Medicare Program; Physician Fee Schedule Update for Calendar Year 1997 and Physician Volume Performance Standard Rates of Increase for Federal Fiscal Year 1997

SUMMARY: This final notice announces the calendar year 1997 updates to

the Medicare physician fee schedule and the Federal fiscal year 1997

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 updates for

calendar year 1997 are 1.9 percent for surgical services, 2.5 percent

for primary care services, and -0.8 percent for other nonsurgical

services. While it does not affect payment for any particular service,

there was a 0.6 percent increase in the update for all physicians'

services for 1997. The physician volume performance standard rates of

increase for Federal fiscal year 1997 are -3.7 percent for surgical

services, 4.5 percent for primary care services, -0.5 percent for other

nonsurgical services, and a weighted average of -0.3 percent for all

physicians' services.

EFFECTIVE DATE: The provisions in this final notice pertaining to the

Medicare volume performance standard rates of increase are effective

October 1, 1996, and the provisions pertaining to the Medicare

physician fee schedule update are effective January 1, 1997, as

provided by the Medicare statute. Ordinarily, 5 U.S.C. section 801

requires that agencies submit major rules to Congress 60 days before

the rules are scheduled to become effective. However, the 104th

Congress adjourned on October 4, 1996, and the 105th Congress is not

scheduled to convene until January 7, 1997. The Department has

concluded that, in this instance, a further delay in the effective

dates in order to satisfy section 801 would not serve the law's intent,

since Congress will not be in session during this period, and such

delay in the effective dates established by the Medicare statute is

unnecessary and contrary to the public interest. The Department finds,

on this basis, that there is good cause for establishing these

effective dates pursuant to 5 U.S.C. section 808(2).

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Content information: Contact Don Thompson, (410) 786-4586.

SUPPLEMENTARY INFORMATION:

I. Background and Summary of Legislation

A. The Physician Fee Schedule Update and Medicare Volume Performance

Standard

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, and a conversion factor. 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 conversion factor. The RVUs and anesthesia

base units reflect the relative amount of resources used by physicians

to furnish the service, and the geographic adjustment factor measures

practice cost differences between areas. The geographically adjusted

RVUs are multiplied by a conversion factor to obtain the physician fee

schedule payment amounts. As is discussed in section IV.C.1. of the

final rule for the 1997 physician fee schedule, ``Medicare Program;

Revisions to Payment Policies and Five-Year Review of and Adjustments

to the Relative Value Units Under the Physician Fee Schedule for

Calendar Year 1997,'' published elsewhere in this Federal Register

issue, there is a separate adjustment to the work RVUs in 1997. (This

rule is referenced from now on as the 1997 physician fee schedule final

rule.) Therefore, for 1997, the work RVUs are adjusted by this separate

factor, and all RVUs are adjusted by a geographic practice cost index

and multiplied by a conversion factor to obtain the physician fee

schedule payment amounts. We plan on eliminating this separate adjuster

in 1998 when we implement resource-based practice expense RVUs.

The 1997 conversion factors are $16.68 for anesthesia services,

$40.9603 for surgical services, $35.7671 for primary care services, and

$33.8454 for other nonsurgical services.

[[Page 59718]]

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 growth in actual expenditures for physicians' services

in the prior fiscal year.

The relationship between that growth and the volume

performance standard rate of increase.

Changes in the volume and intensity of services.

Access to services.

Other factors that may contribute to changes in the volume

and intensity of services or access to services.

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 (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

calendar year 1997 update would equal the 1997 MEI increased or

decreased by the difference between the rate of increase in

expenditures for fiscal year 1995 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.

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

updates for the following calendar year.

The 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.

2. Medicare Volume Performance Standard Rates of Increase

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

volume performance standard rates of increase for Medicare expenditures

for physicians' services. The use of volume performance standard rates

of increase is intended to control the rate of increase in expenditures

for physicians' services.

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 fiscal year 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 health maintenance organization

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.

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 fiscal

year 1997 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 calendar year 1996 and calendar year 1997 contained in fiscal year

1997.

1.0 plus the Secretary's estimate of the percentage change

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

risk health maintenance organization enrollees) from fiscal year 1996

to fiscal year 1997.

1.0 plus the Secretary's estimate of the average annual

percentage growth (divided by 100) in the volume and intensity of all

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

fiscal year 1991 through fiscal year 1996.

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 fiscal year 1997 as compared with expenditures for

physicians' services in fiscal year 1996.

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

fiscal year 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' Medicare Volume Performance Standard Rates of Increase

and Physician Fee Schedule Updates

MVPS rates have been established under section 1848 of the Act

since fiscal year 1990. Calendar year 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 fiscal year since

their inception, the actual rates of increase, and the corresponding

updates in the second subsequent calendar year.

[[Page 59719]]

Fee Schedule Update

[In Percent]

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

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

All services \1\........................................ ........... ........... ........... 1.4

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

All services \1\........................................ ........... ........... ........... 7.0

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

All services \1\........................................ ........... ........... ........... 7.7

CY 1996:

Surgical................................................ 2.0 1.8 ........... 3.8

Primary care............................................ 2.0 -4.3 ........... -2.3

Other nonsurgical....................................... 2.0 -1.6 ........... 0.4

All services \1\........................................ ........... ........... ........... 0.8

CY 1997:

Surgical................................................ 2.0 -0.1 ........... 1.9

Primary care............................................ 2.0 0.5 ........... 2.5

Other nonsurgical....................................... 2.0 -2.8 ........... -0.8

All services \1\........................................ ........... ........... ........... 0.6

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

\1\ The all services update is the weighted average of the category updates and, except for 1992, does not

affect payment.

Medicare Volume Performance Standard Rates of Increase

(In Percent)

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

Fiscal Year MVPS Actual Difference

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

FY 1990:

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 7.3 1.8

Primary care................. 10.5 14.8 -4.3

Other nonsurgical............ 9.2 10.8 -1.6

FY 1995:

Surgical..................... 9.2 9.3 -0.1

Primary care................. 13.8 13.3 0.5

Other nonsurgical............ 4.4 7.2 -2.8

FY 1996:

Surgical..................... -0.5

Primary care................. 9.3

Other nonsurgical............ 0.6

FY 1997:

Surgical..................... -3.7

Primary care................. 4.5

Other nonsurgical............ -0.5

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

Separate MVPS rates for surgical and nonsurgical services were not

required until fiscal year 1991. Separate fee schedule updates were

not required until calendar year 1993. Beginning with the calendar

year 1994 fee schedule update and the fiscal year 1994 MVPS, we

established separate updates and MVPS rates of increase for surgical,

primary care, and other nonsurgical services.

[[Page 59720]]

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

fiscal year 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.

As stated in our December 8, 1994 final notice (59 FR 63638)

announcing the fiscal year 1995 volume performance standard rates of

increase, we included outpatient diagnostic laboratory tests paid

through intermediaries in the MVPS definition of physicians' services

beginning in fiscal year 1996 (59 FR 63640).

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

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

1987) (Pub. L. 100-203), enacted on December 22, 1987, we rely on the

conference report accompanying OBRA 1987 (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 1989) (Pub. L. 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 1997 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 1996. For the 1997

classification of the new 1996 codes, however, we used 6 months of 1996

data to determine whether they meet the criteria for being considered

surgical services. Based on these data, we did not need to reclassify

any codes as surgical or nonsurgical.

Beginning in 1996, we classified monthly end-stage renal disease

services (HCPCS codes 90918 through 90921) as primary care services.

For a full discussion of this classification, see the final rule with

comment period entitled ``Medicare Program; Revisions to Payment

Policies and Adjustments to the Relative Value Units Under the

Physician Fee Schedule for Calendar Year 1996'' published in the

Federal Register on December 8, 1995 (60 FR 63155 through 63156).

Also, Addendum B of the 1997 physician fee schedule final rule,

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.

II. Provisions of This Final Notice

A. Physician Fee Schedule Update for Calendar Year 1997

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

schedule update for calendar year 1997 will be 1.9 percent for surgical

services, 2.5 percent for primary care services, and -0.8 percent for

other nonsurgical services. The weighted average update across all

services for 1997 will be 0.6 percent. We determined this update as

follows:

[[Page 59721]]

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

Primary

Surgical care Nonsurgical

services services services

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

(2) (In Percent)

1997 MEI......................... 2.0 2.0 2.0

MVPS Adjustment.................. -0.1 0.5 -2.8

1997 Update...................... 1.9 2.5 -0.8

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

As discussed in our December 8, 1995 final rule for the 1996

physician fee schedule (60 FR 63172 through 63173), we began applying

budget-neutrality adjustments to the conversion factors rather than to

the RVUs in 1996. As we discuss in section IX of the 1997 physician fee

schedule final rule, published elsewhere in this Federal Register

issue, there will be two separate budget neutrality adjustments in

1997. The first will be a budget neutrality adjustment applied to the

work RVUs when calculating Medicare physicians' fees for 1997. This

budget neutrality adjustment, 8.3 percent, will account for fee changes

related to the 5-year review of work RVUs. The second budget neutrality

adjustment, 1.5 percent, will be applied uniformly to the conversion

factors to account for both the fee schedule changes unrelated to the

5-year review and the anticipated volume and intensity response to all

fee schedule changes unrelated to the conversion factor updates.

Because anesthesia services are not paid on the basis of work RVUs, an

equivalent -7.5 percent adjustment will be made to the anesthesia

conversion factor to account for both these budget neutrality

adjustments.

Applying the updates and conversion factor budget neutrality

adjustment to the 1996 conversion factors of $40.7986 for surgical

services (other than anesthesia services), $35.4173 for primary care

services, and $34.6293 for nonsurgical services yields 1997 conversion

factors of $40.9603 for surgical services, $35.7671 for primary care

services, and $33.8454 for other nonsurgical services. The 1996

anesthesia conversion factor of $15.28, which includes the effect of

the 1996 budget neutrality adjustment, will be updated by the surgical

update to $16.68 for 1997, after adjusting for the 1997 budget

neutrality adjustments.

The specific calculations to determine the fee schedule updates for

physicians' services for calendar year 1997 are explained in section

III.A. of this notice.

B. Physician Volume Performance Standard Rates of Increase for Fiscal

Year 1997

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 fiscal year 1997 are -3.7 percent

for surgical services, 4.5 percent for primary care services, -0.5

percent for other nonsurgical services, and a weighted average of -0.3

percent for all physicians' services.

This determination is based on the following statutory factors:

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

Primary

Statutory factors Surgical care Nonsurgical

services services services

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

(2) (In Percent)

Fees............................. 2.0 2.0 2.2

Enrollment....................... -1.1 -1.1 -1.1

(2) (In Percent)

Volume and Intensity............. 1.6 4.0 4.0

Legislation...................... -2.1 3.4 -1.5

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

Total...................... -3.7 4.5 -0.5

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

The specific calculations to determine the volume performance

standard rates of increase for physicians' services for fiscal year

1997 are explained in section III.B. of this notice.

III. Detail on Calculation of the Calendar Year 1997 Physician Fee

Schedule Update and the Fiscal Year 1997 Physician Volume Performance

Standard Rates of Increase

A. Physician Fee Schedule Update

1. The Percentage Change in the Medicare Economic Index

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's 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 man-hour for the

nonfarm business sector to eliminate double counting for productivity

growth in physicians' offices and the general economy.

The physician's practice expense category represents the rate of

price growth in nonphysician inputs to the production of services in

physicians' 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 man-hour for the nonfarm business sector. The physician's

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

[[Page 59722]]

and percent changes for price proxies for the 1997 update. The calendar

year 1997 MEI is 2.0 percent.

Increase in the Medicare Economic Index Update for Calendar Year 1997 1

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

CY 1997

1989 percent

weights 2 changes

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

Medicare Economic Index Total................. 100.0 2.0

1. Physician's Own Time \3\ \4\........... 54.2 2.0

a. Wages and Salaries: Average hourly

earnings private nonfarm, net of

productivity......................... 45.3 2.2

b. Fringe Benefits: Employment Cost

Index, benefits, private nonfarm, net

of productivity...................... 8.8 1.0

2. Physician's Practice Expense \3\....... 45.8 2.0

a. Nonphysician Employee Compensation. 16.3 1.9

1. Wages and Salaries: Employment

Cost Index, wages and salaries,

weighted by occupation, net of

productivity..................... 13.8 2.0

2. Fringe Benefits: Employment

Cost Index, fringe benefits,

white collar, net of productivity 2.5 1.4

b. Office Expense: Consumer Price

Index for Urban Consumers (CPI-U),

housing.............................. 10.3 2.8

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 2.2

d. Professional Liability Insurance:

HCFA professional liability insurance

survey \5\........................... 4.8 -1.1

e. Medical Equipment: PPI, medical

instruments and equipment............ 2.3 1.6

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

1. Professional Car: CPI-U,

private transportation........... 1.4 2.3

2. Other: CPI-U, all items less

food and energy.................. 5.5 2.9

Addendum:

Productivity: 10-year moving average of

output per man-hour, nonfarm business

sector................................... N/A 0.9

Physician's Own Time, not productivity

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

Wages and salaries, not productivity

adjusted............................. 45.3 3.1

Fringe benefits, not productivity

adjusted............................. 8.8 1.9

Nonphysician Employee Compensation, not

productivity adjusted.................... 16.3 2.8

Wages and salaries, not productivity

adjusted............................. 13.8 2.9

Fringe benefits, not productivity

adjusted............................. 2.5 2.3

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

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

1996, which is the period used for computing the calendar year 1997

update. The price proxy values are based upon the latest available

Bureau of Labor Statistics data as of September 1996.

\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 calendar year 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+.031=1.031 by one

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

average of labor productivity (1+.009=1.009) equals one plus the

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

manhour (1.031/1.009=1.022). 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 calendar year 1995).

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. Medicare Volume Performance Standard Performance Adjustment

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

increasing the update by 0.5 percentage points for primary care

services and decreasing it by 0.1 percentage points for surgical and

2.8 percentage points for other nonsurgical services to reflect the

percentage increase in expenditures between fiscal year 1994 and fiscal

year 1995 relative to the volume performance standard rates of increase

for fiscal year 1995.

Our estimate of the percentage growth in surgical services between

fiscal year 1994 and fiscal year 1995 is 9.3 percent. Because the

volume performance standard rate of increase for fiscal year 1995 was

9.2 percent, the rate of increase in expenditures for surgical services

was greater than the volume performance standard rate of increase by

0.1 percentage points. For primary care services, the rate of increase

in expenditures was 13.3 percent, 0.5 percentage points less than the

volume performance standard rate of increase of 13.8 percent. For other

nonsurgical services, the rate of increase in expenditures was 7.2

percent, 2.8 percentage points greater than the volume performance

standard rate of increase of 4.4 percent.

B. Fiscal Year 1997 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 fiscal year 1997.

[[Page 59723]]

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

Services (Before Applying Legislative Reductions) for Months of

Calendar Years 1996 and 1997 Included in Fiscal Year 1997

This factor was calculated as a weighted average of the fee

increases that apply to fiscal year 1997; that is, the fee increases

that apply to the last 3 months of calendar year 1996 multiplied by 25

percent plus the fee increases that apply to the first 9 months of

calendar year 1997 multiplied by 75 percent. Beginning with calendar

year 1992, physicians' services are updated by a physician fee schedule

update factor that is based on the MEI adjusted for several statutory

factors. The update factor for a category of physicians' services for

calendar year 1997 is adjusted by the number of percentage points that

the rate of increase in expenditures in fiscal year 1995 compared to

fiscal year 1994 was less than the volume performance standard rate of

increase for the category of physicians' services in fiscal year 1995.

Laboratory services are updated by increases in the Consumer Price

Index for Urban Consumers (CPI-U).

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

average percentage increase in physicians' fees.

Table 2.--Medicare Economic Index and Consumer Price Index for Urban

Consumers for Calendar Years 1996 and 1997

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

1996 1997

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

MEI................................................... 2.0 2.0

CPI-U................................................. 3.2 2.7

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

Physicians' services make up approximately 90 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 approximately 10 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

calendar year to enroll as participating physicians for the next

calendar year. 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 fiscal year 1997 before applying the legislative changes

will be 2.0 percent for surgical services, 2.0 percent for primary care

services, 2.2 percent for other nonsurgical services, and a weighted

average of 2.1 percent for all physicians' services.

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

Enrollees from Fiscal Year 1996 to Fiscal Year 1997

We estimate that average Medicare Part B enrollment in fiscal year

1997, excluding those enrolled in risk health maintenance organizations

(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) will be 32.170 million.

The corresponding figure for 1996 is estimated to be 32.532 million

total Part B enrollees not enrolled in risk health maintenance

organizations. This represents a 1.1 percent decrease in enrollment

from fiscal year 1996 to fiscal year 1997 for surgical services,

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

all physicians' services.

Factor 3--Average Annual Growth in the Volume and Intensity of

Physicians' Services for Fiscal Year 1992 Through Fiscal Year 1996

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

estimate the average annual percentage growth in the volume and

intensity of physicians' services or of the category of physicians'

services for fiscal year 1992 through fiscal year 1996. 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 volume and intensity 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. Increases in expenditures, however, are influenced by the

Part B deductible. Section 1832(b) of the Act specifies that the Part B

deductible will be $100 for calendar year 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 volume and intensity component on the lower

5-year growth in allowed charges and compare the volume performance

standards to the higher growth in expenditures, so we instead compare

the standards to the growth in allowed charges.

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 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 durable medical equipment 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 volume and intensity

increase factor. (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 volume increases

for services performed in independent laboratories were included in the

calculation of the physician increases, as were the volume increases

for clinical laboratory tests performed in hospital outpatient

departments.

As described earlier, the fiscal year 1997 volume performance

standards were calculated using category-specific volume and intensity.

The 5-year average rate of increase in volume and

[[Page 59724]]

intensity equals 1.6 percent for surgical services, 4.0 percent for

primary care services, and 4.0 percent for other nonsurgical services.

The weighted-average increase for all physicians' services is 3.4

percent.

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

Resulting From Changes in Law or Regulations in Fiscal Year 1997

Compared With Fiscal Year 1996

Legislative changes enacted in OBRA 1993 and changes in the

regulations required by this law, as well as implementation of the

physician fee schedule (including changes made in the RVUs for 1996 and

1997) will have an impact on the volume performance standard rates of

increase for fiscal year 1997.

The net effect of implementing the physician fee schedule after

making RVU changes for 1996 and 1997 is to increase payment rates for

primary care services and the volume performance standard for those

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

implementing the fee schedule reduces 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 increase the volume

performance standard rates of increase for all physicians' services

because, although the net effect of increases in fees for certain

services and decreases in fees for other services will have a budget

neutral effect on fees for all physicians' services, an adjustment is

required to ensure that changes in volume and intensity related to the

fee changes do not cause an increase in expenditures. The MVPS targets

are increased by this volume and intensity adjustment.

After taking into account these provisions, this factor equals -2.1

percent for surgical services, 3.4 percent for primary care services,

and -1.5 percent for other nonsurgical services, and a weighted average

of -0.7 percent for all physicians' services.

IV. 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 1996 and are effective on

October 1, 1996. 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, 1997,

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

V. Collection of Information Requirements

This document does not impose information collection and

recordkeeping requirements. Consequently, it need not be reviewed by

the Office of Management and Budget under the authority of the

Paperwork Reduction Act of 1995 (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

notice was reviewed by the Office of Management and Budget.

(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 7, 1996.

Bruce C. Vladeck,

Administrator, Health Care Financing Administration.

Dated: November 12, 1996.

Donna E. Shalala,

Secretary.

[FR Doc. 96-29557 Filed 11-15-96; 11:51 am]

BILLING CODE 4120-01-P