College of American Pathologists
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  Why ’07 reimbursement rates are down
  six percent


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February 2007
Feature Story

Pamela Johnson
Janemarie Mulvey

Five-year review of physician work values
Practice expense RVU method changes

Pathologists can expect a six percent reduction in their reimbursement rates this year as a result of changes in the 2007 Medicare physician fee schedule regulations issued in November by the Centers for Medicare and Medicaid Services (CMS). The cuts would have totaled 11 percent on average had it not been for lobbying last year by the College and the medical community that helped pass the federal Tax Relief and Health Care Act of 2006 in the final hours of the 109th Congress.

That law, H.R. 6111, stops the five percent cut for Medicare payments the CMS proposed in the final regulations. The five percent cut, based on the flawed sustainable growth rate formula that Congress and the CMS use as a budgetary tool to penalize physicians when total expenditures exceed a certain target, was seen as necessary in 2007 to meet expenditure targets.

Though the legislation stops the cut, it is only a short-term fix. If the SGR formula is not reformed, physicians can expect an additional 10 percent in cuts in 2008. The CAP will continue to work this year with the medical community to advocate for an overhaul of the SGR formula.

The six percent reduction reflects a combination of changes to the work relative values for pathology and other specialties as part of the third five-year review, the calculation of physician practice expenses, and a freeze in the sustainable growth rate adjustment.

Five-year review of physician work values

Pathology codes. The Omnibus Budget Reconciliation Act of 1990 requires the CMS to review all relative values at least every five years and make needed adjustments. The CMS initiated the third five-year refinement of work RVUs in November 2004 by requesting recommendations from the public on codes that are under- or overvalued. In response, the CAP requested that the following pathology services be included in this refinement effort:

  • 88309: Surgical pathology, gross and microscopic examination, level VI.
  • 88321: Consultation and report on referred slides prepared elsewhere.
  • 88323: Consultation and report on referred material requiring preparation of slides.
  • 88325: Consultation, comprehensive, with review of records and specimens, with report on referred material.

The CAP then collected and presented evidence to the AMA/Specialty Society RVS Update Committee that these four codes were undervalued and should be increased because there had been changes in cancer protocols and the content of work. The committee recommended an increase in the work RVUs for these four codes based on CAP-presented information and submitted its recommendation to the CMS. Subsequently, the CMS announced that it agreed with the data brought forward by the College and the committee’s recommendation to increase the work RVUs for CPT codes 88309, 88321, 88323, and 88325. (Related article: “Effect of five-year review and budget neutrality adjustments on select codes”.)

In addition, the CAP requested early last year that the work RVU for CPT code 88334 [pathology consultation during surgery; cytologic examination (eg, touch prep, squash prep), each additional site] be increased to the committee-recommended work RVU of 0.80; the CMS had decreased the RVU to 0.59 for 2006. Based on the CAP’s comments, the CMS referred the code to the multispecialty validation panel for review. As a result of the statistical analysis of the 2006 multispecialty validation panel ratings, the CMS increased the work RVU for 88334 to 0.73.

Primary care code increases result in budget neutrality reductions. In addition to the pathology codes reviewed, the five-year review includes increases and decreases to work RVUs for more than 400 services for the 2007 Medicare fee schedule based on the update committee’s recommendations. This process led to increases in the work RVUs for evaluation and management services. Because of the large volume of these services, the increases resulted in a boost in expenditures of nearly $4 billion.

Current law requires that total expenditures not increase more than $20 million as a result of changes from the five-year review. Thus, to offset the expected $4 billion increase owing to evaluation and management services, a five percent across-the-board reduction in reimbursement rates across all specialties is necessary.

The method by which this budget neutrality adjustment is determined is key. Specifically, the CAP and the majority of other medical specialties recommended applying necessary adjustments across all three areas of payment (work, practice expense, and medical liability). This would have resulted in a savings of nearly three percent for pathology. This alternative was also endorsed separately by the Practicing Physicians Advisory Council and the American Medical Association (AMA). Despite organized medicine’s nearly unanimous endorsement, the CMS imposed an alternative approach that applies the budget neutrality adjustment only to the work RVUs.

To achieve budget neutrality under this approach, work RVUs must be reduced by 10.1 percent. Unfortunately, this approach places a greater burden on the professional component portion of payments, the formula for which is largely dependent on the magnitude of the work RVU. The technical component, which is not dependent on the work RVU, is not affected by the approach the CMS has taken. The CMS says its approach preserves the integrity of the work RVU because the five-year review focused only on work RVU and not the other components.

Practice expense RVU method changes

New for this year are the CMS’ alterations of its method for calculating the practice expense portion of the physician fee schedule. The practice expense includes the direct costs of such things as laboratory personnel and supplies and the indirect costs, which include overhead expenses such as rent and administrative staff.

The CMS announced that the proposed changes would make the practice expense method “more transparent and easier to understand” and use data that the specialty societies have collected and the update committee has reviewed. The CMS currently uses a top-down method, which allocates aggregate specialty practice costs to specific procedures, and is now proposing a bottom-up approach, whereby direct costs would be determined by summing the costs associated with the clinical staff, equipment, and supplies typically required to provide the services.

The CMS’ revised method bases the measurement of indirect costs on the magnitude of direct costs. The problem is that physicians who are PC-only billers (often hospital-based physicians) have no direct costs and thus their allocation of indirect expenses is limited only to the work RVU (which was further reduced from the five-year review). It’s the CAP’s view that this formula unfairly compensates PC-only billers by not accounting for a large share of their overhead costs. Many of these physicians do indeed have administrative costs. The CAP provided a strong case to the CMS in a formal letter detailing its concerns about the practice expense formula.

Many of the negative effects on hospital-based pathologists would have been eliminated had the CMS accepted the CAP’s alternative method. However, the CMS did express interest in working with the CAP to address this during the phase-in of the new practice expense values. Specifically, in addressing the CAP’s recommended improvements to the indirect practice expense formula, the CMS acknowledges in the final rule: “One commenter recommended that the indirect PE allocation be distributed from the global services to the professional and technical services based upon the share of billings for each service.” While the CMS will retain its current method for 2007, the rule also said it welcomes further clarification regarding this suggestion before full implementation. The CAP will continue to work with the CMS to change the practice expense method to ensure fairer reimbursement rates for PC-only billers.

The CMS estimated that the method changes will result in a one percent reduction for pathology services in 2007, the first year of the phase-in. However, the impact on pathologists will vary. The combination of the changes to the work RVU and the practice expense method is expected to result in a decline in reimbursement rates of eight percent for PC-only billers in 2007. Global billers will experience a minor increase of 0.3 percent reflecting a 4.4 percent increase in the technical component. Independent laboratories are expected to experience a two percent increase in 2007 reflecting the fact that they are largely global billers and benefit from the increases to the technical component.

When viewed across specialties, those facing the greatest cuts are radiologists and anesthesiologists. Internal medicine and general and family practice physicians are expected to experience the largest increases.

Additional PE items affecting pathology pay. The CAP urged the CMS to postpone the use of practice-expense-per-hour data in the CMS practice expense calculations from supplemental surveys supplied by several medical specialties. The AMA, together with medical specialty societies including the CAP, has begun to conduct a new multispecialty practice expense survey for all physician specialties.

The AMA developed the Socioeconomic Monitoring System, or SMS, survey in 1981 and discontinued it in 1999. Beginning in 2002, the CMS incorporated the 1999 SMS survey data into its calculation of the practice expense, adjusted to a common year. The AMA’s SMS data provided aggregate specialty-specific information on hours worked and practice expenses. Subsequently, legislation was enacted to establish a process to supplement the SMS data for a specialty with data collected by entities and organizations other than the AMA. The deadline to submit supplemental surveys expired in 2005.

Concern was raised in comments submitted to the CMS in 2005 that for the practice expense RVUs to reflect accurately the relative indirect costs for all services, it would be preferable to have current data for all specialties collected at the same time. In the 2006 final Medicare physician fee schedule, the CMS agreed with comments that suggested that a multispecialty survey conducted for a uniform period would be helpful, and the agency said it plans to work with the AMA and the medical community to develop a strategy for funding and fielding a multispecialty practice expense survey to help ensure that all specialties are treated equitably.

In its comments, the CAP emphasized that the use of one survey instrument across all specialties would ensure a more consistent measurement of practice expenses. The use of the supplemental surveys would also decrease even further the stability of the practice expense component of the RVUs by making changes now based on supplemental surveys, only to be changed again once the multispecialty survey is completed. While acknowledging the efforts to conduct a multispecialty practice expense survey, the CMS incorporated the supplemental survey data for the several specific specialties as originally proposed. Also in the 2007 final rule, the CMS notes its support for the AMA’s plan to field a multispecialty survey to collect updated practice-expense-per-hour data and says it “will consider any such data as soon as it becomes available.”

Adoption of PE direct cost modifications supported by CAP. The CMS did finalize changes to direct cost data for several pathology codes. Specifically, the agency adopted its proposal to modify equipment time for codes 88304 and 88305 as the CAP requested, and to increase the probe quantity for CPT code 88367, in situ hybridization, auto, equal to that of the other two codes in the family. The CMS also finalized updated equipment, supplies, and clinical labor costs for flow cytometry services. All of these updated costs have been incorporated into the 2007 practice expense RVUs.

Pamela Johnson is CAP assistant director for economic affairs, and Janemarie Mulvey is CAP director for economic affairs, Washington, DC.

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