Practice Expense Data Collection and Methodology: Phase II Final Report

Short abstract

In this article, the authors address how the Centers for Medicare & Medicaid Services (CMS) might improve the methodology used in practice expense (PE) rate-setting, update data that inform PE rates, or both. The system of data and methods that CMS uses to support PE rate-setting is complex; thus, CMS must take into account a number of competing priorities when considering changes to the system.

Abstract

Each year, Medicare allocates tens of billions of dollars for indirect practice expense (PE) across services on the basis of data from the Physician Practice Information (PPI) Survey, which reflects 2006 expenses. Because these data are not regularly updated, and because there have been significant changes in the U.S. economy and health care system since 2006, there are concerns that continued reliance on PPI Survey data might result in PE payments that do not accurately capture the resources that are typically required to provide services.

In this final phase of a study on PE methodology, the authors address how the Centers for Medicare & Medicaid Services (CMS) might improve the methodology used in PE rate-setting, update data that inform PE rates, or both. The authors conclude that this information is best provided by a survey; therefore, they focus on the advantages and disadvantages of survey-based approaches. They also describe the use of a lean model survey instrument, as well as partnering with another agency to collect data. Finally, the authors describe a virtual town hall meeting held in June 2021 to give stakeholders an opportunity to provide feedback on PE data collection and rate-setting.

The system of data and methods that CMS uses to support PE rate-setting is complex; thus, CMS must take into account a number of competing priorities when considering changes to the system. With this in mind, the authors offer a number of near- and longer-term recommendations.

Payments made under the Medicare Physician Fee Schedule (MPFS) reflect physician work, professional liability insurance, and practice expense (PE) components. PE accounts for approximately 45 percent of the total payments made under the MPFS (American Medical Association, 2021). The current Centers for Medicare & Medicaid Services (CMS) system for setting PE payment rates relies in part on data collected in the Physician Practice Information (PPI) Survey, which generally reflects information on the costs of operating physician practices from calendar year (CY) 2006. The key product of the PPI Survey was PE per hour (PE/HR), which was measured at the specialty level for PE rate-setting. Because of changes in the U.S. economy and health care system since that time, there are concerns that continued reliance on measures that use PPI Survey data might result in PE payments that do not accurately capture the relative resources that are typically required to provide services.

In the current system, PE is broken into direct and indirect components. Direct PE includes nonphysician clinical labor, disposable medical supplies, and medical equipment that is typically used to provide a service. Indirect PE relates to such expenses as administration, rent, and other forms of overhead that cannot be attributed to any specific service. This study primarily (but not exclusively) focuses on issues related to indirect PE.

This is the final phase of a two-part study about PE methodology. It addresses the topic of how CMS might improve the methodology that is used in PE rate-setting, update data that inform PE rates, or do both. The research in this study can be divided into three broad topics.

The first topic relates to collecting new PE data, including considerations for establishing an ongoing system of data collection, with a focus on using a rotating panel of practices. In response to feedback from the technical expert panel documented in the Phase II interim report, we investigated the possibility of adding a PE component to an existing data collection effort. We also developed a model survey instrument aimed at updating only PE/HR while retaining the current PE allocation methodology.

The second topic relates to potential methodological refinements to the PE rate-setting system. One thread in this broad topic relates to using information from the Outpatient Prospective Payment System (OPPS) to either assist in PE rate-setting or identify potentially misvalued procedures in the MPFS. We also consider potential refinements to the PE allocation itself, including methods for better handling of differences in PE incurred between facility and nonfacility (e.g., physician office) settings.

Finally, a virtual town hall meeting was held in June 2021 to give stakeholders an opportunity to provide feedback on PE data collection and rate-setting.

New Practice Expense Data Collection

We describe several approaches for collecting new data on a recurring basis, with a particular focus on a rotating panel design, where practices would be recruited to provide data for a period of several years. In the Phase II interim report, we discussed a survey model instrument that could be used as a starting point for developing a field-ready survey for comprehensive data collection that would provide updated PE/HR measures, as well as provide data to support potential refinements to the PE rate-setting methodology itself. In this study, we describe a “lean” model instrument that focuses more narrowly on updating specialty-level PE/HR measures. We also explore the possibility of adding a PE component to existing data collection efforts to minimize survey burden and expense, which is an idea that had some support from the technical expert panel documented in the Phase II interim report. We find that there are likely to be substantial drawbacks to taking a synergistic approach to data collection—such as adding a PE module to an existing survey of physician practices—but that existing data products may be useful for auxiliary functions such as designing sampling frames, assessing representativeness of new data, and performing data quality checks.

Potential Methodological Refinements to Practice Expense Rate-Setting

We continue research begun in our prior two reports to investigate how data from the OPPS could be used to support MPFS PE rate-setting. Medicare pays physicians for practice expenses at the MPFS rates, while similar expenses incurred by hospital outpatient departments are paid according to OPPS. Although these costs are comparable to PE costs incurred by physicians when providing services in nonfacility settings, the MPFS and OPPS use different methodologies to determine payment. We examine ways OPPS information could be used to establish PE relative values that better align the MPFS and OPPS, including identifying potentially misvalued services and addressing inappropriate site-of-service differentials.

In our previous reports, we suggested that changing from collecting PE/HR to collecting PE per work RVU may streamline data collection. In this study, we investigate transforming the current data to a per-work RVU basis. We find that doing so can result in substantial reallocation of money across specialties, particularly for specialties that generate relatively few work RVUs.

Some stakeholders have expressed concerns that, in some cases, too much indirect PE may be allocated to services that require expensive equipment or supplies or that are performed in a facility setting (where a separate facility fee is paid) because of the formula by which indirect PE is allocated. We research potential refinements to the indirect allocation method by investigating use of a single specialty for most facility-setting services and modifications in the linear allocation of indirect costs to direct costs. Moreover, the volume of Medicare services is a key component of PE rate-setting, but the PE/HR measure is inherently an all-payer quantity. Using claims from Colorado, we perform an initial assessment of the feasibility of using all-payer claims volumes in PE rate-setting.

Stakeholders routinely identify year-to-year stability of payments and minimizing survey response burden as key goals of any update to the PE rate-setting system. We document substantial differences by specialty as to how sampling variation in new PE/HR values translates to variation in their PE payments. We propose a method of unequal sample allocation across surveyed specialties to reduce the possibility of large sampling errors. Reducing the number of distinct specialties that receive their own PE/HR measures is another way to reduce aggregate survey burden. We perform exploratory analyses to identify groups of specialties that perform similar distributions of services that may therefore be considered for grouping in a new PE survey.

Practice Expense Town Hall

A virtual town hall meeting was held on June 16, 2021, to share some of the results of RAND's PE research with stakeholders and to solicit feedback. Nearly 500 members of the public registered for the event. Topics discussed included establishing a system of ongoing data collection, collecting PE data by specialty, and improving indirect PE allocation. Issues that were highlighted by commenters included the importance of regularly updating key PE data, ensuring that PE RVUs are relatively stable from year to year, and implementing a survey and PE allocation system that are flexible enough to capture unique expense types that some physician practices incur.

Conclusion

Tens of billions of dollars of PE are paid each year under the MPFS. Data that reflect 2006 financial information are key to the allocation of those payments across physician practices. Since then, there have been important changes in how medicine is practiced and how the business of medicine is organized. Updating the data that support PE rate-setting should be a high priority, and setting up a system of recurring data collection would avoid using similarly outdated data in the future.

In such a system, there is a tension between being responsive to changes that should be reflected in PE rate-setting and providing predictability in MPFS payment rates from year to year. We find that updating the PE allocation methodology may result in greater stability over the long run than simply updating PE/HR measures in the current system. Collecting richer data from practices in the near term could support methodological refinements that result in a system that more appropriately balances stability and responsiveness.