How do Medicare Physician Fees Compare With Private Payers?

Under the new fee schedule, Medicare physician fees are 76 percent of private fees. Consistent with the intent of payment reform, Medicare physician fees more closely approximate private fees for visits (93 percent) than for surgery (51 percent) and in rural areas as compared with large metropolitan areas. Variation in private fees across the country is considerably greater than it is for Medicare fees. Consequently, Medicare fees are most generous in areas that compare least favorably with the private market because private fees in these areas are well above average. These results shed light on the impact of the fee schedule and on the implications of using Medicare payment methods as part of a broad-based health reform.

Introduction

To address the problem of rising Medicare physician expenditures, Congress reformed Medicare physician payments as part of the Omnibus Budget Reconciliation Act (OBRA) of 1989 (Public Law 101-293). The reform has three parts: a fee schedule based on relative values, volume performance standards, and limits on the amount physicians can bill patients above the Medicare fee schedule (MFS). The MFS, the focus of this article, is a major departure from the customary, prevailing, and reasonable (CPR) reimbursement methodology it replaced. Most importantly, the MFS is intended to reduce the difference in reimbursement for cognitive services relative to procedural services that recent research efforts have found to be unjustified (Hsiao et al., 1992), by granting greater weight to the former in the fee schedule. The MFS is also designed to correct geographic distortions in charging practices thought to be fueled by the CPR methodology. 1

The regulatory impact analysis estimated a 6-percent reduction in Medicare payments per service nationally relative to the CPR reimbursement methods by 1996 when the MFS is fully implemented with varying effects by specialty and State (Federal Register, 1991). The regulatory impact analysis focused only on the Medicare program (i.e., the impact of the MFS relative to CPR), and left the question of how physician payments under the MFS compare with private insurance physician fees unanswered.

This question has two important policy implications. Assuming the MFS is used only for Medicare, there is widespread consensus that publicly insured beneficiaries' access can be curtailed when payment rates fall well below those in the private sector. This has been particularly well documented for the Medicaid program (Sloan, Mitchell, and Cromwell, 1978; Mitchell and Schurman, 1984; Held and Holahan, 1985; Long, Settle, and Stuart, 1986). In addition, higher Medicare fees, holding private rates constant, have been found to be positively related to decisions to formally participate and accept assignment (Mitchell, Rosenbach, and Cromwell, 1988; Mitchell and Cromwell, 1982; Paringer, 1980; Rice, 1984; Rice and McCall, 1982; Rodgers and Musacchio, 1983). 2 Private fees, on the other hand, are negatively related to decisions to participate and accept assignment. 3 Of course, physicians' ability to leave the Medicare program altogether is presumably more limited than their ability to leave Medicaid—Medicare beneficiaries are high utilizers of physician services, and the program represents approximately 24 percent of physician revenues.

Another reason for analyzing the relationship between Medicare fees and private fees relates to the growing interest in replacing the current payment methodologies used by private payers thought to result in inappropriate pricing patterns with a more rational approach. One possible approach is the adoption of Medicare payment rules by private payers as part of a broad-based health financing reform. For example, if private payers adopted the MFS, including the conversion factor and geographic adjusters, to set their reasonable charge screens, then the difference between the private and Medicare levels of payments would provide some guide as to how physicians' revenues might be affected. If earlier studies that show the MFS has fees below those in the private sector are correct (Pope et al., 1991), then adoption of the MFS by private payers would suggest that physician revenues could fall. This would mean that payments by private payers would fall and, at the same time, copayments by private patients would be lower. Depending on private sector arrangements, balance billing could offset all or part of this reduction in copayments.

The purpose of this article is to examine the relationship between physician fees under the MFS and private physician fees. 4 This relationship will be examined by type of service (e.g., do fees for visits compare more favorably than fees for imaging?) and by Medicare payment locality. Although the MFS establishes fee levels designed to address the service type and geographic distortions noted earlier, significant variations in this relationship between Medicare and private fees can still exist by type of service and across localities. Analyzing the relationship between Medicare and private fees by type of service and by locality provides insight into those services and areas of the country that might be most affected by the move to the MFS and by the use of Medicare payment methodologies to establish private fees. A second step in the analysis will explore the underlying variation in Medicare and private fees—i.e., is the variation in Medicare and private fees across the United States comparable?

The next section of this article contains our methods for constructing the fee indexes. In the Results section, we analyze the relationship of Medicare fees to private fees overall and by type of service. Comparison between Medicare and private fees are made nationally and for groups of localities (i.e., classified into quartiles based on the ratio of Medicare to private fees). We also analyze the underlying variation driving the relationship between Medicare and private fees. The Discussion section discusses implications of the analysis.

Methods

Medicare fees are computed by applying the Medicare fee schedule payment methodology (i.e., relative value units, GPCI, and conversion factor) to data obtained from the Health Care Financing Administration's (HCFA) Public Use File (PUF) of Physician Services. 5 The data source for private fees is the Health Insurance Association of America's (HIAA) Medical and Surgical Prevailing Healthcare Charges System (PHCS) for 1990. The PHCS is a major source of billed charge data used in the administration of private health benefit programs. The information is derived from more than 150 major commercial health insurers, Blue Cross and Blue Shield Plans, third-party administrators, and self-insured groups. Areas in all 50 States and the District of Columbia are represented. HIAA defines areas based on 3-digit ZIP Codes. These areas are defined so that each contains adequate numbers of claims so as to allow reliable estimates of mean and median charges to be derived for individual health care services. The annual fee estimates for 1990 in the PHCS are based on more than 400 million individual charges for medical and surgical physician services. Average fees for the 84 procedures we selected for this study are based on approximately 84 million individual charges.

To measure relative fees, a series of indexes measuring the ratio of MFS fees to private fees were constructed for five types of service—visits, imaging (X-rays, magnetic resonance imaging), ambulatory procedures (hernia repair, endoscopy), major procedures (coronary artery bypass graft [CABG], arthroplasty), and diagnostic tests (cardiovascular stress test), as well as a summary index. The type of service categories for the separate indexes are defined using the recently developed Berenson and Holahan (1992) classification scheme. These indexes are based on a selected set of physician services (i.e., HCPCS codes) that account for a significant proportion of Medicare physician charges, are representative of the spectrum of physician services (e.g., visits, surgery, and diagnostic tests), and are likely to be provided to a non-Medicare population.

The 84 physician services selected for the indexes are shown in Table 1 ; these services account for 63 percent of Medicare physician services under the MFS. The underlying purpose of this analysis is to compare Medicare fees with private fees. Although services were selected to account for a significant proportion of Medicare physicians services, these services also yield an index representative of services received by both elderly and non-elderly patients. For example, among the visit services, only the two nursing visit services are likely to pertain primarily to the elderly; all of the remaining visit codes pertain to both the elderly and non-elderly populations. Certain cardiovascular-related imaging procedures (left heart catheter), major procedures (insert pacemaker, CABG), and diagnostic tests (cardiovascular stress test) are more likely to pertain to the elderly (particularly males), but they are frequently provided to those under 65 years of age. In summary, the majority of procedures selected for the indexes are applicable to both the elderly and non-elderly populations, and those provided almost exclusively in the elderly population do not account for large proportions of MFS payments (and, consequently, will carry less weight in the calculation of the indexes).

Table 1

NOTES: HCPCS is HCFA Common Procedure Coding System. MFS is Medicare fee schedule.

SOURCE: The Urban Institute analysis of the Health Care Financing Administration (HCFA) Physician Service Public Use File.

As mentioned earlier, the MFS methodology was used to calculate Medicare physicians fees. Although the MFS includes a 5-year transition from historical payment levels to MFS payment levels, we focus on how the MFS will relate to private fees when it is the sole determinant of Medicare's rates. Therefore, Medicare fees for each procedure in each locality were calculated assuming a fully implemented MFS (i.e., no transition rules are reflected). However, because the MFS fee is compared with private fees for 1990, the 1992 conversion factor was deflated to the 1990 factor using the Medicare Economic Index for primary care and other services.

Mapping Data to the Locality

Private insurance fees for the 84 selected physician services were obtained from the PHCS 1990 national data base that, as noted, reports fees for 3-digit ZIP Code areas. These ZIP Code-level data have been mapped to localities. This is accomplished by first mapping fee data for 3-digit ZIP Codes to counties and then aggregating the data for counties to the locality level. Three-digit ZIP Code areas were mapped to counties using the U.S. Postal Service's National Five-Digit ZIP Code and Post Office Directory. PHCS fees were assigned to each county within a 3-digit ZIP Code. Using the proportion of the locality population accounted for by the county as a weight, these private fees were averaged across all counties within a locality to produce a weighted average private fee for each locality and service. The county-to-locality mapping draws on the methods used to develop GPCI. For the GPCI, counties were initially mapped to localities using the Medicare Directory of Prevailing Charges, 1984 and then revised to make the definitions current based on comments from HCFA. 6

Fee Indexes

The PHCS fee data are mean submitted charges—the data base does not contain what insurers actually pay. What insurers actually pay in an area will be affected by fee screens and the presence of non-traditional reimbursement methods (e.g., capitation, fee schedules). Traditionally, commercial insurers use prevailing charge fee screens ranging from the 80th to the 95th percentile charge. Pope et al. (1991) performed a sensitivity analysis using PHCS fee data and found mean fees at the metropolitan statistical area level to be insensitive to the range of percentile cutoffs (e.g., using a 90th-percentile cutoff reduced the mean charge by only 1 percent). This may not be surprising given that only 10 percent of the charges are affected by the screen, and many submitted charges above the 90th percentile may be reduced by very little in determining the payment rate. Nonetheless, because the sensitivity analysis had limitations (i.e., fee screen cutoff percentiles vary across payers, the geographic basis of the fee screens varies, and non-traditional payment methods cannot be simulated), Pope et al. (1991) conclude that private fee estimates based on submitted charges are likely to be overestimates of what is actually paid. To compensate for this potential overstatement, we used 95 percent of the mean private fee (rather than the mean) in our indexes.

As noted earlier, five service-specific indexes were created—visits, imaging, ambulatory procedures, major procedures, and diagnostic tests—that summarize the ratio of Medicare fees to private fees within the locality. 7 A summary index was also created as a weighted average of the five service-specific indexes.

To create this summary index, national weights for each type of service were developed using all physician services subject to MFS. We chose to use physician services subject to MFS because our indexes pertain only to these services. Table 2 reports the national weights for each type of service category. These national type-of-service weights are affected by the definition of physician services and the use of payments (rather than charges or service volume, for instance). By focusing on physician services paid under MFS, for example, the professional component of many laboratory services (which are reimbursed under a separate fee schedule) are not relevant in the computation of the summary index. 8 Similarly, if the national weights had been calculated using allowed charges for all services in the 1989 Part B Medicare Annual Data, the national weights would have been skewed more toward surgery and diagnostic tests and away from visits. This is because the intended effect of MFS shifts payments to cognitive from procedural services.

Table 2