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Medicare: Payments to Physicians

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Publication Date: January 1998

Publisher(s): Library of Congress. Congressional Research Service

Series: 98-75

Topic: Health (Health care financing)


Payments for physicians services under Medicare are made on the basis of a fee schedule. This fee schedule, established by the Omnibus Budget Reconciliation Act of 1989 (OBRA 1989), went into effect January 1, 1992. The fee schedule is intended to relate payments for a given service to the actual resources used in providing that service.

The fee schedule assigns relative values to services. These relative values reflect physician work (i.e., the time, skill, and intensity it takes to provide the service), practice expenses and malpractice costs. The relative values are adjusted for geographic variations. The adjusted relative values are then converted into a dollar payment amount by a conversion factor. The law provides a specific formula for calculating an annual update in the payment amount. Medicare payments for physicians services (excluding those provided under managed care arrangements) totaled an estimated $30.7 billion in FY1997.

The Balanced Budget Act of 1997 (BBA 97) included savings in payments to physicians and other practitioners of $4.5 billion over the FY1998-FY2002 period. These savings are achieved by providing for the use of a single (rather than three) conversion factors and limiting the annual update in the conversion factor to the growth rate in the economy as a whole.

Many physicians have evidenced concern regarding the scope of recent changes. Changes in calculation of the conversion factor coupled with changes in practice expense calculations will have the greatest impact on payments for surgical services. For example, the Health Care Financing Administration (HCFA, the agency that administers Medicare) has estimated that Medicare payments in 1998 will drop by over 5% for cardiac surgeons, thoracic surgeons, neurosurgeons and ophthalmologists. Conversely, the payments are expected to increase by over 5% for internists and family practice physicians. The reductions in payments for surgical services are expected to further decline as a new methodology for paying for practice expenses is implemented over the 1999-2002 period.

Some observers have suggested that as Medicare places additional constraints on spending, access to care may be impeded. To date, this has not been the case. It should be noted that the Medicare program is not alone in attempting to constrain cost increases. Private insurers and employers are also attempting to control spending through various approaches including an increased emphasis on managed care.