did the AMA, which called ourmethod of correcting for the doublecounting of drugs inequitable andimprecise. The American Society ofHematology recommended increasingthe supply per hour costs to 125 percentof the ‘‘All Physicians’’ level.

Response: It is true that otherspecialties may have some drug costsincluded in their SMS supply cost data,but we believe that the total costs forchemotherapy drugs are far greater thanare the drug costs included for any otherspecialty. Failure to make an adjustmentfor these high drug costs would lead toa gross distortion in the supply costpool for oncology.

We also are not convinced that theother supply costs for oncologists wouldnecessarily exceed that of ‘‘AllPhysicians,’’ and we will continue tocrosswalk oncology’s supply costs tothat category’s practice expense perhour. We do agree that duringrefinement we need to considerdevelopment of a methodology forremoving separately billable suppliesand services from the SMS data so thatthe Medicare program avoids makingduplicate payments. We also will workwith the oncology specialty to ensurethat their practice expense per hour forthe supply category adequately reflectsthe actual costs of other oncologysupplies.

Comment: The American Associationof Oral and Maxillofacial Surgeonsobjected to the crosswalk of oral surgeryand maxillofacial surgery to the practiceexpense per hour of ‘‘All Physicians.’’They recommended a crosswalk toeither otolaryngology or plastic surgery,as most of the medical procedures billed


by oral and maxillofacial surgeons canbe crosswalked to these two specialties.The commenter argued that because oftheir significantly higher practiceexpenses, oral and maxillofacial surgeryshould not be in the same practiceexpense pool as manipulative therapistsand optometrists, as this dilutes thepractice expenses for these surgicalservices. In addition, the 1996 HarvardStudy grouped oral and maxillofacialsurgery under otolaryngology andplastic surgery.

Response: We do not currently havesufficient data to make such a change inour crosswalk. This is an issue that canbe addressed during the refinementperiod.

Comment: The American College ofCardiology and the American Society ofEchocardiography disagreed with thecrosswalk of Independent PhysiologicLaboratories (IPLs) to ‘‘All Physicians.’’The comment recommended that IPLs’practice expense per hour becrosswalked to cardiologists, as 60percent of IPL billings are in the 93000series and for the 13 highest volume IPLcodes, cardiologists account for 40percent of claims. The Society ofVascular Technology/Society ofDiagnostic Medical Sonographers alsoexpressed concern that our crosswalk ofIPLs did not adequately recognize theircosts and recommended that we use thefigure of $176 per hour based on thestudies cited in the comment.

Response: As discussed above, wewill be creating a separate practiceexpense pool for all services withoutphysician work, which will includethose technical component servicesdone by IPLs and by cardiologists.

Comment: The Society of GynecologicOncologists requested that we considerusing multiple crosswalks to determinepractice expense per hour for specialtiesthat provide interdisciplinary care. Thecomment stated that the true reflectionof practice expense per hour for agynecologic oncologist is a hybrid of thepractice expense per hour for thespecialties of obstetrics and gynecologyand oncology.

Response: It is not clear whether thisis desirable or what data would be usedto weight such a split between morethan one specialty. Many physiciansbelong to more than one specialty orsubspecialty. This is another issue thatcan be discussed during the refinementperiod.

Comment: The American GeriatricsSociety disagreed with our crosswalk ofgeriatrics to the General InternalMedicine practice expense per hour.The comment stated that geriatricianstypically have higher costs thaninternists because of the need for more

office space and more health careprofessionals on staff. Since manygeriatricians are family physicians,geriatrics should be cross-walked tofamily practice.

Response: We believe thatgeriatricians are typically more likeinternists than family practitioners, sofor the final rule we will not change thecrosswalk. However, we are open toreceiving data that would demonstratethat a crosswalk to family practicewould be more appropriate.

However, we would note thatgeriatrics is a relatively small specialtyand the services performed by them arefrequently done by other specialties.Thus, changes in the practice expenseper hour data for geriatricians would notlikely have a significant impact on theRVUs for services they perform.

Comment: One commenter maderecommendations for revisions oradditions to our proposed crosswalksfor several nursing subspecialties.Another specialty society commentedthat under the physician fee schedulewe have chosen to pay nonphysicianpractitioners a percentage of thephysician reimbursement, andcrosswalking to specialties with higherpractice expense per hour rates thangeneral internal medicine or generalsurgery is not logical or reasonable.Another organization alsorecommended that data from nursepractitioners and physician assistants beexcluded from the practice expense poolcalculations.

Response: We will further considerappropriate crosswalks for nursingsubspecialties during the refinementperiod.

Comment: The American HospitalAssociation and the AmericanOccupational Therapy Associationrecommended that we crosswalk all ofthe practice expense pools foroutpatient rehabilitation services to the‘‘All Physicians’’ practice expensecategory, rather than using the salaryequivalency guidelines for theadministrative, office, and other pool.

Response: We believe that using the‘‘All Physicians’’ practice expense perhour for the administrative, office, andother pool would considerably overstatethe actual practice expense foroccupational therapy. We have carefullyexamined outpatient therapy practicecosts for the development of the salaryequivalency guidelines, and believe thatthese better approximate the actualexpenses for this cost pool. We willcontinue to use the salary equivalencyguidelines to calculate this portion ofthe practice expense pool foroccupational therapy for this final rule.

Comment: The American Speech-Language Hearing Associationcommented that it is not appropriate touse the practice expense per hour datafrom physicians that perform audiologytests and it submitted a 1993 survey,‘‘Audiology Services—Scale of RelativeWork,’’ as part of its comments.

Response: As we stated above, we arecreating a single practice expense poolfor all services, such as audiology, thathave no work RVUs. This practiceexpense pool, created by using theaverage clinical staff time per procedurefrom the CPEP data and the ‘‘AllPhysicians’’ practice expense per hour,raises practice expense RVUs foraudiology services relative to thosepreviously proposed. However, duringthe refinement process we will beconsidering all data submitted on any ofthese services, including the studysubmitted with the above comment.

Calculation of Practice Expense Pools—Other Issues

Comment: Several organizationscommented on potential problems withthe Medicare claims data, which areused as one component of the specialty-specific practice expense poolcalculation.

• Many commenters were concernedabout reliance on Medicare claims datato determine the size of each specialty’spractice expense pool. The commentsclaimed that to the extent that theMedicare population is notrepresentative of the general population,there is a bias against specialties whosepatient population does not matchMedicare’s. Several organizations,representing the gamut of medicalspecialties, urged us to work during therefinement period with organizations forwhom we have no, or inadequate,historical claims utilization informationand to acquire nationally representativeclaims data that include Medicare,Medicaid, and private payer data.

One of these commentersrecommended that, if this is notfeasible, we should conduct sensitivityanalyses to explore the influenceMedicare service utilization patternsmay have on private payers. Thespecialty-specific utilization data arecrucial for the final step of volume-weighted averaging that brings theindividual specialty scales onto onescale, particularly when involvingservices performed very frequently byspecialties that see relatively fewMedicare patients.

For example, the comment argued, tothe extent that the cost estimates forevaluation and management (E&M)services provided by obstetricians andgynecologists and pediatricians differ


significantly from those of specialtiesthat account for the bulk of E&Mservices provided to Medicare patients,the use of an all-payer claims databasewould probably yield different RVUs forE&M services.

• Several surgical specialties urgedthat we clean the Medicare claims datato eliminate obvious errors, such as datashowing a sometimes significantnumber of nonsurgeons or physicianassistants performing complex surgeriesthat can only be performed by surgicalspecialties. This misreporting candecrease a specialty’s practice expensepool and should either be reassigned orexcluded during refinement.

One of the commenters recommendedthat Medicare claims data be reviewedfor the existence of a second listedsurgical specialty identifier. In addition,physician assistants’ claims should usethe -AS modifier, and calculationsshould use only the time that isassigned to the intraoperative period.

• Three specialty organizationscommented that many physicians’ self-designated specialties are incorrectlyclassified in our claims data. Forexample, many cardiologists andgeriatricians may bill as internists,which may affect the respective practiceexpense pools. Until these data becomemore accurate, one of the commentersrecommended that the specialty practiceexpense pools be recalculated on anannual basis.

• An organization representingtransplant surgeons commented that, astransplant surgery is not a designatedspecialty in the Medicare claimsdatabase, many transplant surgeonsdesignate themselves as generalsurgeons, who have the lowest practiceexpense per hour of any surgicalspecialty. The comment argued that thishas led to a significant underestimationof the costs associated with transplantsurgery.

Response: We would be interested inreceiving any reliable nationalutilization data on the procedure codelevel though, to date, we are not awareof the existence of such a data source.We plan during the refinement period towork with the medical community inorder to pinpoint problems in theMedicare claims data, to developstrategies to improve their accuracy,and, if possible, to find reliablesupplemental data for those specialtiesnot appropriately represented in theMedicare database.

Comment: One organizationcommented that the Medicare frequencynumbers for occupational therapy codeswill be understated because BBArequires that all outpatient therapyservices be paid under the Medicare

Physician Fee Schedule beginningJanuary 1, 1999.

Response: We disagree. We have notincluded estimates for frequencies ofexpected services of outpatient therapyservices in computing the practiceexpense RVUs. BBA specified that wepay for these services using thephysician fee schedule. BBA did notincorporate these services into the feeschedule.

Comment: Many organizationsrepresenting radiation oncology, as wellas numerous individual commenters,argued that we erroneously combinedthe SMS radiation oncology survey datawith that of radiology. The commentersargued that these two specialties shouldbe dealt with separately, as radiationoncology utilizes different codes andhas considerably higher costs thanradiology.

Response: We had combined radiationoncology and radiology together intoone practice expense pool because ofthe small sample of radiationoncologists in the SMS data. However,we now agree with the commenters thatthese are two different specialties withdiffering practice costs. Therefore, wehave separated them into two separatepractice expense cost pools in order tocalculate the practice expense per hourfor each of the specialties. For radiology,excluding radiation oncology, the totalpractice expense per hour is $55.90.This is comprised of $17.90 fornonphysician payroll per hour ($9.70for clerical payroll), $12.80 for officeexpense, $4.50 for supply expenses,$7.70 for equipment expense, and$12.90 for other expenses. For radiationoncology, the total practice expense perhour is $68.30. This is comprised of$23.70 for nonphysician payroll perhour ($9.20 for clerical payroll), $11.30for office expense, $6.20 for suppliesexpense, $11.00 for equipment expense,and $16.20 for other expenses.

Allocation of Practice Expense Pools toCodes

Comment: Several organizationscommented on our use of work RVUs aspart of the allocation formula forindirect practice expense costs:

• A primary care specialty groupstated that we should not allocate theindirect practice expenses using thework RVUs, since there is no reason tobelieve that the costs of providing theservice, such as the cost of utilities,would vary by the intensity, where thecosts would vary by time. We should,therefore, use time rather than work inour indirect allocation.

Another primary care organizationcommented that using work as oneallocator for indirect expenses

inappropriately gives surgicalprocedures with higher work RVUssubstantially higher administrative costsfor billing activities than is given toevaluation and management services.We should develop a standardizedmethod to address administrative staffcosts.

• Five other organizations argued thatallocating indirect costs based on acombination of direct costs andphysician work RVUs is inappropriateand treats unfairly chemotherapy andradiation oncology services as well asother technical component services,since they typically are assigned nowork RVUs. Various recommendationswere made by these commenters torectify what they see as discriminationagainst these technical componentservices:

+ Indirect costs should be based ondirect costs.

+ Physician time or clinical staff timeshould be used instead of work.

+ We could allocate 50 percent of theindirect costs based on direct costs and50 percent based on physician work ortime.

+ As an alternative for chemotherapyservices, work could be imputed byusing the work to time ratio for otherhematology or evaluation andmanagement services.

One commenter recommended thatwe vary the indirect cost allocationmethodology in recognition of thepractice patterns of particularspecialties.

• One accounting organizationcommented that the use of work REUSis arbitrary and argued for the use oftotal dollars actually spent to performthe procedures, not indirect splits,suggesting the use of Activity BasedCosting as a preferable methodology.

Response: In this final rule, we willuse an allocation method for the finalrule that is basically similar to ourproposed allocation method. It is widelyrecognized by accountants and othersthat there is no single best method ofallocating indirect expenses toindividual services. If we usedphysician time as an allocator ofindirect expenses, we would be usingthe same values, whose accuracy havealready been questioned by somecommenters, both to create the practiceexpense pools and to allocate thesepools to individual services. If we usedonly direct costs, we would be givingfull weight to CPEP values that have notyet been refined. We agree that the useof physician work as an allocator is notpreferable in the long term. It likelyprovides maximum advantage tohospital-based services in which the


physician incurs relatively few directcosts.

For this final rule, we are making atechnical change to the allocationmethod for indirect costs by using directcosts and the work REUS scaled usingthe Medicare conversion factor insteadof a factor calculated using thephysician time data. Because ofquestions raised by commentersconcerning the time data adjustments,we believe that it is more appropriate toconvert the work REUS into dollarsusing the Medicare conversion factor(expressed in 1995 dollars, consistentwith the AMA SMS survey data). Thiswill give somewhat less weight to workwhile, at the same time, avoiding amajor methodological change until ithas been examined further. We intendto work with the medical communityduring refinement so that we ensure thatour allocation methodology is bothappropriate and equitable.

Comment: Many major specialtysocieties, both primary care andsurgical, commented that we should notapply a different methodology forallocating the practice expense pools tothe radiology codes than we do to allother codes. One commenter argued thatmultiplying the current charge-basedpractice expense RVUs for radiologycodes by some percentage cannot yielda resource-based system.

Organizations representing urologists,pulmonologists, cardiologists, andophthalmologists commented that theuniform reductions made in theradiology codes to maintain relativevalues assumed that all radiologyservices are done only by radiologists,when many of these procedures areperformed by these other specialties. Acommenter stated that decisionsregarding the practice expense valuesfor radiology codes done predominantlyby other specialists should not be madeby one specialty. These organizationsrecommended that the practice expenseRVUs for their codes be establishedusing the allocation methodology usedfor all other services.

One specialty society, representingdiagnostic vascular testing, commentedthat the use of the existing radiologyrelatives to allocate practice expense tothe code level results in significantlylarger decreases in the technicalcomponent than in the professionalcomponent of their services. Thecommenter recommended that if wecontinue to use the radiology relatives,then we should reduce the professionalcomponents of the codes more than thetechnical components because practiceexpenses are greater for the technicalcomponent than for the professionalcomponent.

The AMA supported the use of theradiology relative values for actualradiology services, but recommendedthat this methodology should be appliedonly to services that are performedpredominantly by radiologists.

The American College of Radiologyendorsed the radiology relativity of theradiology RVUs without exception, andthey would oppose the exclusion ofindividual radiology procedures sincethis is inconsistent with the concept ofradiology relative values. They arguedthat maintaining the relativity of theradiology fee schedule—

• Is consistent with generallyaccepted accounting principles becauseit is based on surveys and physicianpanels;

• Is widely accepted;• Solves rank order anomalies caused

by raw CPEP data;• Simplifies the derivation of the

professional component, technicalcomponent, and global practice expenseRVUs;

• Is mandated by law, as the OmnibusBudget Reconciliation Act of 1989stated that for radiology services ‘‘theSecretary shall base the relative valueson the relative values developed undersection 1395m(b)(1)(A)****’’; and

• They also argue that we haverecognized and honored the statutoryobligation to maintain the relationshipsin the radiology relative value scale.

Another national organizationrepresenting diagnostic imaging servicesalso suggested keeping the radiology feeschedule as the allocator for radiology,rather than the direct costs from theCPEP data, as there would be evengreater reductions on codes we allocatedusing the CPEP relatives.

Response: Because the majority ofspecialties that perform radiologyservices object to the use of the currentpractice expense RVUs for radiologyservices, we cannot continue to usethese RVUs. However, since we are notmaking changes to the CPEP data forthis final rule and since the AmericanCollege of Radiology has not hadsufficient opportunity to comment onthe CPEP data because of our proposeduse of the current radiology RVUs, weare using the current radiology RVUs toallocate the direct cost pools of thespecialty radiology until such time asthe CPEP data for radiology serviceshave been validated. We will not use thecurrent radiology RVUs for any otherspecialty.

It should be noted that radiologyservices or components of radiologyservices that lack work RVUs arehandled as described in the section onservices without work RVUs. This altersthe impact of using the current

radiology RVUs for the specialtyradiology since we set the global portionof a radiology service equal to the sumof the technical and professionalcomponents.

Comment: One specialty societycommented that, for one important highvolume pathology service, the proposedtotal professional component practiceexpense RVU payment would be $11.37,approximately $2 short of theadministrative labor costs alone. Thecommenter wanted more information onhow our method splits administrativecosts between the professional andtechnical components. The commenterrequested that we provide a data set ofthe RVUs for administrative labor, officeexpenses, and other expenses that resultfrom our allocation method, with abreak-out of the professional andtechnical component RVUs for servicesthat have both components, so that theappropriateness of the allocationmethod can be evaluated.

Response: Our methodology wasdescribed in the proposal, and we alsoprovided additional detailed data filesthat we used to develop the proposedvalues. We will try to make additionaldata available if the request is furtherspecified.

Comment: The American College ofCardiology expressed concern that,though it might be necessary to weightaverage the allocation to codesaccording to the practice expense perhour of the different specialtiesperforming the service, this defeats theintent of Congress to recognize actualcosts and could also lead to negativeincentives. The commenter suggestedthat this is an issue that we and thespecialties should pursue.

The American Society ofEchocardiography more specificallycommented that we should not includein the calculations for cardiovasculardiagnostic tests the even moreunrepresentative data for internistscoding for these procedures. The societymaintained that because of the lowequipment costs for internists, thisblend dilutes the RVUs allocated tothese codes.

Response: The statute is very specificthat Medicare is not to pay specialtydifferentials. Therefore, weightaveraging of the CPEP inputs amongspecialties that do a service seemsappropriate.

Other IssuesComment: Many commenters,

representing a broad spectrum ofspecialties, expressed concern thatreductions in payment for specificservices could have a negative impacton access to care. Many of these


commenters recommended that wemonitor access and quality of careissues that may arise as a result of theimplementation of a resource-basedpractice expense system.

Response: Maintaining access to highquality health care for Medicarebeneficiaries is, and will continue to be,a high priority, and we will monitoravailable relevant data. However, we donot anticipate that the implementationof resource-based practice expenseRVUs should lead to any majorimpediments to access to care. Anyimpacts of this new system are beingtransitioned in over a 4-year period,during which we will be refining boththe practice expense per hour data andthe direct cost inputs. We will beworking closely with the medicalcommunity during this refinementperiod, and we are confident that wewill achieve a resource-based practiceexpense system that will maintain ourbeneficiaries’ access to the best possiblemedical care.

Comment: One commenter wasconcerned about how the monthlycapitated payment for end-stage renaldisease (ESRD) services was handledunder the top-down approach. Thecommenter argued that, though the‘‘building block’’ process used for thework RVUs for these services does nottranslate perfectly for practice expensevalues, this approach should still beutilized to calculate the practiceexpense RVUs. In addition, thecommenter questioned our choice ofCPT 99213, a mid-level office visit, tocalculate physician time for ESRDservices.

Response: We allocated the practiceexpense pool to ESRD services using theCPEP inputs, as we did for almost allother services. We also believe that theintensity of an average evaluation andmanagement service provides areasonable estimate of physician time.These issues can be further analyzedduring refinement.

Comment: Two commenters notedthat costs associated with thesupervision of diagnostic tests were notincluded in the technical componentamounts.

Response: In separate carrier manualinstructions, we are revising the level ofphysician supervision required formany diagnostic services. For example,we are changing the requirements formost ultrasound procedures frompersonal or direct supervision to generalsupervision. We believe the requiredsupervision for any remaining servicesthat are at the personal supervision levelare generally already reflected in thework RVUs. Therefore, we do not

believe that there are additional costsfor physician supervision.

Comment: One commenter indicatedthat there will be a marked increase inthe volume of services paid under thephysician fee schedule as a result ofBBA changes in payment for outpatienttherapy services. The commentermaintained that this increase should notadversely affect future budget neutralityadjustments.

Response: Although payment forthese outpatient therapy services arebased on payment amounts contained inthe physician fee schedule, theseservices are not included as part of thefee schedule pool for budget neutralitycalculations.

Comment: One commenter arguedthat the budget neutrality adjustment isinappropriately applied because it doesnot recognize the savings provided bythe elimination of the facility paymentsfor endoscopic procedures that willmove to the office setting.

Response: The statute specifies thatthere shall be budget neutrality forphysician fee schedule services. Thebudget neutrality adjustment does nottake into account payments to facilities.

Comment: Two commenters suggestedthat any fiscal adjustments made tocomply with BBA should be reflected inthe conversion factor, or other ratio,rather than be included in thecalculation of the practice expenseRVUs, so that other payerreimbursement would not be affected.

Response: We do not completelyunderstand these comments, but webelieve the request is consistent withour practice of making budget-neutralityadjustments on the conversion factor.

Comment: Several commentersrequested additional impact analysessuch as—

• Comparison of actual practiceexpense by specialty with expectedpractice expense payments, both byamount and by percent, for both ourproposed practice expense paymentsand the current fee schedule practiceexpense RVUs;

• Comparison of impacts bygeographic area, including rural andurban impacts;

• Analysis of impacts on hospital,academic, and community-basedphysicians;

• Analysis of total Medicare and non-Medicare impact using national claimscase mix data; and

• An analysis that would demonstrateto other payers the degree to which ourproposed payment rates are less thanactual practice costs.

Response: We lack the data to providesome of the requested analyses. Forexample, we do not have national

claims case mix data and are unawareof the existence of such data. Withregard to rural and urban impacts, in theJune 5, 1998 proposed rule wediscussed the limitations of suchanalyses given the structure of theMedicare payment localities. We areunsure what the commenters arespecifically requesting on the issue ofactual costs since we have based theresource-based practice expense RVUson the best available source of multi-specialty actual cost data: the SMSsurvey. Cost analyses at the individualpractice level are problematic since, forexample, we do not have physician costreports, but we are open to concretesuggestions on how to perform suchanalyses. We also note that the Medicarepublic use files are an excellent sourceof data for commenters who wish toperform additional analyses that theybelieve are possible with the datasources available to us.

Comment: One commenter requestedthat we make clear to Medicarecontractors that hospital-basedpathologists who incur technicalcomponent costs for nonhospitalpatients can be paid for both thetechnical and professional components.

Response: This is a long-standingpolicy, and we are not aware of anygeneral problems in this regard.However, we would be willing todiscuss the issue with individualcarriers if the commenter provides morespecific information.

Comment: One commenterrecommended that we recalibrate theallocation of RVUs to the pools forphysician work, practice expense andmalpractice, as this allocation hasremained constant since the resource-based relative value scale wasimplemented in 1992.

Response: We are recalibrating theallocation this year to match theMedicare Economic Index (MEI)weights. For example, work goes from54.2 percent of the total to 54.5 percent,the practice expense portion goes from41.0 percent to 42.3 percent, and themalpractice portion goes from 4.8percent to 3.2 percent. (See Section II.D,‘‘Rebasing and Revising the MedicareEconomic Index.’’) In order to preventthe work RVUs from changing as aresult of this, we are altering only thepractice expense and malpractice RVUs.The changes to the practice expense andmalpractice RVUs due to this are offsetby an adjustment to the conversionfactor.

Comment: One commenterrecommended that we should limit themagnitude of the changes in physicianpayments resulting from the shift toresource-based payment for practice


expenses by imposing some reasonablelimit on payment increases anddecreases for individual services. Thecommenter maintains that section1848(c)(4) of the Act, which authorizesthe Secretary of Health and HumanServices to, ‘‘establish ancillary policies,as may be necessary to implement thissection,’’ provides statutory authority onwhich to base such a policy. Thecomment pointed out that we invokedthis section in 1991 with reference tothe transition to resource-basedpayment for physician work.

Response: We believe that Congressintended the transition period to be themechanism by which we would mitigatethe impacts of any changes in paymentbrought about by the shift to resource-based practice expense. Therefore, webelieve it would be inappropriate for usto impose further limits on paymentincreases or decreases.

Comment: One commentermaintained that the proposal violatesboth the Regulatory Flexibility Act andthe Paperwork Reduction Act of 1980because the adequate filings required inboth of these Acts did not accompanythe proposal. Additionally, thecommenter stated that we did not citeany evidence to support its contentionthat a Regulatory Impact Statement isnot required.

Response: We had included aPaperwork Reduction Act (PRA) sectionin HCFA–1006-P that meets therequirements of the PRA of 1980.

One commenter stated that we do notcite any evidence in either of ourproposals to support our contention thatno regulatory impact statement isrequired. There may be some confusionabout the purpose of an impactstatement and the difference between aregulatory impact statement and aregulatory impact analysis (RIA). Aregulatory impact statement is a briefrational on why an analysis was notconducted. An RIA is a completeanalysis based on recent available dataand is more extensive.

An RIA was conducted in theproposed rule of June 5, 1998 (63 FR30866). Absent this analysis, we wouldbe required to furnish an impactstatement. Therefore, there is noviolation of either the RIA or RegulatoryFlexibility Act requirements.

3. Other Practice Expense Policies

Site-of-Service Payment Differential

As part of the resource-based practiceexpense initiative, we are replacing thecurrent policy that systematicallyreduces the practice expense RVU by 50percent for certain proceduresperformed in facilities with a policy that

would generally identify two differentlevels (facility and nonfacility) ofpractice expense RVUs for eachprocedure code depending on the site-of-service.

Some services, by the nature of theircodes, are performed only in certainsettings and will have only one level ofpractice expense RVU per code. Many ofthese are evaluation and managementcodes with code descriptions specific asto the site of service. Other services,such as most major surgical serviceswith a 90-day global period, areperformed entirely or almost entirely inthe hospital, and we are generallyproviding a practice expense RVU onlyfor the out-of-office or facility setting.

In the majority of cases, however, wewill provide both facility andnonfacility practice expense RVUs. Thehigher nonfacility practice expenseRVUs are generally used to calculatepayments for services performed in aphysician’s office and for servicesfurnished to a patient in the patient’shome, or facility or institution otherthan a hospital, skilled nursing facility(SNF), or ambulatory surgical center(ASC). For these services, the physiciantypically bears the cost of resources,such as labor, medical supplies, andmedical equipment associated with thephysician’s service.

The lower facility practice expenseRVUs generally are used to calculatepayments for physicians’ servicesfurnished to hospital, SNF, and ASCpatients. The costs for nonphysicians’services and other items, includingmedical equipment and supplies, aretypically borne by the hospital, by theSNF, or the ASC.

We received the following commentson our site-of-service paymentdifferential proposal.

Comment: We received severalcomments concerning theappropriateness of our site-of-serviceproposal:

• Several specialty groupscommented that they agreed witheliminating the site-of-servicedifferential and replacing it with twolevels of payment.

• A national specialty societyrepresenting gastroenterologists, as wellas several hundred individualcommenters, strongly opposed theelimination of the current site-of-servicedifferential and replacement of it withthe facility and nonfacility resource-based practice expense RVUs. Thecomments argued that we should nothave established different practiceexpense RVUs for facility andnonfacility settings for gastrointestinalendoscopy codes 43234 through 45385because:

• It is unsafe to do these proceduresin the office and will thus jeopardizepatient safety;

• It creates an incentive to providecare in the inappropriate office setting;and

• It is not authorized by legislation, isagainst the intent of BBA to havedifferent payment levels for differentsettings, and is likely to result in legalchallenge.

The commenter recommended thatwe drop the office and out-of-officedifferential in practice expensepayment.

• One organization commented thatour site-of-service proposal willexacerbate the ability to subsidizeuncompensated care and suggestedexempting teaching physicians from thenew site-of-service provision. It alsosuggested that HCFA should alsomonitor the effects of the site-of-servicepolicy.

• The AMA, the American HospitalAssociation, and three otherorganizations commented that paymentdifferentials should not provide anincentive for physicians and patients tochoose one site over another. Somephysician groups are concerned that thedifferential will accelerate the shift ofsome services from facility tononfacility settings at the expense ofpatient safety. They asserted that claimsdata on changes in place of serviceshould be made available and this issueshould be one focus of refinementefforts.

Response: We believe that, to theextent that the differing RVUs for in-office and out-of-office services reflectthe relative differences in practice costsfor performing those services, we havenot created incentives to provideservices in inappropriate settings. Weare required by both the Social SecurityAct Amendments of 1994 and BBA todevelop resource-based practiceexpense RVUs, based on physicians’actual costs. All of our data indicate thatphysicians’ practice expenses are higherin the office, where the physician mustincur all the costs of staff, equipment,and supplies, than in a facility thatprovides and is paid separately for theseresources. As the facility and nonfacilitycosts to the physician can vary by aconsiderable amount, we believe thatadopting a single average payment forboth sites would consistently underpayin-office procedures, and overpay thoseperformed in a facility and would thusbe inherently inequitable, not resource-based, and contrary to the intent of thelaw. Furthermore, we are not aware ofany studies showing that codes 43234through 45385 are being unsafelyperformed in offices. We have complete


confidence that physicians willcontinue to exercise their best clinicaljudgment as to the most appropriatesetting for their patients.

Comment: One specialty societystated its support for the proposedchange in the site-of-service payment, aslong as it does not result in nonpaymentfor services actually provided. Forexample, there are no practice expenseRVUs for emergency intubation in thenonfacility setting, though this servicemay occasionally have to be performedin the office.

Response: If a service for which thereare only facility RVUs is performed inthe office, the facility rate will be paid.

Comment: The American UrologicalAssociation commented that certaincodes—50590, 52234, 52235, 52240,52276, and 52317 were inappropriatelyassigned nonfacility PERVUs, as it is notsafe to perform these services in theoffice.

Response: We would need more datato demonstrate that performing theseservices in the office is not appropriatebefore we would eliminate thenonfacility RVUs. We are willing toreview such information during therefinement process. Such informationshould be submitted to HCFA, Office ofClinical Standards and Quality.

Comment: Two societies representingpulmonologists commented that criticalcare is listed with facility andnonfacility practice expense RVUs,although it is nearly always performedin an inpatient setting.

One organization representingpsychiatrists noted that CPT codes90816 through 90829 are restricted tothe inpatient hospital and partialhospital and residential care settings,and that CPT code 90870,electroconvulsive therapy, would notgenerally be performed in an officesetting. The commenter recommendedthat the final rule list RVUs for only thefacility setting.

Response: We are not deleting RVUsproposed for the nonfacility setting inthis final rule, but will be consideringthis issue during refinement. We wouldnote, however, that services performedin the residential care setting would bepaid by using the nonfacility RVUs.

Comment: One commenter pointedout that in our proposed rule we list theservices that, by nature of their codes,would only have one level of practiceexpense; this list includes codes 99321through 99333 and 99341 through99350. However, in Addendum C, bothfacility and nonfacility values are givenand the facility values are higher thanthe nonfacility values for most of thesecodes. These inconsistencies should becorrected. Another commenter

submitted a list of some codes where thefacility practice expense RVUs arehigher than the in-office values.

Response: We thank the commentersfor pointing out these discrepancies.The instances of higher facility RVUsare an artifact of our indirectmethodology and reflect the differingmix of specialties performing a servicein each setting. We will look at thismore closely during the refinementprocess.

Comment: One specialty societycommented that the dual energy x-rayabsorptiometry codes have the samepractice expense RVUs for both the in-office and out-of-office setting. Thecomment recommended that the in-office RVUs be adjusted to reflect thehigh costs of equipment for the office-based physician.

Response: More specific data will beneeded on the actual costs of theequipment so that we can address anychanges to the CPEP data during therefinement process.

Comment: Three organizationsrepresenting outpatient therapy servicescommented that, though outpatientrehabilitation providers will be paid thenonfacility rate, there are higher costsfor providing rehabilitation services inan SNF or hospital than in a doctor’soffice. These costs are not reflected inthe CPEP data and are grosslyunderestimated in the practice expenseRVUs. There should be a special highersite-of-service differential to be appliedwhen outpatient therapy services arefurnished in provider settings.

Response: The site-of-servicedifferential is intended to ensure thatthe Medicare program avoids makingduplicate payments to practitioners andfacilities for the same services. BBAspecified that outpatient therapyservices, which prior to January 1, 1999have been paid by Medicare using a costreimbursement system, should be paidusing the physician fee scheduleeffective January 1, 1999. As discussedmore fully in the June 5, 1998 proposedrule, we believe it would beinappropriate, and inconsistent withhow we pay for other services under thefee schedule, to pay a higher rate forthese outpatient rehabilitation serviceswhen they are provided in an SNF orhospital.

Comment: One specialty organizationrecommended that we confirm thatfacility-based practice expenses excludeonly those practice expenses that areactually provided and paid for by thefacility. We should provide a data filesummarizing which resources aredeemed to be provided by facilities, sothat physician organizations canidentify any errors or anomalies in

HCFA’s assumptions. For example,vitreoretinal physicians must oftenprovide clinical staff for out-of-officeprocedures, and it is essential that thereis a mechanism for the physician to bereimbursed.

Response: The differential betweenthe facility-based and office-basedpractice expenses is determined by theCPEP inputs for staff labor time,supplies and equipment attributed toeach site and the mix of specialtiesproviding the services in each site. Wewill consider further adjustments to theCPEP inputs during the refinementperiod.

Comment: The American Speech-Language-Hearing Associationcommented that the extra costs forpatient acuity and travel should beadded to the site of service differential.

Response: This is an issue for whichspecific data is needed and that shouldbe addressed during the refinementperiod.

Additional Relative Value Units forAdditional Office-Based Expenses forCertain Procedure Codes

Usually office medical supplies orsurgical services in the physician’soffice are included in the practiceexpense portion of the payment for themedical or surgical service to whichthey are incidental. The November 1991final rule (56 FR 59522) included apolicy for 44 procedure codes thatallowed a practice expense RVU of 1.0to pay for the supplies that are usedincident to a physician’s service butgenerally are not the type of routinesupplies included in the practiceexpense RVUs for specific services. Thislist of procedure codes was expanded inthe December 1993 final rule (58 FR63854). Included in this list ofprocedures for which an additionalamount may be paid for supplies if theprocedure is performed in a physician’soffice are closing a tear duct (CPT code68761) and billing for a permanentlacrimal duct implant (HCPCS A4263),inserting an access port (CPT code36533) and billing for an implantablevascular access portal/catheter (A4300),and performing cystoscopy proceduresand billing for a surgical tray (A4550).

We proposed to revise this policyunder the resource-based practiceexpense system. We believe the supplycosts that this policy is designed tocover were included in the supplyinputs identified by the CPEPs and theAMA’s SMS survey. Thus, they wereincluded in the practice expense RVUsfor each relevant procedure code.Therefore, we proposed to discontinueseparate payment for supply codesA4263, A4300, A4550, and G0025.


Below are the comments we havereceived on this issue:

Comment: While two primary careorganizations agreed with our proposalto discontinue separate payment forselect supply codes, three otherspecialty societies opposed eliminationof the current payment for thesesupplies. One comment argued thatincident-to supplies were not countedin the CPEP process, and the other thatthis separate payment is a preferredmethod of recognizing added costs tophysicians.

Response: We believe that the currentpractice expense RVUs include thepayment for these supplies. However,we are willing to consider evidence thatthe CPEP inputs do not reflect theappropriate use of these supplies for anyservice during the refinement process.

Comment: The AMA, as well as fourphysician specialty organizations,recommended phasing out separatepayment for supplies during thetransition instead of implementing it allat once in 1999.

Response: We agree and we will bephasing out the separate payment forthese supplies over the transitionperiod.

Anesthesia ServicesAlthough physician anesthesia

services are paid under the physicianfee schedule, these services do not havepractice expense RVUs. Rather, paymentfor physician anesthesia services isdetermined based on the sum ofallowable base and time unitsmultiplied by a locality-specificanesthesia CF.

Since the beginning of the physicianfee schedule, overall budget neutralityand work adjustments have been madeto the anesthesia CF and not to the baseand time units. We are following thesame process and making an adjustmentto the anesthesia CF to move anesthesiaservices under the resource-basedpractice expense system. Theadjustment to the anesthesia CF is 3.0percent (phased in other the transitionperiod).

4. Refinement of Practice ExpenseRelative Value Units

Section 4505(d)(1)(C) of BBA requiresthe Secretary to develop a refinementprocess to be used during each of the 4years of the transition period. In theJune 5, 1998 proposed rule, weproposed keeping the practice expenseRVUs as interim RVUs until at least thefall of 1999, and possibly beyond 1999,if we believe more time is needed toidentify and correct errors. We alsosolicited recommendations for arefinement process in subsequent years.

In the June 1998 proposed rule, wedid not propose a specific process for along-term refinement process. Rather,we set out the parameters for anacceptable refinement process forpractice expense RVUs. Such arefinement process would enable us todo the following:

• Review and refine practice expenseand hour data.

We suggested that we would beprepared in the future to refine thepractice expense and hour data of thosespecialties well-represented in the SMSdata if we receive compelling evidencethat the SMS data are incorrect. Weinvited comments on potential revisionsto the SMS survey or alternative sourcesof data and on the need to confirm,through audit or other means, thesurvey data that would be used for longterm refinement.

• Obtain and review practice expenseand hour data for specialties orpractitioners not included in the SMSsurvey.

We invited comments on theappropriateness of our crosswalks andsuggested that any arguments that thepractice expense and hour data shouldbe changed would be strengthened bythe submission of survey datacomparable to the SMS data.

• Address anomalies, if any, in thecode-specific Harvard and RUCphysician time data.

We proposed that we would notrevisit work RVU issues that have beenalready addressed as part of the 5-yearreview.

• Address anomalies, if any, in thecode-specific CPEP data on clinical stafftypes and times, quantity and cost ofmedical supplies, and quantity and costof medical equipment.

We proposed that the codes identifiedby commenters as having possible errorsduring the comment periods of theproposed rule and the final rule willconstitute the universe of codes whosecode-specific CPEP data should bereviewed, as it was not our intention toreview the inputs for all the codes on anannual basis. We also proposed that weobtain the advice of practicingphysicians on the appropriateness ofrecommended changes to the CPEPinputs. We suggested two principaloptions for obtaining that advice, eitherHCFA-convened multiple specialtypanels or the RUC or new organizationlike the RUC that includes broadrepresentation across all specialties andincludes nonphysician practitioners.The panels would need to meet no laterthan the summer of 1999 to consider thecomments we received on both theproposed rule and the final rule. We

invited comments on these options andsolicited any other recommendations.

• Refine, as needed, our process ofdeveloping practice expense RVUs forcodes not addressed by the CPEPprocess, for example, codes that werenew in 1996, 1997, and 1998.

We developed practice expense RVUsfor codes that were new in 1996, 1997,and 1998 by comparing the new codesto other comparable codes for which wehad actual CPEP data and we invitedcomments on the appropriateness of ourcrosswalks. Also, we solicited newcode-specific data on clinical staff typesand times, quantity and cost of medicalsupplies, and quantity and cost ofmedical equipment.

• Develop practice expense RVUs forcodes that will be new in 1999 andbeyond.

Because of time constraints, weproposed that we develop interimpractice expense RVUs for new 1999codes by preparing a crosswalk of CPEPdata from existing codes. Though thepractice expense values for these codeswill be subject to comment, the interimvalues will serve as the basis of paymentduring 1999.

Beyond 1999, we proposed twopossible options that could be used todevelop practice expense RVUs for newcodes. First, we could continue tocrosswalk new codes to existing codesand review comments we receive withthe assistance of our multiple specialtypanels. Second, we could request theRUC or a RUC-like organization toprovide recommended practice expenseRVUs or recommended inputs beforepublication of the proposed rule, as wedo with work RVUs. We invitedcomments on these options andsolicited any other recommendations.Following are the comments that wehave received on our proposal forrefinement of the resource basedpractice expense RVUs:

Comment: The RUC submitted thefollowing comments on the refinementprocess:

• The RUC stated its interest inreviewing any comments that wereceive on the accuracy of the physiciantime data for specific codes.

• The RUC commented that manymembers of the RUC, the RUC’sAdvisory Committee and the HealthCare Professionals Advisory Committee(HCPAC) observed or participated in theentire CPEP process. The commentstated that, based on that experienceand on extensive subsequent discussion,it became clear that the RUC, through itsexperience in developing physicianwork relative value units, should alsoseek involvement in developing


recommendations on practice expenserelative values.

• The RUC comment contained thefollowing proposal for refinement of theCPEP data:

The RUC proposed the developmentof a new Advisory Committee, the RUCPractice Expense Advisory Committee(PEAC) to review comments on thecode-specific CPEP data (that is, clinicalstaff types and times, quantity and costof medical supplies, and quantity andcost of medical equipment) during therefinement period. This committeewould report to the RUC, which wouldmake final recommendations to HCFA.The committee composition wouldmirror the RUC and include additionalrepresentation from the AmericanNurses Association, the AmericanAcademy of Physician Assistants, theMedical Group ManagementAssociation, and four other non-MD andDO organizations to encourage inputfrom nurses and practice managers inthe process.

The committee would include onerepresentative from the followingorganizations:

• Chair (To be selected by the Chair of theRUC);

• American Medical Association;• American Osteopathic Association;• CPT Editorial Panel;• Health Care Professionals Advisory

Committee;• Two rotating seats for the RUC Advisory

Committee (currently held by Rheumatologyand Child Psychiatry);

• American Academy of Dermatology;• American Academy of Family

Physicians;• American Academy of Neurology;• American Academy of Ophthalmology;• American Academy of Orthopaedic

Surgeons;• American Academy of Otolaryngology—

Head and Neck Surgery, Inc.;• American Academy of Pediatrics;• American Academy of Physician

Assistants;• American Association of Neurological

Surgeons;• American College of Cardiology;• American College of Emergency

Physicians;• American College of Obstetricians and

Gynecologists;• American College of Physicians;• American College of Radiology;• American College of Surgeons;• American Nurses Association;• American Psychiatric Association;• American Society of Anesthesiologists;• American Society of Internal Medicine;• American Society of Plastic and

Reconstructive Surgeons;• American Urological Association;• College of American Pathologists;• Medical Group Management Association;

and• Society of Thoracic Surgeons.

Four seats would be added to includeother organizations representing nursingor practice managers, for example,National Federation of LicensedPractical Nurses or American LicensedPractical Nurses Association, AmericanAssociation of Medical Assistants,Association of Surgical Technologists,Professional Association of Health CareOffice Managers, and HealthcareFinancial Management Association.

Also contributing to this refinementprocess would be 80 members of theRUC Advisory Committee, representingthose specialty societies with a seat inthe AMA House of Delegates who haveelected to participate in the RUCprocess. The RUC process will alsoinclude input from the HCPAC, whichrepresents audiologists, chiropractors,nurses, occupational therapists,optometrists, physical therapists,physician assistants, podiatrists,psychologists, social workers, andspeech-language pathologists.

The RUC has not yet implemented thePEAC, pending the initial response(s) tothe proposed rule. However, the RUChas authorized the RUC Chair toconvene the PEAC in a timely fashionand requests that we share all commentswe wish to have reviewed regardingchanges to the CPEP data with the RUCsoon after the conclusion of thecomment period on the final rule. TheRUC would assure that all members ofthe RUC Advisory Committee andHCPAC Advisory Committee arecontacted regarding the comments andwill solicit interest in bringingrecommendations forward to the PEACon these comments. Specialty societieswould collect additional data and,where possible, form a consensusrecommendation with other interestedspecialty societies or HCPACorganizations. After considering thecomments and the specialty societyrecommendation, the PEAC wouldpresent a report with theirrecommendations to the RUC whichwould submit its recommendations tous, along with its usual submission ofwork relative value recommendations,at the end of May.

The RUC comment contained thefollowing proposal for refinement of thecrosswalk for 1996, 1997, 1998, and1999 new codes. The RUC proposes thatthe PEAC, when constituted, alsoreview any comments on the final rulethat are forwarded by us regarding theappropriateness of crosswalks andextrapolated code-specific data for thosecodes that were new in 1996, 1997,1998, and 1999. The RUC wouldencourage specialty societies andHCPAC organizations to collect data orevidence to support new code-specific

data on clinical staff types and times,quantity and cost of medical supplies,and quantity and cost of medicalequipment for each of those newservices that are frequently performed.

The RUC comment also contained thefollowing proposal for the developmentof practice expense RVUs for codes thatwill be new in 2000 and beyond. TheRUC proposes that recommendations forpractice expense RVUs for new codes in2000 and beyond be developedsimultaneously with the work RVUrecommendations. After a new code isapproved by the CPT Editorial Panel,specialty societies would conduct asurvey that would include a section onphysician work and a section on directexpense inputs for that service. Thespecialty society would then presenttheir recommendations on both thework and practice expense RVUs, alongwith all of their supporting data fromthe survey, to the RUC to review. TheRUC would review both RVUs andsubmit the recommendations to us in aformat similar to its current submission.

The RUC comment stated that themajority of the discussion on theexpense inputs would focus on theclinical staff time and, potentially, thecomparison between this time and thephysician time. This time informationwill not be available for new codes. Ifwe were to utilize two differentprocesses for work and practiceexpenses for new codes, it would benecessary to establish a process toreconcile differences in time betweenthe two sets of recommendations. TheRUC comment recommended that theRUC process represents the best choicefor reviewing this relationship andproviding verifiable recommendations.The comment also recommended thatfor new codes for services performed bynonphysicians only, the RUC HCPACReview Board would review both workand practice expense RVUs and wouldsubmit their recommendations to usdirectly. Throughout the updatingprocess of practice expense, the RUCwill also seek the input of nurses,practice managers, and others who haveexpertise in physician practice expense.

Comment: Almost all specialtysocieties and individuals commentingon refinement, as well as MedPAC andthe AMA, agreed that the RUC or agroup like the RUC should undertakethe refinement of the CPEP input datafor individual procedure codes,including reviewing our crosswalks forCPT codes new in 1996 through 1999,and recommending practice expensevalues for codes that will be new in2000 and beyond. Several specialtysocieties, while supporting the role ofthe RUC in handling the complex issue


of refining CPEP data, stated that theRUC would need to includenonphysicians such as practiceadministrators and nurses in order toaccomplish this task, as staff inmanagement roles have more expertisethan practitioners on the intricacies ofpractice management and the details ofpractice expenses. The AmericanPodiatric Medical Associationcommented that podiatry must have fullparticipation on an equal basis withother physicians’ specialties;membership on the HCPAC would notbe sufficient. The American Academy ofAudiology has also commented thatthey want an audiologist to berepresented on any group refining RVUsand the American OccupationalTherapy Association commented on theneed for therapy representatives. TheSociety of Vascular Technology/Societyof Diagnostic Sonographers commentedthat they would support the use of aRUC-like group only if there would beappropriate representation of technicalcomponent service providers; otherwisethey would not favor the RUC handlingrefinement issues.

Response: As previously described,there are four key data items we used forour methodology. Three are needed todevelop practice expense ‘‘pools’’ perspecialty, and the fourth is needed toallocate these aggregate practice costpools to individual CPT codes. The datasources we used are as follows:

Practice Cost Pools

1. AMA SMS survey data for practicecosts per hour, by specialty.

2. Harvard and RUC data for length oftime to perform each service

3. Medicare claims frequency data foreach procedure.

Allocation to Individual CPT Codes

4. ABT CPEP resource inputs per CPTcode.

Refinement requires consideration ofthree broad types of activities:

1. Review of broad strategy andgeneral methodology issues. Examplesof these types of activities includereview of the basic methodology,formulas for allocation of indirectexpenses, development of criteria forconsideration of alternative datasources, survey sample sizeconsideration, development of possibleapproaches to validate survey data, andother similar methodology issues.

2. Refinement of specialty levelpractice cost per hour data.

3. Refinement of detailed code leveldata (CPEP data, procedure time data).

The RUC has proposed to be involvedin the refinement process by creating asubcommittee to advise it, referred to as

the Practice Expense AdvisoryCommittee (PEAC). It would consist ofover 35 members (RUC specialtiessupplemented by other groups such asMGMA, nurses, practice managers andothers). The vast majority of specialtiesthat commented on the refinementprocess indicated their support for theRUC proposal or for a similar process.

Initial Refinement ProcessWe continue to believe that our

proposed general methodology is soundand responsive to the BBArequirements. We did receive a largevariety of comments about broadmethodology issues, practice expenseper hour data, and detailed code leveldata. As described elsewhere, we havemade some adjustments to our originalproposal for a select number ofsituations in which we were convincedan adjustment was appropriate at thistime. We are considering othercomments for possible futurerefinement. The values of all codes willbe considered interim for 1999 and forfuture years during the transitionperiod. Rather than specify a detailedrefinement process at this time, we willcontinue to work with the professionalcommunity to further develop therefinement process. We will modify theprocess as necessary during the period,based on our experiences andrecommendations received.

Our plans to start the initialrefinement process are as follows:

1. We plan to establish a mechanismto receive independent advice fordealing with broad practice expenseRVU technical and methodologicalissues. We are considering contractorsupport and/or other ways of obtainingindependent advice and assessments ofcomments that we have already receivedor will receive in the future aboutimportant technical issues, especiallythose that result in major redistributionsamong specialties. We welcomecontinuing advice and specificrecommendations from the GAO,MedPAC, and the Practicing PhysiciansAdvisory Council. We will alsocontinue to actively consult withphysician and other groups about theseissues. We are particularly interested inreceiving additional comments andsuggestions about methodology fromorganizations that have a broad range ofinterests and expertise in practiceexpense and survey issues. Allcomments will be considered, but weespecially encourage organizations thatrepresent a broad range of physician,practitioner, and provider groups (forexample, groups that represent both‘‘winning’’ and ‘‘losing’’ specialties)with expertise in practice costs issues to

make specific recommendationsregarding the following methodologyissues:

• Bias in ‘‘Top Down’’ methodology.Some commenters believe themethodology we are using to establishinitial practice expense RVUs is flawed.They indicate that it is inappropriate topass through costs and that the methodwill perpetuate inequities amongspecialties because high revenuespecialties have more to spend on theirpractices. One possible way of dealingwith this issue is to further analyze thedifferences in practice costs per hour byspecialty to determine the‘‘reasonableness’’ of these differences.Edits or other adjustments in practicecosts data could be established ifappropriate.

• Validation of data. It is difficult toestablish an unbiased method forrefining and validating practice costsdata. Data from the SMS survey are self-reported. There could be majorincentives in the future for respondentsto expand the definition and reportingof ‘‘costs’’ for purposes of thismethodology. In addition, we wouldexpect that individual specialties wouldbe likely to bring undervalued practiceexpense RVUs to our attention, butwould not have an incentive to reportovervalued practice expense RVUs. Wewelcome comments on the following:

+ What specific methods shouldHCFA use to validate key componentsof the data used for establishing practiceexpense RVUs?

+ What specific approaches shouldbe used to ensure fairness amongspecialties?

+ Should we, for example, requirethat the specialty obtain review by anindependent auditor before we considerchanges in the data?

• Criteria for using alternative surveydata. The primary source of practicecosts per hour data was the AMA’s SMSsurvey. Some specialties have alreadyrequested that alternative,supplementary, or more recent data beused. We welcome comments on whatspecific criteria should be establishedfor use of these alternative data?

• Allocation of indirect expenses. Weallocated indirect expenses toindividual CPT codes based onphysician work and direct expenses.Some commenters suggest that indirectexpenses should be allocated byalternative methods, such as physiciantime and direct expenses, or just directexpenses. We would welcome yourrecommendations.

2. RUC/PEAC. We would welcomecomments from the RUC/PEAC or anyother organization or individual forindividual code level data—both for


resource inputs and time data. The RUCand PEAC would function as an entityindependent from us, much like thecurrent RUC operates for purposes ofproviding comments on work RVUs. Wealso recognize the RUC/PEAC may wishto comment on other aspects of theprocess, such as methodology. Wewould consider such comments alongwith those received from others andwould likely discuss them as part of theprocess described in paragraph 1 above.However, we wish to emphasize that, asin our dealings with the current RUC,we would retain the ultimate authorityand responsibility to establish practiceexpense RVUs.

3. Comments on the refinementprocess.

We seek comments January 4, 1999and suggestions on any aspect of therefinement process as described above.

Comment: All but one of theorganizations commenting on the issue,as well as many individual commenters,recommended that we keep the practiceexpense RVUs as interim for the 4 yearsof the process. One national specialtysociety recommended we make therevised practice expense RVUs interimfor 1 year, only extending the periodbased on the number of misvaluedprocedures identified and also ensuringthat only changes based on compellingevidence are made.

Response: We stated in our proposedrule that we would keep the practiceexpense RVUs as interim through atleast through 1999. Due to thecomplexity of the issues that need to beaddressed during refinement, we nowbelieve that a longer period could beneeded to finalize all the RVUs.Therefore, as stated above, we will bekeeping all the RVUs as interimthroughout the transition period.

Comment: Many commentersrecommended acceptance ofinformation from alternative datasources during the refinement period,including data provided by specialtysocieties. One commenter suggested thatwe develop a standard surveyinstrument for specialties to use.Another organization commented thatwe should consider using MGMA’s costsurvey as an alternative source ofinformation that could be used tosupplement, validate, or otherwiseexpose further areas of refinement in theSMS, or perhaps be a substitute for SMSin the future. This comment also statedthat we should remain open tochallenges about current practiceexpense per hour calculations from allspecialties, even from those largerspecialties represented in the SMSsurvey, in both the short and long term.Many commenters also recommended

that we develop a process for validatingany supplemental data that we use.

Response: We believe that therefinement process that we outlinedabove is responsive to these concerns.One of the major purposes of thetechnical support and advice mentionedwill be to help us to determine whatadditional data, whether from large orsmall specialties, are needed, whethersubmitted information is valid, andwhether and how alternative sources ofdata, such as the MGMA survey, can beused to validate the assumptions used tocreate the practice expense pools.

Comment: One specialty societycommented that we should conductspecialty-specific surveys for all HCFA-designated specialties during therefinement period. The comment statedthat it is not reasonable for us to put theburden of ‘‘oversample’’ costs, whichexceed $100,000 on the HCFA-designated specialties that the AMA haschosen not to include in its annualsurvey sample.

Response: Decisions on what surveysare needed, what the criteria should befor those surveys, who should conductthe surveys, and who should fund themwill be made as we address these issuesduring refinement.

Comment: One organizationrecommended that the refinementprocess distinguish between intra-specialty refinement issues that can beresolved within a specialty, and inter-specialty refinement issues whichchange the cost pool of one specialtywith respect to all other specialties.

Response: Again, we believe that ourchosen refinement process addressesthis concern. The intra-specialtyrefinement issues will, for the most part,revolve around adjustments to the CPEPdata and will be referred to the PEAC fortheir recommendations. Those issuesthat affect the relative size of thepractice expense pools are generallymore fundamental methodologicalquestions for which we will seektechnical and methodological input aswell as input from the medicalcommunity.

Comment: One national organizationcommented that the SMS data appearsto be the best data available for thepurpose of determining practiceexpense RVUs and that SMS dataclosely mirrors the specialty’s own data.The comment recommended thatrefinement should focus on identifyingthe proper inputs for particular codes,rather than adjusting the current SMSdata, or revamping the design of thesurvey, which currently does not reflecta bias towards inflating practiceexpenses for individual specialties.

Response: We agree that the SMSsurvey is, at present, the best dataavailable for determining aggregatespecialty-specific practice costs. Webelieve one of the purposes ofrefinement is to pinpoint whereappropriate adjustments need to bemade in the data that we use. We alsoagree, as mentioned above, that we willneed to develop a system to validate theaccuracy of data collected in the future.

Comment: One commenterrecommended that we ensure that cost-saving innovations are not discouragedby the refinement process. This meansthat the practice expense scale shouldnot be refined to immediately reflect thefull impact of every cost-savingdevelopment, or specialties will bepermanently discouraged fromimplementing such innovations.

Response: We are required by law todevelop practice expense relative valuesthat are resource-based. Therefore, wedo not believe that we could develop analternative approach that would onlyapply to cost-saving innovations. Wealso do not believe that the use ofresource-based practice expense RVUswill have a significant effect on cost-saving innovations; on the contrary, theuse of a prospectively determinedpayment system, in itself, offers anincentive for any individual practitionerto cut costs.

Comment: Two commentersrecommended that codes for entirelynew procedures and technologies havetheir practice expense values taken fromthe all-specialty practice expense pool;two organizations recommended thatcodes that apply to new technologies toreplace current procedures come fromthe pertinent specialty’s pool.

Response: There would be no budgetneutrality adjustment for new codes thatrepresent entirely new procedures andtechnologies. However, we believe that,in the majority of cases (since we wouldtypically expect some type ofsubstitution of new services for moreestablished services) a budget neutralityadjustment would be appropriate. Insuch a case, we would spread theadjustment across all services. However,new codes that merely replace existingservices would only affect the pertinentspecialty’s pool at the time when thepractice expense pools are recalculated.

Comment: A primary care specialtygroup recommended that we leaveundisturbed the Harvard and RUC timedata during the refinement periodbecause of the implications for the workRVUs assigned to codes, while asurgical specialty group recommendedthat we remain open to revising theHarvard physician time data.


Response: The physician time dataplays an important role in determiningthe size of each specialty’s practiceexpense pool and, for this reason, it isimportant that this data be as accurateas possible. Therefore, we cannot ruleout the need for adjustments in the timedata during the refinement period.However, according to our chosenrefinement process, requests to adjustthe physician time data would beinitially referred to the RUC. We believethat the RUC will understand theimplications that changes in physiciantimes could have for the work RVUs.

Comment: One commenter agreedwith our proposal that we addresspotential bias toward specialties whichuse more midlevel providers during therefinement period.

Response: This is one of the issues onwhich we will be seeking input duringthe refinement period.

Comment: The AMA, supported bycomments from two physician specialtygroups, recommended that, to avoidconfusion, we publish only the blendedset of values each year, but make a listof the resource-based practice expenseRVUs available to interested parties.Any proposed changes in the resource-based practice expense RVUs could thenbe published in the spring proposedrules. Four organizations recommendedthat both sets of RVUs be publishedthroughout the period.

Response: We are publishing both setsof RVUs in Addenda B and C.

5. Reductions in Practice ExpenseRelative Value Units for MultipleProcedures

Comment: Two commentersexpressed agreement with our decisionnot to propose further multipleprocedure reductions.Gastroenterologists stated that multipleprocedure reductions should not applyto GI procedures done through differentorifices.

Response: Although we have notmade a specific proposal with respect tomultiple procedures thus far, we may doso in the future. We continue to believethere are efficiencies when more thanone service is performed during a singleencounter.

6. Transition

The Proposed RuleThe transition to resource-based

practice expenses, enacted in section4505(b) of BBA, requires practiceexpense RVUs in 1999 to be based 75percent on the existing charge-basedpractice expense system and 25 percenton the new resource-based system. In2000, the shares are 50 percent of the

former and 50 percent the latter, and in2001, the shares are 25 percent and 75percent, respectively. Beginning in2002, practice expense RVUs areentirely resource-based.

In our October 31, 1997 final rule (62FR 59052), we indicated that we woulduse, as the first factor in the transitionformula, the 1998 practice expenseRVUs actually used for payment. (‘‘Thepractice expense RVUs for 1999 will bebased on the product of 75 percent ofthe previous year’s practice expenseRVUs (1998) and 25 percent of theresource-based practice expenseRVUs.’’) In response to this statement,we received a comment suggesting thatwe consider interpreting the law to use1997 practice expense RVUs as thestarting point for the transition. Thisinterpretation would have eliminatedfrom the transition the 1998 changes inpractice expenses enacted by section4505 of BBA. Those commentingcontended that the 1998 changesapplied only to 1998 and should not beincluded in the first practice expensefactor in the transition formula. Using1997 RVUs would have resulted inhigher payments for certain specialtyprocedures and lower payments foroffice visits during 1999, 2000, and2001. Beginning in 2002, the startingpoint for the transition does not matterbecause the transition will be completeand practice expenses will be basedentirely on the new resource-basedsystem.

When we developed the proposedrule, we specifically considered thesuggestion that we use actual 1997practice expense RVUs as the startingpoint for the transition. In the proposedrule we indicated that we did notbelieve that we could use 1997 practiceexpense RVUs for several reasons. First,this approach seemed to us contrary tothe statute’s intent of moving toward aresource-based payment system; also,the interpretation could potentiallyresult in a ‘‘yo-yoing’’ of practiceexpense RVUs for certain servicesbetween 1998 and future years. Wepointed out that practice expense RVUsfor office medical visits, explicitlyincreased by the Congress in 1998,could be reduced in 1999 only to beincreased again when the practiceexpenses are fully resource-based.

We also stated that we would not use1997 practice expense RVUs as thestarting point for the transition becausethis result was inconsistent with ourconstruction of similar reductions,enacted in OBRA 1993, to practiceexpense values for 1994, 1995, and1996. We also indicated that we wouldreject the only other possibility, using1991 practice expense RVUs; using 1991

RVUs would be unacceptable since todo so would exclude the effects of theseries of reductions to practice expenseRVUs mandated by the Congressbetween 1993 and 1998 and wouldinstead return the system to outmodedpractice expense RVUs established atthe very inception of the fee schedule.We indicated that we believed this to bea poor alternative. Basing the transitionon data for 1991, from which theoriginal practice expenses were derived,would require us to retrospectivelyimpute charge data for the many newprocedure codes that had been addedsince the beginning of the fee schedule.It also would have been contrary to thestatutory scheme, which is movingsteadily toward a resource-basedpayment system. We indicated thatadoption of 1991 data for the transitionstarting point would not graduallytransition payments to the newresource-based system, but insteadwould represent an abrupt change indirection. This result is at odds with thepurpose of a transition and inconsistentwith other transitions in Medicare.Therefore, the June 1998 rule proposedto use the 1998 practice expense RVUsfor purposes of the transition formula in1999, 2000, and 2001.

We received comments stronglysupporting the approach we took in theproposed rule, as well as stronglyopposing our approach. Thesecomments centered on section1848(c)(2)(C)(ii) of the Act. Thatprovision requires practice expenseRVUs to be computed by multiplying‘‘base allowed charges’’ by a practiceexpense percentage. BBA then requiresthat this ‘‘product’’ be used as the firstfactor in the transition formula. A cross-reference to section 1848(c)(2)(D) of theAct appears to require base allowedcharges to be generated from charge datafor 1991. However, we believe that anumber of other factors demonstrate theirrationality of using data for 1991 as thetransition starting point. Using data for1991 would be a total aberration fromthe course of the past 7 years ofcongressional directives to decreasepractice expense RVUs from whichoffice-based and visit codes weregenerally excepted and would turn theclock back without any congressionaldirection to do so. We have analyzedboth the statutory language and thecontext in which it is found, and wehave determined that the bestaccommodation of the two is to usecurrent 1998 practice expense RVUs asthe basis for the transition to theresource-based practice expense system.

We have considered, among otherthings, that we are authorized by law tomake such ancillary policies as are


necessary to implement section 1848 ofthe Act; that the equation, based on1991 average allowed charges that thelaw seems to instruct us to use as thetransition starting point, ignoresconsistent legislative direction since1993, as well as our consistentimplementation; that we have not usedthe average allowed charge provisionsince the establishment of practiceexpense RVUs in 1991, that it has noready application to the more than 2000codes developed since 1992, and,therefore, that using 1991 allowedcharges for the transition creates asignificant administrative burden,unintended by the Congress,particularly given the short time periodfor implementation; that the languagedescribing the transition formula andthe language describing the ‘‘product’’upon which it is based are internallyinconsistent; that our implementation ofadjustments in accordance with section1848(c)(2)(G) of the Act is consistentwith our implementation of the OBRA1993 3-year reductions; that theCongress is familiar with ourimplementation, has amended section1848(c) of the Act since theimplementation, and has not actedlegislatively to alter our implementationprospectively. In addition, we note thatthe Physician Payment ReviewCommission (PPRC) studied resource-based practice expenses for a number ofyears, that the Congress is familiar withPPRC’s data and analyses, and that theresults of our transition are consistentwith the results PPRC predicted. In sum,we believe that our construction of thelaw most appropriately resolves thetensions inherent in the practiceexpense transition provisions of theBBA.

We address below the specificcomments we received with respect totransition issues.

Comment: Some commenters, mainlysocieties representing surgicalspecialties, opposed our proposedapproach and indicated that ourproposal to use the 1998 practiceexpense RVUs in the transition formulais in conflict with the language andintent of BBA. These commentersargued that section 1848(c)(2)(C)(ii)(I)and (II) of the Act require that thepractice expense charge data reliedupon in 1991 to establish the 1992practice expense RVUs be used for thefirst factor in the transition formula.They also contend that the adjustmentsto the 1998 practice expense RVUs,required by BBA, were intended toaccomplish a one-time redistribution ofRVUs from specialty codes to primarycare codes and that using these RVUsduring the transition would perpetuate

the redistribution for three more years.These commenters claimed that thistransition would redistribute anestimated additional $490 million fromspecialists to office-based codes.

These commenters assert that thecharge-based factor in the transitionmust be the formula in section1848(c)(2)(C)(ii) of the Act thatestablished practice expense RVUs asthe product of (I) the base allowedcharges for a service, and (II) thepractice expense percentage for theservice. Base allowed charges aredefined in section 1848(c)(2)(D) of theAct as ‘‘with respect to a physician’sservice, the national average allowedcharges for the service . . . for servicesfurnished during 1991, as estimated bythe Secretary using the most recent dataavailable.’’ (The practice expensepercentage is defined in section1848(c)(3)(C)(ii) of the Act.) Therefore,according to these commenters, thereference in the transition provision thatRVUs be determined based on ‘‘suchproduct’’ requires us to use 1991average charges to compute 1999 RVUs.

Response: We disagree with thesecommenters. We believe that theformula in section 1848(c)(2)(C)(ii) ofthe Act is internally inconsistent, that itwas intended for the establishment ofthe original practice expense RVUs, thatit has no ready application to the 2,000codes new or revised since 1991, andthat it produces results inconsistentwith the balance of section 1848(c)(2)(C)of the Act. The commenters’construction of the law would evisceratethe changes the Congress made topractice expense RVUs since 1993 andwould require that we revert to thebeginning of the program in the absenceof congressional direction to do so.

First, we believe that the reference to‘‘such product’’ in section1848(c)(2)(C)(ii) of the Act supports ourview that the Congress contemplatedthat the first factor in the transitionformula would be based on RVUs andnot on 1991 average allowed charges.Under the commenters’ reading, thetransition formula requires that in 1999we multiply 75 percent of a productbased on average allowable charges and25 percent of the resource-based RVUs.However, ‘‘average allowed charges’’ areexpressed as dollar figures, while theresource-based factor is expressed inRVUs. This internal inconsistencysuggests that the Congress contemplatedinstead that both factors in the formulawould be expressed in RVUs and thatwe would use current RVUs producedunder section 1848(c)(2)(C) of the Actfor the first factor in the transition.

Moreover, although the Congress hasnot repealed section 1848(c)(2)(C)(ii)(I)

and (II) of the Act, the provisions havenot been applied in the fee schedulecomputations since 1992 when the firstpractice expenses were established. Thelanguage of the provisions indicate theinappropriateness of their applicationhere. Thus, section 1848(c)(2)(D) of theAct, incorporated by reference, providesfor use of average allowed charges ‘‘asestimated by the Secretary using themost recent data available.’’ Thislanguage would seem to require us touse 1998 data to recompute 1991charges, surely an unintended result. Inaddition, in 1993, the Congress requiredus to compute practice expenses RVUson a basis other than that contained insection 1848(c)(2)(C)(ii) of the Act:effective January 1, 1994, section1848(c)(2)(E) of the Act provided for a‘‘[r]eduction in practice expense relativevalue units for certain services.’’ TheCongress did not explicitly state that theamendment applied notwithstandingthe existing language of section1848(c)(2)(C)(ii) of the Act; instead, theamendment operated without recourseto that provision at all. The amendmentenvisioned that reductions would bemade to the ‘‘relative value units [being]applied’’ at that time, not to charges for1991. At the end of the period for whichreductions were specified in section1848(c)(2)(E) of the Act, practiceexpense RVUs did not revert to 1992values based on 1991 charges; RVUchanges produced by section1848(c)(2)(E) of the Act were permanentand carried forward into the next year’s(1997) practice expense RVUs. Thesemore recent and more specificprovisions added by the Congress insubsequent years obviously control overthe original provision, and thecommenters’ argument, if adopted,would wipe out the effects of theseintervening changes in the law. Webelieve that it is far more rational andconsistent with congressional intent toharmonize the computation during the4-year transition period with recentlegislative changes rather than revertingback to a system from 1991 that hasbeen unused since that time.

Section 1848(c)(2)(G) of the Act, likesection 1848(c)(2)(E) of the Act,provides specified reductions forspecified services for a particular year tolower excessively high practice expenseRVUs; it explicitly raises low RVUsattributable to office visit codes. Section1848(c)(2)(E) of the Act also providesthat ‘‘the aggregate amount ofreductions’’ to practice expense RVUsfor services furnished in 1998 cannotexceed $390 million. We believe thatthe Congress intended that RVU changesresulting from application of section


1848(c)(2)(G) of the Act be treated in thesame way as we had treated changesresulting from application of section1848(c)(2)(E) of the Act, that is, that theRVU changes produced by section1848(c)(2)(G) of the Act would bepermanent and carried forward into thenext year’s fee schedule.

Accepting the comments advocatinguse of the 1991 average allowed chargesin the transition formula would presentother difficulties. We did not establishaverage allowed charge RVUs for codesnew or revised since 1991. Thus, using1991 average allowed charges in thetransition would require us toretroactively impute average allowedcharges for procedure codes that did notexist in 1991. This would be asignificant administrative burden,particularly given the obligation to havethese amendments implemented byJanuary 1, 1999.

We believe that the Congress intendedthat we devote our efforts to developingthe resource-based practice expensesystem and refining practice expenseRVUs, rather than to creating a set ofimputed charges for new codes to beused only for the transition. BBAexplicitly requires the Secretary todevelop a process to refine resource-based practice expense RVUs duringeach year of the transition (see section4505(d)(1)(C) of the Act). On the otherhand, there is no mention of ourrefining what 1991 national averageallowed charges would have been formore than 2,000 new codes. It isunlikely that the Congress contemplatedthat we would pursue the imputation of1991 charges in the limited time we hadto retool the resource-based practiceexpense system, especially given thatthe imputed values would have noutility after 2001.

Additionally, we note that section1848(c)(4) of the Act provides authorityfor us to ‘‘establish ancillary policies(with respect to the use of modifiers,local codes, and other matters) as maybe necessary to implement this section.’’We view this situation as oneappropriate for the application of theancillary policies provision. We believe,as we have noted, that the statutorylanguage and the context in which itappears are at odds and create anambiguity that we must resolve basedon the design of the section as a wholeand the congressional policiesunderlying it, and we are using section1848(c)(4) of the Act for that purpose. Inorder to rationally implement section1848(c) of the Act, we will use 1998RVUs for the first factor in the transitionformula.

Comment: The surgical specialtysocieties argue that implementing

section 1848(c)(2)(G) of the Act in thesame manner as section 1848(c)(2)(E) ofthe Act is prohibited because the‘‘adjustments in relative value units for1998’’ are limited to $390 million andthat including the reduced practiceexpense RVUs in the base for thetransition makes reductions total morethan $390 million.

Response: We do not agree with thatstatement. We believe that thecommenters are misreading thelimitation on the ‘‘aggregate’’reallocation; that limitation applies onlyto amounts attributable to servicesfurnished in 1998. The law requires usto ‘‘increase the practice expenserelative value units for office visitprocedure codes during 1998 by auniform percentage which [HCFA]estimates will result in an aggregateincrease in payments for such servicesequal to the aggregate decrease inpayments’’ for the overpriced practiceexpenses. The provision simplycontemplates that we add the increasefor each service and assure that the totalof all increases is equal to the total ofall decreases in payments for theoverpriced practice expenses. Thisprovision does not restrict the use of the1998 practice expense RVUs in futureyears. To read the law as thesecommenters suggest would be to reverseyears of intentional redistribution ofpractice expense RVUs mandated by theCongress.

Comment: Primary care groups whocommented on the proposed ruleasserted that the 1998 ‘‘down payment’’(the increased practice expense RVUsfor office visit codes created by section1848(c)(2)(G)) of the Act was a step inthe direction of the ultimate resource-based system. On the other hand, asurgical group believed that we werebiased because we presumed that aresource-based practice expense RVUsystem would lead to a reduction inmost specialty codes and acorresponding increase in primary carecodes.

Response: The trend in practiceexpense RVU redistributions under aresource-based system is clear, andsection 1848(c)(2)(G) of the Act isanother step in that progression,consistent with the precedingredistributions which the Congressmandated in 1993. The direction ofpayment changes for major categories ofservice—increases for medical visits andreductions for surgical procedures—hasbeen mandated by the Congress,implemented by HCFA, and known tothe public for some time. The exceptionof office-based services from the 1993practice expense RVU reductions clearlyindicated that the Congress intended a

relative redistribution toward thoseservices. While the Congress could notknow, on a procedure-by-procedurebasis, the impact of the new resource-based system, it was cognizant of thegeneral direction of a resource-basedsystem before it enacted section 121 ofthe Social Security Act Amendments of1994, mandating resource-basedpractice expense RVUs.

Establishment of a resource-basedsystem for practice expenses has beendiscussed for some time. In 1992, thePPRC, a statutorily establishedCommission that provided advice andrecommendations to the Congress,issued a report titled ‘‘Practice ExpensesUnder the Medicare Fee Schedule: AResource-Based Approach’’ (Number92–1). That report described theCommission’s research on a resource-based alternative for calculating practiceexpense RVUs. It showed the directionof the projected redistributions. Thereport showed that RVUs for thecategory of evaluation and managementservices (medical visits or primary careservices) would increase and thecategory of surgical procedures woulddecrease.

In its 1993 Annual Report to theCongress, the Commission specificallyrecommended that the Congress enact aresource-based system for payment ofpractice expenses. The report, at page147, indicated:

The Commission has long questioned theappropriateness of these charge-basedpractice expense and malpractice expenserelative values as part of the Medicare FeeSchedule. Since it suggested the OBRA 89approach as an interim measure in theAnnual Report to Congress 1989, theCommission has been working to developmethods for calculating practice expense andmalpractice expense relative values that aremore consistent with the reform goals ofresource-based payments (PPRC 1989). Thiswork has lead to the identification ofmethods for calculating these twocomponents that the Commission thinks aremore appropriate than the OBRA 89formulas. Both the practice expense andmalpractice expense methods have beendescribed in previous reports to Congress,and each is the topic of a special researchreport issued by the Commission (PPRC1992b; PPRC 1992c).

In the same report, the Commissionspecifically recommended:

The Congress should revise the practiceexpense component of the Medicare FeeSchedule so that it will be resource-based.Practice expense relative values should bebased on data about the direct costs incurredin delivering each service and an incentive-neutral formula to allocate indirect costs. Atransition to new practice expense relativevalues should be introduced beginning in1997. This date will allow for completion ofthe current fee schedule transition process


and for development and refinement of theresource-based approach.

Id. This report also showed the impactof a resource-based system for fourmajor categories of services. TheCommission estimated that the totalpayment for evaluation andmanagement services would increase by12 percent, that diagnostic procedureswould decrease by 19 percent, thatsurgical global services would decreaseby 29 percent and that technicalprocedures would not be changed.(These impacts reflect the totalMedicare payment; when measuredrelative to the practice expensecomponent alone, there would begreater percentage changes.) Thus, thePPRC reports put the Congress on noticeabout the direction of changes under aresource-based system.

The Congress, in section 13513 ofOBRA 1993, enacted reductions in thepractice expense component payment tomove toward resource-based practiceexpense RVUs. (The Congress also usedthese reductions to achieve savings inthe Medicare program.) The Congressspecifically exempted from reductionany services that were performed atleast 75 percent of the time in an officesetting. Therefore, the impact of thereductions fell on surgical procedures,and the largest impact occurred forthose procedure codes for which thepractice expense RVUs most exceededwork RVUs. The structure of section1848(c)(2)(E) of the Act—reduction ofone-quarter of the amount of excesspractice expense in each of 3 years—was itself a transition to moderatelyreduce practice expense RVUs for non-office-based codes rather than todecrease them precipitously.

Section 121 of the Social Security ActAmendments of 1994 required us todevelop and implement resource-basedpractice expense RVUs effective January1, 1998. Section 4505 of the BBApostponed the change to resource-basedvalues, but included another round ofreductions for certain non-visit codes.We agree with the comment that the1998 payment changes were simplyanother step in the ongoing processmoving payments in the direction of theresource-based practice expense system.

Comment: Groups representingprimary care physicians supported ourproposal, stating that using 1997 RVUsfor the transition would cause someRVUs to ‘‘ping-pong’’ between 1998practice expense RVUs and thetransition years. Some commentersopposing the transition policy in theproposed rule stated that the ‘‘yo-yoing’’of practice expense values around thetransition was not inconsistent with thestatutory scheme.

Response: We agree that it isinconsistent with the statutory schemeto create sharp reversals in practiceexpense RVUs. A transition in thedirection of a resource-based practiceexpense system began in 1993, and aone-time upward spike in RVUs forsurgical procedures, which ignores thechanges previously made, would beinconsistent with congressional intentand with the very purpose of atransition.

In response to comments on ourproposed rule, we have examined theimpact of the transition more preciselyfor a limited set of procedures. Whilethis example is illustrative only, itshows that using 1991 average allowedcharges in the transition formula

(disregarding the 1998 redistribution,the OBRA 1993 practice expensepayment reductions, and all budgetneutrality adjustments) would result inmarked payment spikes in 1999 forprocedures whose fully-implementedresource-based practice expense RVUsare lower than their 1998 practiceexpense RVUs.

The chart below illustrates thechanges in practice expense RVUs foreach year from 1992 through 1998 andthe estimated practice expense RVUs for1999, 2000, 2001, and 2002, using datafor 1991 and 1998 RVUs as alternativestarting points for the transition. Thechart shows the figures for cataractremoval and intraocular lens insertion(CPT code 66984); the practice expenseRVUs for cataract surgery decreasedunder both the OBRA 1993 and BBAreductions. Practice expense RVUs forcataract surgery will decrease between1998 and 2002 when the resource-basedsystem is fully implemented. The chartshows that there would be smooth,moderate decreases between 1998 and2002, as we understand the Congress tohave intended, if the 1998 practiceexpense RVUs are used in the transitionformula. The chart also shows that therewould be large increases in 1999practice expense RVUs (compared to1998 and even compared to earlieryears) if the transition practice expenseRVUs were based on 1991 averageallowed charges. There would indeed bespikes in Medicare payments unless the1998 practice expense RVUs are used inthe transition formula, as we understandthe Congress to have intended, during1999, 2000, and 2001.

BILLING CODE 4120–01–P


BILLING CODE 4120–01–C


Comment: Commenters opposing theproposed policy stated that thelegislative history does not indicate thatthe Congress shares our concern aboutsharp changes in the redistribution ofpractice expense RVUs.

Response: We believe, instead, thatthe shape of the reductions made bysection 1848(c)(2)(G) of the Actevidences the Congress’ concern on thispoint. That provision explicitlyexempted from reduction any procedureif the in-office or out-of-office practiceexpense RVUs would have increasedunder our June 1997 proposed rule.Thus, the Congress specifically chosenot to reduce RVUs for a procedure ifthey were subsequently to be increasedunder the resource-based system. In thisway, the law reflects congressionalintent to avoid perverse shifts inpractice expense RVUs during thetransition.

Comment: Commenters opposed tothe proposed rule also suggested thatthe OBRA 1993 changes codified atsection 1848(c)(2)(E) of the Act wereintended by the Congress to betemporary and apply only during 1994,1995, and 1996.

Response: We disagree; the provisionswere scored legislatively as permanentreductions, and we note that weimplemented the OBRA changes in thatway. Moreover, the Congress hasacquiesced in our implementation ofsection 1848(c)(2)(E) of the Act. Asdiscussed earlier, the OBRA 1993reductions for practice expenses weredesigned to achieve Medicare savingswhile moving the system in thedirection it would ultimately moveunder a resource-based system, greaterrelative payments for office-basedprocedures. The Congressional BudgetOffice and the Administration ‘‘scored’’section 13513 of OBRA as havingpermanent savings, from which it can beinferred that the payment reductionswere permanent. Until we received thiscomment in response to the proposedrule, it had not been suggested that ourimplementation of section 1848(c)(2)(E)of the Act was contrary to congressionalintent. In fact, the Congress has sinceamended section 1848(c) of the Actwithout legislatively altering ourimplementation of section 1848(c)(2)(E)of the Act. We believe that the Congress’failure to take contrary legislative actionon our implementation of section1848(c)(2)(E) of the Act indicates thatwe have implemented that provision asthe Congress intended.

Comment: One specialty societycommented that there should be notransition for services that are new in1999 and beyond.

Response: The law is silent as towhether there should be a transition fornew services in 1999 and beyond.However, we agree with the commenterand will not provide a transition forcodes representing services that are newbeginning in 1999.

Comment: One specialty societysuggested that we consider asking theCongress for additional transition timedue to the disruption caused by the year2000 computer systems overhaul.

Response: For 1999, we plan to makeroutine provider payment updates andother BBA changes. These pose minimalrisks to contractors’ year 2000 (Y2K)efforts and, therefore, can be done.Routine updates between October 1,1999 and April 1, 2000 may need to bedelayed because they would occurduring a critical timeframe in late 1999and early 2000 when final Y2K testingand refinements must be accomplished.We will actively consult with interestedprofessional groups, the Congress andother parties as we develop our plans toachieve Y2K compliance while causingminimum disruption in fee scheduleupdates.

Comment: A surgical group suggestedthat we limit the magnitude of thechanges in physician payments byimposing some reasonable limit onpayment increases and decreases forindividual services. They argue thatsuch an approach is advisable becauseof what they believe is uncertaintyabout the accuracy of the resource-basedRVUs.

Response: We do not believe that it isappropriate to place limits on increasesor decreases in payments as a result ofthe implementation of the new system.We believe that the Congress addressedconcerns about the accuracy of newvalues by explicitly providing for atransition and requiring a refinementprocess to be used each year of thetransition. We believe that, in so doing,the Congress indicated its view of theappropriate contours of relief from theeffects of redistribution of practiceexpense RVUs.

ResolutionWe have considered all of the

comments on our proposal to use 1998practice expense RVUs in the formulafor the 1999, 2000, and 2001 transitionto fully resource-based practice expensevalues. We believe that use of 1998practice expense RVUs is mostconsistent with the statutory design forresource-based practice expense andthat using 1991 average allowed chargesfor this purpose would be antithetical tothis scheme and to the purpose ofproviding a smooth transition. Thus, weare using the current, 1998, practice

expense relative values in the transitionformula for 1999 through 2001.

Revisions to the RegulationsWe are revising § 414.22 (Relative

value units (RVUs)), paragraph (b),(Practice expense RVUs), to state that forservices beginning January 1, 1999, thepractice expense RVUs will be based ona blend of 75 percent of practiceexpense RVUs used for payment in 1998and 25 percent of the relative practiceexpense resources involved infurnishing the service. For servicesbeginning January 1, 2000, the practiceexpense RVUs will be based on a blendof 50 percent of the 1998 PE RVUs and50 percent of the relative practiceexpense resources involved infurnishing the service. For servicesbeginning January 1, 2001, the practiceexpense RVUs will be based on a blendof 25 percent of the 1998 practiceexpense RVUs and 75 percent of therelative practice expense resourcesinvolved in furnishing the service. Forservices beginning January 1, 2002, thepractice expense RVUs will be based on100 percent of the relative practiceexpense resources involved infurnishing the service.

There will be only one level ofpractice expense RVUs per code for thefollowing categories of services: thosethat have only the technical componentof the practice expense RVUs; only theprofessional component practiceexpense RVUs; certain evaluation andmanagement services, such as hospitalor nursing facility visits that arefurnished exclusively in one setting;and major surgical services. For otherservices, there will be two differentlevels of practice expense RVUs percode. The lower practice expense RVUswill apply to services furnished tohospital or ASC or SNF patients. Thehigher practice expense RVUs willapply to services furnished in aphysician’s office or services other thanvisits but performed in a patient’s homeand services furnished to patients in anursing facility or an institution otherthan a hospital, ASC, or SNF.

Result of evaluation of comments:Based on our evaluation of allcomments received on our proposedresource-based practice expensemethodology, we have made thefollowing modifications:

• Creation of a separate pool forservices with work RVUs equal to zero.We created a separate practice expensepool for services with work RVUs equalto zero (including the technicalcomponents of services withprofessional and technical components)using the top-down methodology exceptwe used the average clinical staff time


from the CPEP data (since these codesby definition do not have physiciantime) and, as an interim measure, weused the current 1998 practice expenseRVUs to allocate the direct cost pools(clinical labor, medical supplies, andmedical equipment). For services withprofessional and technical componentspaid under the physician fee schedule,the global practice expense RVUs are setequal to the sum of the professional andtechnical components.

• Allocation of the indirect cost pool.In the indirect allocation methodology,we are converting the work RVUs todollars using the Medicare conversionfactor (expressed in 1995 dollars forconsistency with the SMS survey years).

• SMS based practice expenses perhour. For the specialty of emergencymedicine, we are using the ‘‘AllPhysician’’ practice expense per hour tocreate practice expense cost pools forthe categories ‘‘clerical payroll’’ and‘‘other expenses.’’

For the specialty of pathology, we areremoving the supervision and autopsyhours reimbursed through Part A of theMedicare program from the practiceexpense per hour calculation.

For the specialty of podiatry, we areusing the ‘‘All Physician’’ practiceexpenses per hour to create the practiceexpense cost pools.

For the specialty of allergy/immunology, we are using the ‘‘allergy/immunology’’ supply practice expensesper hour to create the supply practiceexpense pool.

We are splitting the ‘‘radiology’’practice expenses per hour into‘‘radiation oncology’’ practice expensesper hour and ‘‘radiology other thanradiation oncology’’ practice expensesper hour and using these split practiceexpenses per hour to create practiceexpense cost pools for these specialties.

• Corrections to code crosswalks. Wehad inadvertently crosswalked somecodes in settings where CPEP dataexisted. We have removed thesecrosswalks.

• Use of the current practice expenserelatives for radiology services. For thespecialty of radiology, we are using thecurrent practice expense relatives forradiology services, as an interimmeasure, to allocate radiology’s directpractice expense cost pools. For allother specialties that perform radiologyservices, we are using the CPEP relativesfor radiology services in the allocationof that specialty’s direct practiceexpense cost pools. Note that radiologyservices or components of radiologyservices that lack work relative valueunits are handled as described aboveunder ‘‘Creation of a separate pool for

services with work relative value unitsequal to zero.’’

• Physician’s time for radiologycodes. For radiology codes for which welacked Harvard or RUC survey data, wecalculated the physician’s time usingthe average work per unit time of CPTcodes 71010 and 71020.

• Maxillofacial prosthetics. Formaxillofacial prosthetics, we are usingthe ‘‘All Physician’’ practice expensesper hour to create practice expense costpools and, as an interim measure,allocating these pools using the currentpractice expense RVUs.

B. Medical Direction for AnesthesiaServices

General Requirements

The conditions for payment ofmedical direction for anesthesia servicesare included in § 415.110 (Conditionsfor payment: Medically directedanesthesia services). Before January1999, the regulations referred to theseconditions as applying to servicesfurnished directly or concurrently. Thereference to services furnished directlyis not correct. It suggests that thephysician personally performing theanesthesia services only has to providethe same kind of services as thephysician medically directing theanesthesia service. In fact, the physicianpersonally performing the anesthesiaservice must perform the entireanesthesia service alone. This policy isincluded in § 414.46(c)(1)(i) (Additionalrules for payment of anesthesia services,Physician personally performs theanesthesia procedure). Therefore, we aredeleting the reference in § 415.110 toservices furnished directly.

The December 1995 final rule (60 FR63152) allows the physician’s medicaldirection of a certified registered nurseanesthetist (CRNA) performing a singleanesthesia service. However, thisprovision did not take effect untilJanuary 1, 1998. This policy wasincorporated in § 414.46(d)(iii)(Additional rules for payment ofanesthesia services, Anesthesia servicesmedically directed by a physician). Aprogram memorandum explaining thispolicy was issued to the Medicarecarriers in January 1998.

In the June 1998 proposed rule, weproposed revising § 415.110 (Conditionsfor payment: Medically directedanesthesia services) so that it isconsistent with § 414.46(d)(iii) bystating that medical direction can applyto the single anesthesia servicefurnished by a CRNA.

The law provides that the paymentallowance for the physician’s medicaldirection furnished on or after January

1, 1998, is 50 percent of the fee scheduleamount that would have been paid if theanesthesia service was furnished by thephysician alone.

Both the ASA and the AmericanAssociation of Nurse Anesthetists(AANA) have pointed out that ourmedical direction requirements areoutdated and too restrictive. Therequirements are oriented to theadministration of a general anesthetic,which was the predominant mode ofpractice when the regulations wereoriginally implemented. There are othertypes of anesthesia, such as regional,spinal or epidural anesthesia, andmonitored anesthesia care, that arebecoming more common and for whichthe Associations argue, the currentrequirements are not completelyappropriate. For example, in monitoredanesthesia care, there is no definableemergence as there is for generalanesthesia.

Also, the AANA has advised us thatrequiring the presence of theanesthesiologist for induction for allcases may not be appropriate and maydelay the start of surgery and result inthe inefficient use of operating roomtime. In addition, the ASA has advisedus that neither the regulations nor theoperating instructions explain the levelof documentation required by theanesthesiologist to support the paymentfor the medical direction service. TheASA believes that the lack ofinstructions for medical documentationand the concerns about payment auditshave reportedly promptedanesthesiologists to overly documentanesthesia records.

The ASA and the AANA reachedsubstantial consensus on a revisedrecommended set of medical directionrequirements. The only area that theyhad a difference of opinion was withrespect to the pre-anesthetic exam andevaluation. The ASA favored therequirement that the physicianpersonally perform the examination andthe AANA initially favored therequirement that the physician ensurethat the examination and evaluation beperformed by a qualified individual. Wechose the proposed language as acompromise position. We reviewedtheir recommendations and proposedrevising our regulations in § 415.110(Conditions for payment: Anesthesiaservices) to reflect current anesthesiapractice arrangements. Namely, weproposed to—

• Provide that the physician eitherperform the pre-anesthesia examinationand evaluation or review one performedby another qualified individual;


• No longer require the physician tobe present during induction andemergence on all anesthesia cases; and

• Require that the physician—+ Monitor the course of anesthesia at

intervals medically indicated by the

nature of the procedure and thepatient’s condition;

+ Remain physically present in thefacility and immediately available for

diagnostic and therapeutic emergencies;and

+ Provide indicated post-anesthetic orensure that it is provided by a qualifiedindividual.

SUMMARY OF PROPOSED CHANGES TO MEDICAL DIRECTION REQUIREMENTS

For each patient the physician—

Current regulations Proposed regulations

(i) ............................... Performs a pre-anesthetic examination and evaluation ...... Performs a pre-anesthetic examination and evaluation, orreviews one performed by another qualified individualpermitted by the State to administer anesthesia.

(ii) ............................... Prescribes the anesthesia plan. ........................................... Participates in the development of the anesthesia plan andgives final approval of the proposed plan.

(iii) .............................. Personally participates in the most demanding proceduresin the anesthesia plan including induction andemergence.

Personally participates in the most demanding aspects ofthe anesthesia plan.

(iv) .............................. Ensures that any procedures in the anesthesia plan thathe or she does not perform are performed by a qualifiedindividual as defined in program operating instructions.

Ensures that any aspect of the anesthesia plan not per-formed by the anesthesiologist is performed by a quali-fied individual as specified in operating instructions.

(v) .............................. Monitors the course of anesthesia at frequent intervals ...... Monitors the course of anesthesia at intervals medically in-dicated by the nature of the procedure and the patient’scondition.

(vi) .............................. Remains physically present and available for immediate di-agnosis and treatment of emergencies.

Remains physically present in the facility and immediatelyavailable for diagnostic and therapeutic emergencies.

(vii) ............................. Provides indicated post-anesthesia care ............................. Provides indicated post-anesthesia care or ensures that itis provided by a qualified individual.

Comment: Almost all commentersrecommended that we drop theproposed medical directionrequirements and retain the currentrequirements. They pointed out that theproposed regulations wouldsignificantly relax the requirements forphysician involvement in the provisionof anesthesia care when a qualifiednonphysician anesthetist is providingthese services. They believe thesechanges would be to the detriment ofpatients and would diminish the currentstandards of care. The focus of thesecommenters’ concerns was on theproposed requirements that themedically directing physician—(1)Could review a pre-anestheticexamination and evaluation performedby a qualified individual permitted byState law to administer anesthesia; and(2) ensure that indicated post-anesthesiacare is provided by a qualifiedindividual.

Several commenters also pointed outthat the proposed requirement that thephysician participate in the mostdemanding procedures in the anesthesiaplan could be construed as meaning thatthe medically directing physician doesnot have to participate in any aspect ofanesthesia care. Commenters alsoobjected to the proposed requirementthat the physician remain physicallypresent in the facility and immediatelyavailable for diagnostic and therapeuticemergencies. The commenters pointedout that the proposed requirement is too

lax and could be interpreted to mean themedically directing physician could belocated anywhere in the facility.

Response: The medical directionrequirements specify the activities thatthe medically directing physician, whois usually an anesthesiologist, mustperform in order for the carrier to allowpayment for a physician’s service underthe physician fee schedule. The medicaldirection requirements are not quality ofcare standards. As one commenterpointed out, these requirements areminimum requirements. Practicinganesthesiologists can, if they choose,furnish a level of services beyond theminimum standards.

As we noted in the proposed rule, wehad decided to propose revised medicaldirection requirements because ofconcerns that the ASA and the AANApresented. We had asked the ASA andAANA to work together, to the extentpracticable, to come up with a revisedset of medical direction requirements. InFebruary 1998, we met with both groupsand heard their views and concerns. Atthat time, with the exception of the firstproposed requirement that the CRNA beable to furnish the preanesthesia examand evaluation and have the medicallydirecting physician review it, it was ourunderstanding that the leadership ofboth groups agreed to the uniformrevised requirements.

However, because of concerns raisedby their membership, the ASA andseveral State anesthesiologist societies

are now requesting, for the most part,that we retain the current requirements,established in 1983.

We have decided to retain the currentrequirements (that is, requirements (i)and (ii), and (iv) through (vii)) in thepreceding table and make only onetechnical revision in requirement (iii) atthe present time. We will study themedical direction issue further and maypropose to make a change in the future.The technical revision pertains to therequirement that the physicianparticipate in the most demandingprocedures in the anesthesia planincluding, induction and emergence.We published a final rule in the FederalRegister on March 2, 1983 (48 FR 8928)in which the current requirements formedical direction were included toimplement section 108 of TEFRA of1982. Since general anesthesia was theusual mode of practice for anesthesiaservices, the requirement reflected thispractice. However, since 1983, othertypes of anesthesia care, such asregional anesthetics and monitoredanesthesia care have become morecommon. One of our objectives was torevise the current requirement so that itis consistent with current anesthesiapractices. As a result, we have decidedthat the medically directing physicianmust be present at induction andemergence for general anesthesia. Thatfinal requirement is as follows: Themedically directing physicianparticipates in the most demanding


aspects of the anesthesia plan,including, if applicable, induction andemergence.

Documentation RequirementsThe current regulations do not

specifically include medical recorddocumentation requirements formedical direction. The proposedregulations state that the physicianinclusively documents in the patient’smedical record that the conditions setforth in paragraph (a)(1) of § 415.110have been satisfied, specificallydocumenting personal participation inthe most demanding aspects of theanesthesia plan.

The ASA asked initially that weinclude the medical documentationrequirements in the regulations so thatphysicians, carrier staff, and otherclaims/medical record auditors have aclear and uniform understanding of thedocumentation requirements.

In addition, within the past 2 years,we have established medicaldocumentation requirements forteaching physicians, including teachinganesthesiologists, that specify theamount of documentation needed tosupport the claim for the physician’sservice when the attending physician isinvolved in a medical/surgical case witha resident. We sought to establish somelevel of reasonable documentation forthe medically directing physicianconsidering that—(1) The teachinganesthesiologist is paid as if he or shepersonally performed the anesthesiaservice alone (that is, 100 percent of thefee); (2) the medically directinganesthesiologist is paid 50 percent ofthe total fee; and (3) the documentationrequirements for the teachinganesthesiologist, as found at § 415.178,are that the record demonstrates thephysician’s presence or participation inthe administration of the anesthesia.The operating instructions in MCMsection 15016 specifically require thatthe teaching physician document in themedical records that he or she waspresent during the critical (or key)portions of the procedure, includinginduction and emergence. The teachinganesthesiologist’s presence is notrequired during the preoperative orpostoperative visits with thebeneficiary.

Comment: The AANA asked that werevise the medical documentationrequirements to require that thephysician alone personally documentthe record; the Association stated thatthe CRNA should not have to documentthe physician’s participation since theCRNA may not agree concerning theextent of the physician’s participation inthe case.

Response: We believe the proposedregulation text accomplishes thisobjective since it clearly says thephysician must document the medicalrecord. However, for purposes of furtherclarity, we will accept the commenter’srecommendation.

Comment: The ASA asked us if theirinterpretation of the proposed medicaldocumentation requirement is correct.ASA interprets the provision asallowing an anesthesiologist to state inthe medical record that the medicaldirection standards have been met,without enumerating each suchstandard, and as requiring theanesthesiologist to specify in the recordthose demanding aspects of the case inwhich he or she personally participated.

Response: We understand the ASA’sconcerns about the medical directionrequirements. We do not wish to makethe act of medical documentation overlyburdensome to the anesthesiologist.However, the medical record mustinclude an amount of documentation toenable a medical records’ auditor toconclude that the physician wassufficiently involved to support thepayment of a medical direction fee.

The medical direction requirementsspecify certain functions or services thatthe physician must perform and cannotdelegate to the directed qualifiedindividual. We do not believe it isonerous to require the medicallydirecting physician to document that heor she performed the pre-anestheticexam and evaluation, providedindicated post-anesthesia care, and waspresent during the most demandingprocedures, including induction andemergence where indicated. We alsoexpect that there would be someindication in the record that themedically directing physician waspresent during some portion of theanesthesia monitoring.

Limited Activities Permitted DuringMedical Direction

The preamble to the final regulations(48 FR 8928) to implement section 108of TEFRA of 1982 allows the medicallydirecting physician to respond tomedical emergencies and obstetricalpatients in labor and also continue tofurnish medical direction. The specificpreamble language is as follows:

‘‘We do not expect that a physicianwho is directing the administration ofanesthesia to four surgical patientswould be involved routinely infurnishing any additional services toother patients. However, addressing anemergency of short duration in theimmediate area, or administering anepidural or caudal anesthetic to easelabor pain, or periodic rather than

continuous monitoring of an obstetricalpatient, would not substantiallydiminish the scope of control exercisedby the physician in directing theadministration of anesthesia to surgicalpatients. However, the carriers willreview hospital records to ensure thatsuch circumstances do not occurfrequently, are of short duration, and donot constitute a diminution of thephysician’s involvement in the surgicalprocedure.’’

In addition, the preamble addressedthe specific question of whether themedically directing physician couldperform certain routine tasks, such asreceiving patients entering the operatingsuite for the next surgery, checking onor discharging patients in the recoveryroom and handling scheduling matters.The preamble included the followingresponse to this comment:

‘‘We agree that a physician mayappropriately receive patients enteringthe operating suite for the next surgerywhile directing concurrent anesthesiaprocedures. However, checking ordischarging patients in the recoveryroom and handling scheduling mattersis not compatible with our reimbursingthe physician on a reasonable chargebasis (now physician fee schedule basis)for directing concurrent anesthesiaprocedures. The time devoted to suchactivities potentially can be extensiveand would diminish the degree ofinvolvement in the concurrent carebeyond levels acceptable for purposes ofreasonable charge reimbursement (nowphysician fee schedule payment).’’ Thiscontinues to be our position.

Comment: Some commenters askedwhether the policy of allowing certainother activities during medical directionwould continue since the proposedregulation did not specifically addressthis matter. Also, the ASA askedwhether this list of activities wasexclusive or whether other similarservices of short duration could beperformed without violating the medicaldirection payment standards. The ASAdid not provide examples of the kindsof services they would consider ‘‘otherlimited services of short duration.’’

Response: We believe this commentgoes beyond our proposal. We willcontinue the policy enunciated in thepreamble to the final TEFRA section 108regulations. We will not expand or limitthe current policy until we receive andhave our medical staff evaluateinformation from the anesthesiasocieties on the specific services or thekinds of circumstances for which theyare seeking an expansion of the policy.We invite comments on this issue.

Result of evaluation of comments: Wehave decided to include the following


set of requirements for medicaldirection in § 415.110 of this final rule.For each patient, the physician—

(i) Performs a pre-anestheticexamination and evaluation;

(ii) Prescribes the anesthesia plan;(iii) Personally participates in the

most demanding aspects of theanesthesia plan, including, if applicable,induction and emergence;

(iv) Ensures that any procedures inthe anesthesia plan that he or she doesnot perform are performed by aqualified individual as defined inprogram operating instructions;

(v) Monitors the course of anesthesiaadministration at frequent intervals;

(vi) Remains physically present andavailable for immediate diagnosis andtreatment of emergencies; and

(vii) Provides indicated post-anesthesia care.

Also, the physician directs no morethan four anesthesia servicesconcurrently and does not perform anyother services while he or she isdirecting the single or concurrentservices so that all of the conditions formedical direction are met. Thephysician can attend to medicalemergencies and perform other limitedservices as allowed by Medicareinstructions and still be deemed to havemedically directed anesthesiaprocedures.

The physician alone inclusivelydocuments in the patient’s medicalrecord that the medical directionrequirements have been met,specifically documenting that he or sheperformed the pre-anesthetic exam andevaluation, provided indicated post-anesthesia care, and was present duringthe most demanding procedures,including induction and emergence,where applicable.

C. Separate Payment for a Physician’sInterpretation of an AbnormalPapanicolaou Smear

As stated in the proposed rule (63 FR30841), with the exception of services tohospital inpatients, we do not allowseparate payment for a physician’sinterpretation of an abnormal Papsmear. Under our proposed rule,separate payment may be allowed for aphysician’s interpretation of theabnormal Pap smear furnished for anypatient on or after January 1, 1999.

About 10 percent of Pap smears areabnormal and are interpreted by aphysician, usually a pathologist. If aphysician interprets an abnormal Papsmear for a patient, other than a hospitalinpatient, payment for a physician’sinterpretation (and the underlying test)is made under the clinical laboratory feeschedule payment for the Pap smear

test. The physician negotiates with thelaboratory for payment for thephysician’s service.

The College of American Pathologistsrequested that we recognize separatepayment for a physician’s interpretationof an abnormal Pap smear in all settings.We believe this would establish anunderstandable and uniform definitionof physicians’ services across sites.Therefore, we proposed recognizing,under the physician fee schedule,separate payment for a physician’sinterpretation of an abnormal Pap smearin all settings.

The Pap smear test may be furnishedby a hospital or an independentlaboratory. For hospital inpatients, thePap smear test is paid to the hospital ona prospective payment basis. For otherthan hospital inpatients, the Pap smeartest is paid under the clinical laboratoryfee schedule to the hospital laboratoryor independent laboratory. For servicesto hospital patients, the Pap smearinterpretation usually is furnished bythe hospital pathologist who can bill forthe professional component of theservice. If the independent laboratory’spathologist furnishes the Pap smearinterpretation, payment can be made tothe pathologist or the independentlaboratory if it is an appropriatereassignee.

We received 25 comments fromindividuals and organizations on ourproposal to recognize separate paymentfor a physician’s interpretation of anabnormal Pap smear. All of thecommenters supported our proposal.

Comment: Several commenters statedthat our policy in section 15020 of theMedicare Carriers Manual that allowsseparate payment for a physician’sinterpretation of a Pap smear for ahospital inpatient only as long as thereis an abnormality, is too restrictive.They pointed out that regulationsimplementing the Clinical LaboratoryImprovement Amendments at§ 493.1257(c)(1) require a pathologist toconfirm all Pap smears identified by thescreening personnel as showing anabnormality. This includes, byregulation, all smears thought to show‘‘reactive or reparative changes, atypicalsquamous or glandular cells ofundetermined significance, or to be inthe premalignant (dysplasia, cervicalintraepithelial neoplasia or allsquamous intraepithelial lesionsincluding human papilloma virus-associated changes) or malignantcategory.’’

Response: Our regulation will permitseparate payment for a physician’sinterpretation of an abnormal Pap smearin all settings as long as—(1) Thelaboratory’s screening personnel suspect

an abnormality; and (2) the physicianreviews and interprets the smear.

We contrast these services with otherservices of laboratory physicians that weconsidered hospital services. Forexample, the services of the physicianthat involve the review of Pap smears aspart of the laboratory’s quality controlassurance procedures are consideredhospital services and payable only tothe hospital. Such services includereviewing slides that are considerednormal by the cytotechnologist but areroutinely reviewed by a pathologist,because of the risk status of the patient,as part of a random sample selected forquality review.

Comment: Two commentersrecommended that we treat aphysician’s interpretation of anabnormal blood smear similar to theinterpretation of an abnormal Papsmear.

Response: This comment is outsidethe scope of our proposal. Our proposaldid not address abnormal blood smears.However, we will look into this issuenext year as part of our review ofphysician fee schedule policies.

Comment: One commenter pointedout that the percentage of Pap smearsthat are abnormal or thought to beabnormal by the cytotechnologist andthat require a physician’s interpretationcan vary considerably from geographicalarea to area and among laboratorieswithin an area. The commenter wantedto point out that the fact that somelaboratory-specific percentages of Papsmears that are interpreted to beabnormal are above 10 percent is notnecessarily indicative of unacceptableutilization levels.

Response: We appreciate thecommenter’s clarification. In ourproposal, we stated that ‘‘about 10percent of Pap smears are abnormal andare interpreted by a physician.’’ We notethat the 10 percent is a national estimateand that differences among laboratoriescould vary from this amount based onthe population that the laboratoryserves.

Result of evaluation of comments: Weare allowing separate payment for aphysician’s interpretation of a Papsmear to any patient (that is, hospital ornonhospital patient) as long as—(1) Thelaboratory’s screening personnel suspectan abnormality; and (2) the physicianreviews and interprets the Pap smear.

D. Rebasing and Revising the MedicareEconomic Index

BackgroundThe Medicare Economic Index (MEI)

represents a weighted sum of the annualprice changes of the inputs used toproduce physicians’ services. It attempts


to present an equitable measure for thechanges in the costs of physician timeand operating expenses. The MEI nowin use was rebased and revised asstipulated in a final rule published inthe Federal Register (57 FR 55896) onNovember 25, 1992.

The MEI is comprised of two broadcomponents, which are physician netincome and physician practiceexpenses. Physician net income iscomprised of wages, salaries, andbenefits. The physician practice expenseportion is comprised of six majorcategories: (1) Nonphysician employeecompensation, including the wages andsalaries and benefits of nonphysicianemployees in physicians’ offices; (2)office expenses; (3) medical materialsand supplies; (4) professional liabilityinsurance; (5) medical equipment; and(6) other professional expenses.

We believe that it is desirable torebase and revise the index periodically,in order that the expense shares andproxies will reflect approximate currentconditions. Therefore, we are rebasingthe MEI to reflect 1996 physicianexpenses. We chose 1996 as the baseyear for two main reasons: (1) The 1996data were the most recent available data

for most of the data sources we areusing; and (2) the 1996 data wererepresentative of the changingdistribution of physician earnings andpractice expenses over time. We haveselected what we believe is the mostappropriate proxy for each expensecategory. We will continue to adjust thephysician and nonphysician employeecompensation for economy-wide laborproductivity, to avoid accounting forboth physician practice productivityand economy-wide productivity in thephysician update framework.

We determined the number andcomposition of expense categories basedon the criteria used to develop theprevious MEI expenditure weights andour other input price index expenditureweights (for more information on thesecriteria, see the November 25, 1992 finalrule (57 FR 55900)). To determine theexpenditure weights, we used currentlyavailable, valid data sources onphysician earnings and practiceexpenses.

While we consulted numerous datasources, we used five sources todetermine the rebased and revised MEIexpenditure weights: (1) The 1997American Medical Association

Socioeconomic Monitoring System(AMA SMS) survey (1996 data); (2) theMarch 1997 Bureau of Labor Statistics(BLS) Employment Cost Index; (3) the1992 Bureau of the Census Asset andExpenditure Survey (the latestavailable); (4) the 1996 Bureau of theCensus Current Population Survey; and(5) the Medical Economics continuingsurvey published October 1997 (1996data). No one data source provided allof the information needed to determineexpenditure weights according to ourcriteria.

Rebasing and Revising the MedicareEconomic Index

In the June 5, 1998 Federal Register(63 FR 30841), we published a proposedrebased and revised MEI. In that rule,we discussed in detail the methodologyand data sources used to rebase andrevise the MEI. The final rebased andrevised MEI will have a 1996 base yearand use the same data sources weproposed in the June 5, 1998 rule.Therefore, the weights and price proxiesin this final rule are the same as thosewe proposed and are shown in Tables1 and 2.

TABLE 1.—REVISED MEDICARE ECONOMIC INDEX EXPENDITURE CATEGORIES, WEIGHTS, AND PRICE PROXIES

Expense categoryWeights

Proposed price proxies1989 1 1996 1 2

Total ................................................................................... 100.000 100.000Physician Earnings 4 .......................................................... 54.155 54.460Wages and Salaries .......................................................... 45.342 44.197 AHE–Private 3.Benefits 5 ............................................................................ 8.813 10.263 ECI–Ben: Private 3.Physician Practice Expenses ............................................ 45.845 45.540Nonphysician Employee Compensation ............................ 16.296 16.812Employee Wages and Salaries ......................................... 13.786 12.424Prof/Tech Wages ............................................................... 3.790 5.662 ECI–W/S: Private P&T 3.Managers Wages .............................................................. 2.620 2.410 ECI–W/S: Private Admin 3.Clerical Wages .................................................................. 5.074 3.830 ECI–W/S: Private Clerical 3.Services Wages ................................................................. 2.233 0.522 ECI–W/S: Private Service 3.Craft Wages ....................................................................... 0.069 ....................Employee Benefits 5 .......................................................... 2.510 4.388 ECI–Ben: Priv. White Collar 3.Office Expenses ................................................................ 10.280 11.581 CPI(U)–HousingMedical Materials and Supplies ........................................ 5.251 4.516 PPI Drugs/PPI Surg. Appl/CPI(U) Med Sup.Professional Liability Insurance ......................................... 4.780 3.152 HCFA–Prof. Liab. Phys. Prem. Survey.Medical Equipment ............................................................ 2.348 1.878 PPI–Medical Instruments and Equip.Other Professional Expense .............................................. 6.890 7.601Automobile ......................................................................... 1.400 1.300 CPI(U)–Private Transportation.All Other ............................................................................. 5.490 6.301 CPI(U)–All Items less Food and Energy 1.

1 Due to rounding, weights may not sum to 100.000 percent.2 Sources: Socioeconomic Monitoring System 1997 Survey of Physicians, Center for Health Policy Research, American Medical Association;

Anne L. Finger, ‘‘What it costs to run a practice,’’ Medical Economics, October 27, 1997; U.S. Department of Labor, Bureau of Labor Statistics;and U.S. Department of Commerce, Bureau of the Census, 1992 Asset and Expenditure Survey, and 1997 Current Population Survey.

3 Net of change in the 10-year moving average of output per man-hour for the nonfarm business sector.4 Includes employee physician payroll.5 Includes paid leave.


TABLE 2.—PERCENT DISTRIBUTION OFNONPHYSICIAN PAYROLL EXPENSEBY OCCUPATIONAL GROUP: 1996

BLS occupational group Expenditureshares 1

Total .......................................... 100.000Professional and Technical

Workers ................................. 45.570Managers .................................. 19.399Clerical Workers ....................... 30.831Service Workers ....................... 4.199

1 These weights were derived from the 1996Current Population Survey, U.S. Bureau of theCensus.

The time series of percent changes inthe current and rebased MEI arepresented and compared in Table 3.

TABLE 3.—ANNUAL PERCENT CHANGEIN THE CURRENT AND REVISEDMEDICARE ECONOMIC INDEX

Yearsending

June 30

CurrentMEI 89-

base per-cent

change

RevisedMEI 96-

base per-cent

change

Dif-ference

1985 ...... 3.3 3.2 0.01986 ...... 3.3 3.1 ¥0.21987 ...... 3.0 2.8 ¥0.21988 ...... 3.6 3.5 ¥0.11989 ...... 3.4 3.4 0.01990 ...... 3.0 3.2 0.21991 ...... 3.2 3.3 0.11992 ...... 2.8 2.7 ¥0.11993 ...... 2.1 2.2 0.11994 ...... 2.1 2.1 0.01995 ...... 2.0 2.0 0.01996 ...... 2.0 1.8 ¥0.21997 ...... 2.2 2.2 0.01998 ...... 2.5 2.3 ¥0.2Average:

1985–1998 2.7 2.7 0.0

The CY 1999 increase in the MEI, oneof the components used to update thephysician fee schedule, is 2.3 percent.

We received numerous Comments onthe rebased and revised MEI. EachComment, with a response, is providedbelow. The Comments are organizedinto four major sections: indexstructure, expenditure weights, priceproxies, and productivity adjustment.

Index StructureComment: A commenter believed we

should re-examine the structure of theMEI, rather than make minor changes toan index that was developed in 1972when physicians were paid reasonablecharges.

Response: The structure of the MEIconsists of weights associated with eachof the cost categories, price proxies foreach of the cost categories, and anoverall adjustment for changes inproductivity. The 1996-based MEI

structure is identical to the revisedstructure we proposed on September 9,1991 that was based on issues discussedat a public conference on March 19,1987, thoroughly reviewed by theindustry through a public Commentperiod, and ultimately adopted in 1992.This commenter did not offer anyspecific recommendations for change,and we know of no structural change wecould make to improve the MEI.Consequently, the structure of the MEIwill remain the same.

Comment: A commenter suggestedthat we indicate in the annual physicianfee schedule proposed rule what theforecasted MEI would be under thedifferent options considered and underthe agency’s final recommendation. Thecommenter noted that forecast datagenerally are provided when the agencyupdates the hospital market basket.

Response: The physician fee scheduleis updated by a statutory-specifiedformula equal to the MEI plus or minusan update adjustment factor. The agencydoes not consider various options andmake an update recommendation. TheMEI for a year is based on changes inprices for prior periods. Theperformance adjustment is based onactual data; no options are considered.Thus, the situation for physicianupdates is not analogous to the hospitalupdate process where changes inhospital payments are based onforecasts of the hospital market basketincrease in the upcoming Federal fiscalyear. In the case of physicians, thechanges in the physician payment levelsare based on the most current historicaland performance data available.

Comment: A commenter believed thatwe should establish a regular schedulefor updating weights of variouselements of the MEI so that the indexreflects the most recent data andinformation available.

Response: In the past, more frequentrebasing would have resulted in little orno difference in the update factors. Forthis current rebasing, the 1989-basedMEI and the 1996-based MEI grew at thesame rate on average between 1985–1998 as shown in Table 3. We willcontinue to monitor changes in thestructure of physician costs as theymight affect the MEI and we will updateand rebase as needed.

Comment: A commenter believed thatthe MEI should contain an adjustmentreflecting the fact that different inputsare used when services are provided bya SNF.

Response: Part of the fundamentaldesign of the Medicare fee schedule isthat payment is based on the serviceperformed without regard to the placewhere the service is performed. The MEI

is consistent with that design andprovides a single national factor toupdate payments under the feeschedule, regardless of the site ofservice or the specialty of the healthprofessional.

Expenditure WeightsComment: One commenter was

concerned that the proposed MEI doesnot reflect adequately the much largerportion of practice expenses the averageobstetrician-gynecologist pays forprofessional liability insurance ascompared to other specialties. Thecommenter pointed out thatprofessional liability consists of 6.88percent of the obstetrician-gynecologist’s practice expenses, butonly 3.2 percent of the practice expenseof all physicians.

Response: The purpose of the MEI isto recognize the aggregate ‘‘pure price’’increase of providing physicians’’services, regardless of specialty or site ofservice. Therefore, all input costs acrossall specialties are considered whendetermining the appropriate costweights. The resulting cost weights,along with the price proxies andproductivity adjustment, are used tocalculate a national average percentchange in the inputs used to providephysicians’ services. This nationalaverage percent change is used toupdate the national payments under thefee schedule. We recognize thatprofessional liability expenses as aportion of total expenses are above theaverage for some specialties and belowthe average for other specialties.However, differences in regional orspecialty costs are accounted for by theGPCI or the RVU weight, respectively.

The only change to the professionalliability insurance price proxy is thatpremiums are now collected for $1million/$3 million of coverage on aquarterly basis, as opposed to premiumsfor $100,000/$300,000 of coverage on anannual basis. We continue to survey thesame professional liability insurers thatwe surveyed for the 1989-based MEI.

Price ProxiesComment: Several commenters

suggested the price proxy for thephysician earnings component shouldbe the Employment Cost Index (ECI) forprofessional and technical workers,rather than the average hourly earnings(AHEs) for total nonfarm workers, fortwo reasons. First, the rationale forusing a proxy of a highly heterogenousgroup no longer exists under the currentpayment system. Thus, our concernregarding circularity (increases inphysician fees, which are tied toprevailing charges, are linked to


increases in physician payments) is nolonger an issue. Second, earnings ofprofessional workers are used as theproxy for the physician workcomponent in the GPCI while AHEs fortotal nonfarm workers are used forphysician earnings in the MEI. Thecommenter believes that we should useearnings for professional workers as theproxy in the MEI to be consistent withthe GPCI.

Response: The commenters haveraised issues that need to be clarifiedregarding the most fair and relevantprice proxy to use for the physicianwork component of the MEI. Thecommenters are correct that circularitydoes not now exist between chargelevels for individual physicians andsubsequent Medicare fee levels for allphysicians in the aggregate. However,paying based on a fee schedule does notoverride the need for us to continue touse fair and relevant price proxies.

We believe that the current priceproxy, AHEs in the nonfarm businesseconomy, is still the most appropriateproxy to use for the physician workcomponent. AHEs continue to best meetthe criteria of the 1972 Senate FinanceCommittee report shown in the June 5,1998 Federal Register (63 FR 30844),including the criterion of ‘‘fairness to allconcerned.’’ AHEs are also the bestgeneral earnings wage variable of whichwe are aware for our specific purpose.As a measure of equitable paymentincreases, AHEs reflect the impact ofsupply, demand, and economy-wideproductivity for the average worker insociety. By using the AHEs as the priceproxy for physician time, the physicianwage component captures this parity inrates of increase for physicians and theaverage worker in society.

The ECI for professional and technicalworkers includes occupations likeengineer, architect, mathematical andcomputer scientist, and other types oftechnicians. Excess supply or excessdemand for professional and technicalworkers on average can cause theirwages to move differently than wagesare moving in the overall economy orfor a specific professional and technicaloccupation, such as a physician.Consequently, the ECI for professionaland technical workers does notnecessarily provide a good normativeindicator of the percent increases ingeneral earnings. Therefore, the ECI forprofessional and technical workerswould fail to meet the criteria of fairnessin the Senate Finance Committee report.

The commenters are correct that theproxy for physician work time in theGPCI is different than the price proxy inthe MEI. This design reflects thedifferent purposes of the GPCI and the

MEI. The GPCI determines how totaloutlays are allocated among localitiesbased on relative input price levels foreach locality, or the ‘‘pieces of the pie.’’Thus, the GPCI price proxy needs tovalidly reflect the relative levels of thespecific category being proxied. TheMEI, on the other hand, determines theaggregate increase in total outlays, or the‘‘size of the pie.’’ These differentpurposes require that different proxiesbe used. Thus, the purpose of the proxyin this case is to measure the normativechange in physician earnings. Our otherinput price indexes (market baskets),like the prospective payment system(PPS) hospital market basket and theHHA market basket, also use differentprice proxies than the geographicadjustment variable for similar reasons.

We are going to carefully monitor theprice proxy used for physician worktime in the MEI to ensure that itcontinues to be the most appropriateprice proxy available for that purpose.

Comment: Several commenterssuggested that the nonphysicianemployee compensation component ofthe MEI should be adjusted using aprice proxy that reflects the increasedskill mix of staff in physicians’ offices.

Response: The MEI is a Laspeyres(fixed-weight) index that measures thenormative ‘‘pure price’’ increaseassociated with physicians’ services.Our other input price indexes, forhospitals, home health agencies, andskilled nursing facilities, are Laspeyresindexes as well. Changes in skill mix areappropriately captured in the volume-and-intensity adjustment in the feeschedule update, as they are withsimilar update formulas for our otherpayment programs, for example, PPShospitals. By capturing skill mix shiftsin the volume-and-intensity adjustment,we are able to appropriately separatequantity and ‘‘pure price’’ effects in theupdate framework. If we includedpositive and negative skill mix shifts inthe MEI, there would be double-counting. Therefore, we will not adjustfor changes in skill mix for thenonphysician employee compensationcomponents of the MEI.

Comment: A commenterrecommended that we adjust the officeexpense component using a price proxybased on inflation in commercial rentsrather than inflation as measured by thehousing component of the CPI for urbanconsumers.

Response: The CPI–U for housing is acomprehensive measure of changes inthe cost of housing, including rent,owners’ equivalent rent, insurance,maintenance and repair services, fuels,utilities, telephones, furnishings, andhousekeeping services. Note that the

GPCI also uses a consumer rather thana commercial rent index. The GPCI usesan index of Fair Market Rents (FMR)published by the Department of Housingand Urban Development for use in theSection 8 rental subsidy programbecause a valid indicator of commercialrents was not available. This measuredoes not meet the criterion of timelinessto be used in an input price index as itis only available prospectively on anannual basis. It would not representhistorical data or be available quarterlylike the rest of the proxies in the MEI.

Comment: One commenter questionedwhy we proposed using wholesale pricechanges, as measured by producer priceindices (PPI), to measure cost changesfor medical supplies and equipment.The commenter believed most physicianpractices are small entities that areunlikely to be able to purchase suppliesand equipment at wholesale prices.

Response: In revising and rebasing theMEI, we selected wage and price proxiesbased on relevance, reliability, fairness,timeliness, and length of time a serieshad been established. Relevance meansthat the price proxy should representprice changes for goods or serviceswithin the expense category. We believethat use of the PPI for medicalinstruments and equipmentappropriately captures price changes forthe offices of physicians. Note thatmovement in the PPI at any given timeis followed within a few months byapproximately the same movement inthe CPI. If this were not true, retailerswould soon be out of business as theirexpenses rose but their revenues didnot. Movement in the PPI essentiallydrives movement in the CPI, albeit witha slight lag. An increase in thewholesale level for a commodity will befollowed by the same approximateincrease in the retail level. Over time,the PPI does not move faster or slowerthan does the CPI. As mentioned in ourJune 5, 1998 proposed rule (63 FR30846), use of the PPI for medicalinstruments and equipment as the priceproxy for medical equipment isconsistent with the 1989-based MEI.

Productivity AdjustmentComment: A commenter proposed the

elimination of the productivityadjustments to both the physician andnonphysician personnel components.The commenter believed the validity ofthe proposed MEI is compromisedseverely by this productivityadjustment.

Response: The Medicare fee scheduleis appropriately adjusted for ‘‘pureprice’’ inflation using a price index thatapproximates a price change in a freelyfunctioning, competitive market. In


such a market, competitive forces leadto increased efficiencies (productivity).Therefore, a competitive output pricedoes not rise as fast as a competitiveinput price, with the differencereflecting this increased efficiency(productivity). Thus, the input prices inthe MEI need to be appropriatelyadjusted for productivity to approximatea freely functioning, competitive outputprice change. The PPS hospital inputprice index (market basket) is similarlyadjusted for productivity, but theadjustment is included as a separatecomponent of the PPS updateframework.

The commenter believed that usingeconomy-wide labor productivity tomake the adjustment to the MEI inputprices was inappropriate becausephysician productivity is lower thaneconomy-wide productivity. While it istrue that service industry productivitytends to be lower than economy-wideproductivity, there is wide variation inproductivity among specific sectors ofthe service industry. For physicians, thesubstantial influence they have over thevolume and intensity of servicesprovided to their patients allows themto increase output and, therefore,productivity.

The commenter provided informationon the declining number of patientcontacts per physician as evidence ofdeclining productivity. To estimateproductivity per physician, however,the large increase in volume andintensity of services per contact has tobe accounted for. An approximation ofthe change in volume and intensity ofphysicians’ services is the increase inallowed charges per enrollee in excessof the MEI increase (shown in the 1998Annual Report of the Board of Trusteesof the Federal Supplementary MedicalInsurance Trust Fund). The increase inallowed charges per enrollee from TableII.F3. of this report has exceeded theMEI increase by 3.1 percentage points in1994, 5.8 percentage points in 1995, and2.1 percentage points in 1996. Thesedata show that volume-and-intensityincreases for physicians’ services arestill high relative to economy-wideproductivity, which has historicallygrown around 1 percentage pointannually on a 10-year moving averagebasis.

Economy-wide labor productivityincreases automatically result ineconomy-wide wage rate increases asless worker time or other inputs areneeded to produce the same outputs.Thus, the AHEs wage variable implicitlyincludes productivity increases in theoverall economy. The productivityadjustment to the MEI factors out theseeconomy-wide productivity increases.

However, an individual physicianpractice still benefits from its ownproductivity increases in excess ofeconomy-wide productivity increases.This means each individual physicianpractice is allowed to reap the rewardsof having high productivity. Thus, it isboth technically correct and fair to bothproviders and payers to adjust the MEIinput prices by economy-wideproductivity increases.

Result of Evaluation of Comments

As proposed, we rebased the MEI to1996. We used the same data sources(for base year weights and price proxies)and methodology as explained in theJune 5, 1998 proposed rule. The percentchange in the MEI for CY 1999 is 2.3percent.

III. Implementation of the BalancedBudget Act

In addition to the resource-basedpractice expense relative value units,BBA provides for revisions to thepayment policy for drugs andbiologicals, includes a provisionallowing private contracting withMedicare beneficiaries, institutespayment for outpatient rehabilitationservices based on the physician feeschedule, and changes the policy fornonphysician practitioners and forteleconsultations.

A. Payment for Drugs and Biologicals

Before January 1, 1998, drugs andbiologicals not paid on a cost orprospective payment basis were paidbased on the lower of the estimatedacquisition cost (EAC) or the nationalaverage wholesale price (AWP) asreflected in sources such as the RedBook, Blue Book, or Medispan. (Forpurposes of this discussion, we will usethe term ‘‘drugs’’ to refer to both drugsand biologicals). Examples of drugs thatare paid on this basis are drugsfurnished incident to a physician’sservice, drugs furnished by pharmaciesunder the durable medical equipment(DME) benefit, and drugs furnished byindependent dialysis facilities that arenot included in the end-stage renaldisease (ESRD) composite rate payment.

Section 4556 of BBA establishedpayment for drugs not paid on a cost orprospective payment basis at the lowerof the actual billed amount or 95percent of the AWP, effective January 1,1998. In this final rule, we are revisingthe current regulations at § 405.517 toconform to this statutory change. Thisregulation is removing the EAC andprovide for payment at the lower of theactual charge on the Medicare claim or95 percent of the AWP.

Also, we are revising the method ofcalculating the AWP. Our currentregulations provide that, for multiple-source drugs, the AWP equals themedian AWP of the generic forms of thedrug. The AWP of the brand nameproducts is ignored on the presumptionthe brand AWP is always higher thanthe generic AWPs. While this may havebeen true when the policy was firstpromulgated, it is not always true now.Therefore, the AWP for multiple-sourcedrugs would equal the lower of themedian price of the generic AWPs or thelowest brand name AWP.

Comment: We received somecomments on the proposedmethodology for determining the AWPin the case of multi-source drugs. Somecommenters suggested we use theaverage AWP instead of the medianAWP. Others objected to the use of thelowest brand AWP saying that in allcases all AWPs, both generic and brand,should be used. One commenter statedthat the law does not distinguish brandAWP from generic AWP; therefore, weshould not make this distinction.

Response: We agree that the law doesnot define the term ‘‘average wholesaleprice,’’ and, therefore, does notdistinguish brand AWP from genericAWP or average versus median price.However, we believe it is within ourgeneral authority in implementing thestatute to define terms that do not haveexplicit statutory definitions. Webelieve that when there is an array ofcharges, the median is an appropriatemeasure of central tendency. This isconsistent with many other areas of theprogram in which the median is used.With respect to distinguishing betweenbrand and generic AWPs, as we statedin the final rule titled ‘‘MedicareProgram; Fee Schedule for Physicians’’Services (BPD–712–F),’’ published inthe Federal Register on November 25,1991 (56 FR 59502), when this policywas promulgated, the brand AWP wasbelieved to be always greater than thegeneric AWPs (56 FR 59507). Now thereis evidence from the Office of InspectorGeneral (OIG) in its report titled ‘‘TheImpact of High-Priced Generic Drugs onMedicare and Medicaid’’ (OEI–03–97–00510) that this is no longer true. Froma series of OIG reports spanning the past10 years, it is clear that the AWP ishigher than the amount typically paidfor drugs by physicians who bill theprogram. It is also true that when abrand AWP is lower than the mediangeneric AWP, typically there are alsoother generic AWPs that are as low asor lower than this brand AWP. Webelieve, therefore, that the paymentallowance resulting from thismethodology will be adequate.


Comment: Some commenters objectedto a payment allowance of less than theAWP. One commenter alleged that notall physicians can buy drugs at less thanretail prices. Another commenter statedthat only large physician practices canobtain bulk purchase discounts.Another commenter suggested that wemonitor access to drugs. Anothersuggested that we study actualacquisition costs before implementingthe limit of 95 percent of AWP. Twocommenters stated that physiciansshould not be burdened withmaintaining price controls or costcontainment or tracking the prices ofdrugs. Physicians should only beresponsible for choosing the best drugand not be responsible for the cost of thedrug. Furthermore, if physicians are notpaid sufficiently for the drugs they nowinject, they will stop injecting drugs andrefer patients to the hospital instead.This will cost the program much more.

Response: First, the law now requiresthat the Medicare program limit itspayment allowance to 95 percent of theAWP. Furthermore, there are numerousreports by the OIG over the past 10 yearsshowing that significant discounts fromthe AWP are common and are notrelated to bulk purchases. In the absenceof evidence to the contrary of the OIGfindings, we believe it is reasonable toset the payment limit as we haveproposed. With respect to the commentthat physicians will refer patients tohospitals for injections, we believe thatfor the reasons stated and becausepayment for outpatient hospital serviceswill be changed to a prospectivepayment basis, this will not occur.

Comment: One commenter stated thatour definition of ‘‘brand’’ should be ‘‘theproduct of the innovator company.’’ Thecommenter objected to consideringother manufacturers’ products that aremarketed under a proprietary nameother than the generic chemical name ofthe drug as a ‘‘brand.’’

Response: Our definition of ‘‘brand’’is any product that is marketed under aname other than the generic chemicalname of the drug. If a manufacturerchooses to market its product under aproprietary name rather than the genericchemical name of the drug, we believethis is a brand. We do not limit thedefinition of ‘‘brand’’ to the innovatorcompany product or any productmanufactured under a direct licensefrom the innovator. Furthermore, webelieve that it is an unreasonableadministrative burden to require ourcontractors to determine which of thethousands of AWPs they must look up,to also determine which of those areinnovator drugs or licensed by theinnovator company.

Comment: Two commenterssupported our proposal stating that ourproposal was consistent with thestatute.

Response: We agree with thiscomment.

Comment: A commenter stated thatradiopharmaceuticals are drugs, butbecause of their unique nature they donot have AWPs. Therefore, thecommenter recommended that we payfor radiopharmaceutical drugs at thebilled amount.

Response: We agree thatradiopharmaceutical drugs do not haveAWPs, and, therefore, require a differentpricing methodology. However, we donot agree that these drugs should bepaid at the amount billed to theprogram. Currently, our contractorsdetermine an allowance for these drugsthat is reasonable in light of prices paidby physicians who use them. We willcontinue this policy of local pricing byour contractors.

Result of evaluation of comments: Weare adopting our proposal with furtherclarifications. The Medicare allowedcharge for drugs and biologicals is thelower of 95 percent of the mediangeneric AWP or 95 percent of the lowestbrand AWP. A ‘‘brand’’ product isdefined as a product that is marketedunder a labeled name that is other thanthe generic chemical name of the drugor biological. The allowed charge fordrugs and biologicals that do not havean AWP is determined by the localMedicare contractor considering theprices paid by physicians and supplierswho use them.

B. Private Contracting with MedicareBeneficiaries

Section 4507 of BBA 1997 amendedsection 1802 of the Act to permit certainphysicians and practitioners to opt-outof Medicare and to provide throughprivate contracts services that wouldotherwise be covered by Medicare. Thisrule conforms the regulations to sections1802(b) and 1862(a)(19) of the Act. Inaddition, this rule contains ancillarypolicies that we believe are necessary toclarify what it means when a physicianor practitioner ‘‘opts-out’’ of Medicare,and to otherwise effectuate theCongress’’ intent in enacting section4507 of BBA 1997.

The private contracting provision iseffective for private contracts enteredinto on, or after, January 1, 1998. Weimplemented private contractingthrough a series of operatinginstructions for Medicare carriers andinformation that carriers were instructedto provide to physicians andpractitioners.

The Medicare claims submission andprivate contracting rules apply onlywhen a physician or practitionerfurnishes Part B Medicare-coveredservices to a beneficiary who is enrolledin Medicare Part B. The privatecontracting rules do not apply toindividuals who have only MedicarePart A, to individuals who are age 65 orover but who do not have Medicare, orto services that Medicare does not cover.

General Issues

State of Law Before Section 4507 of theBBA

Comment: Some commentersdisagreed with our view that privatecontracting is not valid except asspecified in section 4507 of the BBA.They believed that section 1848(g) of theAct does not preclude privatecontacting. In addition, they believedthat the claims submission requirementsapply only to ‘‘services for whichpayment is made’’ under the feeschedule and, therefore, by definition,do not apply if no claim is submitted.

Response: We continue to believe thatunder the Act, private contracts betweenbeneficiaries and physicians orpractitioners are not enforceable unlessthey meet the requirements of section4507 of the BBA. The mandatory claimssubmission rules of section 1848(g)(4) ofthe Act specify that: ‘‘For servicesfurnished on or after September 1, 1990,within 1 year after the date of providinga service for which payment is madeunder this part on a reasonable chargeor fee schedule basis, a physician,supplier or other person (or an employeror facility in the cases described insection 1842(b)(6)(A))—

• (i) Shall complete and submit aclaim for such service on a standardclaim form specified by the Secretary tothe carrier on behalf of a beneficiary,and

• (ii) May not impose any chargerelated to completing and submittingsuch a form.’’

Because there must be a claim toMedicare before payment can be made,the meaning of the phrase ‘‘. . . forwhich payment is made on a reasonablecharge or fee schedule basis . . .(emphasis added)’’ must be to define theuniverse of claims to which themandatory claims submission rulesapply as being those services for whichMedicare makes payment on a feeschedule or reasonable charge basisonce a claim is submitted. The onlyexceptions the law provides to themandatory claims submission rules arethose found in the private contractingprovisions of section 1802(b) of the Actand those implied by the phrase ‘‘on


behalf of the beneficiary.’’ In addition,one cannot omit the word ‘‘basis’’ andargue that the claims submissionrequirement applies only to services forwhich ‘‘payment is made under this parton a reasonable charge or fee schedule.’’The word ‘‘basis’’ has meaning and wasspecifically included because it definesa universe of services to which theprovision applies. The clear intention ofthe claims submission provision is toapply to all services for which paymentis made under part B on a reasonablecharge or fee schedule basis, but not toinclude services for which payment ismade under part B on a reasonable costbasis (for example, hospital outpatientdepartment services).

The phrase ‘‘. . . for which paymentis made . . .’’ cannot, as commenterscontend, mean that the mandatoryclaims submission rules apply only ifpayment is actually made in an instantcase. That reading would mean themandatory claims rules would neverapply where no payment was madebecause of the absence of a submittedclaim, rendering the mandatory claimsprovision meaningless.

Moreover, the limiting charge rules ofsection 1848(g)(1)(A) of the Actestablish explicit limits on the chargesof a nonparticipating physician ornonparticipating supplier or otherperson who does not accept payment onan assignment-related basis for aphysician’s services furnished to anindividual who is enrolled in Part B.The only exception to these limits isthat found in the private contractingprovisions of section 1802(b) of the Act.

Comment: Commenters disagree thatthe limiting charge applies in theabsence of a claim. They believe that ifthe claims submission rule can bewaived by the beneficiary, then thelimiting charge rule can also be waivedby the beneficiary.

Response: As noted above, there isspecific language in section 1848(g) ofthe Act that indicates that the physician,supplier, or other person must submitthe claim ‘‘on behalf of the beneficiary.’’In contrast, there is no languageincluded in the flat prohibition insection 1848(g)(1)(A)(i) of the Actagainst nonparticipating physicians,suppliers, and other persons chargingmore than the limiting charge. For thesereasons, we believe that we have nodiscretion to waive the limiting charge,except when the criteria established bysection 4507 of the BBA are met.

Participating physicians, suppliers,and other persons who have agreed toalways take assignment on claims forMedicare covered services, andnonparticipating physicians, suppliers,and other persons who take assignment,

have also implicitly agreed to submitclaims because one cannot takeassignment on a claim unless onesubmits a claim. Moreover, becausetaking assignment means agreeing toaccept Medicare allowed amounts aspayment in full for covered services,they have also voluntarily agreed not tocollect more than deductibles andcoinsurance from all patients they see.For these reasons, signing aparticipation agreement, or acceptingassignment by a nonparticipatingphysician, precludes private contractingoutside of section 4507 of the BBA.

Claims for services that are notreasonable and necessary according toMedicare standards

Comment: Commenters asked that weclarify that there is no limit on theamount physicians and practitionersmay charge beneficiaries when servicesfurnished are denied as not reasonableand necessary, and the physician orpractitioner has provided the advancebeneficiary notice (ABN). Somecommenters also asked that we clarifythat when an ABN is provided, there isno private contract. They indicated thatsome physicians and practitioners arerefusing to furnish non-covered servicesto beneficiaries, because they believethat giving an ABN will compel them toopt-out of Medicare.

Response: When a physician orpractitioner furnishes a service that doesnot meet Medicare’s criteria for beingreasonable and necessary, and thephysician or practitioner has furnishedthe beneficiary with an ABN thatadvises the beneficiary that for thisreason there is a likelihood of denial ofthe claim by Medicare, there are nolimits on what the physician orpractitioner may charge the beneficiary.An ABN that states that the physician orpractitioner believes that the servicewill not be covered by Medicare is nota private contract. The act of providingan ABN does not then require that thephysician or practitioner opt-out ofMedicare so that he or she avoids beingat risk of having a penalty assessed fora limiting charge violation. Hence,physicians and practitioners should nothesitate to furnish services to Medicarebeneficiaries when the physician orpractitioner believes that those servicesare in accordance with acceptedstandards of medical care, even whenthose services do not meet Medicare’sparticular and often unique coveragerequirements.

Beneficiaries in Medicare risk HMOsand Medicare+Choice organizations

Comment: Some commenters wantedus to reaffirm that a physician or

practitioner may charge without regardto the limiting charge, when he or shefurnishes a service to a beneficiary whois enrolled in a Medicare risk plan andthe plan will not pay for that service. Inaddition, we were requested to addresswhat happens in situations in which thebeneficiary appeals the denial of theservice and the Medicare risk plansubsequently agrees to pay the claim.Commenters asked that we define whatis meant by ‘‘covered services,’’ forpurposes of physicians and practitionersbeing able to charge Medicare risk planor Medicare+Choice (M+C) organizationenrollees more than the Medicare feeschedule, without having the physicianor practitioner opt-out of Medicare forservices not covered by the plan or theM+C organization.

Response: When a Medicarebeneficiary enrolls in a Medicare riskplan (either currently under section1876 of the Act or after January 1, 1999,under the M+C program), thatbeneficiary has Medicare coverage onlyto the extent that the services arecovered under the risk plan according tothe plan’s rules for coverage. A risk planmay deny payment for a service if thebeneficiary has not abided by the rulesfor coverage of care under the risk plan.(Examples of non-adherence to theplan’s rules could be a beneficiaryacquiring care without the required planprior authorization, or acquiring carefrom a non-network physician ifcoverage is limited to networkphysicians.) In that situation there is noplan coverage of that service and thebeneficiary is fully liable for thepayment of the service, even whenpayment would have been made underoriginal Medicare if the beneficiary werenot in the risk plan. In these types ofsituations, the physician or practitionermay charge the beneficiary withoutregard to the limiting charge for theservice furnished, and no claim need besubmitted for the non-covered service.A private contract is not needed and thephysician or practitioner need not opt-out of Medicare.

We would caution, however, that ifthe beneficiary seeks plan payment andthe plan pays for the service, eitherinitially or on appeal, then thephysician or practitioner is entitled toreceive no more than the amount he orshe would have received under originalMedicare. An adjustment would thenhave to be made to ensure that thebeneficiary received a refund for anyamount in excess of the Medicareallowed amount (if the physicianparticipates in original Medicare) or theMedicare limiting charge (if thephysician does not participate inoriginal Medicare).


Application to Medicaid

Comment: A commenter wanted us torevise the final rule to specify that aphysician or practitioner who opts-outof Medicare may not bill Medicaid forservices he or she furnishes toindividuals who are enrolled in bothMedicare and Medicaid.

Response: There is nothing in section4507 of the BBA that prohibits eitherdually eligible Medicare and Medicaidbeneficiaries, or Medicare providers,from entering into a private contract, orthat prohibits these providers frombilling Medicaid for Medicaid coveredservices.

Excluded physicians and practitionerswho opt-out

A physician or practitioner may beexcluded from Medicare by the Office ofInspector General (OIG) for violations ofthe law according to sections 1128,1156, and 1892 of the Act. An excludedphysician or practitioner may notfurnish, order, prescribe, or certify theneed for Medicare-covered items andservices (except as permitted in 42 CFR1001.1901) for the term of the exclusion.A physician or practitioner must requestand be granted reinstatement by the OIGbefore billing Medicare.

Comment: A commenter asked thatwe not permit excluded physicians andpractitioners to opt-out. She believesthat we need to clarify the relationshipbetween opting-out and being excluded.She believes that if we permit excludedphysicians and practitioners to opt-out,all the rules that apply to excludedphysicians and practitioners can andshould apply to physicians andpractitioners who have opted-out. Forexample, excluded physicians cannotorder covered services. Commentersalso wanted us to agree that a privatecontract entered into by an excludedphysician or practitioner would berecognized by us and the Office of theInspector General as a notice to thebeneficiary that the physician orpractitioner is excluded, because theprivate contract must say whether thephysician or practitioner is excluded.

Response: Section 1802(b)(2)(B) of theAct says, ‘‘[s]uch contract shall alsoclearly indicate whether the physicianor practitioner is excluded fromparticipation under the Medicareprogram under section 1128.’’ We haveinterpreted this to mean that, althoughexcluded physicians can enter intoprivate contracts, they must not onlyindicate their excluded status throughthe contract, but also still abide by theterms of their sanction under section1128 of the Act. Practically speaking,this means that excluded physicians or

practitioners may file affidavits andenter into private contracts, but that allthe provisions of section 1128 of the Actand regulatory requirements pertainingto section 1128 of the Act, such as per-encounter issuances of ABNs, must stillapply. Further, although section1802(b)(2)(B) of the Act specificallymentions exclusions under section 1128of the Act, the Secretary also hasauthority to exclude physicians andpractitioners under sections 1156 and1892 of the Act for the reasons specifiedtherein. We believe it was Congress’sintent to require clear notice of anyexclusion, regardless of the specificstatutory basis for it, in the contractwith the beneficiary. Therefore, we haveadded language to §§ 405.415 and405.425 to require a physician orpractitioner provide clear notice of anyexclusion, be it under section 1128,1156, or 1892 or any other provision ofthe Act. We have also added languageto § 405.440 to make clear that excludedphysicians and practitioners are boundby the standards in 42 CFR § 1001.1901for obtaining Medicare payment foremergency or urgent care services.

Grandfathering of physicians andpractitioners who already opted-out

Comment: Commenters requestedaffirmation that the physicians andpractitioners who have already opted-out will not have to file either revisedaffidavits or revised private contracts tomeet the new standards contained inthese regulations.

Response: We agree. Theseregulations are effective for privatecontracts entered into on or afterJanuary 1, 1999, and for affidavitssubmitted to carriers on or after January1, 1999.

The provisions of section 4507 of theBBA were effective for private contractsentered into on or after January 1, 1998.We have therefore implemented theprovisions of section 4507 of the BBAthrough operational instructions.Specifically, we issued Medicareprogram memoranda to implement thelaw in November 1997, January 1998,April 1998, July 1998. Medicare carriershave provided the information in thesedocuments to all physicians andpractitioners as they were releasedthroughout the year. If physicians andpractitioners submit affidavits inaccordance with these programmemoranda before January 1, 1999, theyhave opted-out of Medicare for the 2-year opt-out period, and need notsubmit revised affidavits to comply withthe regulations. Similarly, when theyhave entered into private contracts withMedicare beneficiaries before January 1,1999, they need not revise the private

contracts or have beneficiaries signsecond private contracts.

Comment: Commenters requested thatphysicians and practitioners who haveopted-out before the regulations takeeffect, be provided with an opportunityto terminate their opt-out within 90days of the date the new rules areeffective, under the terms of earlytermination of opt-out.

Response: We agree. We haveprovided a special one time 90-day earlytermination opportunity for physiciansand practitioners who opted-out during1998, and who are willing to terminatetheir opt-out by complying with therequirements of §§ 405.445(b) (3) and (4)and 405.445(c).

Charitable careComment: Commenters indicated that

physicians and practitioners should bepermitted to opt-out of Medicare to docharitable care. They believed thatbecause currently physicians andpractitioners must collect deductibleand coinsurance, they can be found tohave made an illegal remuneration ifthey do not. They believed that thedeductible and coinsurance are afinancial burden for beneficiaries whodo not have Medicaid. In addition, theybelieved that physicians andpractitioners should be able to privatelycontract on a patient-by-patient basis,when they choose to offer free servicesto Medicare patients in need of thoseservices.

Response: A physician or practitionerneed not opt-out of Medicare to furnishservices for which they do not charge,nor need they opt-out when either thedeductible or coinsurance or both arewaived because of indigence. Undercurrent law, regulations, andinstructions, nothing prevents aphysician or practitioner from notcharging a beneficiary for medicalservices. Moreover, longstandingMedicare policy permits physicians andpractitioners to waive Medicaredeductibles and coinsurance, when thephysician’s or practitioner’s analysis ofthe beneficiary’s financial informationleads him or her to believe thatcollecting either the deductible orcoinsurance or both would impose ahardship on the beneficiary. This policyhas long been stated in Medicare CarrierManual section 5220, and was stated asa permitted exception to the prohibitionon the waiver of the deductible andcoinsurance in section 231(h) of HealthInsurance Portability andAccountability Act of 1996 (Public Law104–191).

However, the commenter is correctthat the provision of free services canbecome problematic in some cases, as


for example, when a charge is not madeas an inducement for the beneficiary toreturn for covered services, or as aninducement for the beneficiary toprovide referrals. The commenter is alsocorrect that indigence is the onlyexplicitly permitted basis for waiver ofeither the deductible or coinsurance orboth.

Definitions (§ 405.400)

BeneficiaryComment: Commenters wanted the

definition of ‘‘beneficiary’’ clarified toindicate that it applies only toindividuals who are enrolled in originalMedicare and does not apply toindividuals who are enrolled inMedicare risk plans, or, after January 1,1999, the M+C organizations.

Response: We have not made thischange. The commenters are under themistaken impression that a physician orpractitioner may opt-out of originalMedicare, but continue to be paid by anM+C organization for Medicare-coveredservices furnished to a beneficiary whois enrolled in an M+C organization.Instead, under the law and as specifiedin these regulations at § 405.220, aphysician or practitioner who opts-outof Medicare may not provide servicesfor which payment is made byMedicare, including where payment ismade to the physician or practitioner byan M+C organization for services to aMedicare beneficiary enrolled in suchan organization.

Emergency care servicesComment: Some commenters raised

the question of whether we would usethe ‘‘prudent layperson’’ definition ofemergency medical condition of § 422.2,instead of the provider agreementdefinition of the term at § 489.24. Thecommenter believed that the ‘‘prudentlay person’’ definition is preferable.

Response: We agree. In order to giveboth beneficiaries and physicians andpractitioners the greatest protection andflexibility in medical decision-making,we have decided to adopt the moreinclusive ‘‘prudent layperson’’ standardof § 422.2, which was recentlypublished as part of the M+Cregulations at 63 FR 34968.

Legal representativeComment: Some commenters objected

to permitting a beneficiary’s ‘‘legalrepresentative’’ signing a privatecontract, because the law makes noprovision for this action. They believedthe regulations should permit no onebut the beneficiary to sign a privatecontract.

Response: We permit a beneficiary’slegal representative to sign a private

contract so that beneficiaries who havelegal representatives will not be treateddifferently than beneficiaries who donot have legal representatives. We canforesee a situation in which the legalrepresentative of a beneficiary believesthat signing a private contract thatallows the physician or practitioner tofurnish care would be in thebeneficiary’s best interest, and, webelieve that, if legal representatives havethe right to do so under applicable Statelaw, they should not be precluded fromdoing so by Medicare regulations.

Comment: Some commenters statedthat the proposed definition of ‘‘legalrepresentative’’ is too restrictive. Thesecommenters believed that we shoulddefine a ‘‘legal representative’’ to be anyperson permitted by State law to makehealth care decisions on behalf of thebeneficiary. They believed that we deferto State law under the M+C rules, andthat there is no reason to make adifferent rule for private contracting.

Some commenters requested that thedefinition of ‘‘legal representative’’ beexpanded to include any person whowould be willing to pay thebeneficiary’s bill, as, for example, familymembers. Some commenters stated thatwe should not define ‘‘legalrepresentative’’ or use the term. Ratherwe should state that the private contractmust be recognized under State law asa legally binding contract on thebeneficiary, thereby letting the Statedetermine when someone other than thebeneficiary may sign it.

Some commenters indicated that thedefinition is not clear and should berevised. They wanted the revision toreflect differences in State law, ordifferences in the scope of the courtorder that appointed the beneficiary’slegal guardian, by defining ‘‘legalrepresentative’’ as ‘‘the beneficiary’scourt-appointed surrogate (guardian,conservator or other State lawterminology) who has authority to enterinto a contract for health care services.Some commenters indicated that theregulation should be revised to clarifythat the ‘‘legal representative’’ acceptsresponsibility for making payment fromthe beneficiary’s financial resources orfrom the beneficiary’s estate, but is notresponsible for making payments usingthe legal representative’s personalfunds. In addition, commenters wantedthe regulation to clarify that the legalrepresentative is not personally liablefor the beneficiary’s bills.

Commenters also indicated that theparty who can make health decisionsmay not be the same party who canmake financial decisions. Thesecommenters believed that privatecontracting involves both health and

financial decisions, and, thus, that bothparties should have to consult and agreebefore any one party enters into aprivate contract on behalf of abeneficiary.

Response: We believe that thequestion of who should be allowed toenter into a private contract should bedetermined in accordance with Statelaw. Therefore, we have changed thedefinition of legal representative asspecified in § 405.400 to be: ‘‘one ormore individuals who, as determined byapplicable State law, has the legalauthority to enter into the contract withthe physician or practitioner on behalfof the beneficiary.’’

Comment: One commenter requestedthat the regulation require that the courtorder or power of attorney documentestablishing a ‘‘legal representative’’ beattached to the contract.

Response: We leave this matter to theStates to regulate in accord with theirapplicable contract and agency laws.

Physician

Comment: Some commenters wantedoptometrists to be able to opt-out.

Response: Section 1802(b)(5)(B) of theAct defines a physician according to thedefinition given in section 1861(r)(1) ofthe Act, which defines a physician as adoctor of medicine or osteopathy. Forthe purposes of opting-out and privatecontracting, the Congress did not definethe term physician to mean the manyother types of health care professionalsas listed in section 1861(r)(2) through(5) of the Act. Optometrists are includedin the definition only at section1861(r)(4) of the Act.

General Rules (§ 405.405)

Two-year opt-out period

Comment: Many commenters objectedto the requirements that when aphysician or practitioner opts-out ofMedicare, he or she must agree to signprivate contracts with all Medicarebeneficiaries, for all services furnishedto Medicare beneficiaries for 2 years(other than emergency and urgent careservices). These commenters believedthat the 2-year requirement transformsprivate contracting from a vehicle formaximizing patient choice and access toservices, into a barrier to the acquisitionof services by the patient from thephysician or practitioner of the patient’schoice.

Response: The statute specifies that,in order to privately contract, thephysician or practitioner must file anaffidavit with Medicare. In the affidavithe or she must agree to enter intoprivate contracts with Medicarebeneficiaries (except in the case of those


who require emergency or urgentservices) for 2 years.

Effect of opt-out that occurs during acontinuum of care

Comment: Commenters asked that weclarify the effect of private contractingwhen the beneficiary is in a continuumof care that overlaps the opt-out period.For example, what will happen when abeneficiary is in the midst of a courseof chemotherapy and the physicianchooses to opt-out?

Response: When a Medicarebeneficiary is in a continuum of caresuch as a course of chemotherapy andthe physician chooses to opt-out ofMedicare, the beneficiary may eitherprivately contract with the physician, orthe beneficiary may acquire theremainder of the care from a physicianwho has not opted-out of Medicare. If aphysician or practitioner has opted-outof Medicare by filing an affidavit withthe carrier, then he or she must enterinto a private contract with everybeneficiary to whom he or she furnishescare, except in situations where thebeneficiary requires emergency orurgent care.

Conditions for Properly Opting-Out ofMedicare (§ 405.410)

Advance notice of opt-out

Comment: A commenter requestedthat we require that physicians andpractitioners give 60 days advancenotice of their intention to opt-out. Fornonparticipating physicians, this wouldbe 60 days prior to filing the affidavit.For participating physicians, this wouldbe 60 days before the calendar quarterin which their opt-out becomeseffective. The notice would be given tobeneficiaries treated by the physician orpractitioner within 3 years, and to newbeneficiaries with pendingappointments.

The commenter knew of cases wherebeneficiaries traveled long distances formedical services without having beeninformed that the physician orpractitioner had opted-out. Then, afterarriving for the appointment, thebeneficiaries had to leave withoutreceiving the needed medical services,because they could not afford to enterinto a private contract. According to thecommenter, the beneficiaries in thesecases suffered anxiety, distress, expense,and a delay in receiving the neededmedical services. Those negativeconsequences could have been avoidedif the beneficiaries had been advised, atthe time the appointment was made orearlier, that the physicians had opted-out of Medicare. The commenterbelieved that the absence of advance

notice leaves beneficiaries subject toduress in the physician’s orpractitioner’s office.

Response: We have not imposed anadvance notice requirement forphysicians and practitioners who opt-out. We do not believe that kind ofrequirement is warranted. Moreover, the60-day advance notice the commenterrequested may cause physicians andpractitioners to refuse to provideservices during those 60 days, possiblyresulting in the delay of needed medicalservices.

However, we hope that organizationswill encourage member physicians andpractitioners who have opted-out tonotify the Medicare beneficiaries towhom they provide care as soon aspossible after they file the affidavit. Wealso hope that these physicians orpractitioners require that their officestaff advise beneficiaries, at the time thebeneficiary makes an appointment, thatthe physician or practitioner has opted-out of Medicare. Advance notice wouldspare beneficiaries the inconvenience,anxiety, duress, and delay in receivingneeded medical services that mightotherwise occur if they cannot enter intothe private contract.

There are also significantadministrative and good will advantagesto the physician or practitioner of thesenotices. Advance notices will preventthe beneficiary from being surprised andpossibly upset or angry in the office.Moreover, they will minimize the illwill that may occur if the beneficiary isasked to enter into a private contract atthe time of the appointment as acondition of seeing the physician orpractitioner, without being givenadvance notice. In addition, an advancenotice will minimize the chance thatbeneficiaries will leave without havingreceived the needed services, and resultin an avoidable loss of income and timefor the physician or practitioner.

We also hope that beneficiaryorganizations will encouragebeneficiaries when they make anappointment to seek out information onwhether they will need to sign a privatecontract before seeing a physician orpractitioner. Then, the beneficiary couldmake a thoughtful and careful decision,in an environment less stressful than thephysician’s or practitioner’s office.

Although we hope that the physicianand practitioner communities willcooperate to provide an appropriateadvance notice, we are concerned aboutthe scenarios presented by thecommenter and will continue toconsider whether further guidance isneeded.

Notice of change in participation statusComment: A commenter indicated

that there should be a mechanism forbeneficiaries who have not signedprivate contracts, to be notified whenthey receive either emergency or urgentcare services from an opt-out physicianor practitioner who participated inMedicare before opting-out (and cannotsign a private contract at that time), thatthe physician or practitioner is now anonparticipating physician orpractitioner. That notification wouldbenefit the beneficiary because thebeneficiary’s financial liability for thoseservices will rise as a result of thechange in the Medicare status of thephysician or practitioner.

Response: We believe that thisrecommendation is an impracticalburden to impose on physicians andpractitioners, and is of little value to thebeneficiary who needs emergency orurgent care services. When a beneficiaryneeds emergency or urgent careservices, he or she probably does nothave the alternative to seek care from aparticipating physician.

SignageComment: A commenter asked that

we require that physicians andpractitioners who opt-out to post a signin a conspicuous space in his or heroffice in 5-inch type, stating that thephysician or practitioner has opted-outof Medicare. Then beneficiaries willknow when they enter the office thatthey will be required to sign a privatecontract to acquire non-emergency orurgent care services.

Response: We have not adopted thissuggestion. As noted earlier we hope thephysician and practitioner communitieswill cooperate to provide an appropriateadvance notice to beneficiaries. Webelieve that a sign such as thecommenter recommends would providelittle or no value to the beneficiary whohas already come to the physician orpractitioner’s office, and is about to beasked to enter into a private contract.

Relationship of opt-out physicians andpractitioners to beneficiaries who do notenter into private contracts

Comment: A commenter asked that§§ 405.410 and 410.420 be revised toinclude an affirmative prohibition thatphysicians or practitioners cannotfurnish an item or service to anybeneficiary who has not privatelycontracted. The commenter believedthat it should also be a condition toproperly opt-out and maintain opt-outso that, if the physician or practitionerdoes not privately contract, thepenalties of § 405.435(b) would beinvoked.


Response: We have revised § 405.435to specify that when a physician orpractitioner who has opted-out fails toenter into a private contract (except inemergency or urgent care situations), heor she has failed to maintain opt-out.Therefore, where an opt-out physicianor practitioner fails to enter into aprivate contract (except in emergency orurgent care situations), he or she will besubject to the penalties in that sectionfor failure to maintain opt-out. Webelieve that this change addresses thecommenter’s concerns, and that changesto §§ 405.410 and 405.420 are notuseful.

Timing of opt-out by participatingphysicians

Comment: Some commenters believedthat participating physicians should beallowed to opt-out at any time after theyprovide sufficient advance notice. Thesecommenters did not believe thatparticipating physicians should have toawait the beginning of a calendarquarter to be able to opt-out. Othercommenters believed that physiciansshould only be permitted to opt-outduring the standard participatingphysician enrollment period. Theyargued that permitting participatingphysicians to opt-out on a quarterlybasis, and permitting nonparticipatingphysicians to opt-out at any time, leavesbeneficiaries with too little time to findanother physician or practitioner iftheirs chooses to opt-out.

Response: We have decided to makeno changes to the conditions regardingthe timing of the opt-out period, eitherto permit opt-out by participatingphysicians at will, or to permit opt-outonly during the participation enrollmentperiod. Medicare carriers must makesystems changes to permit participatingphysicians to opt-out, and, thereby,become nonparticipating physicians inthe middle of the year, in such a waythat they do not reduce Medicarepayments for services furnished duringthe part of the year that they had aparticipation agreement in effect.

Medicare has a longstanding policy ofmaking systems changes no less oftenthan on a quarterly basis. The quarterlyopt-out for participating physicians isdesigned to accommodate that schedule,while simultaneously permittingparticipating physicians to opt-outwithout having to await the annualparticipation enrollment ordisenrollment period. The law does notlink the opt-out election to the annualparticipation period and, therefore, wedo not preclude participating physiciansfrom opting-out only during that period.

Whether a carrier should send a returnreceipt to a physician or practitionerthat submitted an affidavit

Comment: A commenter wantedcarriers to be required to send a returnreceipt verifying the accuracy andacceptance of the affidavit. Thecommenter believed that procedure willeliminate problems with lost mail or anincorrect affidavit, and reduce theincidence of physicians andpractitioners not properly opting-outand later finding themselves in troublefor having failed to properly opt-out.

Response: Our experience with thosephysicians and practitioners who haveopted-out, indicates that there havebeen no notable problems with lost mailor incorrect affidavits. Hence, we do notbelieve that there is sufficientjustification at this time for requiringthe carrier (and the Medicare program)to incur the costs associated withsending return receipts to the physicianor practitioner.

Impact of changes in carrier jurisdictionComment: A commenter asked that

we address how carrier terminationsand replacements will affect the opt-outstatus of physicians and practitioners.Specifically, the commenter wanted toknow if the physician or practitionerneeds to again file the affidavit with thecarrier that is taking over thejurisdiction.

Response: Physicians andpractitioners who have filed affidavitsopting-out of Medicare will not need torefile when a carrier is replaced by anew carrier. The information will betransferred from the existing contractorto the new contractor, as part of thesystems and records transition process.

Requirement to submit affidavits to allcarriers

Comment: Commenters objected tothe requirement that the physician orpractitioner must submit affidavits to allcarriers to which he or she hassubmitted claims in the past 2 years.They believed that this is a burdensomerequirement that will become more so asthere are more M+C organizations.Commenters also believed that thisrequirement is particularly burdensomefor physicians and practitioners inStates that have a lot of ‘‘snowbirds.’’They asked whether the physician orpractitioner must submit an affidavit toeach carrier to which they would sendclaims. A commenter requested thatthere should either be a standard formthat contains all addresses, or theaffidavit should be submitted to us fordistribution to all carriers.

Response: We do not believe that thisrequirement is burdensome. The

submission of an affidavit is done nomore than once every 2 years, andrequires simply mailing it to theaddresses to which the physician orpractitioner ordinarily sends claims.Physicians and practitioners alreadyknow to whom they have sent claimswithin the past 2 years, and this is thereason we proposed this standard.

We want to reinforce the importanceof mailing the affidavits to theappropriate carriers. We have receivedmany affidavits that were sent to theSecretary, rather than being sent to thephysician’s or practitioner’s carrier. Theresult of the misrouting of the affidavitshas been significant delays in theprocessing of these misdirectedaffidavits by carriers. Physicians andpractitioners were instructed where tosend the affidavit in the November 1997‘‘Dear Doctor’’ letter. That letter wassent to all physicians and practitionerswho had submitted claims to Medicarewithin the previous year.

Moreover, the comments reflectseveral misunderstandings. First, thenumber of M+C organizations has norelationship to the number of affidavitsto be filed, because an M+C organizationis not a Medicare carrier. M+Corganizations will acquire informationon physicians and practitioners whohave opted-out through mutually agreedupon arrangements with carriers.

Also, when a physician furnishes careto a Medicare beneficiary who livesmuch of the time in another State, thephysician files the Medicare claim withthe carrier that has jurisdiction over theclaims for the services furnished in thephysician’s or practitioner’s Medicarelocality. For example, when a physicianin Jacksonville treats a Medicarebeneficiary who resides most of the timein Detroit, the physician files the claimwith the carrier who processes claimsfor services furnished in Jacksonville,not with the carrier who processesclaims for services furnished in Detroit.Hence, the physician would file theaffidavit with the carrier forJacksonville, not with the carrier forDetroit.

We recognize that this process couldbe more streamlined. Therefore, we areconsidering ways to simplify it forphysicians, practitioners, carriers, andM+C organizations, and would welcomesuggestions on this subject.

Comment: A commenter asked forspecific guidance in the case ofphysicians and practitioners who havenot filed claims with Medicare in thepast 2 years.

Response: The physician orpractitioner should file the affidavitwith the carrier that has jurisdictionover claims for the services furnished in


the Medicare localities in which thephysician furnishes services.

Requirements of Private Contracts(§ 405.415)

Need for a model contract

Comment: Some commenters wantedus to develop a model contract. Theybelieved that it would help physiciansand practitioners by ensuring that theymaintain their opt-out status. Theybelieved that a model contract wouldincrease the probability thatbeneficiaries will understand the effectsof the private contract.

Response: We agree. We plan to createboilerplate language that may beincluded with any other contractualdocument the physician or practitionerand beneficiary create. We plan to createboilerplate language as part of thedevelopment of manual instructions,after consultation with the physician,practitioner, and beneficiarycommunities.

Wording of the private contract

Comment: Commenters requested thatwe require that the wording of theprivate contract be plain and simple,and not reference law, regulations, orgovernment instructions. They believedsuch references cause beneficiaries tocease reading documents.

Response: We agree that the wordingof private contracts should be plain andsimple. At the same time, a privatecontract is a binding legal document. Itspurpose is to waive a beneficiary’s rightto have his or her government-sponsored insurance coverage pay forcertain health services. It is unlikelythat a sensible and intelligent contracton this issue could be developedwithout a reference to law or regulation.Therefore, we are not prohibitinginclusion of references to law andregulations because such references maybe necessary. However, contracts couldhave references to law or regulationsand still be in plain and simplelanguage.

Comment: Commenters requested thatwe require that the private contractspecify that the beneficiary does notforego Medicare coverage for theservices furnished by other physiciansor practitioners who have not opted-out.In addition, commenters requested thatthe private contract specify that thebeneficiary is not compelled to enterinto private contracts that apply to otherMedicare-covered services.

Response: We believed that theseconcerns were addressed in § 405.415(g)of the proposed rule. However, becauseof this comment, we have revised§ 405.415(g), adding that the beneficiary

must be advised that he or she is notcompelled to enter into private contractsthat apply to other Medicare-coveredservices furnished by other physiciansor practitioners who have not opted-out.In addition, this and other terms aprivate contract should contain may beincorporated in boilerplate languagethat we plan to create after consultingwith the physician, practitioner, andbeneficiary communities. Thatboilerplate language could then beincluded as part of the private contractdocument.

Comment: Commenters requested thatwe require that the private contractcontain wording that specifies that theprivate contract applies to all servicesby the opt-out physician or practitioner,including emergency and urgent careservices, and that, therefore, Medicarewill not pay for any services furnishedby the opt-out physician or practitioner.Commenters indicated that this wordingis needed, because many privatecontracts specify that the beneficiarywill have to pay for certain services,wrongly implying that other services notidentified in the contract will be paid byMedicare. If the beneficiary is misled bythis wording, it increases the likelihoodthat he or she will sign the privatecontract without understanding theeffect.

Response: We have revised§ 405.415(c) to clarify that the privatecontract must state that the beneficiaryunderstands that by signing the privatecontract, the beneficiary or his or herlegal representative accepts fullresponsibility for payment of thephysicians’s or practitioner’s charge forall services furnished by the physicianor practitioner. We will consider theexact language to be used in the privatecontract as part of the development ofthe boilerplate private contractlanguage.

Beneficiary’s copy of the privatecontract

Comment: Commenters asked how farin advance must the physician orpractitioner give the beneficiary a copyof the private contract as required by§ 405.415(l).

Response: Under § 405.415(l), weproposed that the beneficiary receive acopy of the contract before receiving anyservices under the contract, but we didnot require that this occur a specificduration of time before services arefurnished under the contract. We onlyproposed that the beneficiary be inpossession of the private contract, or acopy of the private contract, by the timeservices under the private contract arefurnished. This is consistent with thepolicy we have in place under the

interim operating instructions issued tocarriers in November 1997, January1998, April 1998, and July 1998.

Duration of retention of the privatecontract

Comment: Commenters requested thatwe require the opt-out physician andpractitioner to retain the privatecontract for the duration of the longeststatute of limitations in the relevantstate jurisdiction, so it would beavailable to use in potential claimsagainst the physician or practitioner.They believed that this would assist insettling disputes about whether aprivate contract was required.

Response: We proposed that theprivate contract be retained for theduration of the opt-out term to which itapplies. However, we are aware that, forexample, a particular physician’s orpractitioner’s opt-out term may run fromJanuary 1, 1999 to December 31, 2001.In this example, a beneficiary couldenter into a contract with thatpractitioner or physician in November2001, and a dispute over the existenceor validity of the contract could arise inJanuary 2002. If the physician orpractitioner disposed of the contract onDecember 31, 2001, the physician orpractitioner would not have thecontractual evidence in the subsequentdispute. However, because retention ofthe private contract would be to thepractitioner’s or physician’s benefit, webelieve that the contract would becomepart of the patient’s permanent record.In addition, although the physician orpractitioner might have disposed of hisor her copy of the contract, thebeneficiary should still have the copy ofthe contract the beneficiary was givenwhen the beneficiary entered into thecontract.

Private contract type sizeComment: Commenters indicated that

they support the absence of specifiedrequirements regarding size of the printin the private contract, but that theregulations should stipulate that thephysician or practitioner and thebeneficiary should reach mutualagreement on all aspects of the privatecontract.

Response: Implicit in the fact thatboth parties enter into a private contractis the notion that both parties have read,fully understand, and agree to the termsand provisions of the private contract.

Requirements of the Opt-Out Affidavis(§ 405.420) Reassignment Implications

Comment: Commenters wanted theproposed regulations to be revised toexplicitly authorize continuedreassignment of Medicare benefits for


services furnished by opt-out physiciansand practitioners to community mentalhealth centers (CMHCs). They believedthat opt-out physicians andpractitioners should be able to opt-outof Medicare for purposes of their privatepractices, but be able to remain inMedicare when they furnish services inother settings like CMHCs. That wouldallow the physician and practitioner tocontinue to furnish services to lowincome persons for which the CMHCcould bill Medicare.

Response: We disagree. Under thelaw, when a physician or practitioneropts-out of Medicare, he or she signs anaffidavit that promises that he or shewill privately contract for all Medicare-covered services he or she furnishes toMedicare beneficiaries. Hence, the opt-out decision applies to all servicesfurnished by the physician orpractitioner, including those for whicha CMHC bills and is paid by Medicareunder a reassignment of benefits to theCMHC, a billing agent arrangement, orthrough an employment relationship.Except as discussed below, no paymentmay be made to the physician orpractitioner or to the CMHC for theservices of a physician or practitionerwho has opted-out of Medicare.

The only exception occurs when aclinical social worker (CSW) who isrecognized by Medicare as a practitionerprovides services as part of a partialhospitalization program for whichMedicare is paying the CMHC. In thiscase, the CMHC (and not the CSW) isthe provider of a partial hospitalizationservice (not a CSW service) and the factthat the CSW opted-out of Medicaredoes not preclude payment for thepartial hospitalization service.

Identifying InformationComment: Commenters objected to

the quantity of information that weproposed requiring in the affidavits.They believed that we have gonebeyond what the law requires for thespecific identifying information thatmust be provided. They requested thatthe proposed regulations be revised torequire only a name, address, phonenumber, and one identifying numbersuch as either the national provideridentifier, the uniform provideridentification number, or the taxidentification number.

Response: We are sympathetic tothese commenters concerns, but webelieve that we have requested theminimum practical quantity ofinformation be provided in the affidavitthat we, and carriers, need to properlyand uniquely identify opt-outphysicians and practitioners. Given thepossibility that a large number of

physicians or practitioners could opt-out of Medicare, the potential for havingconfusion among physician orpractitioners with the same name orbusiness address is significant. This isespecially true when the additionalfactors such as the prevalence of the useof billing agents and reassignments areconsidered.

We need sufficient information toensure that no entity is billing on behalfof an opt-out physician or practitioner.We also need sufficient information toidentify persons who have never beeninvolved in the Medicare program. Inaddition, and most importantly from thephysician’s or practitioner’s standpoint,we need what some physicians andpractitioners may believe to beduplicate information to ensure that wehave correctly identified the opt-outphysician or practitioner and have notincorrectly assumed that a physician orpractitioner has opted-out.

Failure to Properly Opt-Out (§ 405.430)

Difference Between Failing to ProperlyOpt-Out and Failing to Maintain Opt-Out

Comment: Commenters asked that weclarify the difference between failing toproperly opt-out (§ 405.430) and failingto maintain opt-out (§ 405.435).

Response: Failure to properly opt-outmeans failure to meet the criteria thatchange a physician’s or practitioner’sstatus, from a physician or practitionerwho is bound by the Medicare claimsfiling rules and limits on charges (thatis, participating or nonparticipating), toa physician or practitioner who is nolonger bound by Medicare claims filingand limits on charges and mustprivately contract with Medicarebeneficiaries (that is, an opt-outphysician or practitioner). The effects offailing to properly opt-out as specifiedin § 405.435(b) are the same conditionsthat existed before the private contractprovisions of section 4507 of the BBAwere effective. These conditionscontinue to exist for all physicians andpractitioners who do not properly opt-out by meeting all of the requirementsof these rules. A physician orpractitioner who has never filed anaffidavit is bound by the rules in§ 405.430(b) because he or she has notproperly opted-out.

Failing to maintain opt-out meansfailure to continue to comply with therequirements of properly opting-out, butonly after having properly opted-out. Aphysician or practitioner who hasopted-out by meeting the requirementsof § 405.410, but who fails to continueto meet one of the requirementsspecified in § 405.435(a), has failed to

maintain opt-out and is subject to theeffects of § 405.435(b).

Beneficiary rights when a physician orpractitioner does not properly opt-out

Comment: Commenters asked that wespecify the beneficiary’s rights when thephysician or practitioner fails toproperly opt-out. Specifically, arebeneficiaries entitled to refunds forservices furnished under privatecontracts? If the answer is yes, are therefunds based on Medicare rules, anddoes the pre-opt-out or post opt-outstatus (participating versusnonparticipating) control the payment?

Response: Beneficiary rights when aphysician or practitioner fails toproperly opt-out are specified in§ 405.430(b). However, we realize thatthe proposed rule failed to indicate thata participating physician in Part B ofMedicare who has not properly opted-out may not charge more than thedeductible and coinsurance that appliesto the service furnished because, in theabsence of the physician properlyopting-out of Medicare, theparticipation agreement to acceptassignment on all claims continues toapply. We have made the relevantchange to this section.

Repeated attempts to opt-out

Comment: Commenters asked us toclarify what happens when thephysician or practitioner fails toproperly opt-out. Does a participatingphysician have to wait until the nextcalendar quarter to properly opt-out?Commenters wanted the regulations tospecify that all attempts to properly opt-out must meet the same criteria as if noopt-out attempt had occurred.

Response: A physician or practitionerwho fails to properly opt-out continuesto be bound by the Medicare claimsfiling and charge limit rules identifiedin § 405.430(b). However, he or she maymake an unlimited number of attemptsto properly opt-out at any time. Webelieve that the regulations are clear thatthe criteria for properly opting-out asspecified in § 405.410 must be met forthe physician or practitioner to opt-out.

Failure to Maintain Opt-Out (§ 405.435)

Inclusion of failure to enter into aprivate contract as a failure to maintainopt-out

Comment: Some commentersrequested that the regulations specifythat the failure of a physician orpractitioner who has properly opted-outto privately contract with a beneficiaryto furnish services, that are notemergency or urgent care services, is afailure to maintain opt-out. In those


cases, the commenters wanted thepenalties for failure to maintain opt-outto apply.

Response: We agree and have revised§ 405.435(a). Failure to enter into aprivate contract with a beneficiary whorequires services that are neitheremergency nor urgent care services isnow a condition that results in thephysician or practitioner failing tomaintain opt-out as specified in§ 405.435(a)(5). Commenters haveprovided information about situationsin which physicians and practitionerswho opted-out of Medicare failed toenter into private contracts withbeneficiaries who did not needemergency or urgent care services.Those beneficiaries subsequentlylearned that they would be wholly liablefor the physician’s or practitioner’scharges because they had opted-out ofMedicare. We believe that failing toprivately contract after promising to doso in the affidavit clearly violates theintent of the law. That intent, webelieve, is to ensure that beneficiarieshave entered into private contractsbefore they assume liability for paymentof furnished services without regard tocharge limits.

Medicare payment when the beneficiaryhas not entered into a private contract

Comment: Some commentersrequested that we require that when theopt-out physician or practitioner fails toenter into a private contract beforefurnishing services that are notemergency or urgent care services, thebeneficiary be reimbursed by Medicare.In addition, the physician orpractitioner would have to refund to thebeneficiary any amount in excess of thelimiting charge. Commenters indicatedthat this would parallel longstandingpolicy in which Medicare pays the firstclaim submitted by an excludedphysician or practitioner.

Response: We have revised § 405.435to add failure to enter into a privatecontract as a failure to maintain opt-out.Under these provisions, the physician orpractitioner would be required to refundamounts in excess of the charge limitsunder the limited terms described in§ 405.435(b). Under those terms, wherea carrier notifies a physician orpractitioner that he or she appears tohave failed to maintain opt-out, thephysician or practitioner would have 45days to respond to the carrier with thegood faith efforts that he or she hastaken to resolve the problem. In cases inwhich the physician or practitioner didnot sign private contracts, those goodfaith efforts would have to includerefunds to those beneficiaries ofamounts in excess of the charge limits

(that is, the limiting charge forphysicians, and deductible andcoinsurance for practitioners). Where acarrier notified a physician orpractitioner that there was an apparentfailure to maintain opt-out and he or shedid not respond within 45 days with anexplanation of how the problem was orwould be solved, the charge limitswould apply after the 45th day,resulting in refund of excess amounts ifany are collected for the remainder ofthe opt-out period. Where the physicianor practitioner responded to the carriernotice and resolved the problem, norefunds would be required and the opt-out would continue unaffected.

In addition, we have added§ 405.435(c), which specifies thatpayment may be made to beneficiariesin a similar manner as payment made tobeneficiaries who receive services fromphysicians and practitioners who areexcluded from Medicare by the Office ofthe Inspector General (OIG).

Under a longstanding exclusionprovision at 42 CFR 1001.1901(c),payment may be made to a beneficiarywho has not been notified of thephysician’s exclusion, for the first claimsubmitted by the enrollee. Payment tothe beneficiary may also be made forservices received by the beneficiary nomore than 15 days after the date of thecarrier’s notice to the beneficiary thatthe physician has been excluded fromMedicare. Therefore, in § 405.435(c), wehave included similar provisions withrespect to physicians and practitionerswho have opted-out of Medicare, butfailed to enter into private contractsbefore furnishing services that are notemergency or urgent care services.

We agree with the commenters that itis not fair to deny beneficiariesreimbursement for otherwise allowableservices when they had no reason tobelieve that Medicare would not pay forthe furnished services. We should pointout, however, that as a practical matter,payment to the beneficiary willprobably be made after denial of thebeneficiary’s claim and as part of theappeal process. In other words, thebeneficiary’s claim initially would bedenied on the basis that the physicianor practitioner opted-out. Should thebeneficiary then appeal on the basis thathe or she did not enter into a contractwith the physician or practitioner, andshould the physician or practitioner failto produce documentation that therewas a contract, the beneficiary’s appealwould be allowed and the claim wouldbe paid.

Comment: Commenters objected toany recovery of payment from thephysician or practitioner when thephysician or practitioner failed to

maintain opt-out, because he or shefailed to enter into a private contractwith the beneficiary before furnishingservices that were not emergency orurgent care services.

Response: As discussed above, wehave revised § 405.435 to define failureof an opt-out physician or practitionerto enter into a private contract as beinga failure to maintain opt-out. When acarrier notifies an opt-out physician orpractitioner that he or she appears tohave failed to maintain opt-out by notentering into a private contract, he orshe may continue to opt-out if he or shemakes good faith efforts at fixing theproblem that led to the failure tomaintain opt-out and notifies the carrierof these efforts within 45 days of thecarrier notice. When a physician orpractitioner appears to have failed tomaintain opt-out by not entering into aprivate contract with a Medicarebeneficiary (except in emergency orurgent care cases), these good faithefforts should include refundingamounts collected in excess ofapplicable charge limits (that is, limitingcharge for physicians and deductibleand coinsurance for practitioners) tobeneficiaries. Where the physician orpractitioner makes good faith efforts tocorrect the problem he or she would notbe subject to the consequences of failingto maintain opt-out. However, if he orshe does not make good faith efforts tofix the problem that resulted in violatingthe opt-out, the consequences of§ 405.435(b) would apply.

Treatment of incidental failure tomaintain opt-out

Comment: Some commentersindicated that the first time the carrierbecomes aware that a physician orpractitioner failed to enter into a privatecontract before furnishing services thatwere not emergency or urgent careservices, there should be a presumptionthat there was an isolated error. Theybelieved in those cases that no adverseconsequences should occur to thephysician or practitioner. Somecommenters stated that there should bea process for dealing with physiciansand practitioners who demonstrate apattern of failing to enter into privatecontracts with beneficiaries, beforefurnishing services that are notemergency or urgent care services.

Response: We agree that, as written,an isolated error causes the physician orpractitioner to fail to maintain opt-out.We also recognize that isolated errorswill occur and should not result in theconsequences provided in § 405.435(b).We accommodated this concern in ouroperating instructions to carriers.Consequently, we have revised the


regulation at § 405.435(b). We havelimited the effects of failing to maintainopt-out when the physician orpractitioner has failed to maintain opt-out in accordance with the provisions of§ 405.435(a), by failing to make a goodfaith effort to advise carriers regardinghow they will correct violations of opt-out within 45 days of the date a carrierbrings those violations to their attention.This change comports with the currentoperating procedures in place when aphysician or practitioner submits aclaim for Medicare payment in violationof the affidavit, in which he or shepromised not to submit claims.

Payment to physicians and practitionerswhen they fail to maintain opt-out

Comment: Commenters indicated thatit is unclear whether the physician orpractitioner would be paid anything forthe services they furnished if they failto maintain opt-out. Commentersobjected to what they view as provisionsthat prevent them from collecting morethan the deductible and coinsurance ifthe physician or practitioner fails tomaintain opt-out.

Response: Physicians andpractitioners who have opted-out andwho fail to maintain opt-out are notprecluded from collecting payment fromthe beneficiary. But if they failed toprivately contract with a beneficiary(other than in an emergency or urgentcare case), they may have to refundamounts in excess of the applicablecharge limits to those beneficiaries withwhom they failed to privately contractin order to preserve their opt-out status.

Specifically, under § 404.435(b) whena physician or practitioner fails tomaintain opt-out, he or she is given 45days after a notice from the carrier torespond with a description of the goodfaith efforts that he or she has made tocorrect the problem that led to thefailure to maintain opt-out. If the failureto maintain opt-out was caused by thephysician’s or practitioner’s failure toprivately contract with a beneficiary(other than one in need of emergency orurgent care), then the good faith effortswould include refunding to thatbeneficiary amounts collected in excessof the applicable charge limits (that is,the limiting charge in the case ofphysicians, and the deductible andcoinsurance in the case of practitioners).If the physician or practitioner does notrespond with a description of the goodfaith efforts taken to resolve the problemthat led to the failure to maintain opt-out, then the provisions of § 405.435(b)apply after the 45th day after the carriernotice and the physician or practitionerbecome again required to submit claims

and are bound by the applicable chargelimits (that is, the limiting charge in thecase of physicians, and the deductibleand coinsurance in the case ofpractitioners) for the rest of the opt-outperiod.

Medicare inspection of private contracts

Comment: Commenters stated that avery high threshold should be metbefore we are allowed to inspect privatecontracts. Commenters wanted theregulations to specify that we would beallowed to inspect private contractsonly if the request is reasonable anddoes not interfere with the delivery ofservices. Commenters wanted theregulations to require that we obtainbeneficiary consent before asking to seethe private contract. Otherwise, theybelieved it is a violation of privacy.Some commenters indicated that whenit is alleged that a physician orpractitioner opted-out but did not enterinto private contracts before furnishingservices that are not emergency orurgent care services, settlement of thecase should be on a case-by-case basisby the appeal process.

Response: We anticipate that we willrequest to see private contracts rarely,and only in cases where a beneficiaryalleges that he or she did not enter intoa private contract before the service wasfurnished. We anticipate we will havethe consent of the beneficiary, or his orher legal representative, to acquire acopy of the private contract from thephysician or practitioner who allegesthat one was entered into, and that thecontract will be requested as part of theprocessing of an appeal of a denial of aclaim for services.

Application of effects of failure tomaintain opt-out

Comment: Commenters objected toconsidering the provisions of§§ 405.435(a)(2), (3), and (4) to be afailure to maintain opt-out resulting inthe adverse effects of § 405.435(b).Commenters believed that the statuteprovides for the adverse effects in§ 405.435(b) only if the physician orpractitioner who has opted-out submitsa claim for Medicare payment. Inaddition, they believed that we haveexceeded what the law permits byproviding adverse consequences inthese other cases:

• The physician or practitioner failsto use private contracts that meet therequirements of § 405.435(a)(2).

• The physician or practitioner failsto comply with the emergency andurgent care rules as specified in§ 405.435(a)(3).

• The physician or practitioner failsto keep a copy of a private contract orfails to permit us to review contracts onrequest as specified in § 405.435(a)(4).

In these cases, commenters believedthat nothing supports applying thepenalties of § 405.435(b) for failing tomaintain opt-out, and they objected thatwe do not apply the knowing andwillful test in these cases.

Response: We believe that undergeneral rulemaking authority, we havethe authority to impose therequirements we believe are necessaryto implement the law in a manner thatconforms with the intended effect. Webelieve that it would be inconsistentwith the intent of the law if we couldnot ensure that—(1) private contractsadequately protect beneficiaries whoenter into them; (2) emergency andurgent care services are providedwithout the patient being asked to enterinto a private contract; and (3) a privatecontract is available for review when anappeal is based on the allegation that acontract was not entered into.

Comment: Commenters wanted theregulations to specify that when thephysician or practitioner who hasopted-out fails to maintain opt-out, thephysician or practitioner must refundamounts collected in excess of thelimiting charge for services he or shefurnished before the failure to maintainopt-out occurred.

Response: We have not made thischange. When a physician orpractitioner has properly opted-out, heor she is not limited in what he or shecan collect from the beneficiary forservices furnished during the period inwhich he or she has properly opted-out.

As discussed previously, to avoid theconsequences of failing to maintain opt-out, the physician or practitioner mustrespond within 45 days after the carriernotice with good faith efforts to resolvethe problem (including refunding to thebeneficiary amounts in excess of thecharge limits where the physician orpractitioner failed to enter into a privatecontract with a beneficiary who did notneed emergency or urgent care).However, if the physician orpractitioner does not respond within 45days with good faith efforts to maintainopt-out, he or she becomes bound by theconsequences of failing to maintain opt-out (including applicable charge limits),but only for services furnished in theremainder of the opt-out period—not forservices furnished while he or she wasin compliance with the opt-out.


Emergency and Urgent Care Services(§ 405.440)

Disagreements about emergency orurgent care services

Comment: Commenters asked whatwill happen if the physician orpractitioner furnishes services that theybelieve are emergency or urgent careservices, but the carrier disagrees. Willthe physician or practitioner besubjected to any penalties for failure toprivately contract? Commentersbelieved that this is particularlyproblematic in instances of furnishingurgent care services, when the carrier orM+C organization believes thoseservices could wait more than 12 hours,but the physician or practitionerdisagrees. There should be someprotection for the physician orpractitioner who believes that theproper categorization of the neededfurnished services was urgent care, evenif the physician or practitioner loses onappeal.

Response: We believe that changingthe definition of emergency care, fromthe ‘‘anti-dumping’’ definition specifiedat § 489.24 to the ‘‘prudent layperson’’standard specified at § 422.2, will offermore protection to physicians andpractitioners who are presented with abeneficiary who believes he or she is inneed of emergency or urgent careservices. Therefore, we have revised thetext of emergency care services to mean‘‘services furnished to an individual fortreatment of an ‘emergency medicalcondition’ as that term is defined in§ 422.2 of this chapter.’’

Comment: Commenters asked whatoversight processes we will use toensure that physicians and practitionersthat opt-out do not abuse their ability tosee patients without private contracts.The commenters were concerned thatbeneficiaries may be left unprotected ifMedicare disagrees with the physician’sor practitioner’s view that the serviceswere emergency medical care or urgentcare services. They were also concernedthat beneficiaries who believe that theyneed emergency medical care or urgentcare services may be coerced byphysicians or practitioners to enter intoprivate contracts. The reason for thatcoercion would be to protect thephysician or practitioner from potentialconflict with the carrier, if the physicianor practitioner does not believe that thepatient needs emergency medical careor urgent care services.

Response: Section 1802(b)(2)(A)(iii) ofthe Act is clear that a physician orpractitioner cannot enter into a privatecontract with a beneficiary if the privatecontract is entered into when thebeneficiary is facing an emergency or

urgent health care situation. We alsoextend this analysis to mean that, incase of a beneficiary emergency, thebeneficiary’s legal representative cannotenter into a private contract on thebeneficiary’s behalf. Because we areadopting the prudent laypersonstandard the test would be whether thebeneficiary is a prudent layperson, andwhether a prudent layperson wouldhave thought he or she was facing anemergency or urgent health caresituation under the particularcircumstances involved.

Renewal and Early Termination of Opt-Out (§ 405.445)

Early termination of opt-out

Comment: Commenters asked that weclarify whether a physician orpractitioner who opted-out but thencompleted an early termination of opt-out, may reapply for a subsequent opt-out period. They also asked that we alsoidentify what notice he or she must giveto the beneficiary.

Response: A physician or practitionerwho opted-out of Medicare andcompleted an early termination of opt-out may reapply for a subsequent opt-out period under the same terms,including the same beneficiary noticeterms, that would apply if he or she hadnot opted-out and then terminated opt-out.

We would note, however, that aphysician or practitioner can terminateopt-out early only once. Therefore, if aphysician or practitioner opts-out, thenexecutes an early termination of opt-out,and then submits a second affidavitopting-out again, he or she will not bepermitted early termination of that orany subsequent opt-out. We expect thata single early termination of opt-out willbe sufficient to meet the needs of aphysician or practitioner who hasopted-out and decides that it was amistake. Moreover, permitting morethan one early termination of opt-outwould be very difficult for carriers’systems to accommodate and wouldimpose a costly systems burden to them(and to Medicare).

Comment: Commenters asked whatparticipation status applies to aphysician or practitioner who completesearly termination of opt-out. In addition,they asked what payment status(participating versus nonparticipating)applies to service charges for servicesfurnished during the aborted opt-outperiod.

Response: When a physician orpractitioner terminates opt-out early, heor she resumes the participation statusthat existed before he or she opted-out.That participation status would apply to

the service furnished during theshortened opt-out period.

Medicare+Choice Organizations(§ 405.450)

Acquisition of information on opt-outphysicians and practitioners byMedicare+Choice organizations

In § 405.455, we indicate that M+Corganizations may not pay for servicesof physicians or practitioners who opt-out of Medicare under these rules. Wealso specify that M+C organizationsmust acquire the information needed toimplement this requirement fromMedicare carriers that have jurisdictionover the claims in the areas the M+Corganization serves.

We recognize that this approach foracquiring this information may not beoptimal and we want to streamline it.We welcome suggestions on the specificinformation M+C organizations need toimplement these rules and the mostefficient means by which they couldreceive it.

C. Payment for OutpatientRehabilitation Services

The term outpatient rehabilitationtherapy encompasses outpatientphysical therapy (including speech-language pathology) and outpatientoccupational therapy.

1. BBA 1997 Provisions AffectingPayment for Outpatient RehabilitationServices

a. Reasonable Cost-Based Payments.Section 4541(a) of BBA 1997 added newsection 1834(k) to the Act. Section1834(k)(2) establishes a 10-percentreduction in the reasonable cost oftherapy services furnished during 1998.The 10-percent reduction does notapply to outpatient therapy servicesfurnished by hospitals. In accordancewith this provision, we have revised ourpolicy to make payment for outpatientrehabilitation services furnished during1998 based upon the lesser of thecharges imposed or the reasonable costdetermined for such services, reducedby 10 percent. The 10-percent reductiondoes not apply to outpatient physicaltherapy or occupational therapy servicesfurnished by a hospital to an outpatientor to a hospital inpatient entitled tobenefits under Part A but who hasexhausted benefits or is otherwise not ina covered Part A stay.

As stated in our proposed rule, thesalary equivalency guidelines willremain in effect until all BBA provisionsregarding a prospective payment systemfor outpatient rehabilitation services areimplemented. The prospective paymentsystem, which is effective for services


furnished on or after January 1, 1999,removes the need for salary equivalencyguidelines because providers will nolonger be paid on a reasonable cost basisfor their therapy services. The salaryequivalency guidelines were a tool usedto determine the reasonable cost oftherapy services provided bypractitioners other than physicians.

Comment: We received severalcomments stating that the 10-percentpayment reduction may cause certainsmall providers to cease operations orcease providing services to Medicarebeneficiaries. The commenters alsostated that the Congress did notadequately consider the impact of the10-percent reduction on small providersand that the Congress was misled.

Response: The 10-percent paymentreduction is required by BBA.

b. Prospective Payment System forOutpatient Rehabilitation Services.

(1) OverviewSection 4541 of BBA adds a new

section 1834(k) to the Act that providesfor a prospective payment system foroutpatient rehabilitation services and allservices provided by CORFs. Theprospective payment system is effectivefor services furnished on or afterJanuary 1, 1999. Section 1834(k)(1)(B) ofthe Act provides for payment for thoseservices to be made at 80 percent of thelesser of (1) the actual charge for theservices, or (2) the applicable feeschedule. Section 1834(k)(2) defines theapplicable fee schedule amount as theamount determined under the physicianfee schedule, or, if there is no such feeschedule established for those services,the amount determined under the feeschedule established for comparableservices as specified by the Secretary.

The physician fee schedule iscurrently applied to certain outpatientrehabilitation therapy services. It is nowthe basis of payment for outpatientrehabilitation services furnished byphysical therapists in independentpractice (PTIPs) and occupationaltherapists in independent practice(OTIPs), physicians, and certainnonphysician practitioners or incidentto the services of these physicians ornonphysician practitioners. Thephysician fee schedule has been themethod of payment for outpatientrehabilitation therapy services providedby such entities for several years. Asdiscussed in our proposed rule, feeschedule payment will now apply whenoutpatient physical therapy,occupational therapy, and speech-language pathology services arefurnished by rehabilitation agencies,public health agencies, clinics, SNFs,home health agencies for beneficiaries

who are not eligible for home healthbenefits because they are nothomebound or to homeboundbeneficiaries who are not entitled tohome health benefits, hospitals (whensuch services are provided to anoutpatient or to a hospital inpatient whois entitled to benefits under Part A butwho has exhausted benefits, or is notentitled), and CORFs. The fee schedulealso applies to outpatient rehabilitationservices furnished under anarrangement with any of the citedentities that are to be paid on the basisof the physician fee schedule. The feeschedule will not apply to outpatientrehabilitation services furnished bycritical access hospitals. Under section1833 of the Act as amended by section4541 of BBA, these services will be paidon a reasonable cost basis.

Comment: We received one commentin support of delaying theimplementation of a prospectivepayment system for outpatientrehabilitation services until April 2000because implementation of the hospitaloutpatient prospective payment systemis being delayed. The commenter statedthat a delay would provide sufficienttime for HCFA to develop a site-of-service differential and, at the sametime, would allow for implementationof all revisions to hospital outpatientbilling. It was also noted that hospitalsare faced with Year 2000 (Y2K)problems as well and that the piecemealimplementation of outpatientregulations adds to the already dauntingY2K task.

Response: We disagree thatdevelopment of a site-of-servicedifferential for outpatient rehabilitationservices is a rational basis for seeking todelay implementation of a prospectivepayment system for outpatientrehabilitation services because as wenoted in our proposed rule, we find nolegislative basis for making such apayment differential. On the other hand,we are sensitive to the commenter’sconcerns about the Y2K systemcompliancy challenges confrontinghospitals and their need to effectivelyand efficiently renovate their systems.We face similar challenges and havetherefore, to delay implementation ofcertain BBA provisions such as thehospital outpatient PPS to which thecommenter refers. However, we will notbe delaying implementation of theoutpatient rehabilitation PPS.Implementation of hospital outpatientPPS must be delayed by the year 2000system renovations because it requiresmassive system changes. Majorcontractor systems will be affected andthe consequence of these requiredchanges to the basic systems will be to

change the entire way fiscalintermediaries process and pay hospitaloutpatient and community mentalhealth claims (These latter claims willbe paid under the hospital outpatientPPS).

By contrast, implementation of the feeschedule provision for outpatientrehabilitation services does not requirethat we develop an entirely new systemor even undertake extensivereprogramming of the existing system inorder to accommodate the new entitiessuch as CORFs and rehabilitationagencies that will bill under this system.Basically, we can implement the feeschedule provision because it involvesextending billing under an existingsystem (the physician fee schedule) toadditional practitioners and services.

However, extension of the two $1,500outpatient financial limitations or capson a per-beneficiary basis as proposedin our June 5, 1998 rule requiresconsiderable new programming that weare not able to undertake concurrentwith our Y2K efforts. Therefore, we aredelaying full implementation of thecaps, effective January 1, 1999. We willimplement them as discussed in ourproposal as soon as possible afterJanuary 1, 2000.

Effective January 1, 1999, we willbegin employing a transitional approachto implementing the caps on a provider/practitioner specific basis. Thisapproach, will require each provider/practitioner not subject to the currentlimitations to cap their Medicarebillings at $1,500 per beneficiary. Wedescribe this partial implementationmeasure elsewhere in this rule underthe section on financial limitations.

(2) Services Furnished by SkilledNursing Facilities

Section 4432(a) of BBA added a newsubsection(e) to section 1888 of the Actto establish a prospective paymentsystems for SNFs. Under the statute,effective for cost reporting periodsbeginning on or after July 1, 1998,Medicare pays for covered Part A SNFstays on the basis of prospectivelydetermined payment rates thatencompass all costs of ‘‘covered SNFservices’’ furnished to an SNF resident.The statute defines covered SNFservices to include (1) post-hospitalextended care services paid for underPart A, and, (2) certain services that maybe paid under Part B and that arefurnished to SNF residents receivingcovered post-hospital extended careservices. Section 1888(e)(2) provides forexclusion of specific services from thedefinition of covered SNF services, butthe statute explicitly states that theexclusions do not encompass ‘‘any


physical, occupational or speech-language therapy services regardless ofwhether or not the services arefurnished by, or under the supervisionof, a physician or other health careprofessional.’’ Thus, if an SNF residentis in a covered Part A stay, therapyservices furnished to the SNF residentare encompassed in the PPS paymentand Medicare does not make a separatePart B payment.

Under the new payment system forSNF inpatient services, and consistentwith current policy (which appliedbefore enactment of BBA), servicesfurnished to SNF residents that are notcovered under Part A may neverthelessbe covered under Part B. Section4432(b) of BBA amended section1842(b)(6) of the Act to require thatpayment for most services furnished toan individual who is a resident of anSNF, including outpatient rehabilitationservices, be made to the facility (withoutregard to whether the service wasfurnished by the facility, by othersunder arrangement with the facility, orunder any other arrangement). When theservices are not being furnisheddirectly, the facility then pays theprovider of therapy services. Theconsolidated billing provision wasscheduled to be effective for servicesfurnished on or after July 1, 1998.However, due to systems modificationdelays in implementing SNFconsolidated billing, instructions inProgram Memorandum (PM) AB–98–18dated July 1998, as they apply toservices and supplies furnished toresidents in a Part A stay in an SNF notyet on the PPS and to the Part B stay(Part A benefits exhausted, posthospitalor level of care requirements not met),are delayed until further notice. Weannounced this decision in asubsequent Program Memoranda, thatis, PM AB–98–35 dated July 1998.

Section 4432(b)(3) of BBA added anew paragraph (9) to section 1888(e) ofthe Act to provide that, with respect toa service covered under Part B that isfurnished to an SNF resident, theamount of payment for the service is theamount provided under the fee schedulefor such item or service. This provisionmust be read in conjunction with theprovisions of section 4541 of BBA.Section 4541 added a new section1833(a)(8) to specify that the amountspayable for outpatient rehabilitationservices furnished by an SNF will be theamounts determined under section1834(k) of the Act. Section 1834(k) ofthe Act provides that payment in 1998is to be based on the lesser of thecharges imposed for these services orthe adjusted reasonable costs and, in1999 and thereafter, 80 percent of the

lesser of the actual charge for the serviceor the physician fee schedule. Thus, asdiscussed in our proposed rule, we haverevised our policy so that Part B servicesfurnished to a SNF inpatient (Part Abenefits exhausted, posthospital or levelof care requirements not met) remainpayable on a reasonable cost basis untilJanuary 1, 1999. Effective January 1,1999, the services will be paid inaccordance with the physician feeschedule.

The physician fee schedule amountapplicable to services furnished in anonfacility setting will apply to the PartB services to inpatients (Part A benefitsexhausted, posthospital or level; of carerequirement not met) and otheroutpatient rehabilitation servicesfurnished by the SNF. The nonfacilityamount applies because theconsolidated billing provision requiresthat the SNF be directly paid for theentire therapy service (including facilitycosts) based on the physician feeschedule. This is in contrast to theamount applicable to physicianservices, excluding outpatientrehabilitation services, billed for SNFresidents. In this case, the physicianpayment is not intended to cover thefacility costs associated with the serviceand the fee schedule amount applicableto services furnished in a facilityapplies. Through PM AB–98–63 datedOctober 1998, we advised our fiscalintermediaries to require SNFs to billMedicare directly for all outpatienttherapy services provided to their SNFresidents in a noncovered Part A stayand to the their nonresidents coveredunder Part B.

(3) Services Furnished by Home HealthAgencies

Section 1833(a)(8)(A) applies thephysician fee schedule to outpatientrehabilitation services furnished by anHHA to an individual who is nothomebound. Most outpatientrehabilitation services furnished by anHHA under section 1861(s)(2)(D) of theAct is to individuals who are nothomebound. The likelihood is great thatmost individuals who are homeboundand are receiving physical therapy,speech-language pathology, oroccupational therapy are entitled tohome health benefits. However, theremay be some individuals who arehomebound and have not required aqualifying service for home healthbenefits but who need occupationaltherapy services. If provided by anHHA, these services could be providedunder section 1861(s)(2)(D) of the Act.Although section 4541 of BBA did notexpressly address these services, thestatute allows them to be remain

payable on a reasonable cost basis undersection 1861(v)(1) of the Act. All otherservices furnished by the HHA will bepaid under a prospective paymentsystem. (Implementation of an HHAprospective payment system that wasscheduled to take effect October 1, 1999has been delayed due to our Y2Kcompliancy efforts.) Section 1861(v)(1)provides that the reasonable cost of anyservice is the cost actually incurred,excluding any costs unnecessary to theefficient delivery of needed healthservices.

Section 1861(v)(1) also allows, use indetermining reasonable cost, to providefor the use of estimates of cost forparticular items and services. Inenacting section 4541 of BBA, theCongress determined that payment inthe amounts dictated by the physicianfee schedule represents the appropriatelevel of payment for outpatientrehabilitation services provided byHHAs to certain non-homeboundbeneficiaries who do not qualify for theHHA benefit. (Of course, pursuant tosection 4541, this payment level appliesto all suppliers of rehabilitation servicesenumerated in the provision.) TheCongress has, thus, evinced its view thatpayment at the fee schedule leveladequately compensates HHAs for theirexpenses for this group of services. Webelieve that the Congress’ determinationin this case forms a basis for us to findthat this level of payment represents anacceptable estimate of the expenses ofproviding rehabilitation services toother, homebound beneficiariesreceiving services from HHAs, but alsonot eligible for the HHA benefit. Thus,we are applying the fee schedulepayment level as our estimate of thereasonable costs of these services forthese beneficiaries receiving outpatientrehabilitation services and not eligiblefor HHA benefits. Therefore, § 413.125is modified to provide that effective forservices furnished on or after January 1,1999, the reasonable cost of outpatientrehabilitation services furnished by anHHA to homebound patients who arenot entitled to home health benefits maynot exceed the amounts payable underthe fee schedule.

(4) Services Furnished byComprehensive OutpatientRehabilitation Facilities

Section 4541(a)(1) of the BBA adds anew section 1832(a)(2)(D)(9) to the Actto provide that all services furnished bya CORF, not just outpatientrehabilitation services, will be paid theapplicable fee schedule amount. Incases in which there is no physician feeschedule amount for the services,section 1834(k) of the Act specifies that

November 2, 1998 federal register · 2010-09-25 · 58814 Federal Register/Vol. 63, No. 211/Monday,...

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