Reconsidering Geographic Adjustments to Medicare Physician Fees

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Note: This report is available in its entirety in the Portable Document Format (PDF).

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), signed into law in December 2003, included several provisions that altered provider payments as a way to address concerns about access, especially in rural areas.¹ One of those provisions alters the adjustments made to Medicare physician fees that account for geographic differences in practice costs (known as the geographic practice cost indices or GPCIs). This change will reduce the extent of the variation in allowed payments for the physician work component of each Medicare fee by setting a floor on the practice costs adjuster for that component so that every area is paid at least at the average, regardless of its relative costs.² This provision, effective only for calendar years 2004 through 2006, will raise physician fees in areas with below average costs for work without adversely affecting fees elsewhere. An earlier version of the Medicare bill had also imposed a floor on the other practice cost adjusters in the fee schedule, the practice expense and the professional liability insurance (PLI) components. Those provisions were not adopted.

Because the work GPCI floor is temporary, policymakers will have a natural opportunity to review the provision and the issues of geographic differences in physician payments and access to services. Congress will have input on this from its mandated General Accounting Office (GAO) study on geographic differences in payments for physician services, due by September 2004. Among other issues, this GAO study will explore the effect of the work GPCI floor on physician location and retention. To further assist this discussion, it may be useful to explore the objectives of the GPCIs when they were being developed and implemented, as well as the goals of now placing floors on a geographic cost adjuster. If the original goal of having fee differences across areas reflect practice cost differences is still the objective, then the question is whether floors are consistent with that goal or broader goals, such as improving access.

We address these issues in this paper. We first provide some background on geographic adjusters in Medicare payment systems as they relate to the floor provision. We then review the conceptual foundation for the geographic practice cost adjusters used in the Medicare physician fee schedule. In particular, we emphasize why researchers and policymakers who developed and implemented the payment system viewed it as appropriate to adjust for geographic differences in the costs of physicians' own time. In addition, we describe how the initial implementation of the adjustment and later changes made to the number and size of physician payment areas reduced the potential impact of the newly adopted floor policy, relative to the geographic indices originally developed. Finally, we discuss the floor provision in the context of the broader aims of its proponents—to increase access to physician services in those areas affected by the floor.

Notes from this section

1. Most of the rural and access-related provisions of MMA are in the 17 sections of Title IV: Rural Health Care Improvements. These represent the largest, most comprehensive set of rural provisions ever enacted by Congress regarding the Medicare program.

2. The Medicare physician fee schedule is comprised of three elements (a relative value scale, a set of geographic practice cost indices or GPCIs, a conversion factor). First, so that differences in payments across services reflect differences in the amount of time, effort, and practice costs required to provide them, payments are derived from a resource-based relative value scale. The total relative value for a given service is the sum three components, which correspond to the main inputs required to produce the service: physician work, practice expenses, and the cost of professional liability insurance or PLI. Second, so that payments reflect differences in local prices, payments are adjusted by GPCIs. Each component of the relative value scale (work, practice expense, PLI) is adjusted by a separate GPCI. By law, the work GPCI reflects only 25 percent of actual variation in wages. There are 89 physician payment localities, 35 of which are state-wide. Third, a conversion factor is used to translate the adjusted relative values into dollar amounts. Note that in Medicare's prospective payment systems for facility providers (hospitals, nursing facilities, etc), the base rate (or conversion factor) is adjusted for geographic differences in costs (eg, rather than the hospital DRGs or nursing facility RUGs) while in the physician fee schedule, the set of relative values is adjusted for these differences. This difference in the placement of the geographic adjustment in a payment formula does not alter the actual payment amount, although the adjustments may appear more fundamentally tied, conceptually, to physician services than to hospital or nursing facility services, given the placement of the adjustment in the physician payment system.

Note: This report is available in its entirety in the Portable Document Format (PDF).

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Usage, posting and reprint of materials on the UI web site:

Most publications may be downloaded free of charge from the web site in PDF format. This information may be used and copies made for research, academic, policy or other non-commercial purposes. Proper attribution is required.

Copyright of the written materials contained within the Urban Institute website is owned or controlled by the Urban Institute. Posting UI research papers on other websites is permitted subject to prior approval from the Urban Institute—contact paffairs@urban.org.

If you are unable to access or print the PDF document please contact us or call the Publications Office at (202) 261-5687.