College of American Pathologists
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CMS revises its estimates of reasonable earnings

Estimates of FTE annual average net compensation levels

October 2003
Carl Graziano

Pathologists and other physicians, all too often the target of Medicare Part B payment cuts, received positive news on the Part A side recently: updated reasonable compensation equivalent, or RCE, limits.

The updated RCEs are in the final regulation for the 2004 inpatient hospital payment system. The RCEs are the federal government’s estimates of reasonable annual earnings for various physician specialties. They provide an important tool in negotiations between pathologists and hospitals to establish Medicare Part A compensation for managing clinical laboratory services.

Under Medicare, RCEs define allowable compensation for physician services that “benefit patients generally,” as opposed to those provided to individual patients. Examples include administrative services, committee work, teaching, and supervision. Directing a clinical laboratory is one such “administrative” service long considered under the province of the RCE system.

Medicare includes payment for directing a clinical laboratory in its diagnosis-related group system for Part A payments to hospitals for inpatient services. But hospitals are under no obligation to pass through a specific amount and, instead, are encouraged to negotiate Part A payment rates with pathologists. This is where the reasonable compensation equivalents come into play.

“Many hospitals continue to use reasonable compensation equivalents as the measure for Part A reimbursement,” says CAP president-elect Thomas M. Sodeman, MD, of Lake Success, NY. “So an adjustment to that rate is important because it hasn’t been adjusted for a while.”

The Centers for Medicare and Medicaid Services’ RCE update in its Aug. 1 inpatient prospective payment system final rule represented only the second time since 1985 that the agency has adjusted the figures. The only other update came in May 1997.

Under the final rule, the RCE for pathologists in nonmetropolitan areas will rise from $180,000 annually to $208,000. For those in metropolitan areas with fewer than 1 million residents, the figure will rise from $190,000 to $219,500. In metropolitan areas with populations of greater than 1 million, the RCE will increase to $215,700 from $186,700. CMS adjusts the RCEs for metropolitan statistical areas and rural counties.

The RCE portion of the final rule, including the complete list of geographic adjustments, is on the CAP Web site at

While the RCE updates are only a small part of the hefty inpatient payment rule, their importance to pathologists must not be overlooked, Dr. Sodeman cautions.

“The key is to make pathologists across the country aware that there has been an adjustment, so if a hospital uses the RCEs in any form, they understand that there’s a new rate,” he says.

For pathologists, the RCEs make for a good “ballpark figure” when negotiations turn to a discussion of payment rates, says former CAP governor Richard J. Hausner, MD, of Houston.

“As a starting point for what may constitute fair market value, consider the RCEs,” Dr. Hausner advises. “But remember that the payment is for time spent full- time for a practice that does only Medicare. A large laboratory may need more than one FTE to handle the percent of the clinical pathology practice that is Medicare, a smaller laboratory less than one FTE.”

The improved RCE limits are welcome news on the academic front, too, says Carl G. Becker, MD, of the Medical College of Wisconsin, Milwaukee.

“A major issue—and you’d probably get this answer from every academic chair of pathology—is that for most medical schools, their survival is increasingly dependent on their clinical income,” Dr. Becker says. He points to estimates that the supply of medical school graduates is expected to fall short of demand by 45,000 in 2015. “We need that money for the educational process, and, increasingly, the cost of training is coming out of clinical money. So it’s an investment in the future of health care and pathology.”

The RCEs represent a work year of 2,080 hours (40 hours a week). When Medicare established the limits in 1983, it based them on American Medical Association Socioeconomic Monitoring System survey data and consumer price index inflation updates. In October 1997, CMS revised the method to use the Medicare economic index, adjusted by the consumer price index, for updates. CMS made the change to make the method for updating the RCEs consistent with that used to update Part B payments under the physician fee schedule.

The Aug. 1 RCE updates will apply to cost reporting periods beginning on or after Jan. 1, 2004. The final rule says Medicare intermediaries can grant exceptions to the RCE limits if a hospital, particularly those that are small or in rural areas, can demonstrate that the limits make it difficult to recruit or maintain an adequate number of physicians.

The College has worked since the start of Medicare’s inpatient prospective payment system to preserve Part A payments to pathologists for directing clinical laboratories. Hospitals sometimes attempt to negotiate contracts that pay pathologists no or token payment for laboratory oversight, a practice that Medicare, at the urging of the CAP, has labeled a potential violation of fraud and abuse statutes. A 1991 Department of Health and Human Services Office of Inspector General report, “Financial Arrangements Between Hospitals and Hospital-Based Physicians,” said agreements that compensate pathologists for less than the fair market value of the goods and services they provide to hospitals or require pathologists to pay more than the fair market value for goods and services provided by the hospital is a potential violation of anti-kickback statutes of the Social Security Act. In 1997, in its “Compliance Program Guidance for Hospitals,” the OIG reaffirmed and strengthened the language by saying that token or no payment for Part A management services may violate the anti-kickback statutes.

Carl Graziano is CAP manager of government communications.