Physician Fee Schedule Update for Calendar Year 1995 and Physician Volume Performance Standard Rates of Increase for Federal Fiscal Year 1995

SUMMARY: This final notice announces the calendar year (CY) 1995

updates to the Medicare physician fee schedule and the Federal fiscal

year (FY) 1995 volume performance standard rates of increase for

expenditures for physicians' services under the Medicare Supplementary

Medical Insurance (Part B) program as required by sections 1848(d) and

(f), respectively, of the Social Security Act. The fee schedule update

for CY 1995 is 12.2 percent for surgical services, 7.9 percent for

primary care services, and 5.2 percent for other nonsurgical services.

While it does not affect payment, there was a 7.7 percent increase in

the update for all physicians' services for 1995. The physician volume

performance standard rates of increase for Federal FY 1995 are 9.2

percent for surgical services, 13.8 percent for primary care services,

4.4 percent for other nonsurgical services, and a weighted average of

7.5 percent for all physicians' services.

In our December 2, 1993 notice announcing the CY 1994 update to the

Medicare physician fee schedule and FY 1994 volume performance standard

rates of increase, we invited public comment on the update indicators

for surgical and nonsurgical procedures that were new or revised in

1994. There were no public comments on those indicators. We have

decided not to establish a public comment period for the codes that are

new and revised in 1995 since, although these codes are initially

classified as surgical or nonsurgical based on the clinical judgment of

our medical staff, that classification ultimately rests on charge data

that we use when they become available to determine whether the codes

classified as surgical meet the criteria specified in our December 1993

notice. Because the classification is finally based on empirical data,

public comment is unnecessary. Any changes to the classification of

codes that are new or revised in 1995, based on our analysis of 1995

charge data, will not be effective before October 1, 1995, for volume

performance standard purposes, or before January 1, 1996, for update

purposes.

In our proposed rule published in the June 24, 1994 Federal

Register entitled ``Medicare Program; Refinements to Geographic

Adjustment Factor Values and Other Policies Under the Physician Fee

Schedule (BPD-789-P)'', we invited public comments on a proposal to

include clinical laboratory services performed in hospital outpatient

settings in the MVPS beginning in FY 1996. We received two comments on

this proposal. Since this proposal is related to the MVPS and this

notice deals with MVPS issues, we are responding to those comments in

this notice instead of in the final rule for the physician fee schedule

entitled ``Medicare Program; Refinements to Geographic Adjustment

Factor Values, Revisions to Payment Policies, Adjustments to the

Relative Value Units (RVUs), and 5-Year Refinement of RVUs (BPD-789-

FC),'' published elsewhere in this Federal Register issue.

DATES: Effective Date: The volume performance standard rates of

increase are effective on October 1, 1994. The Medicare physician fee

schedule update is effective on January 1, 1995.

Applicability Date: The procedure-specific update indicators apply

to payment for services furnished on or after January 1, 1995.

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4586.

SUPPLEMENTARY INFORMATION:

I. Background and Summary of Legislation

A. The Physician Fee Schedule Update and Medicare Volume Performance

Standard (MVPS)

Section 1848 of the Social Security Act (the Act) requires the

Secretary of Health and Human Services to--

Establish annual updates to payment rates under the

Medicare physician fee schedule, and

Establish volume performance standard rates of increase to

help control the rate of growth in expenditures for physicians'

services.

Under section 1848(b)(1) of the Act, payment for physicians'

services, except for anesthesia services, equals the product of the

relative value units (RVUs) for a service, a geographic adjustment

factor (GAF), and a conversion factor (CF). Anesthesia services are

paid under a different relative value system, and payment is equal to

the sum of the base and time units for the service multiplied by a

geographically adjusted anesthesia-specific CF. The RVUs and anesthesia

base units reflect the relative amount of resources used by physicians

to furnish the service, and the GAF measures practice cost differences

between areas. The geographically adjusted RVUs are multiplied by a CF

to obtain the physician fee schedule payment amounts. The 1995 CFs are

$14.770 for anesthesia services, $39.447 for surgical services, $36.382

for primary care services, and $34.616 for other nonsurgical services.

1. Physician Fee Schedule Update

Section 1848(d) of the Act requires the Secretary to provide the

Congress with her recommendation of a physician fee schedule update by

April 15 of each year. Under section 1848(d)(2)(A) of the Act, the

Secretary is required to consider a number of factors, including the

following:

The percentage change in the Medicare economic index

(MEI), a measure of the change in the cost of operating a medical

practice.

The percentage by which actual expenditures for all

physicians' services in the first preceding FY were less than or

exceeded the actual expenditures in the second preceding FY.

The relationship between the percentage determined above

and the volume performance standard rate of increase for the same FY.

Changes in the volume and intensity (VI) of services.

Access to services.

Other factors that may contribute to changes in VI of

services or access to services.

On May 20, 1994, the Secretary recommended to the Congress a

physician fee schedule update for CY 1995 of 10.2 percent for surgical

services, 9.4 percent for primary care services, and 3.7 percent for

other nonsurgical services. The Secretary's update recommendation was

based on our preliminary estimate of the MEI, adjusted for our

estimated rate of increase in expenditures compared to the MVPS for

each category of physicians' services. For surgical and nonsurgical

services, the Secretary recommended a reduction of 3.0 percentage

points to adjust for inappropriately high MVPS goals from prior years.

The Secretary's update recommendation is consistent with the

President's FY 1995 budget, which included a proposal to base the CY

1995 update on the current law methodology less 3.0 percentage points

for all services except primary care. If the Secretary's update

recommendation, adjusted for more recent performance adjustment and MEI

data, had been adopted by the Congress, Medicare payments for

physicians' services furnished in 1995 would have increased by an

estimated $1.5 billion relative to the payments for physicians'

services furnished in 1994. The actual 1995 updates will increase

payments for physicians' services furnished in 1995 by an estimated

$2.2 billion relative to the payments for physicians' services

furnished in 1994. The actual updates are required by the Medicare

statute, and any budget implications associated with them are due to

the requirements of the law and not this notice.

If the Congress does not set the update, section 1848(d)(3) of the

Act establishes the process for updating the physician fee schedule.

Under section 1848(d)(3), unless otherwise specified by the Congress,

the fee schedule update for a category of physicians' services equals

the appropriate update index (that is, the MEI) adjusted by the number

of percentage points by which expenditure growth exceeded or was less

than the volume performance standard rates of increase for the second

preceding year for that category of physicians' services. That is, the

CY 1995 update would equal the 1995 MEI increased or decreased by the

difference between the rate of increase in expenditures for FY 1993 and

the volume performance standard for that year. However, section

1848(d)(3)(B) of the Act limits the maximum downward adjustment for

1995 and any succeeding year to 5.0 percentage points. There is no

restriction on upward adjustments to the MEI.

While the Congress has not specifically set the level of physician

fee schedule updates, section 13511 of the Omnibus Budget

Reconciliation Act of 1993 (OBRA '93) (Public Law 103-66), enacted on

August 10, 1993, amended section 1848(d)(3)(A) of the Act to require

the Secretary to reduce the MEI by 2.7 percentage points in 1995 for

both surgical and nonsurgical services. Primary care services are

exempt from the statutory reductions in the MEI in 1995.

Section 1848(d)(1)(C) of the Act requires the Secretary to publish

in the Federal Register, within the last 15 days of October, the update

for the following CY.

2. MVPS Rates

Section 1848(f) of the Act requires the Secretary to establish

volume performance standard rates of increase for Medicare expenditures

for physicians' services. We refer to these rates of increase as the

MVPS rates. The use of volume performance standard rates of increase is

intended to involve physicians in the effort to slow the annual rate of

increase in expenditures by having physicians carefully evaluate their

services and eliminate those that are inappropriate or ineffective.

The volume performance standard rates of increase are not limits on

expenditures. Payments for services are not withheld if volume

performance standard rates of increase are exceeded. Rather, the

appropriate fee schedule update, as specified in section 1848(d)(3)(A)

of the Act, is adjusted to reflect the success or failure in meeting

the volume performance standard rates of increase.

Section 1848(f) of the Act sets forth the process for establishing

the volume performance standard rates of increase by requiring the

Secretary to recommend to the Congress the physician volume performance

standard rates of increase for the following Federal FY by not later

than April 15. The Secretary is required to recommend MVPS rates for

surgical, primary care, other nonsurgical, and all physicians'

services. In making the recommendations, the Secretary is required to

confer with organizations that represent physicians and to consider the

following factors:

Inflation.

Changes in the number and age composition of Medicare

enrollees under Part B (excluding risk HMO enrollees).

Changes in technology.

Evidence of inappropriate utilization of services.

Evidence of lack of access to necessary physicians'

services.

Other appropriate factors as determined by the Secretary.

The Secretary recommended volume performance standard rates of

increase for FY 1995 of 5.8 percent for surgical services, 11.1 percent

for primary care services, 3.3 percent for other nonsurgical services,

and 5.6 percent for all physicians' services, which included the effect

of proposals in the President's FY 1995 budget and a proposal to change

the allocation of clinical diagnostic laboratory services in FY 1996.

If the Congress does not set the volume performance standard rates

of increase, section 1848(f)(2) (A) and (B) of the Act requires the

Secretary to set MVPS rates for all physicians' services and each

category of physicians' services equal to the product of the following

four factors reduced by a performance standard factor, which for FY

1995 is 4.0 percentage points:

1.0 plus the Secretary's estimate of the weighted-average

percentage increase (divided by 100) in fees for all physicians'

services or for the category of physicians' services for the portions

of CY 1994 and CY 1995 contained in FY 1995.

1.0 plus the Secretary's estimate of the percentage change

(divided by 100) in the average number of Part B enrollees (excluding

risk HMO enrollees) from FY 1994 to FY 1995.

1.0 plus the Secretary's estimate of the average annual

percentage growth (divided by 100) in VI of all physicians' services or

of the category of physicians' services for FY 1989 through FY 1994.

1.0 plus the Secretary's estimate of the percentage change

(divided by 100) in expenditures for all physicians' services or of the

category of physicians' services that will result from changes in law

or regulations in FY 1995 as compared with expenditures for physicians'

services in FY 1994.

Section 1848(f)(1)(C) of the Act requires the Secretary to publish

in the Federal Register within the last 15 days of October of each year

the volume performance standard rates of increase for all physicians'

services and for each category of physicians' services for the Federal

FY that began on October 1 of that year. (The MVPS for all physicians'

services has no practical effect on the update. We publish it only

because we are required to do so by section 1848(f) of the Act.)

3. Past Years' MVPS Rates and Physician Fee Schedule Updates

MVPS rates have been established under section 1848 of the Act

since FY 1990. CY 1992 was the first year in which the update was

affected by expenditures under the MVPS system. The following tables

illustrate the MVPS rates in each FY since their inception, the actual

rates of increase in expenditures, and the corresponding updates in the

second subsequent CY.

Fee Schedule Update

------------------------------------------------------------------------

Performance Legislative

Calendar year MEI adjustment adjustment Update

------------------------------------------------------------------------

CY 1992:

All services............ 3.2% -0.9% -0.4% 1.9%

CY 1993:

Surgical................ 2.7% 0.4% ........... 3.1%

Nonsurgical............. 2.7% -1.9% ........... 0.8%

CY 1994:

Surgical................ 2.3% 11.3% -3.6% 10.0%

Primary care............ 2.3% 5.6% 0.0% 7.9%

Other nonsurgical....... 2.3% 5.6% -2.6% 5.3%

CY 1995:

Surgical................ 2.1% 12.8% -2.7% 12.2%

Primary care............ 2.1% 5.8% 0.0% 7.9%

Other nonsurgical....... 2.1% 5.8% -2.7% 5.2%

------------------------------------------------------------------------

MVPS

------------------------------------------------------------------------

Fiscal year MVPS Actual Difference

------------------------------------------------------------------------

FY 1990:\1\

All services............................ 9.1% 10.0% -0.9%

FY 1991:

Surgical................................ 3.3% 2.9% 0.4%

Nonsurgical............................. 8.6% 10.5% -1.9%

FY 1992:

Surgical................................ 6.5% -4.8% 11.3%

Nonsurgical............................. 11.2% 5.6% 5.6%

FY 1993:

Surgical................................ 8.4% -4.4% 12.8%

Nonsurgical............................. 10.8% 5.0% 5.8%

FY 1994:

Surgical................................ 9.1% ....... ..........

Primary care............................ 10.5% ....... ..........

Other nonsurgical....................... 9.2% ....... ..........

FY 1995:

Surgical................................ 9.2% ....... ..........

Primary care............................ 13.8% ....... ..........

Other nonsurgical....................... 4.4% ....... ..........

------------------------------------------------------------------------

\1\Separate MVPS rates for surgical and nonsurgical services were not

required until FY 1991. Separate fee schedule updates were not

required until CY 1993. Beginning with the CY 1994 fee schedule update

and the FY 1994 MVPS, we established separate updates and MVPS rates

of increase for surgical, primary care, and other nonsurgical

services.

B. Physicians' Services

Section 1848(f)(5)(A) of the Act defines physicians' services for

purposes of the volume performance standard rates of increase as

including other items or services (such as clinical diagnostic

laboratory tests and radiology services), specified by the Secretary,

that are commonly performed by a physician or furnished in a

physician's office. Section 1861(s) of the Act defines medical and

other health services covered under Part B. As provided for in the FY

1990 volume performance standard rates of increase notice in the

Federal Register on December 29, 1989 (54 FR 53819), we are including

the following medical and other health services in section 1861(s) of

the Act in the physician volume performance standard rates of increase

if bills for the items are processed and paid for by Medicare carriers:

Physicians' services.

Services and supplies furnished incident to physicians'

services.

Outpatient physical therapy and speech therapy services,

and outpatient occupational therapy services.

Antigens prepared by or under the direct supervision of a

physician.

Services of physician assistants, certified registered

nurse anesthetists, certified nurse midwives, clinical psychologists,

clinical social workers, nurse practitioners, and clinical nurse

specialists.

Diagnostic x-ray tests, diagnostic laboratory tests, and

other diagnostic tests.

X-ray, radium, and radioactive isotope therapy.

Surgical dressings, splints, casts, and other devices used

for reduction of fractures and dislocations.

We stated in our December 29, 1989 notice (54 FR 53819) announcing

the FY 1990 volume performance standard rates of increase that we would

consider including outpatient diagnostic laboratory tests paid through

intermediaries in the MVPS definition of physicians' services. We have

always included diagnostic laboratory tests if paid through the

carriers, but have not included them if paid through intermediaries

since the detailed information required to set the volume performance

standard rates of increase was not readily available from our data

collection systems. This information is now more easily accessible,

and, therefore, on June 24, 1994, we published in the Federal Register

a proposed rule, ``Medicare Program; Refinements to Geographic

Adjustment Factor Values and Other Policies Under the Physician Fee

Schedule (BPD-789-P)'' (59 FR 32754), which announced our intention to

include these services in the nonsurgical category beginning with the

FY 1996 MVPS. We received two comments regarding this proposal, and we

respond to these comments in section II. of this notice. We will

include outpatient diagnostic laboratory tests paid through the

intermediaries on the basis of the clinical diagnostic laboratory fee

schedule in the nonsurgical MVPS category beginning in FY 1996.

C. Definition of Surgical, Primary Care, and Other Nonsurgical Services

As described below, we have classified codes that are new or

revised for 1995 as surgical, primary care, or other nonsurgical

services. We have also changed the classification of eight codes that

were new or revised for 1994 from surgical to nonsurgical based on data

from the first 6 months of 1994. Since our definitions of surgical,

primary care, or other nonsurgical services have not changed, we have

not changed the classifications of any other codes.

As described in the December 2, 1993 notice (58 FR 63858)

containing our definitions of surgical, primary care, or other

nonsurgical services, we consider a procedure to be surgical if the

following conditions are met:

In the HCFA Part B data system, the service is classified

under ``type of service'' as a ``surgery.''

The service is performed by surgical specialists more than

50 percent of the time.

As also discussed in the December 1993 notice, section 1842(i)(4)

of the Act defines primary care services as ``office medical services,

emergency department services, home medical services, skilled nursing,

intermediate care, and long-term care medical services, or nursing

home, boarding home, domiciliary, or custodial care medical services.''

Since this language was the result of an amendment to the Act made by

section 4042(b) of the Omnibus Budget Reconciliation Act of 1987 (OBRA

'87) (Public Law 100-203), enacted on December 22, 1987, we rely on the

conference report accompanying OBRA '87 (H.R. Rep. No. 100-495, 100th

Congress, 1st Session 594-595 (1987)) to determine the HCFA Common

Procedure Coding System (HCPCS) codes to be included in the definition

of primary care services. In addition, section 6102(f)(10) of the

Omnibus Budget Reconciliation Act of 1989 (OBRA '89) (Public Law 101-

239), enacted on December 19, 1989, indicated intermediate and

comprehensive office visits for eye examinations and treatments for new

patients were to be considered primary care services.

We classify physicians' services not meeting the surgical or

primary care definitions as nonsurgical services.

For a procedure code that is new in 1995 and does not meet the

primary care definition, we do not have any data for determining how

often the procedure is performed by surgical specialists and therefore

whether the service should be classified as surgical or nonsurgical. We

categorized these codes as surgical or nonsurgical based on the

judgment of our medical staff. To assist us in making these

determinations, we considered the type-of-service classification within

the Physicians' Current Procedural Terminology (CPT) and the

relationship of services represented by the new codes to surgical

services meeting the above-described criteria. We followed a similar

process to classify codes that were new in 1994. For the 1995

classification of the new 1994 codes, however, we used 6 months of 1994

data to determine whether they meet the criteria for being considered

surgical services. Based on these data, we have changed the

classification of the following HCPCS codes from surgical to

nonsurgical:

------------------------------------------------------------------------

HCPCS

code Description

------------------------------------------------------------------------

33213... Insertion or replacement of pacemaker pulse generator only;

dual chamber.

33214... Upgrade of implanted pacemaker system, conversion of single

chamber system to dual chamber system (includes removal of

previously placed pulse generator, testing of existing lead,

insertion of new lead, insertion of new pulse generator).

33220... Repair of pacemaker electrode(s) only; dual chamber.

33233... Removal of permanent pacemaker; pulse generator only.

33235... Removal of permanent pacemaker; and transvenous electrode(s),

dual lead system.

33247... Insertion or replacement of implantable cardioverter-

defibrillator lead(s), by other than thoracotomy.

44393... Colonoscopy through stoma; with ablation of tumor(s),

polyp(s), or other lesion(s) not amenable to removal by hot

biopsy forceps, bipolar cautery or snare technique.

48400... Injection procedure for intraoperative pancreatography.

------------------------------------------------------------------------

For 1995, we have classified care plan oversight (HCPCS code 99375)

as a primary care service. For a full discussion of this

classification, see the final rule with comment period entitled

``Medicare Program; Refinements to Geographic Adjustment Factor Values,

Revisions to Payment Policies, Adjustments to the Relative Value Units

(RVUs), and 5-Year Refinement of RVUs (BPD-789-FC),'' published

elsewhere in this Federal Register issue and hereafter referred to as

the physician fee schedule final rule.

Also, Addendum B of the physician fee schedule final rule (BPD-789-

FC), published elsewhere in this Federal Register issue, lists the RVUs

and related information used in determining Medicare payments for HCPCS

codes. For the purposes of the physician fee schedule, we have assigned

the following surgical, primary care, or other nonsurgical service

update indicators to these codes:

------------------------------------------------------------------------

Update

indicator Interpretation

------------------------------------------------------------------------

S Surgical services.

P Primary care services.

N The physician fee schedule update applies, but the code is

not defined as surgical or primary care.

O The physician fee schedule update does not apply.

------------------------------------------------------------------------

The MVPS indicator for a procedure code is identical to the update

indicator for codes that have a surgical, primary care, or other

nonsurgical service update indicator. However, we consider some codes

with an update indicator of ``O'' to be nonsurgical for the purposes of

the MVPS, most notably the clinical diagnostic laboratory codes.

The update indicators for codes new or revised in 1995 are shown in

Addendum C of the physician fee schedule final rule (BPD-789-FC),

published elsewhere in this Federal Register issue.

II. Analysis of and Responses to Public Comments

Our final notice with comment period published in the December 2,

1993 Federal Register entitled ``Physician Volume Performance Standard

rates of increase for Federal Fiscal Year 1994 and Physician Fee

Schedule Update for Calendar Year 1994 (BPD-774-FNC)'' (58 FR 63856)

referenced the surgical and nonsurgical update indicators for new and

revised procedure codes to be used in applying the CY 1994 updates and

for measuring expenditures under the MVPS for FY 1994. These update

indicators appeared in Addendum C of our final rule with comment period

in the December 2, 1993 Federal Register entitled ``Revisions to

Payment Policies and Adjustments to the Relative Value Units Under the

Physician Fee Schedule for Calendar Year 1994 (BPD-770-FC)'' (58 FR

63626). We invited comments on the update indicators for these new and

revised procedure codes. There were no public comments on those

indicators.

In our proposed rule published in the June 24, 1994 Federal

Register entitled ``Medicare Program; Refinements to Geographic

Adjustment Factor Values and Other Policies Under the Physician Fee

Schedule (BPD-789-P)'' (59 FR 32754), we invited public comments on a

proposal to include clinical diagnostic laboratory services performed

in hospital outpatient settings in the MVPS beginning in FY 1996. We

received two comments on this proposal. Since this proposal is related

to the MVPS and this notice deals with MVPS issues, we are responding

to these comments in this notice instead of in the physician fee

schedule final rule (BPD-789-FC), published elsewhere in this Federal

Register issue. Our responses to the comments follow:

Comment: One commenter expressed concern over the proposal to

include clinical diagnostic laboratory services performed in hospital

outpatient settings in the MVPS beginning in FY 1996 since the

commenter believed we had not demonstrated that the costs of clinical

diagnostic laboratory services were entirely attributable to

physicians. This commenter believed that, in many instances, the

preadmission testing is ordered by nonphysician staff and is a hospital

requirement.

Response: Section 1848(f)(5)(A) of the Act specifies that the MVPS

category of nonsurgical services includes ``clinical diagnostic

laboratory tests.'' We have always believed the Congress intended these

tests to be included in the MVPS category of nonsurgical services

regardless of the setting where they are performed. As we mentioned

above, the only reason these tests were not included if performed in

the outpatient departments of hospitals was that the detailed

information required to set the volume performance standard rates of

increase was not readily available under our data collection systems.

This information is now more easily accessible.

In addition, we do not believe the majority of these tests are

ordered by nonphysician hospital staff to satisfy hospital

requirements. We intend to include these services in the MVPS category

of nonsurgical services beginning in FY 1996.

Comment: Two commenters questioned whether this proposal affected

the setting of the MVPS and consequently the update to the Medicare

physician fee schedule.

Response: Since clinical diagnostic laboratory tests are

nonsurgical services, the inclusion of these services will affect only

the nonsurgical MVPS. We will account for the effects of including

these services in setting the nonsurgical MVPS. This change will affect

the nonsurgical update to the extent that the actual VI increase in

outpatient laboratory services differs from the allowance for that

growth in the nonsurgical MVPS.

III. Provisions of this Final Notice

A. Physician Fee Schedule Update for CY 1995

Under the requirements of section 1848(d)(3) of the Act, the fee

schedule update for CY 1995 will be 12.2 percent for surgical services,

7.9 percent for primary care services, and 5.2 percent for other

nonsurgical services. While it does not affect payment, there was a 7.7

percent increase in the update for all physicians' services for 1995.

We determined this update as follows:

------------------------------------------------------------------------

Primary

Surgical care Nonsurgical

services services services

(percent) (percent) (percent)

------------------------------------------------------------------------

1995 MEI............................. 2.1 2.1 2.1

OBRA '93 Adjustment.................. -2.7 0.0 -2.7

MVPS Adjustment...................... 12.8 5.8 5.8

1995 Update.......................... 12.2 7.9 5.2

------------------------------------------------------------------------

Applying these updates to the 1994 CFs of $35.158 for surgical

services and $32.905 for nonsurgical services results in CFs of $39.447

for surgical services and $34.616 for nonsurgical services (other than

anesthesia and primary care services) for 1995. The 1994 CF of $33.718

for primary care services will be updated by 7.9 percent to $36.382 for

primary care services for 1995. The 1994 anesthesia CF of $14.20, which

includes the effect of the 1994 RVU budget-neutrality adjustment, will

be updated by the nonsurgical update to $14.77 for 1995, after

adjusting for the 1995 RVU budget-neutrality adjustment.

The specific calculations to determine the fee schedule updates for

physicians' services for CY 1995 are explained in section IV.A. of this

notice.

B. Physician Volume Performance Standard Rates of Increase for FY 1995

Under the requirements in section 1848(f)(2)(A) and (B) of the Act,

we have determined that the volume performance standard rates of

increase for physicians' services for FY 1995 are 9.2 percent for

surgical services, 13.8 percent for primary care services, 4.4 percent

for other nonsurgical services, and a weighted average of 7.5 percent

for all physicians' services.

This determination is based on the following legislative factors:

------------------------------------------------------------------------

Primary

Surgical care Nonsurgical

Legislative factors (percent) services services services

(percent) (percent) (percent)

------------------------------------------------------------------------

Inflation............................ 2.3 2.3 2.4

Enrollment........................... 0.7 0.7 0.7

VI................................... 4.4 4.4 4.4

Legislation.......................... 5.3 9.5 0.7

Performance Standard Factor.......... -4.0 -4.0 -4.0

----------------------------------

Total................................ 9.2 13.8 4.4

------------------------------------------------------------------------

The specific calculations to determine the volume performance

standard rates of increase for physicians' services for FY 1995 are

explained in section IV.B. of this notice.

IV. Detail on Calculation of the CY 1995 Physician Fee Schedule Update

and the FY 1995 Physician Volume Performance Standard Rates of Increase

A. Physician Fee Schedule Update

1. The Percentage Change in the MEI

The MEI measures the weighted-average annual price change for

various inputs needed to produce physicians' services. The MEI is a

fixed-weight input price index, with an adjustment for the change in

economy-wide labor productivity. This index, which has 1989 base

weights, is comprised of two broad categories: (1) Physician's own

time, and (2) physician practice expense.

The physician's own time component represents the net income

portion of business receipts and primarily reflects the input of the

physician's own time into the production of physicians' services in

physicians' offices. This category consists of two subcomponents, wages

and salaries and fringe benefits. These components are adjusted by the

10-year moving average percent change in output per manhour for the

nonfarm business sector to eliminate double counting for productivity

growth in physician offices and the general economy.

The physician practice expense category represents the rate of

price growth in nonphysician inputs to the production of services in

physician offices. This category consists of wages and salaries and

fringe benefits for nonphysician staff and other nonlabor inputs. Like

physician's own time, the nonphysician staff categories are adjusted

for productivity using the 10-year moving average percent change in

output per manhour for the nonfarm business sector. The physician

practice expense component also includes the following categories of

nonlabor inputs: office expense, medical materials and supplies,

professional liability insurance, medical equipment, professional car,

and other expense. The table below presents a listing of the MEI cost

categories with associated weights and percent changes for price

proxies for the 1995 update. The CY 1995 MEI is 2.1 percent.

Increase in the Medicare Economic Index, Update for CY 1995\1\

------------------------------------------------------------------------

CY 1995

1989 percent

weights\2\ changes

------------------------------------------------------------------------

Medicare Economic Index Total................. 100.0 2.1

1. Physician's Own Time\3\\4\............. 54.2 1.6

a. Wages and Salaries: Average hourly

earnings private nonfarm, net of

productivity......................... 45.3 1.3

b. Fringe Benefits: Employment Cost

Index, benefits, private nonfarm, net

of productivity...................... 8.8 3.4

2. Physician Practice Expense\3\ \4\...... 45.8 2.6

a. Nonphysician Employee Compensation. 16.3 2.1

1. Wages and Salaries: Employment

Cost Index, wages and salaries,

weighted by occupation, net of

productivity..................... 13.8 1.8

2. Fringe Benefits: Employment

Cost Index, fringe benefits,

white collar, net of productivity 2.5 3.4

b. Office Expense: CPI-U, housing..... 10.3 2.6

c. Medical Materials and Supplies:

Producer Price Index (PPI), ethical

drugs/PPI, surgical appliances and

supplies/CPI-U, medical equipment and

supplies (equally weighted).......... 5.2 3.2

d. Professional Liability Insurance:

HCFA professional liability insurance

survey\5\............................ 4.8 4.0

e. Medical Equipment: PPI, medical

instruments and equipment............ 2.3 1.2

f. Other Professional Expense......... 6.9 2.8

1. Professional Car: CPI-U,

private transportation........... 1.4 1.8

2. Other: CPI-U, all items less

food and energy.................. 5.5 3.0

Addendum:

Productivity: 10-year moving average of

output per manhour, nonfarm business

sector................................... n/a 1.2

Physician's Own Time, not productivity

adjusted................................. 54.2 2.9

Wages and salaries, not productivity

adjusted............................. 45.3 2.5

Fringe benefits, not productivity

adjusted............................. 8.8 4.7

Nonphysician Employee Compensation,

not productivity adjusted............ 16.3 3.3

Wages and salaries, not productivity

adjusted............................. 13.8 3.0

Fringe benefits, not productivity

adjusted............................. 2.5 4.6

------------------------------------------------------------------------

\1\The rates of change are for the 12-month period ending June 30, 1994,

which is the period used for computing the CY 1995 update. The price

proxy values are based upon the latest available Bureau of Labor

Statistics data as of September 9, 1994.

\2\The weights shown for the MEI components are the 1989 base-year

weights, which may not sum to subtotals or totals because of rounding.

The MEI is a fixed-weight, Laspeyres-type input price index whose

category weights indicate the distribution of expenditures among the

inputs to physicians' services for CY 1989. To determine the MEI level

for a given year, the price proxy level for each component is

multiplied by its 1989 weight. The sum of these products (weights

multiplied by the price index levels) over all cost categories yields

the composite MEI level for a given year. The annual percent change in

the MEI levels is an estimate of price change over time for a fixed

market basket of inputs to physicians' services.

\3\The Physician's Own Time and Nonphysician Employee Compensation

category price measures include an adjustment for productivity. The

price measure for each category is divided by the 10-year moving

average of output per man-hour in the nonfarm business sector. For

example, the wages and salaries component of Physician's Own Time is

calculated by dividing the rate of growth in average hourly earnings

by the 10-year moving average rate of growth of output per man-hour

for the nonfarm business sector. Dividing one plus the decimal form of

the percent change in the average hourly earnings (1+.025=1.025) by

one plus the decimal form of the percent change in the 10-year moving

average of labor productivity (1+.012=1.012) equals one plus the

change in average hourly earnings net of the change in output per man-

hour (1.025/1.012=1.013). All Physician's Own Time and Nonphysician

Employee Compensation categories are adjusted in this way. Due to a

higher level of precision the computer-calculated quotient may differ

from the quotient calculated from rounded individual percent changes.

\4\The average hourly earnings proxy, the Employment Cost Index proxies,

as well as the CPI-U, housing and CPI-U, private transportation are

published in the Current Labor Statistics Section of the Bureau of

Labor Statistics' Monthly Labor Review. The remaining CPIs and PPIs in

the revised index can be obtained from the Bureau of Labor Statistics'

CPI Detailed Report or Producer Price Indexes.

\5\Derived from a HCFA survey of several major insurers (the latest

available historical percent change data are for CY 1993). This is

consistent with prior computations of the professional liability

insurance component of the MEI.

n/a Productivity is factored into the MEI compensation categories as an

adjustment to the price variables, therefore no explicit weight exists

for productivity in the MEI.

2. Adjustment in Update

As required by section 1848(d)(3)(A) of the Act, as amended by

section 13511 of OBRA '93, we are reducing the update by 2.7 percentage

points for surgical services and nonsurgical services other than

primary care services.

3. MVPS Performance Adjustment (MPA)

As required by section 1848(d)(3)(B)(i) of the Act, we are

increasing the update by 12.8 percentage points for surgical services

and by 5.8 percentage points for primary care and other nonsurgical

services to reflect the percentage increase in expenditures between FY

1992 and FY 1993 relative to the volume performance standard rate of

increase for FY 1993.

Our estimate of the percentage growth in surgical services between

FY 1992 and FY 1993 is -4.4 percent. Because the volume performance

standard rate of increase for FY 1993 was 8.4 percent, the rate of

increase in expenditures for surgical services was less than the volume

performance standard rate of increase by 12.8 percentage points. For

primary care and other nonsurgical services, the rate of increase in

expenditures was 5.0 percent, 5.8 percentage points less than the

volume performance standard rate of increase of 10.8 percent.

B. FY 1995 Physician Volume Performance Standard Rates of Increase

Below we explain how we determined the increases for each of the

four factors used in determining the volume performance standard rates

of increase for FY 1995.

Factor 1--Weighted Average Percentage Increase in Fees for Physicians'

Services (Before Applying Legislative Reductions) for Months of CYs

1994 and 1995 Included in FY 1995

This factor was calculated as a weighted average of the fee

increases that apply to FY 1995; that is, the fee increases that apply

to the last 3 months of CY 1994 multiplied by 25 percent plus the fee

increases that apply to the first 9 months of CY 1995 multiplied by 75

percent. Beginning with CY 1992, physicians' services are updated by a

physician fee schedule update factor that is based on the MEI adjusted

for several statutory factors. For instance, the MEI for 1995 is

reduced 2.7 percentage points for surgical services and nonsurgical

services other than primary care services. The update factor for a

category of physicians' services for CY 1995 is also adjusted by the

number of percentage points that the rate of increase in expenditures

in FY 1993 compared to FY 1992 was less than the volume performance

standard rate of increase for the category of physicians' services in

FY 1993. Laboratory services are updated by increases in the Consumer

Price Index for Urban Consumers (CPI-U). For 1995, the laboratory

update will be 0.0 percent, as required by section 1833(h)(2)(ii) of

the Act, as amended by section 13551 of OBRA '93.

We are showing the MEI and CPI-U in Table 2 below unadjusted for

the legislated 2.7 percentage point reduction in the surgical and other

nonsurgical updates and the legislated 0.0 percent laboratory update

because of section 1848(f)(2)(A)(iv) of the Act as amended by section

4118(e) of the Omnibus Budget Reconciliation Act of 1990 (OBRA '90)

(Public Law 101-508), enacted on November 5, 1990. We interpreted

section 4118(e) to account for legislated adjustments to the physician

fee schedule and laboratory updates in Factor 4 rather than Factor 1.

Table 2 shows the updates that were used to determine the weighted-

average percentage increase in physician fees.

Table 2--MEI and CPI-U for CYs 1994 and 1995

------------------------------------------------------------------------

1994 1995

------------------------------------------------------------------------

MEI....................................................... 2.3 2.1

CPI-U..................................................... 3.3 2.8

------------------------------------------------------------------------

Physicians' services make up 91 percent of the total expenditures

in the definition of physicians' services used for purposes of the

volume performance standard rates of increase; laboratory services

represent 9 percent.

In addition to the annual updates and individual weights of the

above services, one other element has an effect on the rate of increase

in physician fees. Section 1842(h)(1) of the Act provides for

``participating physicians'' who agree to accept Medicare payment as

payment in full and to bill Medicare beneficiaries only for the 20

percent coinsurance amount and any unmet portion of the $100 annual

deductible amount. Sections 1842(b)(4)(A)(iv) and 1848(a)(3) of the Act

provide that nonparticipating physicians are paid 5 percent less for

their Medicare services than participating physicians. The

nonparticipating physicians are given an opportunity at the end of each

CY to enroll as participating physicians for the next CY. Participation

rates have increased each year, and we assume that this trend will

continue. The increase in the number of participating physicians and

the fact that they are paid at a rate higher than nonparticipating

physicians also add to the rate of increase in the weighted-average

percentage increase in physician fees.

After taking into account all the elements described above, we

estimate that the weighted-average increase in fees for physicians'

services in FY 1995 before applying the legislative changes will be 2.3

percent for surgical services, 2.3 percent for primary care services,

2.4 percent for other nonsurgical services, and a weighted average of

2.4 percent for all physicians' services.

Factor 2--The Percentage Increase in the Average Number of Part B

Enrollees From FY 1994 to FY 1995

We estimate that average Medicare Part B enrollment in FY 1995 will

be 35.728 million. Decreasing that figure by the estimated enrollment

in risk HMOs of 2.364 million (those enrolled in risk HMOs whose

Medicare-covered medical care is paid for through the adjusted average

per capita cost mechanism and is therefore outside the scope of the

MVPS) results in an estimate of 33.364 million Part B enrollees in FY

1995 not in risk HMOs.

The corresponding figures for 1994 are estimated to be 35.069

million total Part B enrollees and 1.938 million risk HMO enrollees,

which result in an estimate of 33.131 million Part B enrollees not in

risk HMOs. We estimate that there will be 0.233 million more Part B

enrollees not in risk HMOs in FY 1995 than in FY 1994, which represents

a 0.7 percent increase from FY 1994 to FY 1995 for surgical services,

primary care services, other nonsurgical services, and the average of

all physicians' services.

Factor 3--Average Annual Growth in VI of Physicians' Services for FY

1990 Through FY 1994

Section 1848(f)(2)(A)(iii) of the Act requires the Secretary to

estimate the average annual percentage growth in the VI of physicians'

services or of the category of physicians' services for FY 1990 through

FY 1994. This estimate must be based upon information contained in the

most recent annual report issued by the Board of Trustees of the

Supplementary Medical Insurance Trust Fund (Trustees' Report).

The data on the percentage increase in the VI of services in the

Trustees' Report are based on historical trends in increases in allowed

charges, which are not influenced by the Part B deductible. The volume

performance standard rates of increase under this notice, however, have

historically been compared to increases in expenditures, which are

influenced by the Part B deductible. Section 1832(b) of the Act

specifies that the Part B deductible will be $100 for CY 1991 and

subsequent years. The effect of the deductible remaining fixed at $100

is that the overall annual increases in allowed charges for MVPS

physicians' services are lower than the overall annual increases in

expenditures. Although we believe it would be consistent with a literal

interpretation of section 1848(f)(2)(A)(iii) of the Act, it would be

inappropriate to base the VI component on the lower 5-year growth in

allowed charges and compare this with the higher growth in

expenditures. Rather than adjust Factor 3 of the MVPS, as we have done

in the past, to account for the effect of the fixed deductible, we will

simply compare the MVPS to the growth in allowed charges. This has

exactly the same effect as adjusting Factor 3 for the fixed deductible

and comparing the MVPS to the growth in expenditures.

Consistent with data contained in the Trustees' Report, we

estimated Factor 3 using a definition of physicians' services that

includes certain supplies and nonphysician services not otherwise

included in computing the volume performance standard rates of increase

(primarily durable medical equipment (DME) and ambulance services). We

included data for these services because we were required to base the

estimate on data contained in the Trustees' Report, and it was not

feasible to recompute the data from the 5-year period to exclude these

supplies and nonphysician services. We believe the inclusion of these

nonphysician supplies and services in this component has a minimal

effect on the estimate because the component measures rates of change.

Since DME and ambulance services constitute only about 10 percent of

the total charges used in the Trustees' Report, the rate of change for

these nonphysician services and supplies would have to be significantly

different from the rate of change for physicians' services to have any

measurable impact on this VI increase factor. The volume increases for

services performed in independent laboratories were included in the

calculation of the physician increases. (Factor 3 is the only component

of the volume performance standard rate of increase that was estimated

using data that included nonphysician services and supplies.) The 5-

year average rate of increase in VI of physicians' services equals 4.4

percent for surgical services, primary care services, other nonsurgical

services, and the average of all physicians' services.

Factor 4--Percentage Increase in Expenditures for Physicians' Services

Resulting from Changes in Law or Regulations in FY 1995 Compared with

FY 1994

Legislative changes enacted in OBRA '93 and changes in the

regulations required by this law, implementation of the physician fee

schedule (including refinements made in the RVUs for 1994 and 1995),

and adjustments in the physician fee schedule updates will have an

impact on the volume performance standard rates of increase for FY

1995.

The net effect of implementing the physician fee schedule after

making the RVU refinements for 1994 and 1995 will increase payment

rates and, therefore, the volume performance standard for primary care

services. Similarly, the net effect of refining the RVUs and

implementing the new fee schedule will reduce payment rates for most

surgical services and many nonsurgical services other than primary

care, thus, lowering the volume performance standard rates of increase

for these services. Implementing the fee schedule will have no effect

on the volume performance standard rates of increase for all

physicians' services because the net effect of increases in payment for

certain services and decreases in payment for other services will have

a budget-neutral effect on payment for all physicians' services

throughout the transition to the physician fee schedule. That is,

payment rates are, in effect, being determined so that outlays for

physicians' services under the physician fee schedule equal the outlays

that would have occurred had the reasonable charge payment system been

continued.

The net adjustments to the physician fee schedule updates will have

the effect of increasing the volume performance standard rates for

surgical, primary care, and other nonsurgical services. Nonsurgical

services other than primary care will also be affected by a payment

freeze and a lower payment limit for clinical laboratory services. OBRA

'93 also included a provision to lower payment for practice expenses

for certain services paid under the physician fee schedule, which will

have the effect of lowering the MVPS for both surgical and nonsurgical

services. An OBRA '93 provision that limits payment for the anesthesia

care team will also have the effect of reducing the MVPS for surgical

services. After taking into account all of these provisions, this

factor equals 5.3 percent for surgical services, 9.5 percent for

primary care services, 0.7 percent for other nonsurgical services, and

a weighted average of 3.5 percent for all physicians' services.

V. Other Required Information

A. Inapplicability of 30-Day Delay in Effective Date

We usually provide a delay of 30 days in the effective date for

final Federal Register documents. In this case, however, the volume

performance standard rates of increase are required by law to be

published in the last 15 days of October 1994 and are effective on

October 1, 1994. Thus, the Congress has clearly indicated its intent

that the rates of increase be implemented without the usual 30-day

delay in the effective date and has foreclosed any discretion by us in

this matter. Therefore, the requirement for a 30-day delay in the

effective date does not apply to this notice. With regard to the

physician fee schedule, the effective date will be January 1, 1995,

which is more than 30 days beyond the publication date of this notice.

B. Collection of Information Requirements

This notice does not impose information collection or recordkeeping

requirements. Consequently, it need not be reviewed by the Office of

Management and Budget under the authority of the Paperwork Reduction

Act of 1980 (44 U.S.C. 3501 et seq.).

VI. Regulatory Impact Statement

A. Regulatory Flexibility Act

We generally prepare a regulatory flexibility analysis that is

consistent with the Regulatory Flexibility Act (RFA) (5 U.S.C. 601

through 612) unless the Secretary certifies that a notice will not have

a significant economic impact on a substantial number of small

entities. For purposes of the RFA, States and individuals are not

entities, but we consider all physicians to be small entities.

We are not preparing a regulatory flexibility analysis since we

have determined, and the Secretary certifies, that this notice will not

have a significant economic impact on a substantial number of small

entities.

Also, section 1102(b) of the Act requires the Secretary to prepare

a regulatory impact analysis if a notice may have a significant impact

on the operations of a substantial number of small rural hospitals.

This analysis must conform to the provisions of section 604 of the RFA.

For purposes of section 1102(b) of the Act, we define a small rural

hospital as a hospital that is located outside of a Metropolitan

Statistical Area and has fewer than 50 beds.

We are not preparing a rural impact analysis since we have

determined, and the Secretary certifies, that this notice will not have

a significant impact on the operations of a substantial number of small

rural hospitals.

In accordance with the provisions of Executive Order 12866, this

final notice was reviewed by the Office of Management and Budget.

B. Effects of the Proposal for Physician Volume Performance Standard

Rates of Increase (Inclusion of Outpatient Clinical Diagnostic

Laboratory Services in the MVPS Category of Nonsurgical Services)

The inclusion of clinical diagnostic laboratory services in the

MVPS category of nonsurgical services beginning in FY 1996 is estimated

to result in savings of $25 million in FY 1998 and $75 million in FY

1999. These savings result from our current projections that growth in

the volume and intensity of these services will exceed the overall

growth in the volume and intensity of the other services in this

category. However, $37 million of these savings will be used to offset

the FY 1996 through FY 1999 estimated costs of two Medicare physician

fee schedule changes: separate payment for care plan oversight of

certain home health agency and hospice services ($15 million) and the

inclusion of the end-stage renal disease monthly capitation payment in

the fee schedule ($22 million). Both of these changes are described in

the physician fee schedule final rule (BPD-789-FC), published elsewhere

in this Federal Register issue.

(Sections 1848(d) and (f) of the Social Security Act) (42 U.S.C.

1395w-4(d) and (f))

(Catalog of Federal Domestic Assistance Program No. 93.774,

Medicare--Supplementary Medical Insurance Program)

Dated: November 14, 1994.

Bruce C. Vladeck,

Administrator, Health Care Financing Administration.

Dated: November 16, 1994.

Donna E. Shalala,

Secretary.

[FR Doc. 94-29915 Filed 12-1-94; 10:20 am]

BILLING CODE 4120-01-P