[Federal Register: June 5, 1998 (Volume 63, Number 108)]
[Proposed Rules]               
[Page 30817-30866]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05jn98-45]
 
[[Page 30817]]
_______________________________________________________________________
Part II
Department of Health and Human Services
_______________________________________________________________________
Health Care Financing Administration
_______________________________________________________________________
42 CFR Parts 405, et al.
Medicare Program; Revisions to Payment Policies Under the Physician Fee 
Schedule for Calendar Year 1999; Proposed Rule
[[Page 30818]]
DEPARTMENT OF HEALTH AND HUMAN SERVICES
Health Care Financing Administration
42 CFR Parts 405, 410, 413, 414, 415, 424, and 485
[HCFA-1006-P]
RIN 0938-AI52
 
Medicare Program; Revisions to Payment Policies Under the 
Physician Fee Schedule for Calendar Year 1999
AGENCY: Health Care Financing Administration (HCFA), HHS.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: This proposed rule would make several policy changes affecting 
Medicare Part B payment. The changes that relate to physician services 
include: resource-based practice expense relative value units, medical 
direction rules for anesthesia services, and payment for abnormal Pap 
smears. Also, we would rebase the Medicare Economic Index from a 1989 
base year to a 1996 base year. Under the law, we are required to 
develop a resource-based system for determining practice expense 
relative value units. The Balanced Budget Act of 1997 (BBA 1997) 
delayed, for 1 year, implementation of the resource-based practice 
expense relative value units until January 1, 1999. Also, BBA 1997 
revised our payment policy for nonphysician practitioners, for 
outpatient rehabilitation services, and for drugs and biologicals not 
paid on a cost or prospective payment basis. In addition, BBA 1997 
permits certain physicians and practitioners to opt out of Medicare and 
furnish covered services to Medicare beneficiaries through private 
contracts. In addition, since we established the physician fee schedule 
on January 1, 1992, our experience indicates that some of our Part B 
payment policies need to be reconsidered. This proposed rule is 
intended to correct inequities in physician payment and solicits public 
comments on specific proposed policy changes.
DATES: Comments on the proposed resource-based practice expense policy 
will be considered if we receive them at the appropriate address, as 
provided below, no later than 5 p.m. on September 3, 1998. Comments on 
all other issues will be considered if we receive them at the 
appropriate address, as provided below, no later than 5 p.m. on August 
4, 1998.
ADDRESSES: Mail written comments (1 original and 3 copies) to the 
following address: Health Care Financing Administration, Department of 
Health and Human Services, Attention: HCFA-1006-P, P.O. Box 26688, 
Baltimore, MD 21207-0488.
    If you prefer, you may deliver your written comments (1 original 
and 3 copies) to one of the following addresses:
Room 309-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, DC 20201, or
Room C5-09-26, 7500 Security Boulevard, Baltimore, MD 21244-1850
    Because of staffing and resource limitations, we cannot accept 
comments by facsimile (FAX) transmission. In commenting, please refer 
to file code HCFA-1006-P. Comments received timely will be available 
for public inspection as they are received, generally beginning 
approximately 3 weeks after publication of a document, in Room 309-G of 
the Department's offices at 200 Independence Avenue, SW., Washington, 
DC, on Monday through Friday of each week from 8:30 a.m. to 5 p.m. 
(phone: (202) 690-7890).
    Copies: To order copies of the Federal Register containing this 
document, send your request to: New Orders, Superintendent of 
Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954. Specify the date 
of the issue requested and enclose a check or money order payable to 
the Superintendent of Documents, or enclose your Visa or Master Card 
number and expiration date. Credit card orders can also be placed by 
calling the order desk at (202) 512-1800 or by faxing to (202) 512-
2250. The cost for each copy is $8. As an alternative, you can view and 
photocopy the Federal Register document at most libraries designated as 
Federal Depository Libraries and at many other public and academic 
libraries throughout the country that receive the Federal Register.
    This Federal Register document is also available from the Federal 
Register online database through GPO Access, a service of the U.S. 
Government Printing Office. Free public access is available on a Wide 
Area Information Server (WAIS) through the Internet and via 
asynchronous dial-in. Internet users can access the database by using 
the World Wide Web; the Superintendent of Documents home page address 
is http://www.access.gpo.gov/su__docs/, by using local WAIS client 
software, or by telnet to swais.access.gpo.gov, then login as guest (no 
password required). Dial-in users should use communications software 
and modem to call 202-512-1661; type swais, then login as guest (no 
password required).
FOR FURTHER INFORMATION CONTACT: Roberta Epps, (410) 786-4503 (for 
issues related to outpatient rehabilitation services, nurse 
practitioners, clinical nurse specialists, and certified nurse-
midwives).
    Stephen Heffler, (410) 786-1211 (for issues related to the Medicare 
Economic Index).
    Anita Heygster, (410) 786-4486 (for issues related to private 
contracts).
    Jim Menas, (410) 786-4507 (for issues related to Pap smears and 
medical direction for anesthesia services).
    Robert Niemann, (410) 786-4569 (for issues related to the drugs and 
biologicals policy).
    Regina Walker-Wren, (410) 786-9160 (for issues related to physician 
assistants).
    Stanley Weintraub, (410) 786-4498 (for issues related to practice 
expense relative value units and all other issues).
SUPPLEMENTARY INFORMATION: To assist readers in referencing sections 
contained in this preamble, we are providing the following table of 
contents. Some of the issues discussed in this preamble affect the 
payment policies but do not require changes to the regulations in the 
Code of Federal Regulations. Information on the regulation's impact 
appears throughout the preamble and not exclusively in part V.
Table of Contents
I. Background
    A. Legislative History
    B. Published Changes to the Fee Schedule
II. Specific Proposals for Calendar Year 1999
    A. Resource-Based Practice Expense Relative Value Units
    1. Current Practice Expense Relative Value Unit System
    2. Criticism of Current Practice Expense Relative Value Unit 
System
    3. Resource-Based Practice Expense Legislation
    4. Originally Proposed Methodology for Developing Resource-Based 
Practice Expense Relative Value Units
    5. Balanced Budget Act of 1997 Provisions Pertaining to 
Resource-Based Practice Expense Relative Value Units
    6. HCFA Response to BBA 1997 Requirements
    7. Summary of General Input from the Medical Community and 
Comments from the October 1997 Notice with Comment Period
    8. Issues Considered in Developing New Practice Expense RVUs
    9. Alternative Practice Expense Methodologies Considered
    10. Description of the Proposed Methodology for Developing 
Practice Expense Relative Value Units
    a. Overview
    b. Data Sources
    c. Practice Expense Cost Pools
    d. Cost Allocation Methodology
[[Page 30819]]
    11. Comments of the American Medical Association Regarding the 
Use of the Socioeconomic Monitoring System Survey Data to Construct 
Practice Expense Relative Value Units
    12. Other Methodological Issues
    a. Professional and Technical Component Services
    b. Practice Expenses per Hour Adjustments and Specialty 
Crosswalks
    c. Time Associated with the Work Relative Value Units
    13. Other Practice Expense Policies
    a. Site-of-Service Payment Differential
    b. Additional Relative Value Units for Additional Office-Based 
Expenses for Certain Procedure Codes
    c. Anesthesia Services
    14. Refinement
    a. Issues Involved in Refinement
    b. Example of the Process for Reviewing and Commenting on 
Practice Expense Relative Value Units
    c. Information on Accessing Data Files on HCFA's Homepage
    15. Reductions in Practice Expense Relative Value Units for 
Multiple Procedures
    16. Transition
    17. Proposed Regulation Revisions
    18. Response to GAO Recommendations
    B. Medical Direction for Anesthesia Services
    C. Separate Payment for Physician Interpretation of an Abnormal 
Papanicolaou Smear
    D. Rebasing and Revising the Medicare Economic Index
    1. Background
    a. History
    b. Use of Current Data
    2. Rebasing and Revising Expense Categories
    a. American Medical Association Socioeconomic Monitoring System 
Survey
    b. Employment Cost Index Survey
    c. Asset and Expenditure Survey
    d. Current Population Survey
    e. Medical Economics Continuing Survey
    3. Selection of Price Proxies
    a. Background
    b. Expense Categories
    (1) Physician's Time
    (2) Nonphysician Employee Compensation
    (3) Office Expense
    (4) Medical Materials and Supplies
    (5) Professional Liability Insurance
    (6) Medical Equipment
    (7) Other Professional Expenses
    4. Summary of Changes
III. Implementation of the Balanced Budget Act of 1997
    A. Payment for Drugs and Biologicals
    B. Private Contracting with Medicare Beneficiaries
    C. Payment for Outpatient Rehabilitation Services
    1. Overview of Policies Before BBA 1997
    a. Coverage
    b. Providers of Outpatient Rehabilitation Services
    c. Payment for Services
    (1) Reasonable Cost-Based Payments
    (2) Fee Schedule Payments
    d. Financial Limitation
    2. BBA Provisions Affecting Payment for Outpatient 
Rehabilitation Services
    a. Reasonable Cost-Based Payments
    b. Prospective Payment System for Outpatient Rehabilitation 
Services
    (1) Overview
    (2) Services Furnished by Skilled Nursing Facilities
    (3) Services Furnished by Home Health Agencies
    (4) Services Furnished by Comprehensive Outpatient 
Rehabilitation Facilities
    (5) Site-of-Service Differential
    (6) Mandatory Assignment
    3. Uniform Procedure Codes for Outpatient Rehabilitation 
Services
    4. Financial Limitation
    5. Qualified Therapists
    6. Plan of Treatment
    D. Payment for Services of Certain Nonphysician Practitioners 
and Services Furnished Incident to their Professional Services
    1. Coverage and Payment for Nurse Practitioner Services Before 
BBA 1997
    2. Coverage and Payment for Nurse Practitioner Services 
Subsequent to BBA 1997
    3. Coverage and Payment for Clinical Nurse Specialist Services 
Before BBA 1997
    4. Coverage and Payment for Clinical Nurse Specialist Services 
Subsequent to BBA 1997
    5. Coverage and Payment for Certified Nurse-Midwife Services
    6. Coverage and Payment for Physician Assistant Services Before 
BBA 1997
    7. Coverage and Payment for Physician Assistant Services 
Subsequent to BBA 1997
IV. Collection of Information Requirements
V. Response to Comments
VI. Regulatory Impact Analysis
    A. Regulatory Flexibility Act
    B. Resource-Based Practice Expense Relative Value Units
    C. Medical Direction for Anesthesia Services
    D. Separate Payment for Physician Interpretation of an Abnormal 
Papanicolaou Smear
    E. Rebasing and Revising the Medicare Economic Index
    F. Payment for Nurse Midwives' Services
    F. Payment for Drugs and Biologicals
    G. BBA 1997 Provisions Included in This Proposed Rule
    1. Payment for Services of Certain Nonphysician Practitioners 
and Services Furnished Incident to Their Professional Services
    2. Payment for Outpatient Rehabilitation Services
    3. Payment for Drugs and Biologicals
    4. Private Contracting with Medicare Beneficiaries
    H. Impact on Beneficiaries
Addendum A--Description of Clinical Practice Expert Panel Data and 
Methodology
Addendum B--Technical Description of the Proposed Methodology for 
Developing Practice Expense Relative Value Units
Addendum C--Relative Value Units (RVUs) and Related Information
    In addition, because of the many organizations and terms to 
which we refer by acronym in this proposed rule, we are listing 
these acronyms and their corresponding terms in alphabetical order 
below:
AANA--American Association of Nurse Anesthetists
ABC--Activity based costing
ABN--Advance Beneficiary Notice
AHE--Average Hourly Earnings
AMA--American Medical Association
ASA--American Society of Anesthesiologists
AWP--Average Wholesale Price
BBA--Balanced Budget Act of 1997
BLS--Bureau of Labor Statistics
CF--Conversion factor
CFR--Code of Federal Regulations
CMSAs--Consolidated Metropolitan Statistical Areas
CORF--Comprehensive outpatient rehabilitation facility
CPEPs--Clinical Practice Expert Panels
CPI--Consumer Price Index
CPI-U--Consumer Price Index for All Urban Consumers
CPS--Current Population Survey
CPT--[Physicians'] Current Procedural Terminology [4th Edition, 
1997, copyrighted by the American Medical Association]
CRNA--Certified Registered Nurse Anesthetist
DME--Durable medical equipment
DMEPOS--Durable medical equipment, prosthetics, orthotics, and 
supplies
DRG--Diagnosis-related group
EAC--Estimated Acquisition Cost
ECI--Employment Cost Index
ES-202--Data--Bureau of Labor Statistics from State unemployment 
insurance agencies
ESRD--End-stage renal disease
FDA--Food and Drug Administration
FMR--Fair market rental
GAAP--Generally accepted accounting principles
GAF--Geographic adjustment factor
GPCI--Geographic practice cost index
HCFA--Health Care Financing Administration
HCPCS--HCFA Common Procedure Coding System
HHS--[Department of] Health and Human Services
HMO--Health maintenance organization
HUD--[Department of] Housing and Urban Development
MEDPAC--Medicare Payment Advisory Commission
MEI--Medicare Economic Index
MGMA--Medical Group Management Association
MSA--Metropolitan Statistical Area
NAIC--National Association of Insurance Commissioners
NPI--National provider identifier
OBRA--Omnibus Budget Reconciliation Act
OTIP--Occupational therapist in independent practice
PC--Professional component
PMSA--Primary Metropolitan Statistical Area
PPI--Producer Price Index
PPS--Prospective payment system
PTIP--Physical therapist in independent practice
RUC--[AMA's Specialty Society] Relative [Value] Update Committee
[[Page 30820]]
RVU--Relative value unit
SMS--Socioeconomic Monitoring System
SNF--Skilled nursing facility
TC--Technical component
TEFRA--Tax Equity and Fiscal Responsibility Act
UPIN--Uniform provider identifier number
I. Background
A. Legislative History
    Since January 1, 1992, Medicare has paid for physician services 
under section 1848 of the Social Security Act (the Act), ``Payment for 
Physicians' Services.'' This section contains three major elements: (1) 
A fee schedule for the payment of physician services; (2) a sustainable 
growth rate for the rates of increase in Medicare expenditures for 
physician services; and (3) limits on the amounts that nonparticipating 
physicians can charge beneficiaries. The Act requires that payments 
under the fee schedule be based on national uniform relative value 
units (RVUs) based on the resources used in furnishing a service. 
Section 1848(c) of the Act requires that national RVUs be established 
for physician work, practice expense, and malpractice expense.
    Section 1848(c)(2)(B)(ii)(II) of the Act provides that adjustments 
in RVUs because of changes resulting from a review of those RVUs may 
not cause total physician fee schedule payments to differ by more than 
$20 million from what they would have been had the adjustments not been 
made. If this tolerance is exceeded, we must make adjustments to the 
conversion factors (CFs) to preserve budget neutrality.
B. Published Changes to the Fee Schedule
    We published a final rule on November 25, 1991 (56 FR 59502) to 
implement section 1848 of the Act by establishing a fee schedule for 
physician services furnished on or after January 1, 1992. In the 
November 1991 final rule (56 FR 59511), we stated our intention to 
update RVUs for new and revised codes in the American Medical 
Association's (AMA's) Physicians' Current Procedural Terminology (CPT) 
through an ``interim RVU'' process every year. The updates to the RVUs 
and fee schedule policies follow:
    <bullet> November 25, 1992, as a final notice with comment period 
on new and revised RVUs only (57 FR 55914).
    <bullet> December 2, 1993, as a final rule with comment period (58 
FR 63626) to revise the refinement process used to establish physician 
work RVUs and to revise payment policies for specific physician 
services and supplies. (We solicited comments on new and revised RVUs 
only.)
    <bullet> December 8, 1994, as a final rule with comment period (59 
FR 63410) to revise the geographic adjustment factor (GAF) values, fee 
schedule payment areas, and payment policies for specific physician 
services. The final rule also discussed the process for periodic review 
and adjustment of RVUs not less frequently than every 5 years as 
required by section 1848(c)(2)(B)(i) of the Act.
    <bullet> December 8, 1995, as a final rule with comment period (60 
FR 63124) to revise various policies affecting payment for physician 
services including Medicare payment for physician services in teaching 
settings, the RVUs for certain existing procedure codes, and to 
establish interim RVUs for new and revised procedure codes. The rule 
also included the final revised 1996 geographic practice cost indices 
(GPCIs).
    <bullet> November 22, 1996, as a final rule with comment period (61 
FR 59490) to revise the policy for payment for diagnostic services, 
transportation in connection with furnishing diagnostic tests, changes 
in geographic payment areas (localities), and changes in the procedure 
status codes for a variety of services.
    <bullet> October 31, 1997, as a final rule with comment period (62 
FR 59048) to revise the geographic practice cost index (GPCI), 
physician supervision of diagnostic tests, establishment of independent 
diagnostic testing facilities, the methodology used to develop 
reasonable compensation equivalent limits, payment to participating and 
nonparticipating suppliers, global surgical services, caloric 
vestibular testing, and clinical consultations. The final rule also 
implemented certain provisions of the Balanced Budget Act of 1997 (BBA 
1997) (Public Law 105-33), enacted on August 5, 1997, and implemented 
the RVUs for certain existing procedure codes and established interim 
RVUs for new and revised procedure codes.
    This proposed rule would affect the regulations set forth at 42 CFR 
part 405, which consists of regulations on Federal health insurance for 
the aged and disabled; part 410, which consists of regulations on 
supplementary medical insurance benefits; part 414, which consists of 
regulations on the payment for Part B medical and other health 
services; part 415, which pertains to services furnished by physicians 
in providers, supervising physicians in teaching settings, and 
residents in certain settings; part 424, which pertains to the 
conditions for Medicare payment; and part 485, which pertains to 
conditions of participation: specialized providers.
II. Specific Proposals for Calendar Year 1999
A. Resource-Based Practice Expense Relative Value Units
1. Current Practice Expense Relative Value Unit System
    The Act details the types of services that are paid under the 
physician fee schedule. These include physician services, services and 
supplies incident to a physician service, diagnostic x-ray tests, 
diagnostic laboratory tests (excluding clinical laboratory tests), and 
x-ray, radium, and radioactive isotope therapy. BBA 1997 added other 
services such as certain preventive services. While some of these 
services do not have work RVUs, all of the services have practice 
expense and malpractice expense RVUs. (Physician anesthesia services 
are included under the physician fee schedule but are paid under a 
different payment methodology that uses a separate CF and allowable 
base and time units. Physician anesthesia services do not have practice 
expense and malpractice expense RVUs.) Payments for practice expense 
RVUs account for approximately 41 percent of total physician fee 
schedule payments.
    In most cases, the current practice expense RVUs are calculated 
based on a statutory formula. They are derived from the product of 
``base allowed charges'' and service-specific practice expense 
percentages. The base allowed charge is the national allowed charge for 
the service furnished during 1991. The service-specific practice 
expense percentage is a weighted average of the practice expense 
percentages of the specialties performing the service.
    For services furnished beginning with calendar year 1994 and whose 
practice expense RVUs exceed 1994 work RVUs and are performed in the 
office setting less than 75 percent of the time, practice expense RVUs 
in each of 1994, 1995, and 1996 were reduced by 25 percent of the 
amount they exceed the 1994 work RVUs. (Before 1998, practice expense 
RVUs were not reduced to less than 128 percent of 1994 work RVUs.)
    For services furnished beginning with calendar year 1998 whose 
practice expense RVUs (determined for 1998) exceeded 110 percent of the 
work RVUs and which were provided less than 75 percent of the time in 
an office setting, the 1998 practice expense RVUs were reduced to a 
number equal to 110 percent of the work RVUs. This limitation did not 
apply to services that had a proposed resource-based practice expense 
RVU in the June 18, 1997 proposed rule (62 FR 33158), which was
[[Page 30821]]
an increase from its 1997 practice expense RVU. For office visit 
procedure codes performed beginning calendar year 1998, the practice 
expense RVUs were increased by a uniform percentage to equal the 
aggregate decrease in the practice expense RVUs for other services.
2. Criticism of Current Practice Expense Relative Value Unit System
    A common criticism of the current practice expense RVU system is 
that for many services the RVUs, which are based on charges under the 
reasonable charge system, are not based directly on the resources 
involved with furnishing the service. Rather, the charge-based nature 
of the current fee schedule practice expense retains historical charge 
patterns that existed before the implementation of the physician fee 
schedule on January 1, 1992. Those charge patterns favor procedures and 
tests performed in hospitals rather than evaluation and management 
services and other office-based services.
    For example, a primary care physician would have to bill CPT code 
99213 (level 3 office visit, established patient) approximately 80 
times to collect the same amount of practice expense payments as a 
cardiac surgeon would for performing one coronary artery bypass graft 
with three coronary venous grafts (CPT code 33512), although the 
practice expenses the surgeon typically incurs for the cardiac surgery 
are primarily related to the pre- and postoperative services furnished 
in the office, administrative costs, and overhead. The costs for 
clinical staff, medical supplies, and medical equipment furnished to 
hospital patients are included in the diagnosis-related group (DRG) 
payment made to the hospital as required by section 1862(a)(14).
    In their 1993 annual report to the Congress, the Physician Payment 
Review Commission recommended that the Congress revise the practice 
expense component of the physician fee schedule so that it is resource-
based. They further recommended that we collect data regarding the 
direct cost incurred in delivering each service and that a formula-
based approach be used to allocate indirect costs. This recommendation 
was instrumental in the Congress' legislating the resource-based 
practice expense component.
3. Resource-Based Practice Expense Legislation
    Section 121 of the Social Security Act Amendments of 1994 (Public 
Law 103-432), enacted on October 31, 1994, requires us to develop a 
methodology for a resource-based system for determining practice 
expense RVUs for each physician service. In developing the methodology, 
we must consider the staff, equipment, and supplies used in providing 
medical and surgical services in various settings. The legislation 
required the new payment methodology to be effective for services 
furnished in 1998.
    The legislation specifically requires that, in implementing the new 
system of practice expense RVUs, we must apply the same budget-
neutrality provisions that we apply to other adjustments under the 
physician fee schedule.
    Before publication of the final rule in October 1997, section 4505 
of the BBA 1997 delayed initial implementation of resource-based 
practice expense RVUs until 1999. It also required that we do the 
following:
    <bullet> Use, to the maximum extent practicable, generally accepted 
cost accounting principles that recognize all staff, equipment, 
supplies, and expenses, not solely those that can be linked to specific 
procedures.
    <bullet> Consult with organizations representing physicians 
regarding methodology and data to be used.
    <bullet> Develop a refinement method to be used during the 
transition.
    <bullet> Consider impact projections that compare new proposed 
payment amounts to data on actual physician practice expenses.
4. Originally Proposed Methodology for Developing Resource-Based 
Practice Expense Relative Value Units
    To implement the October 1994 legislation, we published a proposed 
rule on June 18, 1997 (62 FR 33158). In the proposed rule, we 
established a framework in which practice expenses were divided into 
direct and indirect costs. Direct costs are those costs that can be 
directly attributed to providing a service, such as the cost of a 
nurse's time (salary), medical supplies and equipment, administrative 
costs of billing, record maintenance, and the scheduling of office 
patients. Direct costs also include the physician's costs of office 
staff time for scheduling appointments and billing and collection 
activities associated with a medical procedure furnished in a hospital. 
Indirect costs cannot be directly attributed to a specific service, and 
include costs such as rent, utilities, office equipment and supplies, 
and accounting and legal fees. The allocation of indirect costs to 
specific products or services is a classic accounting problem. The 
indirect costs are difficult to relate directly to a specific service 
because they are incurred by the practice as a whole.
    The June 1997 proposed rule (62 FR 33172) described the following 
methodology for calculating the proposed direct practice expense RVUs.
    <bullet> We calculated the total pool of practice expense RVUs for 
1995 and divided it into direct and indirect practice expense pools 
using the American Medical Association's (AMA's) Socioeconomic 
Monitoring System (SMS) survey data and our 1995 national claims 
history data. The national distribution of direct and indirect practice 
expense RVUs was 55 percent direct practice expense RVUs and 45 percent 
indirect practice expense RVUs.
    <bullet> The underpinning for the proposed direct components of the 
practice expense RVUs was the data reported by the Clinical Practice 
Expert Panels (CPEPs) for clinical and administrative labor, medical 
supplies, and medical equipment inputs. There were 15 CPEPs, 
corresponding to the major medical specialties, which were made up of 
nominees from all major specialty societies. (A description of the 
CPEPs is contained in the June 1997 proposed rule (62 FR 33161).) (See 
Addendum A for a detailed description of the CPEP process.)
    <bullet> These data were edited to apply Medicare payment policy 
rules to ensure that the reported data were consistent with our 
national hospital and physician payment policies. The primary 
adjustment was the removal of direct inputs recorded for clinical labor 
staff, medical equipment, and medical supplies furnished to hospital 
patients. Other adjustments were made for the professional component of 
a service, the technical component of a service, and the combined 
service, for codes that have an indicator of ZZZ under the physician 
fee schedule, and for certain allergy and immunotherapy codes performed 
on a per-test, per-dose, or per-vial basis.
    <bullet> We believed that the relative relationships of the staff 
time estimates within the individual CPEPs were generally correct but 
that the absolute time estimates needed normalization. We placed the 
codes from the different CPEPs on the same scale using a normalization 
process that we call ``linking.'' Specifically, linking shifted an 
entire CPEP's data relative to other CPEPs' data, based on the 
relationship of the values assigned across panels for codes that had 
been assigned to multiple CPEPs. We separately linked clinical and 
administrative labor costs. Statistically, the linking was done using 
regression methods.
[[Page 30822]]
    <bullet> After the data were edited and linked, our physicians and 
clinical staff analyzed the direct practice expense RVUs to determine 
if there were unexplainable variations in the underlying CPEP data. 
This review resulted in the application of two general reasonableness 
rules. First, a decision was made to cap the administrative time of 
several categories of service (services without a global period and 
procedures subject to global periods with zero follow-up days) at the 
administrative time assigned to CPT code 99213 (midlevel office 
visits). Second, we decided to cap the nonphysician clinical staff time 
at 1.5 times the physician time, in minutes, for performing the 
procedure. Additional more specific rules were applied to certain 
supplies and supply costs and for certain codes, such as psychotherapy, 
physical therapy, chemotherapy, and nerve block codes.
    <bullet> The aggregate percentage shares across all specialties of 
labor and medical supplies and equipment from the CPEP data were scaled 
to the percentage shares of these categories from the AMA's SMS survey 
data. The CPEP expenses for labor, medical supplies, and medical 
equipment were adjusted by scaling factors of 1.21, 1.06, and 0.39 
respectively.
    <bullet> The direct practice expense dollar amounts were converted 
into direct practice expense RVUs. An adjustment factor of 0.65 was 
used to convert the aggregate direct practice expense dollars to the 
available Medicare direct practice expense dollars.
    <bullet> Aggregate indirect practice expense RVUs were allocated to 
individual codes based on the code-specific sum of the direct practice 
expense, the malpractice expense, and the physician work RVU.
    <bullet> The direct and the indirect practice expense RVUs per code 
were combined to produce a single practice expense RVU per code.
    Other practice expense proposals in the June 1997 proposed rule (62 
FR 33160) included:
    <bullet> Replacement of the current site-of-service differential 
policy that systematically reduces the practice expense RVUs by 50 
percent for certain procedures with a policy that would generally 
identify two different levels (office or nonoffice) of practice expense 
RVUs for each procedure code depending on the site of service.
    <bullet> Elimination of the current policy that allows additional 
practice expense RVUs for supplies that are used incident to a 
physician service but were not the type of routine supplies included in 
the current practice expense RVUs for specific services. These supplies 
were included in the CPEP data for the specific procedure code.
    <bullet> Reduction of the practice expenses for multiple 
nonsurgical services performed at the same time as an evaluation and 
management service.
    The June 1997 proposed rule provided for a 60-day comment period 
ending on August 18, 1997.
5. Balanced Budget Act of 1997 Provisions Pertaining to Resource-Based 
Practice Expense Relative Value Units
    On August 5, 1997, the President signed into law the Balanced 
Budget Act of 1997 (BBA 1997). Section 4505(a) of BBA 1997 delayed the 
effective date of the resource-based practice expense RVU system until 
January 1, 1999. In addition, BBA 1997 provided for the following 
revisions in the requirements to change from a charge-based practice 
expense RVU system to a resource-based method.
    Instead of paying for all services entirely under a resource-based 
system in 1999, section 4505(b) of BBA 1997 provided for a 4-year 
transition period. The practice expense RVUs for the year 1999 will be 
the product of 75 percent of the previous year's RVUs (1998) and 25 
percent of the resource-based RVUs. For the year 2000, the percentages 
will be 50 percent charge-based and 50 percent resource-based. For the 
year 2001, the percentages will be 25 percent charge-based and 75 
percent resource-based. For subsequent years, the RVUs will be totally 
resource-based.
    Section 4505(c) of BBA 1997 required the Comptroller General to 
review and evaluate our proposed rule and report to the Congress by 
February 1998. The review was required to include an analysis of (1) 
the adequacy of the data used in preparing the rule, (2) categories of 
allowable costs, (3) methods for allocating direct and indirect 
expenses, (4) the potential impact of the rule on beneficiary access to 
services, and (5) any other matters related to the appropriateness of 
resource-based methodology for practice expenses. The Comptroller 
General was also to consult with representatives of physician 
organizations with respect to matters of both data and methodology.
    Section 4505(e) of BBA 1997 provided that, for 1998, the practice 
expense RVUs be adjusted for certain services in anticipation of the 
implementation of resource-based practice expenses beginning in 1999. 
Practice expense RVUs for office visits were increased. For other 
services whose practice expense RVUs (determined for 1998) exceeded 110 
percent of the work RVUs and which were provided less than 75 percent 
of the time in an office setting, the 1998 practice expense RVUs were 
reduced to a number equal to 110 percent of the work RVUs. This 
limitation did not apply to services that had a proposed resource-based 
practice expense RVU in the June 1997 proposed rule that was an 
increase from its 1997 practice expense RVU. The total of the 
reductions was less than the statutory maximum of $390 million. The 
procedure codes affected and the final RVUs for 1998 were published in 
the October 31, 1997 final rule (62 FR 59103).
    Section 4505(d)(2) of BBA 1997 required that the Secretary transmit 
a report to the Congress by March 1, 1998, including a presentation of 
data to be used in developing the practice expense RVUs and an 
explanation of the methodology. A report was submitted to the Congress 
in early March 1998. Section 4505(d)(3) requires that a proposed rule 
be published by May 1, 1998, with a 90-day comment period. For the 
transition to begin on January 1, 1999, a final rule must be published 
by October 31, 1998.
    BBA 1997 also required that we develop new resource-based practice 
expense RVUs. In developing these new practice expense RVUs, section 
4505(d)(1) required us to: (1) Utilize, to the maximum extent 
practicable, generally accepted accounting principles that recognize 
all staff, equipment, supplies, and expenses, not just those that can 
be tied to specific procedures, and use actual data on equipment 
utilization and other key assumptions; (2) consult with organizations 
representing physicians regarding the methodology and data to be used; 
and (3) develop a refinement process to be used during each of the 4 
years of the transition period.
6. HCFA Response to BBA 1997 Requirements
    BBA 1997 required us to develop new resource-based RVUs and to 
consult with physician organizations regarding methodology and data. To 
meet the BBA 1997 requirements and to promote input as we developed new 
RVUs, we have sought and will continue to encourage maximum input from 
those affected by this initiative. The following is a summary of 
activities we have undertaken.
    <bullet> Validation Panel Meetings.
    We hosted 17 medical specialty panels that were charged with 
validating the CPEP direct cost data for the high-volume CPT codes for 
each specialty. All the major medical specialty societies were 
represented, including nonphysician organizations.
[[Page 30823]]
Each panel, consisting of about 12 to 15 members, was made up of the 
appropriate specialists, two general surgeons, two primary care 
physicians, and two Medicare carrier medical directors. The panel 
members reviewed and, if they believed necessary, revised the clinical 
and administrative times and the supplies and equipment involved for 
each code. Consensus within panels was reached on about 200 codes.
    <bullet> Cross Specialty Panel.
    Although the October validation panels were able to reach consensus 
on many high-volume procedures within specific specialties, we were 
concerned that there was not a uniform or consistent scale applied to 
labor inputs across specialties. Therefore, in December, we convened a 
multiple specialty panel of 37 panelists, including physicians, 
nonphysicians, and administrators nominated by the specialty societies.
    We expected the panel to help us achieve consistency across panels 
on resource inputs, such as insurance billing and transcription times, 
and to standardize the clinical staff types for similar classes of 
services, whether they be registered nurses, medical assistants, 
licensed practical nurses, or a mix of these staff types. The results 
of the cross specialty panel were generally unsuccessful. While the 
panel did provide the arena for panelists to furnish explanations of 
times for activities that we believed to be excessive, the panelists 
were generally reluctant to make any major modifications in the times 
or staff they had assigned to their own services. The panelists could 
not agree to any rules that would aid us in standardizing the data.
    The panelists did recommend that we explore an option that treats 
billing and insurance activities as indirect costs. Many panelists also 
suggested that we proceed cautiously and try to minimize the magnitude 
of redistribution.
    <bullet> Indirect Cost Symposium.
    We convened a meeting on November 21, 1997 on indirect practice 
expenses to provide a forum for participants to discuss their preferred 
methodology for allocating indirect costs. We asked those organizations 
that commented on our proposed indirect cost methodology to make a 
formal presentation of their views. All major medical specialty groups 
were invited to attend and join in the discussion.
    Some groups endorsed the methodology we proposed in the June 1997 
proposed rule (62 FR 33172) with some modifications. One modification 
recommended was to eliminate malpractice RVUs as a factor in allocating 
indirect costs. It was noted, even by some advocates for other 
allocation methods, that our proposed methodology embodied traditional 
accounting methods for allocating indirect costs.
    Only two major alternatives to our proposed methodology were 
presented. The first, the Activity Based Costing (ABC) method, was 
described as a cutting edge approach to determining the cost of 
individual products (CPT codes). Under the ABC method, the total costs 
of a practice are collected and assigned to discrete processes or 
activities. These costs are then assigned to products to which they are 
related.
    The ABC method was developed for industries in which direct labor 
(the traditional cost accounting method for allocating indirect costs) 
is not the dominant factor in the production of the good or service. 
This method is in the early developmental stages in medical practice 
use.
    The second alternative methodology presented was the physician work 
RVU method of allocating indirect practice expenses. This method would 
allocate indirect costs using only the physician work RVUs. However, 
there did not appear to be much support for this methodology at the 
meeting. It would, for example, penalize physician practices that have 
proportionately higher equipment costs.
    <bullet> October 31, 1997 Notice with Comment Period
    <bullet> To inform all interested parties of our plans to issue a 
new proposed rule and to request additional data from the medical 
community to assist us in meeting BBA 1997 requirements, on October 31, 
1997, we published a notice (62 FR 59267).
    In that notice, we requested that physicians, physician 
organizations, or others provide us with the following information:
    <bullet> Generally accepted cost accounting principles--We 
specifically requested information on the following: (1) Aspects of the 
cost accounting methodology used in the June 1997 proposed rule that 
were not consistent with the statutory guidance; and (2) complete 
copies of studies of resource-based practice expense RVUs, including 
any underlying surveys supporting these studies, performed by 
physicians or physician groups or their contractors or consultants, 
including pertinent details about the survey.
    <bullet> Equipment utilization--We specifically requested complete 
copies of any studies or other data showing the actual utilization of 
equipment by physician practices, including pertinent details about the 
survey, such as response rates, sampling design, methodology, 
directions, and definitions.
    <bullet> Other assumptions--We specifically requested information 
regarding the useful life of equipment, the amount and percentage of 
direct practice costs versus the amount and percentage of indirect 
costs by specialty, and practice expense values for sites for which 
values were not proposed in the June 1997 proposed rule (62 FR 33158).
    <bullet> Use of physician-employed staff in hospitals and other 
facility settings--We specifically requested comments and information 
about the extent to which a physician employee, such as a registered 
nurse, accompanies the physician to the hospital, ambulatory surgical 
center, or other facilities to provide services, such as acting as an 
assistant at surgery or serving as a scrub nurse. We asked for names of 
specific facilities so that we might contact them in order to more 
fully understand the nature of the relationships.
    <bullet> Refinement process--We requested comments on how this 
refinement process would operate including assigning practice expense 
RVUs to new codes, who would be involved in the refinement process, and 
how all of the users of the physician fee schedule would have access to 
the process.
    <bullet> Review of New Methodology by KPMG Peat Marwick LLP--Under 
contract #500-97-0402, we requested that KPMG Peat Marwick LLP review 
the practice expense per hour methodology. They concluded that the 
methodology follows reasonable cost accounting principles. They made 
this determination based on an examination of the available data 
sources and a consideration of the cost and feasibility of acquiring 
additional nationally representative data. As a future consideration, 
they recommended sample validation of our cost allocation bases.
7. Summary of General Input From the Medical Community and Comments 
From the October 1997 Notice With Comment Period
    Some physicians, such as primary care physicians, expressed 
satisfaction that the proposed methodology was generally sound. In 
addition, the AMA was supportive of our panel process for direct 
expenses and offered many helpful comments. However, many surgeons and 
medical specialties argued that we should discard our current practice 
expense data, and develop payments that reflect their ``actual costs.''
[[Page 30824]]
    Both in written comments and in our meetings with the medical 
community, we received much feedback on our methodology for indirect 
practice expense. However, there was no consensus regarding methods for 
allocating indirect costs to individual procedure codes.
    In addition, we received 56 specific comments from individuals, 
major organizations, and physician specialty groups on our October 1997 
notice. The comments are summarized by the following categories:
    <bullet> Generally Accepted Accounting Principles.
    Some of the groups expected to experience an increase in payment 
under the June 1997 proposed rule thought our approach satisfied the 
current statutory mandate that we utilize generally accepted accounting 
principles (GAAP). Those physician groups that expected to experience a 
decrease in payments based on the methodology described in the June 
1997 proposed rule said the approach in the proposed rule was 
inconsistent with GAAP. They argued that GAAP requires us to use actual 
practice expense data and said the data from the CPEPs and validation 
panels were based on erroneous assumptions, or were unverified 
approximations. At least five commenters supported using the activity-
based accounting approach.
    <bullet> Equipment utilization.
    Some groups furnished equipment-specific utilization levels for a 
few services. Generally, the equipment and utilization levels were not 
based on representative surveys of physicians performing the service. 
Some suggestions were as follows:
------------------------------------------------------------------------
                                                       Percent          
------------------------------------------------------------------------
Electroencephalography equipment...........  26                         
Electromyography...........................  36.5                       
Nerve Conduction Velocity..................  36.5                       
Cystoscope.................................  5                          
Loop electrode excision procedure..........  1                          
Colposcope.................................  1.6                        
YAG laser..................................  12                         
ARGON laser................................  5 to 6.4                   
Fundus camera..............................  31.3                       
Spirometry and Ancillary Equipment.........  10 to 17                   
Bronchoscopy...............................  5 to 10                    
------------------------------------------------------------------------
    <bullet> Useful Life.
    We did not receive specific comments on suggested useful lives for 
specific medical equipment, which is an important factor in estimating 
equipment costs.
    <bullet> Direct and Indirect Costs.
    Some commenters pointed out that not all clinical labor can be 
classified as direct costs. Tasks such as ordering supplies and 
attending meetings or continuing education classes should be captured 
as indirect costs. Some groups, including one primary care group, said 
that billing costs should be an indirect expense, while others 
supported maintaining them as direct costs. Many groups supported an 
allocation process in which indirect costs are assigned based on a 
specialty's specific indirect cost percentage. Only one group 
specifically objected to this approach. Some physician groups provided 
specific direct and indirect cost ratios based on limited surveys of 
their membership.
    <bullet> Employed Staff.
    According to an American Hospital Association survey, 63 percent of 
respondents (from 573 hospitals) believed that a physician brought 
staff to the hospital during the last 6 months of 1996. Of these 
respondents, 82 percent said this was not a regular practice. 
Therefore, the American Hospital Association commented it is not a 
typical practice in the United States for physicians to bring their own 
staff to a hospital.
    Five surgical specialties and subspecialties--neurosurgery, 
ophthalmology, general thoracic surgery, congenital thoracic surgery, 
and adult cardiac surgery--indicated that at least 50 percent of 
practices use employed clinical staff in nonoffice settings. General 
surgery indicated that 31 percent of general surgery practices pay for 
clinical staff working in nonoffice settings. The Society of Thoracic 
Surgeons stated that they do not have data on the number of clinical 
nurses who work with thoracic surgeons in hospitals. However, they 
stated that a survey of physician assistants shows that 72 percent of 
physician assistants employed in cardiovascular surgery were employed 
by solo or group physician practices.
    According to the American Academy of Ophthalmology, 51 percent of 
ophthalmologists bring equipment, such as keratomes, diamond knives, 
cataract trays, and muscle trays to furnish services to hospital 
patients.
    <bullet> Refinement.
    Most commenters support using the AMA's Specialty Society Relative 
Value Update Committee's (RUC's) process to refine the practice expense 
RVUs. (Currently the RUC recommends refinement of the physician work 
RVUs.) Of these commenters, many recommended that the process include 
nurses and practice managers, that there be established rules and 
procedures for data collection, survey design, and response rates, and 
that the process allows participation by subspecialties, such as 
transplant surgeons and pediatric surgeons. One commenter suggested a 
process using the AMA, Medical Group Management Association (MGMA), and 
HCFA. Some commenters suggested using a RUC process only for new codes.
    <bullet> Transition.
    Several commenters stated that the base year for the transition 
should be the 1997 practice expense RVUs and not the 1998 practice 
expense RVUs. They suggested that the 1998 adjustment required by BBA 
1997 is not intended to be included in the base for purposes of the 
practice expense transition. Some commenters recommended that we 
explore using ceilings and floors during the transition period or use 
caution so as to limit the amount of the redistribution.
    <bullet> Site-of-Service Differential.
    Commenters from the American Academy of Orthopaedic Surgeons stated 
that we need office practice expense RVUs for musculoskeletal system 
surgery codes 25000, 25031, 26040, 26060, 26608, 29815 through 29848, 
and 29870 through 29898. Some commenters believe we should develop 
practice expense RVUs for all procedures at all sites and permit office 
endoscopy only under very limited and clearly defined standards.
    <bullet> Data Quality.
    The American College of Surgeons stated that the CPEP data are 
based on erroneous assumptions, educated guesses, and unverified 
approximations. They stated that the data from panels are unreliable 
for the administrative times for chiropractic manipulation, level 3 
office visits, inpatient consultations, balloon angioplasty, and 
clinical times for allergy skin testing.
    <bullet> Validation.
    The AMA stated that we should use AMA and MGMA data on full time 
equivalent staff for each physician to assess how well various 
methodological options account for total labor costs. The American 
College of Physicians suggested we complete an impact analysis that 
compares proposed practice expense payments to actual practice expenses 
on a specialty by specialty basis, as well as sponsoring a study 
requiring on-site visits to practices.
8. Issues Considered in Developing New Practice Expense RVUs
    We faced the following major issues as we decided whether and how 
to modify our original proposal for physician practice expense RVUs. 
These issues arose from many sources: from concerns about the CPEP data 
and our
[[Page 30825]]
original proposed methodology, from the requirements of BBA 1997, from 
the findings and recommendations in the General Accounting Office's 
Report to the Congress on physician practice expense, and from input we 
received from the medical community.
    <bullet> Purpose.
    Our original practice expense proposal was based on the 1994 
legislation, which stated that the new practice expense methodology 
must consider the staff, equipment, and supplies used in the provision 
of various medical and surgical services in various settings. We 
interpreted this to mean that Medicare payments for each service should 
be based on the relative resources typically and reasonably involved 
with performing the service. We believed we could best calculate these 
resources by achieving clinical consensus on the actual inputs it would 
typically take to perform a given service. However, surgeons and some 
other specialties contended that the purpose of a resource-based 
practice expense system should be to reimburse them based on their 
total current expenditures for practice costs. Because the higher paid 
specialties have more to spend on their practices as a result of 
historic charging practices and insurance coverage, there is a concern 
that adopting such a methodology would not achieve the desired equity. 
The argument made by some outside groups is that physicians have been 
increasingly forced to be more efficient and, as a result, differences 
in practice expenses among specialties reflect ``real'' costs that 
should then be reflected in the new practice expense RVUs.
    With the passage of BBA in August 1997, the statute now requires us 
to ``utilize, to the maximum extent practicable, generally accepted 
cost accounting principles which recognize all staff, equipment, 
supplies, and expenses, not just those which can be tied to specific 
procedures. * * *'' Therefore, in developing and analyzing any new 
alternative methods for computing practice expense RVUs, we have 
evaluated how well each option recognizes all practice expense costs.
    <bullet> ``Bottom-up'' versus ``Top-down'' Methodology.
    In line with our original stated purpose and the 1994 legislation, 
our practice expense methodology published in the June 1997 proposed 
rule (62 FR 33172) used a ``bottom-up'' approach, which obtained expert 
panel estimates of actual inputs--staff times, supplies, and 
equipment--for each procedure and then used these estimates to build up 
to the direct practice expense RVUs. Some groups complained that some 
of the published relative values were too low and favored using studies 
that actually measured the inputs onsite. Unfortunately, if any 
reliable data exist at all, they are only for a few scattered 
specialties, and it certainly is not practical for us to undertake such 
a task (Medicare pays physicians for over 7,000 services). We 
understand that even the few specialties that have attempted surveys 
have had limited success obtaining complete practice expense data from 
even limited selected practices.
    Many of the specialty societies favored a ``top-down'' methodology, 
which would start our calculations with their total current 
expenditures and then allocate these costs down to the procedure level 
by some method. Several groups supported using an Activity Based 
Costing (ABC) methodology for calculating practice expenses. The 
proponents of ABC maintain that it produces more accurate costs because 
it measures the costs of processes (for example, servicing patients, 
scheduling, and billing) as opposed to traditional costing systems, 
which measure resources (for example, salaries and rent). However, ABC 
is only in the experimental stages in medical practice use, and many 
difficult questions about its utility in medical practices have not 
been resolved, for example, its assumption that all medical practices 
operate in the same manner. ABC still requires subjective estimations, 
or some other algorithm, to allocate costs from ``processes'' to 
individual CPT codes.
    <bullet> Available Data Sources.
    Much of the debate about what would constitute the most accurate 
practice expense methodology cannot be resolved in the short run. There 
is no consensus about the best way to determine the most accurate 
practice expense methodology. Furthermore, there are only limited data 
sources available. CPEP data, along with the modifications made by our 
subsequent panels, are the only source of estimates at the CPT code 
level of resource inputs needed to provide each service. AMA's SMS 
survey data are from a national survey of randomly selected self-
employed physicians that collects information on practice expense on an 
aggregate level, and can be used to determine overall differences in 
expenditures among specialties.
    The only other relevant data sources of which we are presently 
aware are a few other surveys of practice expense, such as those 
performed by the MGMA, Medical Economics, and the American College of 
Surgeons. Because of selective sampling and low response rates of these 
three surveys, these data are not representative of the population of 
physicians and cannot be used to derive code-specific RVUs, though the 
data might prove useful in validating general impacts.
    <bullet> Specialty-Specific Differences.
    Our June 1997 proposed rule did not explicitly recognize specialty-
specific differences. Differences across specialties were only 
reflected implicitly to the extent that more indirect RVUs would be 
allocated to those procedures with the greatest physician work and 
direct costs. Under our June 1997 proposed approach, we allocated 
indirect relative values based on the typical use of resources, that 
is, the direct practice expense RVUs, the physician work RVUs, and the 
malpractice RVUs per code.
    The specialty groups, along with the AMA and even some primary care 
groups, were almost unanimous in their view that we should use an 
approach that explicitly recognizes specialty-specific differences in 
the indirect cost of practice. It was pointed out, as an example, that 
some specialties such as radiology or ophthalmology would have much 
higher indirect equipment costs than other specialties. The specialty 
groups believed that not recognizing such specialty differences would 
be inherently unfair to some specialties. The AMA staff suggested that 
we use their survey data to calculate the specialty-specific indirect 
costs.
    In developing our options for a new practice expense methodology, 
we, therefore, needed to decide whether we would maintain specialty-
neutral methods, use specialty differentials to help allocate only 
indirect RVUs, or use specialty-specific data to establish the total 
redistributive pools for each specialty.
    <bullet> Administrative Costs.
    Another decision we had to make as we developed new practice 
expense RVUs was how a new proposal would treat administrative costs. 
The June 1997 proposed rule (62 FR 33167) methodology treated 
administrative labor cost as a direct expense, and the administrative 
cost RVUs were derived from the CPEP data. On first reviewing the raw 
CPEP inputs for administrative staff times, it appeared that there were 
some problems with the data. First, some of the suggested 
administrative staff times appeared excessively high, particularly for 
the billing staff. Second, there was variation in staff times for the 
same CPT code between the different panels. In the June 1997 proposed 
rule (62 FR 33166), we dealt with these problems through our linking
[[Page 30826]]
methodology and by capping administrative times. Both of these methods 
were strongly opposed by many specialty groups, largely because our 
adjustments had dramatic effects on the raw data. For example, the 
linking coefficient for thoracic surgery reduced their administrative 
inputs by 76 percent. There were also comments claiming that many 
administrative duties are of a general nature that cannot be fully 
captured on a code-specific basis.
    As a result of these concerns, many outside groups have suggested 
that we treat administrative cost as an indirect practice expense. The 
advantages of adopting this suggestion would be that we could get 
around the mentioned data discrepancies, avoid the controversial use of 
linking for administrative labor, and be more certain that we had 
captured all administrative costs. The main disadvantage would be that 
it would greatly increase the percentage of RVUs that would have to be 
allocated by a formula.
    <bullet> Clinical Costs.
    Although the problems were on a lesser scale, we observed many of 
the same difficulties with the raw CPEP inputs for clinical costs as 
there were for the administrative costs discussed above. There was some 
lack of standardization of clinical staff types between the CPEP 
panels, and some staff times appeared excessive. In the June 1997 
proposed rule, these problems were addressed by linking and by capping 
the clinical times; both of these methods caused considerable 
controversy in the medical community. We had hoped that the validation 
and cross-specialty panels would have resolved the inconsistencies 
across specialties, but they were unable to accomplish this task. It 
was clear, therefore, that any new proposal would still have to address 
a method of standardizing the data between the various specialty 
panels.
    <bullet> The General Accounting Office (GAO) Report to Congress on 
Physician Practice Expense.
    As already mentioned, BBA 1997 required the GAO to review and 
evaluate our June 1997 proposed rule on a resource-based methodology 
for practice expenses. This report was issued in February 1998 and 
concluded that both our use of expert panels to develop direct cost 
estimates and our original allocation methodology for indirect costs 
were acceptable options. However, the GAO raised questions about the 
validity of some specifics of the linking regression model and about 
the appropriateness of capping administrative and clinical labor time 
estimates. In addition, the report suggested that using specialty-
specific indirect expense ratios, based on the SMS survey data, would 
be more clearly consistent with BBA 1997. Also, the report recommended 
that we consider classifying administrative labor costs as indirect 
expenses. (See section 18 for a more detailed discussion of the 
report's recommendations.)
9. Alternative Practice Expense Methodologies Considered
    We carefully considered two alternative approaches to developing 
new practice expense RVUs: the first maintained the ``bottom-up'' 
methodology of our original proposal, while the second adopted a ``top-
down'' methodology.
    <bullet> ``Bottom-up'' Option.
    We regard our original ``bottom-up'' proposal as a viable method of 
developing practice expense RVUs. It clearly fulfilled the requirement 
of the Social Security Amendments of 1994, which states that practice 
expense relative values should be based on the relative practice 
expense resources involved in furnishing the service. Both the GAO and 
the Physician Payment Review Commission, as well as many researchers in 
the field, supported our use of expert panels to estimate direct 
practice expenses. Therefore, we developed a method that was similar to 
our original proposal.
    Like our proposal in the June 1997 proposed rule, this option based 
its calculation for all direct inputs on the data reported by the 
CPEPs. As before, both clinical and administrative labor were linked, 
and all direct cost estimates were scaled as in the original proposed 
rule. However, in a significant departure from our original proposal, 
the caps on clinical and administrative staff times were eliminated. 
For indirect costs, this option continued not to recognize a specialty-
specific method of cost allocation to specific procedures. It did, 
however, have a different indirect allocation formula from our original 
proposal; under this option, 50 percent would be allocated on the basis 
of direct costs and 50 percent on the basis of physician time. Of the 
latter 50 percent, physician time in the office would get a weight 50 
percent higher than physician time out of the office. If there was no 
physician involvement, as is the case with technical component 
services, the maximum clinical staff time would be used.
    <bullet> The ``Top-Down'' Option.
    This option is a departure from our original proposal and is an 
effort to balance the requirements of the 1994 Social Security 
Amendments with the 1997 BBA requirements. It uses the two significant 
sources of actual practice expense data we have available: the CPEP 
data and the AMA's SMS survey data. It allocates current aggregate 
specialty practice costs to specific procedures and, thus, can be seen 
as a ``top-down'' approach.
    This option is based on an assumption that current aggregate 
specialty practice costs are a reasonable way to establish initial 
estimates of relative resource costs of physician services across 
specialties. The specialty practice cost data are derived from the 
AMA's SMS survey data on actual practice expenses. The survey data are 
used to calculate the practice expenses generated for every hour worked 
by a physician. The average practice expense per hour for the 
physicians in a given specialty is then multiplied by the total number 
of physician hours worked by that specialty as reflected in the 
Medicare claims data. This determines the total pool of practice 
expense payments for that specialty. We then allocated this pool to the 
procedures performed by that specialty using the CPEP data (excluding 
the administrative staff time associated with specific procedures) and 
the physician work RVUs. We calculated a weighted average of the 
practice expense payments for procedures performed by more than one 
specialty.
    After much analysis and discussion, we have decided to propose the 
``top-down'' methodology. We believe the ``top-down'' methodology is 
more responsive than the ``bottom-up'' approach to both BBA 1997 
requirements and to many of the concerns of the medical community. By 
using aggregate specialty practice costs as the basis for establishing 
the practice expense pools, we are recognizing all of a specialty's 
costs, not just those linked with a specific procedure. By basing the 
redistributions of the practice expense system on physician-reported 
actual practice expense data, by using a specialty-specific allocation 
method, and by treating administrative costs as an indirect expense, we 
avoid many of the criticisms leveled at our original proposal.
    We also believe this option is responsive to the short-term 
recommendations in the GAO Report to Congress on physician practice 
expense payments relating to the June 1997 proposed rule's limits on 
clinical and administrative staff time and possible changes in the 
linking algorithm. Our recommended methodology would make these 
recommendations moot by eliminating the limits and linking algorithm 
that were part of our previous
[[Page 30827]]
proposal. Finally, based on our experiences with the validation panels 
we held in October and December 1997, we believe the ``top-down'' 
approach will be less difficult to refine.
10. Description of the Proposed Methodology for Developing Practice 
Expense Relative Value Units
(See Addendum B for a detailed technical description of the proposed 
methodology.)
    a. Overview. We used actual practice expense data by specialty to 
create six cost pools (administrative labor, clinical labor, medical 
supplies, medical equipment, office supplies, and all other). We then 
allocated these cost pools to individual procedure codes. An overview 
of this approach is presented in Exhibit 1.
Exhibit 1. Overall Allocation Approach
[GRAPHIC] [TIFF OMITTED] TP05JN98.019
    b. Data Sources. We used the 1995 through 1997 AMA's SMS survey 
data to develop the cost pools and the CPEP data to allocate these cost 
pools to procedure codes.
    The AMA originally developed the SMS in 1981. It covers a broad 
range of economic and practice characteristics. The annual SMS survey 
is designed to provide representative information on the population of 
all non-federal physicians who spend the greatest proportion of their 
time in patient care activities. The survey is sent to both office and 
hospital-based physicians, but excludes residents. The recipients of 
the survey are randomly selected from the AMA's physician master file, 
which contains current and historical information on every physician in 
the United States, including nonmembers of the AMA.
    The SMS survey consists of three distinct sections:
    <bullet> Screening questions to verify the physician's self-
designated practice specialty and eligibility for the survey.
    <bullet> A main questionnaire to collect information on practice 
characteristics, hours worked, volume of services, fees for selected 
procedures, income, and expenses.
    <bullet> Special topic questions to provide information on key 
socioeconomic issues.
    The SMS survey is a computer-assisted telephone survey that checks 
the consistency of responses during the survey and automatically skips 
questions that are not relevant to the physician. To prepare the 
physician, the AMA mails a practice expense summary in advance. The 
physician may designate a proxy such as a practice manager or an 
accountant to answer the practice expense questions. The AMA makes 
vigorous efforts to achieve a high response rate despite the short 
field period of surveys. Each interviewer's work is monitored by 
supervisory staff for both production and quality. AMA staff also 
monitors interviews to ensure that a high level of quality is 
maintained throughout the survey.
    The CPEP data were collected from panels of physicians, practice 
administrators, and nonphysicians (for example, registered nurses) who 
were nominated by physician specialty societies and other groups. There 
were 15 CPEPs consisting of 180 members from more than 61 specialties 
and subspecialties. Approximately 50 percent of the panelists were 
physicians. The CPEPs identified the direct inputs involved in each 
physician service for procedure codes in an office setting and out-of-
office setting. (See Addendum A for a detailed description of the CPEP 
process.)
    c. Practice Expense Cost Pools. We created practice expense cost 
pools by physician specialty for clinical labor, administrative labor, 
medical supplies, medical equipment, office supplies, and all other 
expenses. There are three steps in the creation of the cost pools.
    Step 1: Use the AMA's SMS survey data of actual cost data, by 
physician specialty, for 1995 through 1997 to determine practice 
expenses per hour by cost category.
    Step 2: Determine the total number of physician hours, by 
specialty, spent treating Medicare patients as reflected in the 
Medicare claims data.
    Step 3: Calculate the practice expense pools by specialty and by 
cost category using the results from step 1 and step 2.
    A short description of each step follows.
    Step 1: Determine practice expenses per hour by cost category.
    Based on the AMA's SMS survey data for each physician respondent, 
we calculated practice expenses per hour spent in patient care 
activities by cost pool. We made the following assumptions in this 
calculation:
    <bullet> The physician respondent shares practice expense equally 
with all other physician owners in the practice.
    <bullet> The physician respondent works the same number of hours as 
all other physician owners in the practice.
    <bullet> For any employee physician in the practice, the hours 
spent in patient care activities are the average hours spent in patient 
care activities for employee physicians in the specialty of the 
physician respondent.
    Using the above assumptions, the practice expenses per hour for 
each physician respondent's practice was calculated as the practice 
expenses for the practice divided by the total number
[[Page 30828]]
of hours spent in patient care activities by the physicians in the 
practice. The practice expenses per hour for the specialty are an 
average of the practice expenses per hour for the respondent physicians 
in that specialty.
    Step 2: Determine the number of physician hours spent treating 
Medicare patients.
    For each specialty, the total number of physician hours spent 
treating Medicare patients was calculated from physician time data for 
each procedure code and the Medicare claims data. The primary sources 
for the physician time data are surveys submitted to the AMA's RUC and 
surveys done by Harvard for the initial establishment of the work RVUs.
    Step 3: Determine the practice expense pools by specialty and by 
cost category.
    The practice expense cost pools for clinical labor, administrative 
labor, medical supplies, medical equipment, office expenses, and all 
other expenses are determined by multiplying the practice expenses per 
hour for these categories (calculated in step 1) by the total physician 
hours (calculated in step 2).
     d. Cost Allocation Methodology
    We allocated by specialty each practice expense cost pool to 
individual procedure codes either using the CPEP data for clinical 
labor, medical supplies, and medical equipment, or using a combination 
of the CPEP data for clinical labor, medical supplies, and medical 
equipment and the physician fee schedule work RVUs.
    Exhibit 2 depicts our cost allocation methodology. For each 
specialty, the six cost pools and their respective cost allocation 
bases are used to determine costs for each procedure code.
Exhibit 2. Cost Allocation Methodology
[GRAPHIC] [TIFF OMITTED] TP05JN98.020
    Step 4: Allocate the practice expense pools by specialty to 
individual procedures.
    For each specialty, we separated the six practice expense pools 
(clinical labor, administrative labor, medical supplies, medical 
equipment, office expenses, and all other expenses) created in Step 3 
into two groups and used a different allocation basis for each group. 
Group one includes clinical labor, medical supplies, and medical 
equipment, and group two includes administrative labor, office 
expenses, and all other expenses.
    Group one: clinical labor, medical supplies, and medical equipment.
    We used the CPEP data as the allocation basis for the group one 
pools (clinical labor, medical supplies, and medical equipment). The 
CPEP data for clinical labor were used to allocate the clinical labor 
cost pool, the CPEP data for medical supplies were used to allocate the 
medical supplies cost pool, and the CPEP data for medical equipment 
were used to allocate the medical equipment cost pool.
    Group two: administrative, labor, office expenses, and other 
expenses.
    For the allocation of administrative labor, office expenses, and 
other expenses, a combination of the group one cost allocations and the 
physician fee schedule work RVUs was used to allocate the cost pools.
    Step 5: Weight average allocations for procedures performed by more 
than one specialty.
    For procedures performed by more than one specialty, the final 
procedure code allocation was a weighted average of allocations for the 
specialties that perform the procedure, with the weights being the 
frequency with which each specialty performs the procedure on Medicare 
patients.
11. Comments of the American Medical Association Regarding the Use of 
the Socioeconomic Monitoring System Survey Data to Construct Practice 
Expense Relative Value Units
    At our request, the AMA sent two tables summarizing practice 
expense information by physician specialty. Additionally, the AMA 
supplied us with SMS background information and comments regarding its 
use to construct resource-based practice expense RVUs.
    The following are the AMA's comments as well as two tables derived 
from the SMS data:
    The SMS survey is an annual nationally representative survey of 
physicians drawn randomly from the AMA's Physician Masterfile (a 
listing of all member and nonmember physicians in the United 
States). The survey was conducted by an external contractor--the 
Rand Corporation was the survey contractor for the 1995 through 1997 
SMS surveys. Unit response rates to SMS have been roughly 60 percent 
in recent years, which is as high or higher than comparable 
physician surveys. It is a computer-assisted telephone survey which 
allows checks to be made for the consistency of responses during the 
survey and to automatically skip questions that are not relevant to 
particular physicians. On the practice expense questions, special 
effort is made to obtain accurate information. A practice expense 
summary is mailed to all physicians that are to be surveyed to allow 
them to obtain the information before being contacted. The physician 
may designate a proxy such as a
[[Page 30829]]
practice manager or accountant to answer the practice expense 
questions if they do not have the information.
    However, it is important to stress that the SMS data were never 
collected for the purpose of developing relative values. We feel 
that there are several potential problems with using SMS data to 
construct practice expense RVUs. These concerns were first raised in 
a letter from the AMA to HCFA in November 1996. In particular, we 
are concerned that:
--Sample sizes for some specialties will be too small to permit 
separate calculation of expense data from SMS. Even among the larger 
specialties, the inherent variability of the expense data will mean 
that the average expense figures provided will be subject to 
significant sampling error.
--Response rates for the expense items tend to be low relative to 
other questions on the survey leading to potential non-response 
bias.
--SMS is a physician-level survey, and physicians in groups are 
asked for their share of expenses rather than the practice's 
expenses. Practice-level data may provide a better basis for 
constructing practice expense RVUs.
    Despite these problems, we recognize your need to use the best 
available information. The tables that you requested show the means 
and standard errors of practice expenses per direct patient care 
hour from the 1995 through 1997 SMS surveys. Since SMS collects 
practice expense data for the prior year, these tables summarize SMS 
respondents' hourly expenses for the years 1994 through 1996. Only 
non-federal, non-resident, patient care physicians are surveyed on 
SMS. In addition, only physicians who are full or part-owners of 
their practices are asked the practice expense questions. The 
following records were excluded prior to tabulating the data as you 
requested:
--Physicians practicing fewer than 26 weeks the prior year 
(including cases where weeks worked the previous year were missing);
--Cases with a missing response to the question on typical hours in 
direct patient care per week (3 cases where the response to this 
question was 168 hours were also excluded);
--Cases where any of the individual expense items (total non-
physician personnel expense; clerical non-physician personnel 
expense; office expenses; medical supplies expenses; medical 
equipment expenses; and other or miscellaneous practice expenses) 
were missing; and
--Cases where total expenses (excluding professional liability 
insurance premiums and employee physician payroll expense) were 
zero.
    Expenses per hour were calculated as you requested (and as 
described in the notes to the tables). All results were weighted for 
unit non-response. It will not be possible to replicate these 
figures exactly from the AMA's Physician Marketplace Statistics or 
Socioeconomic Characteristics of Medical Practice publications due, 
in part, to the exclusions mentioned above.
[[Page 30830]]
                Table 1.--Mean Practice Expenses Per Hour Spent in Patient Care Activities, Hours and Expenses Adjusted for Practice Size               
                                                                      [In dollars]                                                                      
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Non-phys     Clerical      Office      Supplies    Equipment      Other        Total   
                    Specialty                      Number of   payroll per  payroll per  expense per  expense per  expense per  expense per  expense per
                                                     cases         hour        hour*         hour         hour         hour         hour        hour**  
--------------------------------------------------------------------------------------------------------------------------------------------------------
ALL PHYSICIANS..................................         3910         27.0         15.0         19.1          7.2          3.2         11.0         67.5
GENERAL/FAMILY PRACTICE.........................          409         30.2         15.1         18.2          8.1          3.6          8.6         68.6
GENERAL INTERNAL MEDICINE.......................          430         22.4         13.3         17.0          6.4          2.1          6.2         54.2
CARDIOVASCULAR DISEASE..........................           94         30.2         14.9         19.9          5.8          6.4         20.7         82.9
GASTROENTEROLOGY................................           84         23.2         15.4         17.9          2.7          1.8         11.0         56.6
ALLERGY/IMMUNOLOGY..............................           31         66.2         27.0         33.3         17.5          3.3         16.4        136.6
PULMONARY DISEASE...............................           49         20.0         12.2         15.0          2.8          1.6          6.4         45.8
ONCOLOGY........................................           27         44.7         22.7         25.7         87.2          5.5         10.3        173.4
GENERAL SURGERY.................................          257         22.5         15.7         17.2          3.1          2.0          9.4         54.1
OTOLARYNGOLOGY..................................          103         44.8         27.3         33.4          7.7          5.8         18.3        110.1
ORTHOPEDIC SURGERY..............................          203         42.9         26.0         30.8         10.3          3.6         18.1        105.6
OPHTHALMOLOGY...................................          210         52.9         27.8         35.9         11.3          9.0         22.7        131.8
UROLOGICAL SURGERY..............................          118         29.6         18.6         22.8         24.5          6.0         11.6         94.6
PLASTIC SURGERY.................................           85         28.6         18.3         30.2         16.3          4.6         23.3        103.0
NEUROLOGICAL SURGERY............................           42         33.5         24.3         31.7          1.8          1.1         15.7         83.9
CARD/THOR/VASC SURGERY..........................           44         30.1         16.2         18.3          1.4          3.1         11.0         63.8
PEDIATRICS......................................          249         26.1         13.3         20.0         10.8          1.6          8.4         66.9
OBSTETRICS/GYNECOLOGY...........................          266         32.3         16.9         21.2          7.3          3.4         11.7         75.9
RADIOLOGY.......................................          214         19.0          9.6         12.5          4.8          8.3         13.6         58.2
PSYCHIATRY......................................          351          7.3          5.3         10.1          0.4          0.3          7.5         25.6
ANESTHESIOLOGY..................................          232         14.4          3.7          5.9          0.3          0.4          5.7         26.7
PATHOLOGY.......................................           82         16.7          8.4          6.7          4.0          1.6         17.7         46.7
DERMATOLOGY.....................................           96         49.5         26.7         33.1         12.5          4.8         15.2        115.0
EMERGENCY MEDICINE..............................           61          5.3          1.9          1.6          0.5          0.1          5.5         13.0
NEUROLOGY.......................................           61         26.2         21.6         15.8          5.0          4.2          7.7         58.8
PHYS MED/RHEUMATOLOGY...........................           75         38.6         23.2         28.5          4.9          3.9         12.0         88.0
OTHER SPECIALTY.................................           37         21.1         12.4         19.7          3.6          1.3          9.7         55.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: American Medical Association, 1995-1997 Socioeconomic Monitoring System (SMS) surveys.                                                          
* Clerical payroll is included in total non-physician payroll.                                                                                          
** Total expenses exclude professional liability insurance premiums and employee physician payroll.                                                     
Notes:                                                                                                                                                  
(1) Only self-employed non-federal non-resident patient care physicians who responded to all relevant expense questions are included.                   
Self-employed physician respondents with no practice expenses for the year are excluded.                                                                
(2) Physicians whose typical number of hours worked in patient care activities per week is missing, less than 20, or equal to 168 (3 cases) are         
  excluded. Physicians whose number of weeks worked the previous year is missing or less than 26 are excluded.                                          
(3) For each respondent, total practice expense and expense components per hour are calculated as (4)/(5) below.                                        
(4) Expenses adjusted for practice size = self-employed respondent expenses* # physician owners.                                                        
(5) Hours adjusted for practice size = (respondent hours* # physician owners) + (employee physician hours (see (6) below)* # employee physicians).      
6) The typical number of hours worked in patient care activities for the employee physician(s) of a self-employed physician's practice is not known.    
  Mean hours worked in patient care activities for employee physicians of each specialty are used as an estimate of employee physician hours.           
[[Page 30831]]
      Table 2.--Standard Errors of Mean Practice Expenses per Hour Spent in Patient Care Activities, Hours and Expenses Adjusted for Practice Size      
                                                                      [In dollars]                                                                      
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Non-phys     Clerical      Office      Supplies    Equipment      Other        Total   
                    Specialty                      Number of   payroll per  payroll per  expense per  expense per  expense per  expense per    expenses 
                                                     cases         hour         hour         hour         hour         hour         hour     per hour **
--------------------------------------------------------------------------------------------------------------------------------------------------------
ALL PHYSICIANS..................................         3910          0.5          0.3          0.4          0.3          0.2          0.3          1.1
GENERAL/FAMILY PRACTICE.........................          409          1.3          0.6          1.2          0.5          0.7          0.6          3.0
GENERAL INTERNAL MEDICINE.......................          430          1.2          0.6          1.0          0.6          0.3          0.6          2.6
CARDIOVASCULAR DISEASE..........................           94          2.9          1.4          1.9          0.8          1.3          5.2          8.0
GASTROENTEROLOGY................................           84          1.6          1.1          1.9          0.3          0.3          2.2          4.1
ALLERGY/IMMUNOLOGY..............................           31          7.9          3.8          3.8          4.2          1.5          2.9         11.2
PULMONARY DISEASE...............................           49          1.6          1.4          2.2          0.6          0.5          0.9          3.5
ONCOLOGY........................................           27          7.5          3.8          5.7         16.4          1.4          3.8         23.2
GENERAL SURGERY.................................          257          1.4          0.9          0.9          0.3          0.3          0.8          2.5
OTOLARYNGOLOGY..................................          103          3.0          2.3          3.5          0.9          1.1          2.1          6.8
ORTHOPEDIC SURGERY..............................          203          1.7          1.2          2.1          0.8          0.4          2.0          4.7
OPHTHALMOLOGY...................................          210          2.9          1.4          2.6          1.3          1.1          2.1          6.3
UROLOGICAL SURGERY..............................          118          1.4          1.0          2.1          1.8          1.0          1.4          4.4
PLASTIC SURGERY.................................           85          2.3          1.4          3.5          2.8          1.0          3.4          8.1
NEUROLOGICAL SURGERY............................           42          4.0          2.5          5.7          0.7          0.4          2.1          9.4
CARD/THOR/VASC SURGERY..........................           44          4.2          2.0          2.9          0.3          1.7          2.2          8.0
PEDIATRICS......................................          249          1.6          0.7          1.7          1.0          0.3          1.2          3.8
OBSTETRICS/GYNECOLOGY...........................          266          1.7          0.9          1.3          0.7          0.3          1.0          3.3
RADIOLOGY.......................................          214          2.0          0.9          2.0          0.8          1.9          1.3          5.7
PSYCHIATRY......................................          351          0.7          0.5          0.6          0.2          0.1          0.6          1.5
ANESTHESIOLOGY..................................          232          1.8          0.6          0.8          0.1          0.1          0.7          2.4
PATHOLOGY.......................................           82          2.7          1.8          1.7          0.8          0.5          2.9          6.4
DERMATOLOGY.....................................           96          4.8          2.0          5.2          2.0          1.2          1.8         10.4
EMERGENCY MEDICINE..............................           61          1.4          0.6          0.5          0.3          0.1          0.9          2.1
NEUROLOGY.......................................           61          3.1          3.1          1.4          1.5          1.1          2.2          6.4
PHYS MED/RHEUMATOLOGY...........................           75          5.1          2.5          6.1          0.7          1.4          2.9         12.1
OTHER SPECIALTY.................................           37          4.4          2.4          5.1          1.1          0.6          2.1         9.5 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: American Medical Association, 1995-1997 Socioeconomic Monitoring System (SMS) surveys.                                                          
* Clerical payroll is included in total non-physician payroll.                                                                                          
** Total expenses exclude professional liability insurance premiums and employee physician payroll.                                                     
Notes:                                                                                                                                                  
(1) Only self-employed non-federal non-resident patient care physicians who responded to all relevant expense questions are included. Self-employed     
  physician respondents with no practice expenses for the year are excluded.                                                                            
(2) Physicians whose typical number of hours worked in patient care activities per week is missing, less than 20, or equal to 168 (3 cases) are         
  excluded. Physicians whose number of weeks worked the previous year is missing or less than 26 are excluded.                                          
(3) For each respondent, total practice expense and expense components per hour are calculated as (4)/(5) below.                                        
(4) Expenses adjusted for practice size = self-employed respondent expenses * # physician owners.                                                       
(5) Hours adjusted for practice size = (respondent hours * # physician owners) + (employee physician hours (see (6) below) * # employee physicians).    
(6) The typical number of hours worked in patient care activities for the employee physician(s) of a self-employed physician's practice is not known.   
  Mean hours worked in patient care activities for employee physicians of each specialty are used as an estimate of employee physician hours.           
12. Other Methodological Issues
    a. Professional and Technical Component Services. Using the 
methodology described above, the professional and technical components 
of the resource-based practice expense relative value units do not 
necessarily sum to the global resource-based practice expense relative 
value units since specialties with different practice expenses per hour 
provide the components of these services in different proportions. For 
example, emergency medicine physicians have proportionately more 
professional component chest x-ray billings than global billings 
relative to radiologists. We used the following methodologies so that 
the professional and technical component resource-based practice 
expense relative value units for a service sum to the global resource-
based relative value units.
    For codes with professional and technical components excluding 
HCPCS codes 70010 through 79440, G0030 through G0047, G0050, G0062, 
G0063, G0106, G0120, G0122, G0125, and G0126, we used the following 
methodology:
    After we determined the practice expense RVUs using the practice 
expense per hour methodology, we budget neutrally distributed the total 
(global, professional, and technical) practice expense payments for 
each code between the global, professional, and technical components as 
follows:
    Step 1: Calculate a weighted average resource-based practice 
expense RVU across the facility and nonfacility settings using the 
allowed utilization from the Medicare claims data.
    Step 2: Using the RVUs calculated in Step 1 for the global, 
professional, and
[[Page 30832]]
technical components of each code and the Medicare utilization data, 
calculate the total new resource-based practice expense payments for 
each code.
    Step 3: Set the global resource-based practice expense RVUs for 
each code equal to the sum of the resource-based practice expense RVUs 
for the professional and technical components calculated in Step 2.
    Step 4: Using the global RVUs calculated in Step 3, the 
professional and technical component RVUs calculated in Step 1, and the 
Medicare utilization data, calculate practice expense payments for each 
code.
    Step 5: Multiply the global relative value units calculated in Step 
3 and the professional and technical component RVUs calculated in Step 
1 by the ratio of the practice expense payments for each code 
calculated in Step 2 to the practice expense payments for each code 
calculated in Step 4.
    For HCPCS codes 70010 through 79440, G0030 through G0047, G0050, 
G0062, G0063, G0106, G0120, G0122, G0125, and G0126, we used the 
following methodology:
    We used the current 1998 practice expense RVUs for this set of 
codes, which are based primarily on the original radiology fee 
schedule, to determine the relatives between the new resource-based 
practice expense relative value units as follows:
    Step 1: Using the current 1998 practice expense RVUs, calculate the 
current aggregate practice expense payments for this set of codes.
    Step 2: Using the resource-based practice expense RVUs determined 
from the methodology described above, calculate the aggregate practice 
expense payments for this set of codes.
    Step 3: Uniformly multiply the current practice expense RVUs by the 
ratio of the aggregate resource-based practice expense payments 
calculated in Step 2 to the aggregate practice expense payments 
calculated in Step 1.
    For HCPCS codes Q0092, R0070, and R0075, we used the following 
methodology:
    The practice expense RVUs for HCPCS code Q0092 was determined by 
applying the ratio described in Step 3 above to the existing practice 
expense RVUs. The practice expense RVUs for HCPCS codes R0070 and R0075 
were determined by applying the ratio described above to practice 
expense RVUs for these codes calculated from the average allowed charge 
in the Medicare claims data.
    b. Practice Expenses per Hour Adjustments and Specialty Crosswalks. 
We have one general comment on our use of the SMS practice expense per 
hour data. Some practices employ midlevel providers such as nurse 
practitioners and optometrists. The practice expenses per hour from the 
SMS survey are calculated in terms of hours spent in patient care 
activities by physicians in a practice. These practice expenses per 
hour are greater than practice expenses per hour spent in patient care 
activities by the physicians and midlevel providers in a practice. As a 
result, the practice expense per hour methodology is potentially biased 
in favor of specialties who use more, relative to other specialties, 
midlevel providers as physician extenders to create billable services 
under the Medicare fee schedule. Although we made no adjustment to the 
practice expenses per hour for this due to a lack of data, we believe 
the issue should be examined as part of the refinement of the resource-
based practice expense RVUs.
    Below are the adjustments we made to the practice expense per hour 
data and the crosswalks we used to assign the specialties reflected in 
our claims data to those found in the practice expense tables from the 
SMS survey data.
    <bullet> We set the medical materials and supplies practice 
expenses per hour for the specialties of ``Oncology'' and ``Allergy and 
Immunology'' equal to the medical materials and supplies practice 
expenses per hour for ``All Physicians'' since we make separate payment 
for the drugs furnished by these specialties.
    With regard to oncology, while Medicare does not have an expansive 
outpatient drug benefit, it does cover outpatient drugs that are 
furnished by a physician, oral cancer drugs, and certain other specific 
drugs. In addition to paying for the costs of these drugs (outside the 
physician fee schedule), Medicare also makes a separate payment to 
physicians for the ``administration'' of cancer drugs (under the 
physician fee schedule). This separate payment for chemotherapy 
administration recognizes the expenses involved with ordering, storing 
and handling, and performing other tasks associated with administering 
such drugs. These expenses are practice expenses and are treated as 
part of resource-based practice expenses; they are not part of the 
costs of the drug and are not included in Medicare payments for 
chemotherapy drugs.
    We believe that physicians' expenses for the administration of 
cancer drugs, as well as the costs of the drugs themselves, are 
included in their responses to the AMA survey. Therefore, to avoid a 
duplicate payment (that is, paying for the drug separately and also 
including the costs of the drug in practice expenses), we need to 
separate the costs of the drug from the practice expenses for the 
administration of the chemotherapy drugs.
    We are proposing to use the ``All Physician'' practice expenses per 
hour for medical materials and supplies to reflect, in a relative 
sense, all the practice expenses for administration of chemotherapy. 
The difference between the practice expense per hour for medical 
material and supplies for oncologists and for all physicians would be 
the costs of the drugs themselves. We invite comments about our 
approach or alternative ways to separate the costs of the drugs from 
the costs of their administration.
    <bullet> We based the administrative payroll, office, and other 
practice expenses per hour for the specialties of ``Physical Therapy'' 
and ``Occupational Therapy'' on data used to develop the salary 
equivalency guidelines for these specialties. (Since speech and 
language pathologists are not identified as Medicare specialties in our 
claims data, we could not explicitly use their salary equivalency 
guideline data.) The data used to calculate the salary equivalency 
practice expenses per hour for these categories of expenses includes an 
allowance for 250 square feet of space per therapist, and the utilities 
and other overhead to run the practice, including administrative costs. 
We set the remaining practice expense per hour categories equal to the 
``All Physicians'' practice expenses per hour from the SMS survey data. 
We used the clinical payroll expenses for ``All Physicians'' instead of 
the salary equivalency data for physical therapy assistants and aides 
since we are concerned that there may be an overlap between the cost of 
therapy assistants and aides reflected in the practice expenses and the 
amount of work allocated to services provided by occupational and 
physical therapists.
    <bullet> The following are the crosswalks we used to assign the 
specialties reflected in our claims data to those found in the practice 
expense tables from the SMS survey data. Note that we refer to the 
difference between the nonphysician payroll expenses per hour and the 
clerical payroll expenses per hour as the clinical payroll expenses per 
hour.
[[Page 30833]]
                                 Table 3.--Practice Expense per Hour Crosswalks                                 
----------------------------------------------------------------------------------------------------------------
                                                                             Medical      Medical       Cler.,  
     HCFA specialty code and             AMA specialty          Clinical   supplies PE/  equipment   office, and
           description                                        labor PE/Hr       Hr         PE/Hr     other PE/Hr
----------------------------------------------------------------------------------------------------------------
01--General Practice.............  General/Family Practice..       $15.10        $8.10        $3.60       $41.90
02--General Surgery..............  General Surgery..........         6.80         3.10         2.00        42.30
03--Allergy/Immunology...........  Allergy And Immunology*..        39.20         7.20         3.30        76.70
04--Otology, Laryn., Rhino.......  Otolaryngology...........        17.50         7.70         5.80        79.00
05--Anesthesiology...............  Anesthesiology...........        10.70         0.30         0.40        15.30
06--Cardiology...................  Cardiovascular Disease...        15.30         5.80         6.40        55.50
07--Dermatology..................  Dermatology..............        22.80        12.50         4.80        75.00
08--Family Practice..............  General/Family Practice..        15.10         8.10         3.60        41.90
10--Gastroenterology.............  Gastroenterology.........         7.80         2.70         1.80        44.30
11--Internal Medicine............  General Internal Medicine         9.10         6.40         2.10        36.50
12--Manip. Therapy...............  All Physicians...........        12.00         7.20         3.20        45.10
13--Neurology....................  Neurology................         4.60         5.00         4.20        45.10
14--Neurosurgery.................  Neurological Surgery.....         9.20         1.80         1.10        71.70
16--OB-GYN.......................  Obstetrics/Gynecology....        15.40         7.30         3.40        49.80
18--Ophthalmology................  Ophthalmology............        25.10        11.30         9.00        86.40
19--Oral Surgery.................  All Physicians...........        12.00         7.20         3.20        45.10
20--Orthopedic Surgery...........  Orthopedic Surgery.......        16.90        10.30         3.60        74.90
22--Pathology....................  Pathology................         8.30         4.00         1.60        32.80
24--Plastic Surgery..............  Plastic Surgery..........        10.30        16.30         4.60        71.80
25--Physical Medicine............  Physical Medicine/               15.40         4.90         3.90        63.70
                                    Rheumatology.                                                               
26--Psychiatry...................  Psychiatry...............         2.00         0.40         0.30        22.90
28--Colorectal Surgery...........  General Surgery..........         6.80         3.10         2.00        42.30
29--Pulmonary Disease............  Pulmonary Disease........         7.80         2.80         1.60        33.60
30--Radiology....................  Radiology................         9.40         4.80         8.30        35.70
33--Thoracic Surgery.............  Cardiac/Thoracic/Vascular        13.90         1.40         3.10        45.50
                                    Surgery.                                                                    
34--Urology......................  Urological Surgery.......        11.00        24.50         6.00        53.00
35--Chiropractor, Licensed.......  General Internal Medicine         9.10         6.40         2.10        36.50
36--Nuclear Medicine.............  Radiology................         9.40         4.80         8.30        35.70
37--Pediatrics...................  Pediatrics...............        12.80        10.80         1.60        41.70
38--Geriatrics...................  General Internal Medicine         9.10         6.40         2.10        36.50
39--Nephrology...................  General Internal Medicine         9.10         6.40         2.10        36.50
40--Hand Surgery.................  Orthopedic Surgery.......        16.90        10.30         3.60        74.90
41--Optometrist..................  All Physicians...........        12.00         7.20         3.20        45.10
43--CRNA/AA......................  Anesthesiology...........        10.70         0.30         0.40        15.30
44--Infectious Disease...........  General Internal Medicine         9.10         6.40         2.10        36.50
46--Endocrinology................  General Internal Medicine         9.10         6.40         2.10        36.50
48--Podiatry.....................  General Surgery..........         6.80         3.10         2.00        42.30
50--Nurse Practitioners..........  General Internal Medicine         9.10         6.40         2.10        36.50
62--Psychologist (Billing          Psychiatry...............         2.00         0.40         0.30        22.90
 Independently).                                                                                                
65--Physical Therapist (Indep.     All Physicians*..........        12.00         7.20         3.20        10.90
 Practice).                                                                                                     
66--Rheumatology.................  Physical Medicine/               15.40         4.90         3.90        63.70
                                    Rheumatology.                                                               
67--Occupational Therapist.......  All Physicians*..........        12.00         7.20         3.20        10.90
68--Clinical Psychologist........  Psychiatry...............         2.00         0.40         0.30        22.90
69--Independent Laboratory.......  All Physicians...........        12.00         7.20         3.20        45.10
70--Clinic Or Other Group........  All Physicians...........        12.00         7.20         3.20        45.10
76--Periperal Vascular Disease...  All Physicians...........        12.00         7.20         3.20        45.10
77--Vascular Surgery.............  Cardiac/Thoracic/Vascular        13.90         1.40         3.10        45.50
                                    Surgery.                                                                    
78--Cardiac Surgery..............  Cardiac/Thoracic/Vascular        13.90         1.40         3.10        45.50
                                    Surgery.                                                                    
79--Addiction Medicine...........  Psychiatry...............         2.00         0.40         0.30        22.90
80--Clinical Social Worker.......  Psychiatry...............         2.00         0.40         0.30        22.90
81--Critical Care (Intensivists).  All Physicians...........        12.00         7.20         3.20        45.10
82--Hematology...................  General Internal Medicine         9.10         6.40         2.10        36.50
83--Hematology/Oncology..........  Oncology*................        22.00         7.20         5.50        58.70
84--Preventive Medicine..........  General Internal Medicine         9.10         6.40         2.10        36.50
85--Maxillofacial Surgery........  All Physicians...........        12.00         7.20         3.20        45.10
86--Neuropsychiatry..............  Psychiatry...............         2.00         0.40         0.30        22.90
89--Clinical Nurse Practitioner..  General Internal Medicine         9.10         6.40         2.10        36.50
90--Medical Oncology.............  Oncology.................        22.00         7.20         5.50        58.70
91--Surgical Oncology............  All Physicians...........        12.00         7.20         3.20        45.10
92--Radiation Oncology...........  Radiology................         9.40         4.80         8.30        35.70
93--Emergency Medicine...........  Emergency Medicine.......         3.40         0.50         0.10         9.00
94--Interventional Radiology.....  Radiology................         9.40         4.80         8.30        35.70
95--Indep. Physiological Lab.....  All Physicians...........        12.00         7.20         3.20        45.10
97--Physician Assistants.........  General/Family Practice..        15.10         8.10         3.60        41.90
98--Gynecology/Oncology..........  Obstetrics/Gynecology....        15.40         7.30         3.40       49.80 
----------------------------------------------------------------------------------------------------------------
* Practice expense per hour were adjusted as follows:                                                           
(1) Allergy & Immunology and Oncology use supplies for All Physicians.                                          
(2) Physical Therapy and Occupational Therapy use salary equivalency data for clerical, office and other        
  practice expenses per hour.                                                                                   
[[Page 30834]]
    <bullet> Due to uncertainty concerning the appropriate crosswalk 
and time data for the nonphysician specialty ``Audiologist'' and the 
fact that the relatively few codes performed by audiologists are also 
performed by other specialties, we did not crosswalk this specialty. 
Until we can obtain more data, we derived the resource-based practice 
expense RVUs for codes performed by audiologists from the practice 
expenses per hour of the other specialties which perform these codes.
    <bullet> Because we have no reason to assume that the distribution 
of radiologists by equipment ownership reflected in the SMS survey data 
differs from the distribution found in our claims data, we did not 
attempt to differentiate the practice expenses per hour for 
radiologists by equipment ownership. The use of the average practice 
expenses per hour should create the appropriate practice expense pool 
for radiology. We invite comments on this issue. We realize that 
practice expenses vary by equipment ownership; however, the appropriate 
recognition of this is through the differential allocation of the 
practice expense pool to the professional, technical, and global 
services performed by radiologists.
    c. Time Associated with the Work Relative Value Units.  As a 
general comment on the time data, we are concerned that any imprecision 
in the time estimates for high volume services which have relatively 
little time associated with them may potentially bias the practice 
expense methodology in favor of the specialties which perform these 
services. For example, if a high volume procedure which typically takes 
four minutes to perform has a surveyed time of 5 minutes, this 
procedure's contribution to the practice expense pool for that 
specialty is inflated by 25 percent. In contrast, if a procedure which 
typically takes 100 minutes to perform has a surveyed time of 101 
minutes, its contribution is only inflated by 1 percent. We believe 
this issue should be examined as part of the refinement of the 
resource-based practice expense RVUs.
    <bullet> The time data from the Harvard study performed for the 
initial establishment of the work relative value units were collected 
over a number of years using primarily surveys of practicing 
physicians. The time data submitted to the RUC for the refinement of 
the work relative value units were also collected over a number of 
years using primarily physician surveys. The time data resulting from 
the refinement of the work relative value units have been 
systematically greater than the time data obtained by the Harvard study 
for the same services. On average, this difference is approximately 25 
percent. We increased the Harvard time data in order to ensure 
consistency between these data sources.
    <bullet> We calculated the total physician time for CPT codes 70010 
through 79440 using the work RVUs and the work per unit time for CPT 
99213, except for codes in the range of CPT codes 78000 through 78891 
for which we had Harvard survey data and codes for which we had data 
from surveys done for the AMA RUC.
    <bullet> Based on the judgment of our clinical staff, we calculated 
the total physician time for CPT codes 90918 through 90921 using the 
work RVUs and the work per unit time for CPT code 99213.
    <bullet> Based on the judgment of our clinical staff, we set the 
total time associated with the work RVUs for CPT 97001 through 97770 as 
follows:
------------------------------------------------------------------------
                                                                   Time 
                             HCPCS                                (min) 
------------------------------------------------------------------------
97001..........................................................       30
97002..........................................................       20
97003..........................................................       45
97004..........................................................       30
97010..........................................................        5
97012..........................................................       15
97014..........................................................       13
97016..........................................................       18
97018..........................................................       13
97020..........................................................       14
97022..........................................................       15
97024..........................................................       15
97026..........................................................       10
97028..........................................................        9
97032..........................................................       18
97033..........................................................       14
97034..........................................................       16
97035..........................................................       12
97036..........................................................       15
97039..........................................................       10
97110..........................................................       15
97112..........................................................       15
97113..........................................................       15
97116..........................................................       15
97122..........................................................       15
97124..........................................................       15
97139..........................................................       15
97150..........................................................       15
97250..........................................................       15
97260..........................................................       15
97261..........................................................       15
97265..........................................................       15
97504..........................................................       15
97520..........................................................       15
97530..........................................................       15
97535..........................................................       15
97537..........................................................       15
97542..........................................................       15
97703..........................................................       15
97750..........................................................       15
97770..........................................................       15
------------------------------------------------------------------------
    <bullet> A high percentage of codes performed by the nonphysician 
specialties of Independent Physiological Lab, Clinical Psychologist, 
and Psychologist (Independent Billing) do not have work RVUs and, 
therefore, time data. Because the practice expenses per hour for these 
specialties were crosswalked from SMS specialties, when calculating 
their practice expense pools we used the maximum clinical staff time 
from the CPEP data for the codes that lack work RVUs.
    <bullet> We calculated the time for CPT codes 00100 through 01996 
using the base and time units from the anesthesia fee schedule and the 
Medicare allowed claims data.
13. Other Practice Expense Policies
    a. Site-of-Service Payment Differential. Under the physician fee 
schedule, if a physician service of the type routinely furnished in 
physician offices is furnished in facility settings, our current policy 
is that the fee schedule amount for the service is determined by 
reducing the practice expense RVUs for the service by 50 percent. 
Certain services are excluded from the regulation including rural 
health clinic services, surgical services not on the ambulatory 
surgical center covered list that are furnished in an ambulatory 
surgical center, anesthesia services, and diagnostic and therapeutic 
radiology services (see Sec. 414.32 (Determining payments for certain 
physician services furnished in facility settings)).
    The site-of-service payment differential is a long established 
policy to avoid duplicate payments for practice costs while, at the 
same time, recognizing that some office practice cost is incurred when 
physicians perform procedures outside the office setting. The site-of-
service policy applies to both inpatient and outpatient hospital 
settings.
    Since the implementation of the physician fee schedule, we have 
compiled a list of services furnished outside physician offices that 
are subject to the site-of-service payment differential. The current 
list includes approximately 700 services.
    As part of the resource-based practice expense initiative, we are 
proposing to replace the current policy that systematically reduces the 
practice expense RVU by 50 percent for certain procedures with a policy 
that would generally identify two different levels (facility and 
nonfacility) of practice expense RVUs for each procedure code depending 
on the site-of-service. In general, we would furnish two levels of 
practice expense RVUs per code; one when the procedure is performed in 
the office or other site (or nonfacility) if no additional facility fee 
is paid and
[[Page 30835]]
another when the procedure is performed out of the office (for example, 
in a hospital or an ambulatory surgical center in which the costs of 
resources, such as labor, medical supplies, and medical equipment are 
paid outside the physician fee schedule and only to the hospital or 
ambulatory surgical center).
    Some services, by the nature of their codes, are performed only in 
certain settings and would have only one level of practice expense RVU 
per code. Many of these are evaluation and management codes with code 
descriptions specific as to the site of service. Examples of these 
codes are the following:
    <bullet> Inpatient hospital care for new or established patients 
(CPT codes 99221 through 99223).
    <bullet> Subsequent hospital care (CPT codes 99231 through 99239).
    <bullet> Emergency department services for new or established 
patients (CPT codes 99281 through 99285).
    <bullet> Critical care services (CPT codes 99291 through 99297).
    <bullet> Nursing facility services (CPT codes 99301 through 99303).
    <bullet> Subsequent nursing facility care (CPT codes 99311 through 
99313).
    <bullet> Domiciliary, rest home (CPT codes 99321 through 99333).
    <bullet> Home services (CPT codes 99341 through 99350.
    We note that office or outpatient evaluation and management 
services (CPT codes 99201 through 99215) are used to report services 
furnished in the physician office or in a hospital outpatient 
department; therefore, these procedure codes will have different levels 
of practice expense RVUs. Other services, such as most major surgical 
services with a 90-day global period, are performed entirely or almost 
entirely in the hospital, and we are generally providing a practice 
expense RVU only for the out-of-office or facility setting.
    In the majority of cases, however, we would provide both facility 
and nonfacility practice expense RVUs. The higher nonfacility practice 
expense RVUs are generally used to calculate payments for services 
performed in a physician office and for services furnished to a patient 
in the patient's home, or facility or institution other than a 
hospital, skilled nursing facility, or ambulatory surgical center. For 
these services, the physician typically bears the cost of resources, 
such as labor, medical supplies, and medical equipment associated with 
the physician service.
    The lower facility practice expense RVUs generally are used to 
calculate payments for services furnished to hospital, SNF, and 
ambulatory surgical center patients. The costs for nonphysician 
services and other items, including medical equipment and supplies, are 
typically borne by the hospital, by the SNF, or the ambulatory surgical 
center.
    b. Additional Relative Value Units for Additional Office-Based 
Expenses for Certain Procedure Codes. Usually office medical supplies 
or surgical services in the physician office are included in the 
practice expense portion of the payment for the medical or surgical 
service to which they are incidental. The November 1991 final rule (56 
FR 59522) included a policy that allowed a practice expense RVU of 1.0 
to pay for the supplies that are used incident to a physician service 
but generally are not the type of routine supplies included in the 
practice expense RVUs for specific services. For example, if the 
physician performed a cystourethroscopy with a biopsy (CPT code 52204) 
in the office and billed for a surgical tray (HCFA Common Procedure 
Coding System (HCPCS) code A4550) in addition to the procedure, the 
physician would receive approximately $34.86 (an RVU of .95) for the 
surgical tray in addition to the payment for the cystourethroscopy with 
biopsy. The November 1991 final rule (56 FR 59811) listed 44 procedure 
codes that qualified for additional RVUs if furnished in the physician 
office. This list was expanded in the December 1993 final rule (58 FR 
63854) to include several cystoscopy codes. Included in this list of 
procedures for which an additional amount for supplies may be paid if 
performed in a physician office are closing a tear duct (CPT code 
68671) and billing for a permanent lacrimal duct implant (HCPCS A4263) 
and inserting an access port (CPT code 36533) and billing for an 
implantable vascular access portal/catheter (A4300). These supplies 
were given the same RVU as HCPCS code A4550.
    We are proposing to revise this policy under the resource-based 
practice expense system. We believe the supply costs that this policy 
is designed to cover were included in the supply inputs identified by 
the CPEPs and the AMA's SMS survey. Thus, they were included in the 
practice expense RVUs for each related procedure code. Therefore, we 
are proposing to discontinue separate payment for supply codes A4263, 
A4300 and A4550.
    c. Anesthesia Services. Although physician anesthesia services are 
paid under the physician fee schedule, these services do not have 
practice expense RVUs. Rather, payment for physician anesthesia 
services is determined based on the sum of allowable base and time 
units multiplied by a locality-specific anesthesia CF.
    Since the beginning of the physician fee schedule, overall budget 
neutrality and work adjustments have been made to the anesthesia CF and 
not to the base and time units. We are proposing to follow the same 
process and make an adjustment to the anesthesia CF to move anesthesia 
services under the resource-based practice expense system. The 
adjustment to the anesthesia CF is 3.5 percent.
14. Refinement
    Section 4505(d)(1)(C) of the BBA requires the Secretary to develop 
a refinement process to be used during each of the 4 years of the 
transition period. In this section, we will describe those aspects of 
this proposed rule that we believe are subject to refinement as well as 
our proposed process for refinement during the coming year. In light of 
the complexity of the issues associated with establishing the initial 
proposed practice expense RVUs, we believe it is premature to propose, 
in this proposed rule, the refinement process for subsequent years of 
the transition period. We also believe it would be premature to 
finalize the practice expense RVUs before the fall of 1999. Therefore, 
we will keep the practice expense RVUs as interim RVUs until at least 
the fall of 1999. We also are open to extending the period during which 
the practice expense RVUs are interim beyond 1999 if we believe that 
more time is needed to identify and correct errors.
    We are particularly interested in receiving comments on our 
proposed refinement process for this year, and we are soliciting 
recommendations for the process in subsequent years. Based on our 
analysis of comments we receive, we hope to describe our plans for the 
entire refinement process in the final rule.
    a. Issues Involved in Refinement. We believe the refinement process 
for practice expense RVUs will enable us to:
    <bullet> Review and refine practice expense/hour data.
    <bullet> Obtain and review practice expense/hour data for 
specialties or practitioners not included in the SMS survey.
    <bullet> Address anomalies, if any, in the code-specific Harvard/
RUC physician time data.
    <bullet> Address anomalies, if any, in the code-specific CPEP data 
on clinical staff types and times, quantity and cost of medical 
supplies, and quantity and cost of medical equipment.
    <bullet> Refine, as needed, our process of developing practice 
expense RVUs for codes that were not addressed by the
[[Page 30836]]
CPEP process, for example, codes that were new in 1996, 1997, and 1998.
    <bullet> Develop practice expense RVUs for codes that will be new 
in 1999 and beyond.
    Our plans for each of these six points are as follows:
    <bullet> Refinement of the practice expense/hour data. The practice 
expense/hour data are based on the SMS survey. (These data can be found 
in Table 1). Although the SMS survey was not designed to support the 
development of practice expense RVUs, we believe it is the best 
available source of data on actual practice costs that allows us to 
recognize all staff, equipment, supplies, and expenses, not just those 
that can be tied to specific procedures. In fact, we believe one 
advantage of the SMS data is that they were collected before this 
proposed rule.
    The SMS survey data used in this proposed rule do not include the 
practice expense information on all specialties recognized by Medicare. 
However, for certain larger specialties, for example, family practice 
and general surgery, the sample of physicians surveyed is of sufficient 
size to serve as the basis of the practice expense/hour calculation in 
the short term. For those larger specialties, we are unlikely to make 
any changes in the practice expense/hour calculation in the final rule 
to be published this fall. In the long term, specifically, 1999 and 
beyond, we are prepared to refine the practice expense/hour data of the 
larger specialties if we receive compelling evidence that the SMS data 
are incorrect. Any arguments that the practice expense/hour for a given 
specialty should be changed would be strengthened by the submission of 
survey data comparable to the SMS that include data for a range of 
specialties expected to gain and lose Medicare revenue.
    We are concerned that the validity of future SMS surveys could be 
affected if we decided to explicitly link the data collected to future 
revisions of the Medicare fee schedule. Also, SMS is a physician level 
survey, and physicians in groups are asked for their share of expenses 
rather than the practices' expenses. Practice level data may provide a 
better basis for constructing practice expense RVUs. We invite comments 
on potential revisions to the SMS survey or alternative sources of data 
that could be used for long term refinement. Finally, because the 
calculation of the practice expense/hour is so critical to our 
methodology, we also invite comment on the need to confirm, through 
audit or other means, the survey data that would be used for long term 
refinement.
    <bullet> Refinement of the crosswalk for the practice expense/hour 
data. The SMS data we used for this proposed rule do not include data 
for all specialties that are recognized by Medicare, and they do not 
include data on nonphysician practitioners who are paid under the 
physician fee schedule. To develop this proposal, it was necessary to 
crosswalk certain specialties and nonphysician practitioners to the 
practice expense/hour data we developed for the specialties included in 
the SMS. We invite comments on the appropriateness of our crosswalks. 
Any arguments that the practice expense/hour data should be changed 
would be strengthened by the submission of survey data comparable to 
the SMS data.
    <bullet> Refinement of the physician time data. The number of 
practice expense RVUs assigned to the services performed by a given 
specialty is determined by the practice expense/hour data from the SMS 
and the physician time data for each of the codes. The physician time 
data are based on the Harvard resource-based RVS study and RUC survey 
data that were developed as part of the refinement of the work RVUs. We 
are confident that these data are accurate although there may be some 
codes for which the final work RVUs we have assigned may be 
inconsistent with the time data. We will accept comments on the code-
specific physician time data but must point out that any proposed 
revisions to the time data have implications for the work RVUs assigned 
to those codes. We do not intend to revisit work RVU issues that have 
been already addressed as part of the 5-year review. (Total physician 
time data can be found in the ``Total Physician Time'' file located on 
the HCFA Homepage. Specific instructions for accessing this and other 
Internet files referred to in this proposed rule can be found at the 
end of this refinement section.)
    <bullet> Refinement of the CPEP data. The identification and 
correction of errors, if any, in the code-specific CPEP data on 
clinical staff types and times, quantity and cost of medical supplies, 
and quantity and cost of medical equipment has its principal effect on 
the relative relationship of the practice expense RVUs assigned to 
services performed by a given specialty.
    It is important to understand that the allocation of practice 
expense RVUs at the code level is based on CPEP data that have not been 
revised or edited in any fashion. We have not made any revisions or 
edits for two main reasons. First, we received many comments in 
response to last year's proposed rule that objected to the data 
reasonableness edits and caps that were part of our proposal. Second, 
we received many comments in response to June 1997 proposed rule that 
objected to our decision to exclude from the CPEP data the direct 
inputs for medical equipment, medical supplies, and clinical staff 
recorded for hospital patients. In addition, we found this decision to 
be quite controversial in subsequent meetings with representatives of 
various specialty societies. Under our proposed methodology that begins 
with the total practice expense costs, the question as to the 
appropriateness of including the direct inputs for medical equipment, 
medical supplies, and clinical staff in the inputs for hospital 
patients is much less important because the inclusion of the data 
impacts the distribution of practice expense RVUs across the entire fee 
schedule only to the extent codes are performed by more than one 
specialty.
    For example, if a given specialty performs cardiovascular 
procedures, including time for nursing staff in the hospital for these 
procedures allocates more of the fixed practice expense pool of dollars 
for that specialty to these procedures, leaving fewer dollars for the 
other codes performed by that specialty. We believe the most 
appropriate method for determining the relative relationship of the 
RVUs assigned to cardiovascular procedures in this proposed rule is to 
rely on the CPEP that developed the inputs for those procedures. 
Therefore, the direct inputs for medical equipment, medical supplies, 
and clinical staff recorded for hospital patients have not been removed 
from the CPEP data.
    In deciding not to modify the CPEP data, we recognize the 
possibility that the RVUs assigned to some codes will appear to be 
incorrect or anomalous. Any apparent errors will be identified and 
corrected in response to the comments we receive on this proposed rule 
and through our refinement process. We received comments in response to 
last year's proposed rule that pointed out apparent errors in the RVUs, 
and many of the CPEP inputs were revised during the validation panels 
we conducted in October 1997. We have not incorporated any of those 
revisions to the data primarily because our methodology for developing 
RVUs has been revised, and we were not convinced that all the revisions 
that occurred during the validation panels were correct. To the extent 
that commenters believe that previously submitted comments are still 
valid or that data revisions that occurred during the validation panels 
are still
[[Page 30837]]
appropriate, we request that they again be brought to our attention in 
response to this proposed rule.
    While we will accept comments on any code-specific data, we 
recommend that commenters focus their attention during this comment 
period on high-volume services with large aggregate expenditures under 
Medicare. We will review the comments with the assistance of our 
carrier medical directors. Time constraints preclude convening multiple 
specialty panels to assist us in our review of the comments. However, 
as noted above, the practice expense RVUs would be interim values for 
at least 1999, including those we change as a result of our review of 
the comments.
    Because all of the practice expense RVUs will be interim during 
1999, commenters will have another opportunity to identify errors in 
the code-specific CPEP data during the comment period of the final rule 
with comment period to be published in the fall of 1998. We believe 
that the codes identified as possible errors during the comment periods 
of the proposed rule and the final rule will constitute the universe of 
codes whose code-specific CPEP data should be reviewed. In other words, 
although we may keep all the practice expense RVUs interim beyond 1999 
as we refine other aspects of the physician fee schedule, it is not our 
intention to continually review the inputs for all the codes on the fee 
schedule on an annual basis.
    We do believe it is important to have the advice of practicing 
physicians on the appropriateness of recommended changes to the CPEP 
inputs. We have two principal options for obtaining that advice. The 
first option would be for us to convene multiple specialty panels to 
review the recommended changes. The second option would be to ask the 
RUC, or a new organization like the RUC that includes broad 
representation across all specialties and includes nonphysician 
practitioners, to do this. We believe that under either option, the 
panel or panels should include individuals other than physicians, for 
example, practice managers or nurses, who could bring additional 
experience and expertise to the discussion. The panels would need to 
meet no later than the summer of 1999 to consider the comments we 
received on both the proposed rule and the final rule. We invite 
comments on these options and would welcome any other recommendations.
    <bullet> Refinement of the crosswalk for 1996, 1997, and 1998 
codes. Because the CPEP process was based on 1995 CPT codes, it was 
necessary for us to develop practice expense RVUs for new codes that 
were developed for the 1996, 1997, and 1998 CPT books. The process we 
used was based on comparing the new codes to other comparable codes for 
which we had actual CPEP data. Files containing information about the 
crosswalks used for codes that were new in 1996, 1997, and 1998 are 
available on the HCFA homepage under the heading ``CPEP Data 
Crosswalked to 1998 CPT Codes.'' Since this crosswalk was based on our 
judgment rather than actual data, we invite comments on the 
appropriateness of our crosswalks. Also, we will accept new code 
specific-data on clinical staff types and times, quantity and cost of 
medical supplies, and quantity and cost of medical equipment. Any 
comments we receive on these codes will be reviewed as part of the 
process of review described above.
    <bullet> Development of practice expense RVUs for codes that will 
be new in 1999 and beyond. There will be new codes included in CPT 1999 
for which we will not have practice expense data in time for 
publication in the 1998 final rule. We plan to develop interim practice 
expense RVUs for these codes by preparing a crosswalk of CPEP data from 
existing codes. The crosswalk we use will be available with the final 
rule, and the practice expense values for the codes will be subject to 
comment. However, the interim values will serve as the basis of payment 
during 1999.
    We do not believe that preparing a crosswalk of new codes is the 
most appropriate method of developing practice expense RVUs for new 
codes. However, for 1999, time constraints do not permit any other 
approach. Beyond 1999, we would like to develop a process whereby we 
receive recommended practice expense RVUs or recommended inputs for 
clinical staff types and times, quantity and cost of medical supplies, 
and quantity and cost of medical equipment.
    For the assignment of work RVUs to new and revised codes, we first 
look to the RUC for recommended RVUs. Under that process, codes that 
will be new or revised in the next year's CPT are referred from the CPT 
editorial panel to the RUC. Specialty societies are informed of these 
codes and furnished an opportunity to survey a sample of physicians in 
their specialty for the development of recommended RVUs. The entire RUC 
then reviews the survey results and forwards the recommended work RVUs 
to us.
    We then review the RUC's recommended work RVUs with the assistance 
of our Medicare carrier medical directors and publish our decisions as 
interim RVUs in the final rule for the upcoming year. For example, work 
RVUs for codes that were new or revised in CPT 1998 were published as 
interim RVUs in the October 1997 final rule.
    Publishing RVUs as interim allows the public the opportunity to 
furnish comments on the appropriateness of our interim work RVUs. 
During the following year, we review any comments we have received with 
the assistance of multiple-specialty panels we have convened. We 
consider our analysis of any comments on the interim work RVUs and the 
advice we receive from the multiple specialty panels in the assignment 
of the final work RVUs that are announced in the final rule for the 
next year's physician fee schedule.
    For practice expense RVUs, we believe there are two principal 
options. First, we could continue to crosswalk new codes to existing 
codes, publish the results of that crosswalk as interim practice 
expense RVUs in the final rule, and review comments we receive with the 
assistance of our multiple specialty panels. Second, we could request 
the RUC or a RUC-like organization to provide recommended practice 
expense RVUs or recommended inputs before publication of the proposed 
rule as we do with work RVUs. This approach would allow us to publish 
interim RVUs based on the advice of practicing physicians. As with the 
work RVUs, any comments we received on the interim RVUs could then be 
reviewed with the assistance of HCFA multiple specialty panels. We 
invite comments on these options and would welcome any other 
recommendations.
    b. Example of the Process for Reviewing and Commenting on Practice 
Expense Relative Value Units. To facilitate the development of 
responses to this proposed rule, to illustrate the issues involved in 
refining the RVUs for practice expense, and to furnish further guidance 
on the use of the data files that are available on the Internet, we are 
furnishing the following analysis of an apparent anomaly in a family of 
codes. This analysis is intended to serve as an example of the process 
for reviewing and commenting on the practice expense RVUs. We have not 
concluded that revisions to the RVUs proposed for this family of codes 
are warranted. In the event that no comments are received on the RVUs 
for these codes, it is unlikely that we will make any revisions.
    In the ophthalmology section of the CPT, there are four codes for 
the reporting of eye exams. The codes, brief descriptors, and the 
proposed practice expense RVUs follow:
[[Page 30838]]
------------------------------------------------------------------------
                                                               Practice 
              Code                        Descriptor           expense  
                                                                 RVUs   
------------------------------------------------------------------------
92002...........................  Eye exam, new patient,            0.96
                                   intermediate.                        
92004...........................  Eye exam, new patient,            1.58
                                   comprehensive.                       
92012...........................  Eye exam, established             1.26
                                   patient, intermediate.               
92014...........................  Eye exam, established             1.25
                                   patient, comprehensive.              
------------------------------------------------------------------------
    We believe there is a rank order anomaly in this family. We 
expected that the practice expense RVUs for new patients would be 
higher than the practice expense RVUs for established patients and that 
the practice expense RVUs for comprehensive visits would be higher than 
practice expense RVUs for intermediate visits. For example, we expected 
that CPT code 92014 would have higher practice expenses than CPT code 
92012, which is not the case.
    To analyze this apparent anomaly, we first reviewed the data on 
which specialties furnish the services. These data are located on the 
HCFA Homepage under the file name ``Procedure Code Utilization by 
Specialty.'' This analysis is important because one potential cause of 
an anomaly is that codes in a given family of codes are performed by 
physicians in different specialties whose practice expenses per hour 
are different. In this case, the dominant specialty performing the 
codes is ophthalmology. Optometrists also perform these services but 
with less frequency than ophthalmologists. In Table 2, the sum of the 
practice expenses per hour for ophthalmology is $131.80, and the sum of 
the practice expenses per hour for optometry is $67.50. Although the 
practice expense per hour differs for ophthalmology and optometry 
because ophthalmology is by far the dominant specialty, this anomaly 
cannot be attributed to differences in practice expense per hour.
    We next reviewed the code-specific data for in-office services on 
clinical labor, equipment, and supplies that are included in the file 
``CPEP Data Converted Into 1998 Dollar Amounts,'' located on the HCFA 
Homepage. This file is based on the raw CPEP data that have been 
converted to monetary amounts. It is considerably easier to review than 
the raw CPEP data because it includes fewer data points per code. (The 
file containing raw CPEP data, ``Raw CPEP Data'', can also be found in 
the HCFA Homepage. Both of these files also contain CPEP data for 
supplies and equipment.)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                    Total           %                   
                   Code                              Descriptor               Clin         Eqp          Sup        services   Ophthalmology  % Optometry
--------------------------------------------------------------------------------------------------------------------------------------------------------
92002....................................  Eye exam, new patient,               15.44        11.76         3.41      354,000            48            50
                                            intermediate.                                                                                               
92004....................................  Eye exam, new patient,               16.87        12.85         3.41    1,866,000            72            27
                                            comprehensive.                                                                                              
92012....................................  Eye exam, est. patient,              11.15         8.49        27.60    6,022,000            85            13
                                            intermediate.                                                                                               
92014....................................  Eye exam, est. patient,              14.01        10.67         3.41    6,980,000            79            20
                                            comprehensive.                                                                                              
--------------------------------------------------------------------------------------------------------------------------------------------------------
    These data show that the relative relationship within the family of 
codes appears to be appropriate for clinical staff and equipment. 
However, for supplies there is a large discrepancy in that the supply 
costs for code 92012 are eight times greater than the supply costs for 
the other three codes. To determine whether the supply costs for code 
92012 are too high or the supply costs for the other three codes are 
too low, it is necessary to review the actual supply inputs assigned to 
the codes by the CPEP. These data may be found as a subdirectory of the 
file, ``CPEP Data Converted to 1998 Dollars.'' We reviewed the inputs 
but have made no judgments about them. We believe the inputs should be 
reviewed by the specialties providing the service.
    As can be seen in the table, 85 percent of the code 92012 services 
are furnished by ophthalmologists, and 13 percent are furnished by 
optometrists. The table also shows that this is a high volume family of 
codes and that errors in the CPEP data could cause distortions in the 
relative relationships of the RVUs assigned to services furnished by 
ophthalmologists and optometrists. Under our proposed methodology for 
developing RVUs, any revisions to the CPEP data will primarily impact 
only those specialties that furnish the service. Thus, if we determine 
that the supply inputs for code 92012 include items that are not 
typically furnished and are recommended for removal, that will ``free 
up'' RVUs that can be redistributed across the other services furnished 
by the two specialties.
    Conversely, if it is determined that the supply inputs for the 
other three codes are missing items that are typically furnished and 
are recommended for inclusion, that will require RVUs to be taken from 
the other services furnished by the two specialties, not from other 
services on the physician fee schedule. We view this as a significant 
advantage of our proposed methodology in that the highly contentious 
atmosphere of refinement under our earlier methodology is greatly 
reduced because, except when multiple specialties perform the same 
service, agreement or disagreement with the CPEP inputs of one 
specialty does not directly impact the RVUs assigned to services 
furnished by other specialties.
    c. Information on Accessing Data Files on HCFA's Homepage. The 
aforementioned files can be obtained on the HCFA Homepage at 
``www.hcfa.gov.'' Following is the step by step process by which the 
data files can be accessed.
    Step 1: After accessing the HCFA Homepage go to Stats and Data.
    Step 2: Go to 1999 Resource-Based Practice Expense.
    Step 3: Under Resource-Based Practice Expense, you will have the 
option of accessing one of six files related to resource-based practice 
expense:
Raw CPEP Data
    This file includes the original CPEP data. There are four subgroups 
within this file:
Clinical Work
Medical Supplies
Procedure Specific Medical Equipment
[[Page 30839]]
Overhead Medical Equipment
1998 Code Crosswalks
    Since the CPEP data were based upon 1995 data, we performed 
crosswalks for codes which were new codes in 1996, 1997, and 1998. This 
file shows the crosswalks that were used for all codes that were new 
after 1995. In addition, this file also contains those codes gap-filled 
based on analogous procedures due to an absence of data from the CPEP 
process.
CPEP Data Crosswalked to 1998 Codes
    This file crosswalks all CPEP data to 1998 codes.
CPEP Data Converted to 1998 Codes Converted Into Dollars
    This file converts the CPEP data, crosswalked to 1998 codes, into 
dollars.
Procedure Code Utilization by Specialty
    This file shows the Medicare allowed services for each procedure 
code performed by each specialty.
Time Associated With the Work Relative Value Units
    This file contains the time associated with the work RVUs for each 
procedure.
15. Reductions in Practice Expense Relative Value Units for Multiple 
Procedures
    In the June 1997 proposed rule (62 FR 33171), we had recommended 
reducing the practice expense RVUs for multiple nonsurgical services 
performed at the same time as an evaluation and management service. We 
had proposed this as a way to reflect the lower practice costs that 
would result when more than one service is performed during a single 
patient encounter. Many commenters, as well as the Medicare Payment 
Advisory Commission (MEDPAC), recommended that we not implement a 
multiple procedure reduction, at least until this issue has been 
further studied.
    We have decided not to propose this reduction at this time but will 
consider it in the future. We invite comments on this specific issue. 
The current multiple surgical procedure reduction policy with regard to 
physician work is not affected by the practice expense proposal.
16. Transition
    Under the transition enacted under BBA 1997, practice expense RVUs 
in 1999 are to be based 75 percent on the old method and 25 percent on 
the resource-based method. In 2000, the shares are 50 percent old 
method and 50 percent resource-based. In 2001, the shares are 25 
percent old method and 75 percent resource-based. Beginning in 2002, 
practice expense RVUs are entirely resource-based.
    In our October 1997 final rule (62 FR 59052), we indicated that the 
old method to be used in the formula constitutes the 1998 practice 
expense RVUs actually used for payment. We received a comment that 
suggested that we consider an alternative interpretation of the law for 
purposes of the transition starting point that would eliminate the 1998 
changes in practice expenses enacted by BBA 1997. This comment was 
based on the theory that the 1998 changes were for 1 year only and not 
intended to be included in the base practice expense used for the 
transition. This alternative would result in higher payments for 
certain specialty procedures and lower payments for medical visits 
during 1999, 2000, and 2001. Beginning in 2002, the starting point for 
the transition does not matter as practice expenses are entirely 
resource-based.
    We have considered this suggestion. We do not believe that we can, 
as suggested by the commenter, utilize 1997 practice expense RVUs 
actually used for payment because we do not believe that we could treat 
the reductions enacted in BBA 1997 for 1998 differently from the 
similar reductions enacted in OBRA 1993 on practice expenses for 1994, 
1995, and 1996. That is, the effects of both amendments should be 
included in the base or excluded. We believe that the appropriate 
option, other than using 1998 practice expense RVUs, is to exclude the 
effects of both the OBRA 1993 and BBA 1997 provisions and revert to 
practice expense RVUs as they existed before any amendments. We do not 
believe that this is the better alternative. In addition to creating 
practical problems of requiring imputation of practice expense RVUs for 
the many new codes that have been established between 1991 and 1998, it 
would seem contrary to the statute's plain intent of moving toward a 
resource-based payment system. This alternative could also potentially 
result in a ``yo-yoing'' of practice expense RVUs between 1998 and 
future years. Practice expense RVUs for certain procedures explicitly 
increased by the Congress in 1998 could be reduced in 1999 only to be 
increased again when the practice expense is fully resource-based. If 
we were to use 1997 RVUs as the base for the transitions, payments for 
office visit procedure codes, for example, would likely decrease 
noticeably during 1999, reversing the clear policy the Congress enacted 
in BBA 1997 by raising them. To adopt such a construction of the law 
would not gradually ``transition'' payments to the new resource-based 
system, but instead would represent an abrupt change in direction, a 
result at odds with the purpose of having a transition period and with 
transitions previously established for payment changes in Medicare. We 
find nothing in the legislative history to suggest that the Congress 
intended such an atypical transition. Therefore, we propose to use the 
1998 practice expense RVUs for purposes of the blend during the 
transition years of 1999, 2000, and 2001.
17. Proposed Regulation Revisions
    We are proposing to revise Sec. 414.22 (Relative value units 
(RVUs)), paragraph (b), (Practice expense RVUs), to state that for 
services beginning January 1, 1999, the practice expense RVUs would be 
based on a blend of 75 percent of the 1998 code-specific practice 
expense RVUs and 25 percent of the relative practice expense resources 
involved in furnishing the service. For services beginning January 1, 
2000, the practice expense RVUs would be based on a blend of 50 percent 
of the 1998 code-specific practice expense RVUs and 50 percent of the 
relative practice expense resources involved in furnishing the service. 
For services beginning January 1, 2001, the practice expense RVUs would 
be based on a blend of 25 percent of the 1998 code-specific practice 
expense RVUs and 75 percent of the relative practice expense resources 
involved in furnishing the service. For services beginning January 1, 
2002, the practice expense RVUs would be based on 100 percent of the 
relative practice expense resources involved in furnishing the service.
    There would be only one level of practice expense RVUs per code for 
the following categories of services: those that have only the 
technical component of the practice expense RVUs; only the professional 
component practice expense RVUs; certain evaluation and management 
services, such as hospital or nursing facility visits that are 
furnished exclusively in one setting; and major surgical services. For 
other services, there would be two different levels of practice expense 
RVUs per code. The lower practice expense RVUs would apply to services 
furnished to hospital or ambulatory surgical center patients. The 
higher practice expense RVUs would apply to services furnished in a 
physician office or services other than visits but performed in a 
patient's home and services furnished to patients in a nursing 
facility, skilled nursing
[[Page 30840]]
facility, or an institution other than a hospital or ambulatory 
surgical center.
18. Response to GAO Recommendations
    As previously discussed, the GAO report to Congress on practice 
expense made five recommendations for further action; two of these are 
short term recommendations that are addressed by this proposed rule and 
three are longer term recommendations that will be addressed during the 
refinement process. The GAO recommendations are as follows:
    <bullet> Short Term Recommendations.
    + Use sensitivity analyses to test the effects of the limits we 
placed on the panels' estimates of clinical and administrative labor 
and our assumptions about equipment utilization.
    We believe that our proposed methodology answers the concerns that 
prompted this recommendation. Our current proposal has eliminated the 
limits previously placed on the CPEP panels' estimates of clinical and 
administrative staff times. In addition, because the proposed 
methodology is based on specialty-specific RVU pools, changes in 
assumptions about equipment utilization rates would impact 
redistributions between specialties only to the extent that codes are 
performed by more than one specialty.
    + Evaluate the classification of the administrative labor 
associated with billing and other administrative expenses as indirect 
expenses, alternative methods for assigning indirect expenses, and 
alternative specifications of the regression model used to link the 
panels' estimates.
    We again believe that our proposed methodology is responsive to 
this recommendation. Under our proposal, administrative expenses are 
treated as indirect costs, and we have developed a method of assigning 
indirect expenses that we believe most closely reflects the various 
specialties' actual costs. The third part of the recommendation is now 
moot as the current proposed methodology no longer utilizes the linking 
algorithm.
    <bullet> Longer Term Recommendations.
    + Determine whether changes in hospital staffing patterns and 
physicians' use of their clinical staff in hospital settings warrant 
adjustments between Medicare reimbursements to hospitals and 
physicians. Similarly, we should determine whether physicians have 
shifted tasks to nonphysician clinical staff in a way that warrants 
reexamining the physician work RVUs.
    + Work with physician groups and the AMA to develop a process for 
collecting data from physician practices as a cross-check on the 
calculated practice expense RVUs and periodically refine and update the 
RVUs.
    + Monitor indicators of beneficiary access to care, focusing on 
those services with the greatest cumulative reductions in physician fee 
schedule allowances, and consider any access problems when making 
refinements to the practice expense RVUs.
    We agree with all of these recommendations. One of the major tasks 
of any proposed refinement process will be determining when any 
additional data are need, whether it be on physician practice patterns 
or actual practice expenses. We welcome comments and suggestions on how 
best to carry out these recommendations to aid us in developing a 
strategy for data gathering in our final rule. We plan to monitor 
access to care.
B. Medical Direction for Anesthesia Services
    The conditions for payment of medical direction were discussed in 
the March 2, 1983 final rule (48 FR 8902) that implemented section 108 
of the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982, 
effective October 1, 1983.
    TEFRA added section 1887 to the Act and required that we 
distinguish between services furnished by physicians to patients that 
are now payable under the physician fee schedule and services furnished 
by physicians to hospitals that are reimbursed to the hospital on a 
prospective payment basis for inpatients or on a reasonable cost basis 
for outpatients.
    Section 1887 of the Act did not, however, include a reference to 
``medical direction.'' This is a term we adopted from the medical 
profession that refers to the necessary level of direct involvement of 
the anesthesiologist in each of two to four concurrent anesthesia 
procedures so that the service meets the definition of physician 
services as required by section 1887 of the Act.
    Our definition of medical direction closely followed the standards 
of anesthesia care team practice promulgated by the American Society of 
Anesthesiologists (ASA).
    The conditions for payment of medical direction are included in 
Sec. 415.110 (Conditions for payment: Medically directed anesthesia 
services). For each patient, the physician must furnish seven kinds of 
services, and the physician may not perform any other services while he 
or she is directing the concurrent procedures unless they meet the 
exception as noted. The medical direction activities in Sec. 415.110(a) 
(Services furnished directly or concurrently) are as follows:
    <bullet> Performs a pre-anesthesia examination and evaluation.
    <bullet> Prescribes the anesthesia plan.
    <bullet> Personally participates in the most demanding procedures 
in the anesthesia plan, including induction and emergence.
    <bullet> Ensures that any procedures in the anesthesia plan that he 
or she does not perform are performed by a qualified individual as 
defined in program operating instructions.
    <bullet> Monitors the course of anesthesia at frequent intervals.
    <bullet> Remains physically present and available for immediate 
diagnosis and treatment of emergencies.
    <bullet> Provides indicated post-anesthesia care.
    The regulations currently refer to these conditions as applying to 
services furnished directly or concurrently. The reference to services 
furnished directly is not correct. It suggests that the physician 
personally performing the anesthesia services only has to provide the 
same kind of services as the physician medically directing the 
anesthesia service. In fact, the physician personally performing the 
anesthesia service must perform the entire anesthesia service alone. 
This policy is included in Sec. 414.46(c)(1)(i) (Additional rules for 
payment of anesthesia services, Physician personally performs the 
anesthesia procedure). Therefore, we are proposing to delete the 
reference in the regulations to services furnished directly.
    The December 1995 final rule (60 FR 63152) included the policy to 
allow the physician's medical direction of a certified registered nurse 
anesthetist (CRNA) performing a single anesthesia service. However, 
this provision did not take effect until January 1, 1998. This policy 
was incorporated in Sec. 414.46(d)(iii) (Additional rules for payment 
of anesthesia services, Anesthesia services medically directed by a 
physician). A program memorandum explaining this policy was issued to 
the Medicare carriers in January 1998.
    We are revising Sec. 415.110 (Conditions for payment: Medically 
directed anesthesia services) so that it is consistent with 
Sec. 414.46(d)(iii) by stating that medical direction can apply to the 
single anesthesia service furnished by a CRNA.
    The Omnibus Budget Reconciliation Act of 1993 (OBRA 1993) added 
section 1848(a)(4)(Special Rule For Medical Direction) to the Act. This 
section of the
[[Page 30841]]
Act specified the calculation of the payment allowances for medical 
direction services on or after January 1, 1994. Thus, the specific 
payment policy is specified in the law. The law provides that the 
medical direction of the performance of an anesthesia service furnished 
on or after January 1, 1998, is 50 percent of the fee schedule amount 
that would have been paid if the anesthesia service was furnished by 
the physician alone.
    Both the ASA and the American Association of Nurse Anesthetists 
(AANA) have pointed out that the current requirements are outdated and 
too restrictive. The current requirements are oriented to the 
administration of a general anesthetic, which was the predominate mode 
of practice when the regulations were originally implemented. There are 
other types of anesthesia, such as regional, spinal or epidural 
anesthesia, and monitored anesthesia care, which are becoming more 
common and for which the current requirements are not completely 
appropriate. For example, in monitored anesthesia care, there is no 
definable emergence as there is for general anesthesia.
    Also, the AANA has advised us that requiring the presence of the 
anesthesiologist for induction for all cases may not be appropriate and 
may delay the start of surgery and result in the inefficient use of 
operating room time. In addition, the ASA has advised us that neither 
the regulations nor the operating instructions explain the level of 
documentation required by the anesthesiologist to support the payment 
for the medical direction service. The ASA believes that the lack of 
instructions for medical documentation and the concerns about payment 
audits have reportedly prompted anesthesiologists to overly document 
anesthesia records.
    The ASA and the AANA have reached consensus on a revised 
recommended set of medical direction requirements. We have reviewed 
their recommendations and are proposing to revise our regulations in 
Sec. 415.110 (Conditions for payment: Anesthesia services) to reflect 
current anesthesia practice arrangements. Namely, we would:
    <bullet> Provide that the physician either perform the pre-
anesthesia examination and evaluation or review one performed by 
another qualified individual.
    <bullet> No longer require the physician to be present during 
induction and emergence.
    <bullet> Require that the physician monitor the course of 
anesthesia at intervals medically indicated by the nature of the 
procedure and the patient's condition.
C. Separate Payment for Physician Interpretation of an Abnormal 
Papanicolaou Smear
    With the exception of hospital inpatients, we currently do not 
allow separate payment for the physician's interpretation of an 
abnormal Papanicolaou (Pap) smear.
    About 10 percent of Pap smears are abnormal and are interpreted by 
a physician, usually a pathologist. If a physician interprets an 
abnormal Pap smear for a patient, other than a hospital inpatient, 
payment for the physician interpretation (and the underlying test) is 
made under the clinical laboratory fee schedule payment for the Pap 
smear test. The physician negotiates with the laboratory for payment 
for the physician service.
    The clinical laboratory fee schedule allowances were initially 
derived from the 1984 prevailing charges made by independent 
laboratories for the Pap smear test. Historically, independent 
laboratories did not bill separately for the physician interpretation 
of the abnormal Pap smear; thus, no separate allowance was established. 
Therefore, the initial clinical laboratory fee schedule allowances 
reflect payment for both the test and any associated interpretation.
    The 1998 clinical fee schedule national allowance for the Pap smear 
test is $7.15. The 1998 physician fee schedule national allowance for 
the physician interpretation of the abnormal Pap smear for a hospital 
inpatient is $28.62.
    The College of American Pathologists requested we recognize 
separate payment for the physician interpretation of the abnormal Pap 
smear in all settings. We believe this proposal would establish an 
understandable and uniform definition of physician services across 
sites. Therefore, we are proposing to recognize, under the physician 
fee schedule, separate payment for the physician interpretation of an 
abnormal Pap smear in all settings.
    The Pap smear test may be furnished by a hospital or an independent 
laboratory. The independent laboratory could bill for the complete 
service: the technical component (the performance of the test) and the 
professional component (the interpretation of the test) furnished by 
the independent laboratory's pathologist. For services to hospital 
patients, the Pap smear interpretation usually is furnished by the 
hospital pathologist who can bill for the professional component of the 
service.
D. Rebasing and Revising the Medicare Economic Index
1. Background
    a. History. In the 1972 Amendments to the Act (Public Law 92-603) 
enacted on October 30, 1972, the Congress mandated the use of an 
economic index in determining payment for physician services under 
Medicare Part B. Although the 1972 Amendments did not specify the 
particular type of index to be used, we established the Medicare 
Economic Index (MEI). The MEI follows the recommendations outlined by 
the Senate Finance Committee in its report accompanying the legislation 
in that it attempts to present an equitable measure for changes in the 
costs of physician time and operating expenses.
    The current MEI represents a weighted sum of annual price changes 
for various inputs needed to produce physician services. Since its 
inception, the MEI has consisted of two principal components or expense 
categories--physician net income and physician practice expenses. 
Physician net income is further delineated into wages and salaries and 
benefits. The physician practice expense portion is delineated into six 
major categories: (1) Nonphysician employee compensation, which 
includes the wages and salaries and benefits of nonphysician employees 
in physician offices; (2) office expenses; (3) medical materials and 
supplies; (4) professional liability insurance; (5) medical equipment; 
and (6) other professional expenses. These broad expense categories are 
still the major expense shares in the proposed MEI and are discussed in 
greater detail in the following sections.
    b. Use of Current Data. The MEI was last rebased and revised in the 
November 25, 1992 final rule (57 FR 55896). The current base year for 
the MEI is 1989. We believe that it is desirable to rebase and revise 
the index periodically so that the expense shares and proxies will 
reflect current conditions. For this reason, we are proposing to rebase 
the MEI to reflect 1996 physician expenses and review the proxies we 
currently use to ensure using the most appropriate proxy for each 
expense category. We will continue to adjust the physician and 
nonphysician employee compensation for economy-wide labor productivity 
to avoid accounting for both physician productivity and economy-wide 
productivity in the physician update framework.
    The proposed MEI expense categories were derived primarily from the 
1997 AMA SMS, which measured physician earnings and practice expenses 
for 1996.
[[Page 30842]]
The AMA data were used to set expenditure weights for physician 
earnings and the six major physician practice expense categories. To 
further disaggregate into subcategories reflecting more specific 
physician expenses, we used data from the 1992 Asset and Expenditure 
Survey, the 1996 Bureau of the Census Current Population Survey, the 
1997 Bureau of Labor Statistics Employment Cost Index, and the Medical 
Economics Continuing Survey data for 1996.
2. Rebasing and Revising Expense Categories
    Developing a rebased and revised MEI requires selecting a base year 
and determining the number and composition of expense categories. As 
mentioned earlier, we are proposing to rebase the MEI to 1996. We chose 
1996 as the base year for two main reasons: (1) The 1996 data were the 
most recent available data for most of the data sources we are 
proposing to use; and (2) the 1996 data were representative of the 
changing distribution of physician earnings and practice expenses over 
time.
    We determined the number and composition of expense categories 
based on the criteria used to develop the current MEI expenditure 
weights and our other input price index expenditure weights (for more 
information on these criteria see the November 25, 1992, proposed rule 
(57 FR 55900)). Using these criteria of mutually exclusiveness and 
exhaustiveness, we developed the rebased and revised MEI presented in 
Table 4.
          Table 4.--Revised Medicare Economic Index Expenditure Categories, Weights, and Price Proxies          
----------------------------------------------------------------------------------------------------------------
                                Weights      Weights                                                            
      Expense category       --------------------------                  Proposed price proxies                 
                                1989 (<SUP>1)    1996 (<SUP>1 <SUP>2)                                                          
----------------------------------------------------------------------------------------------------------------
Total.......................      100.000      100.000                                                          
    Physician Earnings (\4\)       54.155       54.460                                                          
    Wages and Salaries......       45.342       44.197  AHE--Private (\3\).                                     
    Benefits (\5\)..........        8.813       10.263  ECI--Ben: Private (\3\).                                
Physician Practice Expenses.       45.845       45.540                                                          
    Non-Physician Employee         16.296       16.812                                                          
     Compensation.                                                                                              
        Employee Wages and         13.786       12.424                                                          
         Salaries.                                                                                              
        Prof/Tech Wages.....        3.790        5.662  ECI--W/S: Private P&T (\3\).                            
        Managers Wages......        2.620        2.410  ECI--W/S: Private Admin (\3\).                          
        Clerical Wages......        5.074        3.830  ECI--W/S: Private Clerical (\3\).                       
        Services Wages......        2.233        0.522  ECI--W/S: Private Service (\3\).                        
        Craft Wages.........        0.069                                                                       
        Employee Benefits           2.510        4.388  ECI--Ben: Priv. White Collar (\3\).                     
         (\5\).                                                                                                 
    Office Expenses.........       10.280       11.581  CPI(U)--Housing.                                        
    Medical Materials and           5.251        4.516  PPI Drugs/PPI Surg. Appl/CPI(U) Med Sup.                
     Supplies.                                                                                                  
    Professional Liability          4.780        3.152  HCFA--Prof. Liab. Phys. Prem. Survey.                   
     Insurance.                                                                                                 
    Medical Equipment.......        2.348        1.878  PPI--Medical Instruments and Equip.                     
    Other Professional              6.890        7.601                                                          
     Expense.                                                                                                   
        Automobile..........        1.400        1.300  CPI(U)--Private Transportation.                         
        All Other...........        5.490        6.301  CPI(U)--All Items less Food and Energy.                 
----------------------------------------------------------------------------------------------------------------
Footnotes:                                                                                                      
(\1\) Due to rounding, weights may not sum to 100.000%.                                                         
(\2\) Sources: Socioeconomic Monitoring System 1997 Survey of Physicians, Center for Health Policy Research,    
  American Medical Association; Anne L. Finger, ``What it costs to run a practice,'' Medical Economics, October 
  27, 1997; U.S. Department of Labor, Bureau of Labor Statistics; and U.S. Department of Commerce, Bureau of the
  Census, 1992 Asset and Expenditure Survey, and 1997 Current Population Survey.                                
(\3\) Net of change in the 10-year moving average of output per man-hour for the non-farm business sector.      
(\4\) Includes employee physician payroll.                                                                      
(\5\) Includes paid leave.                                                                                      
    To determine the expenditure weights, we used currently available 
and statistically valid data sources on physician earnings and practice 
expenses. While we consulted numerous data sources, we used five 
sources to determine the rebased and revised MEI expenditure weights: 
(1) The 1997 AMA SMS survey (1996 data); (2) the March 1997 Bureau of 
Labor Statistics (BLS) Employment Cost Index; (3) the 1992 Bureau of 
the Census Asset and Expenditure Survey (the latest available); (4) the 
1996 Bureau of the Census Current Population Survey; and (5) the 
Medical Economics continuing survey published October 1997 (1996 data). 
No one data source provided all of the information needed to determine 
expenditure weights according to our criteria. The use of each of these 
data sources is described in detail below.
    a. American Medical Association Socioeconomic Monitoring System 
Survey. Like the current MEI, the proposed MEI will use AMA data on 
mean physician net income (physician earnings) and professional 
expenses for self-employed physicians for the major expenditure 
categories. The seven major expenditure categories taken from the AMA 
data, as shown in Table 1, are physician earnings, nonphysician 
employee compensation, office expenses, medical materials and supplies, 
professional liability insurance, medical equipment, and other 
professional expenses. The weights represent each expenditure 
category's proportion of total expenses in 1996. While many of the 
category weights have changed since 1989, the effect on the percent 
change in the MEI has been minimal, as explained later.
    The physician earnings expenditure category in the rebased MEI is 
defined differently from the one in the current MEI as it includes 
employee physician compensation. Until recently, employee physician 
compensation was not available through the AMA survey and was not 
included in any AMA expenditure categories. AMA reported these data 
separately in 1996. We believe it is appropriate, for our purposes, to 
include employee physician compensation in the MEI category of 
physician earnings. The physician income (earnings) and overhead 
expenses generated by employee physicians are currently included in the 
AMA expenditure
[[Page 30843]]
categories. We propose including employee physician payroll in 
physician earnings to be consistent with the current methodologies used 
in payment under the physician fee schedule. Under the physician fee 
schedule, the work RVU is paid based on the service provided and not on 
who provides the service. Since employee physicians do the same 
services as self-employed physicians, employee physician time would be 
included in the work RVU. By including employee physician compensation 
in the physician earnings category for the MEI, we have achieved two 
goals: (1) Appropriately categorizing these expenses to be consistent 
with the physician fee schedule; and (2) adjusting these expenses by 
the appropriate price proxies for a physician's own time. A detailed 
discussion of the price proxies is presented below.
    b. Employment Cost Index Survey. The Employment Cost Index (ECI) 
survey has shares of total compensation for wages and salaries and 
benefits by private industry health services occupational category that 
can be used to allocate the wage and fringe benefit shares for 
nonphysician employees. The data on these shares are produced for March 
of every year. We determined that March 1997 would be most 
representative of the shares in 1996 because the March 1996 data would 
miss any changes that occurred during the last three quarters of that 
year. The shares are determined from employer costs per hour worked. 
Paid leave is defined as a benefit under this survey. Unfortunately, 
this survey does not have data for offices of physicians. However, data 
are available on wage and fringe benefit shares for total health 
services that include hospitals, nursing homes, offices of physicians, 
and offices of dentists. While not a direct measure of employee wage 
and fringe benefit shares in offices of physicians, the shares for 
health services from the ECI survey do provide a normative estimate of 
the split between wages and fringes.
    In the ECI survey for total health services, the wage and fringe 
benefit split of compensation was 73.9 percent and 26.1 percent, 
respectively. For comparison purposes, when we included paid leave as 
part of wages, these shares were very similar to nonphysician employee 
wage and fringe benefit share data from two physician group practice 
studies. Based on this analysis, we are proposing to use the wage and 
fringe benefit shares for total health services from the ECI survey, 
with paid leave as a benefit, in the rebased and revised MEI for 
nonphysician employee compensation. The wage and fringe benefit shares 
for physicians and nonphysician compensation in the current MEI were 
developed from a special study conducted by our Office of the Actuary. 
These current and revised shares are presented in Table 1.
    c. Asset and Expenditure Survey. We are proposing to use the 1992 
Bureau of the Census Asset and Expenditure survey to derive an estimate 
of the wage and fringe benefit share for physicians under the MEI. The 
wage and fringe benefit share for all persons employed in physician 
offices is available from the 1992 Asset and Expenditure survey. This 
share includes both physicians and nonphysician employees in the 
physician office. By aging this share to 1996 using the ECI for wages 
and fringe benefits for total health services and moving paid leave 
from wages to fringe benefits based on analysis of ECI data on health 
services, we were able to develop a wage and fringe benefit share for 
physician offices for 1996. The wage share for physician offices was 
79.4 percent, and the fringe benefit share 20.6 percent. Using this 
wage and fringe benefit share, the wage and fringe benefit share for 
nonphysician employees developed from the ECI survey, and the share for 
physician and nonphysician compensation developed from the AMA survey, 
we were able to impute a wage and fringe benefit share for physicians. 
The wage share was 81.2 percent, and the benefit share 18.8 percent for 
physicians. We compared these shares to physician group data on 
physician wage and fringe benefit shares and found them to be very 
consistent. Therefore, we are proposing to use these wage and fringe 
benefit shares for physicians in the rebased and revised MEI, as shown 
in Table 1.
    d. Current Population Survey. We are proposing to use the 1996 
Current Population Survey (CPS) from the Bureau of the Census to 
determine the distribution of nonphysician employee wages in the 
rebased and revised MEI. The 1989 CPS was used to determine the 
distribution for the current MEI. The new distribution is presented in 
Table 5. Craft and kindred workers are no longer included in the 
distribution because their share is not significant.
   Table 5.--Percent Distribution of Non-Physician Payroll Expense by   
                        Occupational Group: 1996                        
------------------------------------------------------------------------
                                                             Expenditure
                   BLS occupational group                     shares (1)
------------------------------------------------------------------------
Total......................................................      100.000
    Professional and Technical Workers.....................       45.570
    Managers...............................................       19.399
    Clerical Workers.......................................       30.831
    Service Workers........................................       4.199 
------------------------------------------------------------------------
(1) These weights were derived from the 1996 Current Population Survey, 
  U.S. Bureau of the Census.                                            
    e. Medical Economics Continuing Survey. Consistent with the current 
MEI, we are proposing to use the Medical Economics Continuing Survey to 
determine the weight for automobile (professional car) expenses. We 
used the 1996 Continuing Survey published in the October 27, 1997, 
Medical Economics (Finger, 1997) to determine a weight of 1.3 percent 
in the proposed MEI for automobile expenses, which is nearly identical 
to the 1.4 percent share in the current MEI.
3. Selection of Price Proxies
    a. Background. After the 1996 cost weights for the revised MEI were 
developed, we reviewed the current set of price proxies to determine 
whether they were still the most appropriate to monitor the rate of 
price change for each expenditure category. As was the case in 1992 (57 
FR 55901), most of the indicators we considered are based on BLS data 
and are grouped into one of the following five categories:
    <bullet> Producer Price Indices (PPIs). PPIs measure price changes 
for goods sold in other than retail markets. They are the preferred 
proxies for physician purchases at the wholesale level. These fixed-
weight indexes are a measure of price change at the producer or at the 
intermediate stage of production.
    <bullet> Consumer Price Indices (CPIs). CPIs measure change in the 
prices of final goods and services bought by consumers. Similar to the 
PPIs, they are fixed-weight. CPIs may not represent the price changes 
faced by producers. For this reason, CPIs were used absent an 
appropriate PPI or if the expenditure was similar to that of retail 
consumers in general, rather than to a purchase at the wholesale level.
    <bullet> Average Hourly Earnings (AHEs). AHEs permit the 
measurement of changes in hourly earnings for production and 
nonsupervisory workers for specific industries as well as the nonfarm 
business economy. AHEs are calculated by dividing gross payrolls for 
wages and salaries by total hours. The
[[Page 30844]]
series reflects shifts in employment mix and, thus, is representative 
of actual changes in hourly earnings for industries or for the nonfarm 
business economy.
    <bullet> ECIs for wages and salaries. These ECIs measure the rate 
of change in employee wage rates per hour worked. These fixed-weight 
indices are not affected by shifts in industry or occupation employment 
levels.
    <bullet> ECIs for employee benefits. These ECIs measure the rate of 
change in employer costs of employee benefits such as the employer's 
share of Social Security taxes, pension and other retirement plans, 
insurance benefits (life, health, disability, and accident), and paid 
leave. Like ECIs for wages and salaries, they are not affected by 
changes in industry output or occupational shifts.
    As with choosing the expenditure categories, choosing appropriate 
wage and price proxies for each expense category necessarily involves 
making tradeoffs and using judgment. The strengths and weaknesses of 
each proxy variable need to be evaluated using several criteria that 
can potentially conflict.
    The first criterion is relevance. The price variable should 
appropriately represent price changes for specific goods or services 
within the expense category. Relevance may encompass judgments about 
relative efficiency of the market generating the price and wage 
increases and may include normative factors relating to fairness.
    The second criterion is reliability or low sampling variability. If 
the proxy wage-price variable has a high sampling variability or 
inexplicable erratic patterns over time, its value is greatly 
diminished since it is unlikely to reflect accurately price changes in 
its associated expenditure category. Low sampling variability can 
conflict with relevance since the more specifically a price variable is 
defined in terms of service, commodity, or geographic area the higher 
the sampling variability in some cases.
    Timeliness of actual published data is the third criterion. For 
this reason, monthly and quarterly data take priority over annual data.
    The fourth criterion is the length of time the time-series data has 
been in use. A well-established time series is needed to assess the 
reasonableness of the series and to provide a solid base from which to 
forecast future price changes in the series. Forecasting the MEI is 
required to make Federal budget and Trustee's report estimates.
    The BLS price proxy categories previously described meet the 
criteria of relevance, reliability, timeliness, and time-series length. 
The price-wage proxies for the rebased and revised MEI (shown in Table 
1) are the same as those chosen for the current MEI.
    b. Expense Categories. (1) Physician Time
    Because the revenue associated with physician time is the single 
largest cost component in the MEI (54.5 percent), the selection of the 
price proxy for wages and salaries cost category is a major determinant 
of the rate of change in the MEI. For that reason, we are furnishing an 
extensive discussion of the selection of the price proxy for the wages 
and salaries component as we did in the November 1992 final rule (57 FR 
55903). We have found no compelling reason to change the wage proxy for 
this expense category and offer the same rationale that we used in the 
November 1992 final rule.
    The legislative history of the MEI reveals Congressional concern 
that increases in physician charges are a cause, rather than a result, 
of inflation. The following language from the Senate Finance Committee 
report accompanying the 1972 Social Security Amendments makes that 
point clearly:
    The committee * * * believes that it is necessary to move in the 
direction of an approach to reasonable charge reimbursement that 
ties recognition of fee increases to appropriate economic indexes so 
that the program will not merely recognize whatever increases in 
charges are established in a locality but would limit recognition of 
charge increases to rates that economic data indicate would be fair 
to all concerned (emphasis added) and follow rather than lead 
inflationary trends. * * * Initially, the Secretary would be 
expected to base the proposed economic indexes on presently 
available information on changes in expenses of practice and general 
earnings levels. * * * S. Rep. No. 1230, 92d Cong., 2d Sess. 190-191 
(1972).
    There is obvious circularity if increases in prevailing charges are 
linked to increases in physician charges, which are then tied to 
increases in physician income. The committee's expectation that the 
rate of price inflation assigned to the physician time portion of the 
MEI be permitted to increase by an amount consistent with increases in 
general earnings levels seems to reflect the Congress' preference for 
an equitable external price proxy; that is, a compensation proxy based 
on compensation outside or external to the physician services industry. 
We examined the following three principal alternatives for the wages 
and salary component of the physician time cost category:
    <bullet> The use of AHEs for production and nonsupervisory workers 
in the private nonfarm economy.
    This option suggests a standard of payment that implies that price 
increases for the physician labor component should be the same as for 
workers in the overall economy, that is, general earnings. This option 
presumes that the price increase for the physician time category 
(excluding fringe benefits) should reflect the changing mix of industry 
output and employment. This alternative appears to reflect most closely 
the Senate Finance Committee's reference to general earnings levels. 
Since earnings are per hour, a constant quantity of labor input per 
unit of time is reflected. In addition, the use of the AHEs data is 
consistent with the BLS labor productivity measures. The revised MEI as 
well as the current MEI incorporates an adjustment for economy-wide 
labor productivity to preclude a double-counting of productivity. 
Economy-wide wage increases reflect economy-wide productivity 
increases. In addition, physician practice productivity increases 
associated with the fee-for-service Medicare payment system 
automatically result in revenue increases for the individual physician 
practices. Economy-wide productivity increases are adjusted out of the 
compensation portion of the MEI so that individual physician practices 
get all of their own productivity increases, but not economy-wide 
productivity increases as well. The adjustment will continue to be for 
the 10-year moving average change in productivity.
    <bullet> The use of ECIs for wages and salaries of the total 
private nonfarm economy.
    This option suggests a standard of payment that implies that price 
increases for the physician labor component should be the same as that 
for workers in a hypothetical, overall economy in which there are no 
shifts in the employment patterns of workers. The overall ECI weighs 
nine broad occupational categories and permits measurement of the 
change in the hourly straight time wage rate for private industry 
workers (Nathan, 1987 and Schwenk, 1985). ECIs are unaffected by 
changes in occupational employment shifts or industry output shifts. 
Therefore, this alternative would not recognize changes in the 
composition of the work force over time as intended by the Senate 
Finance Committee.
    <bullet> The use of an ECI for wages and salaries for private 
professional and technical workers.
[[Page 30845]]
    This proxy implies that price changes in the physician time 
component, excluding fringe benefits, should correspond to those for 
private sector professional and technical workers. The professional and 
technical workers category is one of the nine categories that comprise 
the overall ECI. Physicians are a tiny subset of this occupational 
group. The supply, demand, and opportunity cost characteristics of this 
broad category, however, may be different from the supply, demand, and 
opportunity cost characteristics of an efficient market for physician 
services. Most professional and technical workers are in labor markets 
where firms compete for employees. Most office-based physicians are 
self-employed. Some occupations within the professional and technical 
group are in short supply leading to upward pressure on compensation 
levels. Use of this price series would take the MEI away from the 
general earnings specified in the enacting legislation.
    Each of the above options implies a different standard of equity. 
In Table 6, we compare the annual rates of change in the MEI using 
three different price variables for physician earnings suggested as 
options.
     Table 6.--Comparison of Annual Percent Changes in the MEI With     
                Alternative Physician Wage Price Proxies                
------------------------------------------------------------------------
                                           Revised MEI with alternative 
                                           proxies for physicians' own  
                                                       time             
                                        --------------------------------
                                                    ECI:                
          Year ending June 30              AHE:    wages/    ECI: wages/
                                          total   salaries  salaries for
                                         private     for    professional
                                           non-     total        and    
                                           farm    private    technical 
------------------------------------------------------------------------
1992...................................      2.8       3.1         3.4  
1993...................................      2.2       2.3         2.7  
1994...................................      2.1       2.3         2.3  
1995...................................      2.0       2.1         2.0  
1996...................................      1.9       1.9         1.8  
1997...................................      2.3       2.2         2.0  
Average:                                                                
  1992-1997............................      2.2       2.3         2.4  
------------------------------------------------------------------------
    The proposed MEI uses AHEs for the private nonfarm economy as the 
proxy of choice for the physician wages and salaries component of the 
input price index and is the same price measure used in the 1989-based 
MEI. In our judgment, this alternative remains the one that most 
closely comports with Congressional intent as expressed in the Senate 
Finance Committee's 1972 report referenced above. AHEs change in 
accordance with market forces associated with changes in the type and 
mix of workers. This is not the case with ECIs, since ECIs reflect a 
fixed composition of the work force at a given time. Therefore, the 
rate of change in an ECI may differ substantially from an actual AHE 
measure.
    The current MEI uses the ECI for fringe benefits for total private 
industry as the price proxy for fringe benefits. We propose using the 
same proxy for the 1996-based MEI. This means that both the wage and 
fringe benefit proxies for physician time are derived from the nonfarm 
private sector and are both computed on a per-hour basis.
    (2) Nonphysician Employee Compensation. As in the 1989-based MEI, 
we are proposing to use the 1996 Current Population Survey data on 
earnings and employment by occupation to develop labor cost shares for 
the nonphysician occupational groups shown in Table 5. BLS maintains an 
ECI for each of these occupational groups and we are proposing to use 
these as price proxies for nonphysician employee wages in the same 
manner they are used in the current MEI. We multiplied each of the 
occupational cost shares by the changes in the occupational ECI for 
that category. These values were summed to yield an overall rate of 
price change.
    The skill mix shift in physician offices has been substantial in 
the last few years as work formerly done in the hospital increasingly 
is done in ambulatory settings. These skill mix shifts appropriately 
are held constant in this Laspeyres index of nonphysician employees' 
wages and salaries. Skill mix shifts that reflect rising intensity of 
outputs in physician offices are automatically paid for by higher 
charge structures for the more complex mix of service inputs. 
Physicians performing more complex services may hire more skilled 
employees, and, thus, may tend to charge more for their services.
    The current MEI uses the ECI for fringe benefits for white collar 
employees in the private sector. Most nonphysician employees in 
physician offices are white collar employees. We are proposing to use 
the ECI for benefits for white collar employees in the rebased and 
revised MEI. Note that we will continue to adjust the nonphysician 
employee compensation portion of the MEI by the 10-year moving average 
change in economy-wide productivity since physician practice 
productivity is being recognized.
    (3) Office Expense. Office expenses include rent or mortgage for 
office space, furnishings, insurance, utilities, and telephone. We are 
proposing the continued use of the CPI-U for housing because it is a 
comprehensive measure of the cost of housing including rent, owner's 
equivalent rent, insurance, maintenance and repair services, fuels, 
utilities, telephones, furnishings, and housekeeping services. This 
proxy covers about 80 percent of the population.
    (4) Medical Materials and Supplies. This cost category includes 
drugs, outside laboratory work, x-ray films, and other related 
services. There is no price proxy that includes this mix of materials 
and supplies. In the absence of one index, in the 1989-based MEI we 
equally weighted the following three price proxies associated with the 
medical materials and supplies listed above:
    <bullet> The PPI for ethical drugs.
    <bullet> The PPI for surgical appliances and supplies.
    <bullet> The CPI-U for medical equipment and supplies.
    We propose using the same blended proxy for the 1996-based MEI.
    (5) Professional Liability Insurance. This cost category includes 
costs for professional medical liability or malpractice insurance 
premiums including costs associated with self-insurance. Changes in the 
cost of medical liability insurance premiums currently are measured 
based on our survey of the rate of change in average liability premiums 
for $100,000/$300,000 coverage (that is, $100,000 for per-case 
limitation and $300,000 for total coverage or the minimum furnished) 
among major insurers. We measured change with historical data each 
January 1 and interpolated quarterly changes for March, June, and 
September.
    We improved the professional medical liability index in two major 
ways. First, we used actual rates for $1 million/$3 million premiums in 
the index for the most current historical period and estimated them for 
earlier years. Starting with 1996 levels and 1997 percentage changes, 
rates for $1 million/$3 million premiums will be computed; in future 
periods we will use premiums for $1 million/$3 million of coverage.
    Second, the revised index uses data on a quarterly basis that is 
calculated into a four-quarter moving average percent change like all 
our other price proxies. We achieve this by tracking the premium 
changes that occur during each quarter. We gathered historical premium 
data back to 1992 and established average premium levels based on the 
mix of physicians by specialty in 1996. We calculated four-
[[Page 30846]]
quarter moving averages and percent changes from 1992 through 1997 to 
more accurately forecast changes in premium levels for future budget 
and Trustees' report estimates. The previous method obtained the 
premium change only for January 1 of each year.
    We are proposing the changes described above because we believe 
they will improve the quality of measuring change in physician 
professional medical liability premiums. Far more physicians have $1 
million/$3 million coverage rather than $100,000/$300,000 coverage. 
Taking quarterly measurements and computing a four-quarter moving 
average percent change is the same methodology used for all the other 
price proxies. The resulting series better captures the changes through 
the year.
    (6) Medical Equipment. Medical equipment includes depreciation, 
leases, and rent on medical equipment. We propose to use the PPI for 
medical instruments and equipment as the price proxy for this category, 
consistent with the price proxy used in the 1989-based MEI.
    (7) Other Professional Expenses. This category has two 
subcomponents: professional car and ``other.'' The professional car 
category includes depreciation and upkeep for the practice-related use 
of a professional car. We are proposing the continued use of the CPI-U 
for private transportation for this cost category, consistent with the 
price proxy used in the 1989-based MEI. This excludes airline fares, 
inter-city bus and train transportation, and intra-city bus and train 
transportation.
    This category also includes the residual subcategory of other 
expenses. This residual category includes professional expenses such as 
accounting services, legal services, office management services, 
continuing education, professional association memberships, journals, 
and other professional expenses. In the absence of one price proxy or 
even a group of price proxies that might reflect this heterogeneous mix 
of goods and services, we use the CPI-U for all items less food and 
energy, consistent with the price proxy used in the 1989-based MEI.
4. Summary of Changes
    Updating the MEI to the 1996 base year resulted in small changes in 
expense category weights. Physician earnings increased slightly from 
54.2 percent of the index in 1989 to 54.5 percent in 1996. Physician 
practice expenses dropped slightly due to declines in the expense 
shares for medical materials and supplies, professional liability 
insurance, and medical equipment. These declines were mostly offset by 
increases in the expense shares for nonphysician employee compensation, 
office expenses, and other professional expenses.
   Table 7.--Annual Percent Change in the Current and Revised Medicare  
                             Economic Index                             
------------------------------------------------------------------------
                                            Current  Revised            
                                            MEI 89-  MEI 96-            
           Years ending June 30              base %   base %  Difference
                                             change   change            
------------------------------------------------------------------------
1985......................................      3.3      3.2       -0.1 
1986......................................      3.3      3.0       -0.3 
1987......................................      3.0      2.7       -0.3 
1988......................................      3.6      3.4       -0.2 
1989......................................      3.4      3.5        0.1 
1990......................................      3.0      3.4        0.4 
1991......................................      3.2      3.4        0.2 
1992......................................      2.8      2.8        0.0 
1993......................................      2.1      2.2        0.1 
1994......................................      2.1      2.1        0.0 
1995......................................      2.0      2.0        0.0 
1996......................................      2.1      1.9       -0.2 
1997......................................      2.2      2.3        0.1 
Average 1985--1997........................      2.8      2.8        0.0 
------------------------------------------------------------------------
    The rebased and revised MEI is very similar to the current MEI. 
Using the new expense category weights and new proxy for professional 
medical liability premiums, the difference in the annual percent change 
in the index is within two-tenths of one percent in most years from 
1985 through 1997. The average annual percent change from 1985 to 1997 
was identical. Thus, this revision and rebasing, while making the 
expense shares more timely, has little impact on the percent changes in 
the MEI as a whole.
III. Implementation of the Balanced Budget Act of 1997 (BBA 1997)
    In addition to the resource-based practice expense relative value 
units, BBA 1997 provides for revisions to the payment policy for drugs 
and biologicals, a provision allowing private contracting with Medicare 
beneficiaries, payment for outpatient rehabilitation services based on 
the physician fee schedule, and revisions to our policy for 
nonphysician practitioners.
A. Payment for Drugs and Biologicals
    Before January 1, 1998, drugs and biologicals not paid on a cost or 
prospective payment basis were paid based on the lower of the estimated 
acquisition cost (EAC) or the national average wholesale price (AWP) as 
reflected in sources such as the Red Book, Blue Book, or Medispan. For 
purposes of this discussion, we will use the term ``drugs'' to refer to 
drugs and biologicals. Examples of drugs that are paid on this basis 
are drugs furnished incident to a physician service, drugs furnished by 
pharmacies under the durable medical equipment (DME) benefit, and drugs 
furnished by independent dialysis facilities that are not included in 
the end-stage renal disease (ESRD) composite rate payment.
    Section 4556 of BBA 1997 established payment for drugs not paid on 
a cost or prospective payment basis at the lower of the actual billed 
amount or 95 percent of the AWP, effective January 1, 1998. In this 
proposed rule, we are revising the current regulations at Sec. 405.517 
to conform to this statutory change. This regulation would remove the 
EAC and provide for payment at the lower of the actual charge on the 
Medicare claim or 95 percent of the AWP.
    Also, we are proposing to revise the method of calculating the AWP. 
Our current regulations provide that, for multiple-source drugs, the 
AWP equals the median AWP of the generic forms of the drug. The AWP of 
the brand name products is ignored on the presumption the brand AWP is 
always higher than the generic AWPs. While this may have been true when 
the policy was first promulgated, it is not always true now. Therefore, 
we are proposing that the AWP for multiple-source drugs would equal the 
lower of the median price of the generic AWPs or the lowest brand name 
AWP.
B. Private Contracting With Medicare Beneficiaries
    Section 4507 of BBA 1997 amended section 1802 of the Act to permit 
certain physicians and practitioners to opt-out of Medicare and to 
provide through private contracts services that would otherwise be 
covered by Medicare. Under such contracts the mandatory claims 
submission and limiting charge rules of section 1848(g) of the Act 
would not apply. This section, which was effective on January 1, 1998, 
and was implemented through operating instructions, counters the effect 
of certain provisions of Medicare law that, absent section 4507 of BBA 
1997, preclude physicians and practitioners from contracting privately 
with Medicare beneficiaries to pay without regard to Medicare limits.
    Specifically, section 1848(g) of the Act restricts the amounts that 
can be collected from beneficiaries by nonparticipating physicians who 
do not take assignment on the Medicare claim (physicians who take 
assignment
[[Page 30847]]
voluntarily agree to accept the Medicare payment amount as payment in 
full and collect only deductible and coinsurance amounts from the 
beneficiary). Moreover, section 1842(b)(18) requires certain 
practitioners to take assignment when they furnish covered services to 
Medicare beneficiaries and restricts what they can collect from 
beneficiaries to deductible and coinsurance amounts. The statute not 
only imposes these rules (without an exception before passage of 
section 4507 of BBA 1997), but it also provides strong sanctions for 
violation of them. Hence, Medicare law absent section 4507 effectively 
precludes a physician or practitioner from privately contracting with a 
Medicare beneficiary for the delivery of Medicare-covered items and 
services, except in compliance with these rules (for example, to pay 
more than the limits set by law). Section 4507 of BBA 1997 permits such 
private contracting, provided the requirements of BBA 1997 are met.
    The private contracting provision was effective for private 
contracts entered into, on, or after January 1, 1998. We implemented it 
through a series of operating instructions for Medicare carriers and 
information that carriers were instructed to provide to physicians and 
practitioners. Specifically, in November 1998, we issued Program 
Memorandum No. B-97-9 (change request number 294) that transmitted the 
Medicare fee schedule for physician services and contained the fact 
sheet that carriers were instructed to send to physicians and 
practitioners with the 1998 fee schedule information. This document, 
which is commonly called the ``Dear Doctor letter,'' advised physicians 
and practitioners of the fee schedule amounts for 1998, the changes to 
regulations, and also the important changes that BBA 1997 made to 
coverage and payment for physician services, including the private 
contracting changes.
    Due to the private contracting provisions, we extended the 
participating enrollment period to February 2, 1998, to give physicians 
sufficient time to consider the changes made by BBA 1997 before making 
a participation decision. In January 1998, we issued Program Memorandum 
No. B 97-17 (change request number 193), that was devoted in its 
entirety to private contracting and not only laid out the processes 
that would apply but also answered the most frequently asked questions 
about private contracting. Carriers were instructed to share this 
information with physicians and practitioners through carrier 
bulletins.
    Lastly, in April 1998, we issued Program Memorandum No. B 98-12 
(change request number 468), which amended the process to be followed 
when the carriers receive a claim from a physician or practitioner who 
has opted-out of Medicare under the private contracting provision and 
thus should not bill Medicare.
    We are using this proposed rule to place in regulations the 
requirements that section 4507 of BBA 1997 added to sections 1802(b) 
and 1862(a)(19) of the Act. In addition to placing the statutory 
requirements in regulations, this proposed rule also proposes ancillary 
policies that we believe are necessary to clarify what it means when a 
physician or practitioner exercises his or her ability to ``opt out'' 
of Medicare.
    There has been a lot of confusion and misinformation about when 
private contracts are needed. Before we discuss our proposed rules 
governing private contracting, we want to address some of the most 
common questions about Medicare claims submission rules and private 
contracting.
    <bullet> Do the private contracting rules apply to Part A?
    No. The Medicare claims submission and private contracting rules 
apply only when a physician or practitioner furnishes Medicare-covered 
services to a beneficiary who is enrolled in Medicare Part B. They do 
not apply to individuals who have only Medicare Part A or to 
individuals who are age 65 or over but who do not have Medicare. 
Therefore, if the patient is not enrolled in Medicare Part B, a private 
contract is not needed for the physician or practitioner to continue to 
bill the patient and to charge without regard to the Medicare mandatory 
claims submission and limiting charge rules.
    The private contracting provision of the statute defines 
``beneficiary'' (for purposes of that section only) as a person who is 
eligible for Part A or who is enrolled in Part B. However, the private 
contracting provisions of the law set aside the mandatory claims and 
limiting charge rules that apply only to Part B. Therefore, 
notwithstanding the statutory definition of the term ``beneficiary'' to 
mean, in part, an individual who is eligible for Part A, as a practical 
matter section 4507 applies only to services furnished to an individual 
who is enrolled in Part B.
    <bullet> Must a physician or practitioner who provides services 
that are not covered by Medicare sign a private contract with the 
beneficiary and opt-out of Medicare to be paid for noncovered services?
    No. Since Medicare rules do not apply to services that Medicare 
does not cover, a section 4507 private contract is not needed to bill 
for them, and neither the Medicare claims submission nor the Medicare 
limiting charges rules apply to these services. A private contract is 
needed only for Medicare-covered services and then only if the 
physician or practitioner is opting-out or has opted-out.
    A physician or practitioner may furnish a service that Medicare 
covers under some or many circumstances but that would likely be deemed 
as not reasonable and necessary by Medicare in a particular case (for 
example, multiple nursing home visits, some concurrent care services). 
In that particular case, the physician or practitioner should give the 
beneficiary an advance beneficiary notice (ABN) that states the service 
may not be covered by Medicare and that the beneficiary will be liable 
to pay for the service if it is denied. If the claim is denied by 
Medicare, a private contract is not necessary to permit the physician 
or practitioner to bill the beneficiary for the service.
    <bullet> What are the rules governing claims submission to 
Medicare?
    There are situations where a physician or practitioner who has not 
opted-out of Medicare is not authorized to submit a claim for a covered 
item or service provided to a Medicare beneficiary. A beneficiary, for 
reasons of his or her own, may decline to authorize the physician or 
practitioner to submit a claim or to furnish confidential medical 
information that is needed to submit a proper claim to Medicare. For 
example, the beneficiary may not want information about the 
beneficiary's mental illness or HIV/AIDS status to be disclosed to 
anyone. If the beneficiary does not sign the claim or otherwise 
authorize the claim submission, the physician or practitioner should 
not submit the claim to Medicare. However, the limiting charge would 
apply to the service. Moreover, if the beneficiary or his or her legal 
representative later decides to authorize the submission of a claim for 
the service and asks the physician or practitioner to submit the claim, 
the physician or practitioner must do so.
    Where the beneficiary authorizes the claim submission, physicians 
and practitioners must submit claims for services furnished to an 
individual enrolled in Medicare Part B unless they have opted-out of 
Medicare under the private contracting provisions of the law.
    Physicians and practitioners who furnish services to a Medicare 
beneficiary need not submit claims to Medicare in the following cases:
[[Page 30848]]
    <bullet> The beneficiary is not enrolled in Medicare Part B; 
Medicare limiting charge does not apply.
    <bullet> The beneficiary refuses to authorize the physician or 
practitioner to submit a claim for a covered service to Medicare; 
Medicare limiting charge does apply.
    <bullet> The service is categorically noncovered (for example, 
hearing aids and meals on wheels for diabetics); Medicare limiting 
charge does not apply.
    <bullet> The service is not covered because the beneficiary is 
enrolled in a Medicare risk HMO and the HMO will not pay for the 
service because the physician or practitioner is outside of the HMO's 
network; Medicare limiting charge does not apply.
    Provisions of the proposed rule relating to private contracting.
Definitions
    In Sec. 405.400, we define certain terms. We are proposing to 
define ``beneficiary'' to mean an individual who is enrolled in Part B 
of Medicare. As we discussed above, the statute's definition of the 
term has created considerable confusion about whether physicians must 
opt-out of Medicare to charge individuals who are over age 65 and 
eligible for Part A of Medicare but who are not enrolled in Part B of 
Medicare. We believe it is necessary to define the term ``beneficiary'' 
as being limited to an individual who is enrolled in Part B of Medicare 
in order to avoid continued confusion on this issue. We believe that 
having a definition that differs from the statute's definition is 
justified because the context in which the definition is used is that 
of Part B claims submission rules, Part B limiting charges, and 
coverage of Part B services. None of these policies is applicable to 
individuals who are not enrolled in Part B of Medicare.
    We propose to define ``emergency care services'' as being services 
furnished to an individual who has an ``emergency medical condition'' 
as that term is defined in Sec. 489.24. Reliance on the longstanding 
definition of emergency medical condition is, we believe, an 
appropriate and useful way to define emergency care services.
    We are proposing to define ``legal representative'' to mean an 
individual who has been appointed as the Medicare beneficiary's legal 
guardian under State law, or who has been granted a power of attorney 
from the beneficiary, which power of attorney is sufficient to permit 
the individual to enter into private contracts on the Medicare 
beneficiary's behalf. This is necessary to clarify that, if a 
beneficiary has a legal representative, that party can act on the 
beneficiary's behalf when signing a private contract. We recognize that 
this is a strict standard and we invite comments on it. However, our 
concern is that we ensure that only parties who were authorized to make 
legal and financial commitments on behalf of the beneficiary be 
permitted to sign private contracts on a beneficiary's behalf since 
signing such a contract may incur a significant debt for a beneficiary.
    We are defining the term ``opt-out'' to mean the status of meeting 
the conditions specified in Sec. 405.410. When the physician or 
practitioner meets these conditions, he or she ceases to be bound by 
Medicare's mandatory claims submission rule and, in the case of a 
physician, the limiting charge rule or, in the case of a practitioner, 
the mandatory assignment rule.
    We are defining ``participating physician'' to mean a physician as 
defined in this section who has signed an agreement to participate in 
Part B.
    We are defining ``physician'' to mean a doctor of medicine or a 
doctor of osteopathy (who is legally authorized to practice as such in 
the State in which he or she practices). This is the statutory 
definition of the term for purposes of this section as specified in 
section 1802(b)(5)(B) of the Act.
    We are defining ``practitioner'' to mean any of the following to 
the extent that the individual is legally authorized to practice as 
such by the State where he or she furnishes services: a physician 
assistant, nurse practitioner, clinical nurse specialist, certified 
registered nurse anesthetist, certified nurse midwife, clinical 
psychologist, and clinical social worker. These practitioners are those 
included in the statutory definition of practitioner for this purpose 
in section 1802(b)(5)(C) of the Act, that incorporates by reference 
those practitioner types listed in section 1842(b)(18)(C) of the Act.
    We are defining ``private contract'' to mean a document that meets 
the criteria in Sec. 405.415.
    We propose to define ``properly opt-out'' to mean to fully complete 
the requirements in Sec. 405.410, each of which must be met for the 
physician or practitioner to opt-out of Medicare and furnish items or 
services under a private contract.
    We propose to define ``properly terminate opt-out'' to mean to 
fully complete the requirements in Sec. 405.445, each of which must be 
met for the physician or practitioner who has opted-out of Medicare to 
terminate his or her opt-out.
    We are proposing to define ``urgent care services'' as services 
that are provided to an individual who requires services to be 
furnished within 12 hours in order to avoid the likely onset of an 
emergency medical condition.
    We also adopted the concept of ``emergency medical condition'' as 
defined in Sec. 489.24 to help define urgent care services because the 
former term has a longstanding history of use in Medicare with respect 
to when a hospital must furnish emergency care to an individual who 
appears at its door (specifically, the ``anti-dumping'' rules). We have 
no standardized definition of ``urgent care services.'' We have been 
unable to find a definition of an ``urgent care service'' in standard 
usage. However, we think that an urgent care service would 
appropriately be any service that needs to be furnished without 
significant delay so as to avoid the onset of an emergency medical 
condition. Therefore, we are proposing that an ``urgent care service'' 
is one that needs to be furnished within 12 hours of the determination 
of need in order to avoid the individual's condition from becoming an 
emergency medical condition. The chief distinction between urgent care 
services and emergency care services is that urgent care services do 
not have to be furnished ``immediately'' as do ``emergency care 
services.''
General Rules
    In Sec. 405.405, we specify the general rules that apply to private 
contracting. Specifically, in Sec. 405.405(a), we state that a 
physician or practitioner may enter into one or more private contracts 
with Medicare beneficiaries for the purpose of furnishing items or 
services that would otherwise be covered by Medicare when the 
requirements of these rules are met. This is required by section 
1802(b)(1)of the Act.
    In Sec. 405.405(b), we specify that a physician or practitioner who 
enters into at least one private contract with a Medicare beneficiary 
under this provision, and who submits one or more affidavits in 
accordance with these rules, opts out of Medicare for a 2-year period. 
This is required by section 1802(b)(3)(B)(ii) of the Act. We also 
specify that the physician's or practitioner's opt-out may be renewed 
for subsequent 2-year periods. Since the statute specifies that the 
physician or practitioner who meets the criteria for private 
contracting cannot be paid by Medicare for a 2-year period and does not 
address continuance of this period, we have chosen to make the opt-out 
period 2 years but to permit subsequent opt-out periods. There is no 
limit on the number of subsequent periods for which a physician or 
practitioner may opt-out.
[[Page 30849]]
    In Sec. 405.405(c), we specify that both the private contracts 
described in paragraph (a) and the physician's or practitioner's opt-
out described in paragraph (b) are null and void if the physician or 
practitioner fails to complete opt-out in accordance with these rules 
or fails to remain in compliance with the conditions for opting-out. We 
specify the results of failure to properly opt-out or to maintain the 
conditions for opting-out in Sec. 405.430 and Sec. 405.435. Sections 
1802(b)(2) and (b)(3)(A) of the Act, the criteria that governs the 
private contract and the affidavit, must be met by physicians and 
practitioners that want to opt-out and to privately contract with 
Medicare beneficiaries.
    In Sec. 405.405(d), we specify that services furnished under 
private contracts meeting the requirements of this Subpart are not 
covered services under Medicare and that no Medicare payment will be 
made for such services either directly or indirectly. This implements 
section 1862(a)(19) of the Act, which causes services furnished under 
private contracts by physicians and practitioners who opt-out to be 
excluded from coverage under Medicare.
Conditions for Opting-Out of Medicare
    In Sec. 405.410, we specify the conditions that must be met for a 
physician or practitioner to opt-out of Medicare and to furnish 
services under private contracts with Medicare beneficiaries. 
Specifically, in Sec. 405.410(a), we specify that each private contract 
between a physician or a practitioner and a Medicare beneficiary must 
meet the specifications of Sec. 405.415. In Sec. 405.410(b), we specify 
that the physician or practitioner who wants to privately contract with 
Medicare beneficiaries must submit to Medicare one or more affidavits 
that meet the specifications of Sec. 405.420. The physician or 
practitioner must submit an affidavit to each Medicare carrier to which 
the physician or practitioner submits claims for Medicare payment.
    In Sec. 405.410(c), we specify that a nonparticipating physician or 
a practitioner may opt-out of Medicare at any time. We also specify 
that the 2-year opt-out period begins the date the affidavit meeting 
the requirements of Sec. 405.420 is signed, as long as the affidavit is 
timely filed (that is, within 10 days after the first private contract 
is entered into). In addition, we specify that if any required 
affidavit is not timely filed, the 2-year opt-out period begins when 
the last of the affidavits is filed. In this event, the private 
contracts signed by the parties before the last required affidavit is 
properly filed become effective upon the filing of the last required 
affidavit, and the furnishing of any items or services to Medicare 
beneficiaries under contracts before the last required affidavit is 
properly filed are subject to standard Medicare rules. Section 
1802(b)(3)(B)(ii) provides that the opt-out period begins when the 
affidavit is signed, and section 1802(b)(3)(B)(iii) of the Act 
specifies that the affidavit must be filed within 10 days of the date 
the first private contract is signed.
    In Sec. 405.410(d), we specify that a participating physician may 
opt-out of Medicare at the beginning of any calendar quarter, provided 
the affidavit described in Sec. 405.420 is submitted to Medicare at 
least 30 days before the beginning of such quarter. Private contracts 
signed by the parties before the beginning of the calendar quarter 
become effective at the beginning of such calendar quarter, and the 
furnishing of any items or services to Medicare beneficiaries under 
these contracts before the beginning of that calendar quarter is 
subject to standard Medicare rules.
    It is necessary to treat participating physicians differently from 
nonparticipating physicians because each participating physician has 
entered into a contract with Medicare to be paid at the full fee 
schedule for the services they furnish to Medicare beneficiaries 
(rather than at 95 percent of the payment amount for nonparticipating 
physicians). When a participating physician opts-out of Medicare, he or 
she, in effect, terminates his or her participation agreement with 
Medicare since he or she no longer agrees to accept assignment on all 
services furnished to Medicare beneficiaries. When a participating 
physician opts-out of Medicare, the carrier (that is, each applicable 
carrier) must make systems changes to ensure the system pays the 
physician at the higher participating-physician rate for the period 
before the effective date of the opt-out, pays the physician as a 
nonparticipating-physician for emergency and urgent care services 
effective the date of the opt-out, and does not pay at all for all 
other items and services effective the date of the opt-out. Therefore, 
carriers need at least 30 days advance notice when a participating 
physician opts-out to ensure that the systems changes are made 
correctly. Moreover, carriers generally make systems changes no less 
frequently than at the beginning of each calendar quarter. Therefore, 
participating physicians must provide 30 days notice that they intend 
to opt-out at the beginning of the next calendar quarter for the 
changes to be made properly. We do not anticipate that this requirement 
will cause significant hardship on participating physicians who choose 
to opt-out or on beneficiaries who choose to privately contract with 
them.
Requirements of Private Contracts
    In Sec. 405.415, we are specifying criteria for a physician or 
practitioner to opt-out of Medicare. To opt-out of Medicare, the 
physician or practitioner must meet all of the criteria in this 
section.
    In Sec. 405.415, we specify the requirements for a private 
contract. In Sec. 405.415(a) we specify that it must be in writing, in 
accordance with section 1802(b)(2)(A)(i) of the Act. In addition, we 
are proposing requiring that the contract be printed in sufficiently 
large type to ensure that beneficiaries are able to read the contract.
    In Sec. 405.415(b), we specify that, as required by 1802(b)(2)(B) 
of the Act, it must state whether the physician or practitioner has 
been excluded from Medicare under section 1128 of the Act.
    In Sec. 405.415(c), we specify that, as required by 
1802(b)(2)(B)(ii) of the Act, it must state that the beneficiary or 
legal representative accepts full responsibility for payment of the 
physician's or practitioner's charge for the services furnished.
    In Sec. 405.415(d), as required by section 1802(b)(2)(B)(iii) of 
the Act, it must state that the beneficiary or legal representative 
understands that there are no limits on what the physician or 
practitioner may charge for items or services furnished by the 
physician or practitioner.
    In Sec. 405.415(e), we specify that, as required by 
1802(b)(2)(B)(i) of the Act, it must state that the beneficiary or 
legal representative agrees not to submit a claim to Medicare nor to 
ask the physician or practitioner to submit a claim to Medicare.
    In Sec. 405.415(f), we specify that, as required by section 
1802(b)(2)(B)(ii) of the Act, it must state that the beneficiary or 
legal representative understands that no Medicare payment will be made 
for any services furnished by the physician or practitioner, although 
such Medicare-covered services would likely be covered and paid by 
Medicare if they were provided by a physician or practitioner who had 
not opted-out of Medicare.
    In Sec. 405.415(g), we specify that, in accordance with section 
1802(b)(2)(B)(v) of the Act, it must state that the beneficiary or 
legal representative enters into this contract with the knowledge that 
he or she has the right to obtain Medicare-covered items and services
[[Page 30850]]
from physicians and practitioners who have not opted-out of Medicare.
    In Sec. 405.415(h), we propose that the private contract contain 
the beginning effective date and expiration date of the opt-out period. 
The private contract must expire on the expiration date of the opt-out 
period since, after the expiration of the opt-out period, the physician 
or practitioner is no longer authorized to privately contract unless he 
or she enters into a new opt-out period.
    In Sec. 405.415(i), we specify, in accord with section 
1802(b)(2)(B)(iv) of the Act, that the private contract must state that 
the beneficiary understands that Medigap plans do not, and that other 
supplemental insurance plans may elect not to, make payments for such 
items and services because payment is not made by Medicare.
    In Sec. 405.415(j), we specify that the contract must be signed by 
the beneficiary or by the beneficiary's legal representative and by the 
physician or practitioner. Section 1802(b)(2)(A)(i) of the Act 
expressly requires that the contract must be signed by the beneficiary. 
Although there is no parallel express requirement for the physician or 
practitioner, we believe that such a requirement is implicit in the 
statute, and we are, therefore, proposing that the physician or 
practitioner also sign the contract.
    In Sec. 405.415(k), in accordance with 1802(b)(2)(A)(iii), we 
specify that the contract must not have been entered into during a time 
when the beneficiary requires emergency care services or urgent care 
services.
    405.415(l), we propose that the beneficiary or legal representative 
must receive a copy of the contract before items or services are 
furnished under the contract. This is standard practice when parties 
sign binding contracts, and we believe it is important in this case so 
that the beneficiary or family members have the contract available if 
questions about charges for the services furnished arise.
    In Sec. 405.415(m), we propose that the physician or practitioner 
must retain a copy of each private contract for the duration of the 
opt-out period to which the contract applies. Physicians and 
practitioners may want to retain the private contracts for a longer 
period of time in case a beneficiary disputes whether a valid contract 
was signed.
    In Sec. 405.415(n), we propose that the physician or practitioner 
must permit us to inspect each such contract upon request. We propose 
these requirements to ensure that the contracts will be available if 
there are allegations that the physician or practitioner has failed 
properly opt-out or maintain opt-out or if there is need to review them 
to process an appeal under Sec. 405.450.
    In Sec. 405.415(o), we propose that a private contract must be 
entered into for each opt-out period.
    We have been requested to create a standard form for the private 
contract. We have decided that such a form is not necessary. While the 
minimal content of the contract is controlled by Federal law and 
regulation, the contracts are otherwise private agreements. Moreover, 
such contracts will not generally be provided to nor inspected by the 
Government.
Requirements for Opt-Out Affidavits
    In Sec. 405.420, we specify the required elements of the affidavit 
that the physician or practitioner must file with Medicare to opt-out. 
In Sec. 405.420(a), as required by section 1802(b)(3)(B)(i) of the Act, 
we specify that the affidavit must be in writing and be signed by the 
physician or practitioner.
    In Sec. 405.420(b), we specify that the affidavit must contain the 
physician or practitioner's full name, address, telephone number, 
national provider identifier (NPI) or billing number if one has been 
assigned, uniform provider identification number (UPIN) if one has been 
assigned, or, if neither a NPI, billing number nor a UPIN has been 
assigned, the physician or practitioner's tax identification number 
(TIN). This information is necessary to enable the Medicare carrier to 
positively and uniquely identify the opt-out physician or practitioner, 
as required by section 1802(b)(3)(B)(i), and to ensure that no Medicare 
payment is made to the physician or practitioner or to any party for 
the services of the physician or practitioner (except for emergency and 
urgent care services), as required by section 1802(b)(1)(B)of the Act. 
Medicare carriers will provide the identifying information to 
Medicare+Choice (M+C) plans to ensure that they do not pay opt-out 
physicians or practitioners or enable them to be paid by Medicare funds 
for services they furnish to Medicare beneficiaries.
    The TIN is necessary for physicians and practitioners that do not 
have a NPI, billing number, or UPIN so that the carrier can establish a 
means of tracking them without forcing them to complete the full 
Medicare enrollment process in order to opt-out of Medicare.
    Recent data indicate that approximately 4 percent of physicians in 
the nation do not provide services to Medicare beneficiaries. We 
believe that some of these physicians (and some practitioners who are 
currently not enrolled in Medicare) are likely to choose to privately 
contract with Medicare beneficiaries under section 1802(b) of the Act, 
since doing so will open a market to them. It is also likely that many 
of these physicians and practitioners do not have Medicare billing 
numbers or UPINs because they have not been providing care to Medicare 
beneficiaries. Now, however, if such physicians and practitioners wish 
to privately contract with Medicare beneficiaries under section 1802 of 
the Act, they will need to be enumerated, for purposes of monitoring 
compliance with the law and particularly in case they furnish emergency 
or urgent care services for which they must bill and be paid by 
Medicare, notwithstanding that they have opted-out. Since we expect the 
provision of emergency or urgent care services by opt-out physicians to 
be very infrequent, and since we intend to monitor for potential abuse, 
we believe that the burden associated with collecting this information 
is very slight, is far outweighed by the benefit to beneficiaries of 
having these physicians available to provide emergency or urgent care 
services if they need such care, and is necessary to monitor 
compliance.
    In Sec. 405.420(c), we specify, pursuant to sections 1802(b)(3)(A), 
1802(b)(3)(B), and 1802(b)(3)(C) of the Act, that the affidavit must 
state that the physician or practitioner will provide items and 
services to Medicare beneficiaries only through private contracts that 
meet the criteria of Sec. 405.415.
    In Sec. 405.420(d), we specify that, in accordance with section 
1802(b)(3)(B)(ii) of the Act, the affidavit must state that the 
physician or practitioner will not submit a claim to Medicare for any 
item or service furnished to a Medicare beneficiary, nor will the 
physician or practitioner permit any entity acting on his or her behalf 
to submit a claim to Medicare for any item or service furnished to a 
Medicare beneficiary. The extension of the requirement to include any 
``entity'' reflects our belief that very few physicians and 
practitioners themselves submit claims for services. Rather, we believe 
that most physicians and practitioners use a billing service or 
reassign benefits to organizations that bill and are paid for the 
physician's or practitioner's services.
    In Sec. 405.420(e), we specify that, in accordance with section 
1802(b)(3)(B)(ii) of the Act, the affidavit must state that the 
physician or practitioner understands that he or she may receive no 
direct or indirect payment from Medicare for services to Medicare 
beneficiaries who have signed
[[Page 30851]]
private contracts, whether as an employee of an organization, a partner 
in a partnership, under a reassignment of benefits, or as payment for a 
service furnished to a Medicare beneficiary under a M+C plan. As with 
the prohibition on billing, this provision reflects the reality that 
most physician and practitioner services are billed by and paid to 
organizations to whom the physician or practitioner reassigns benefits.
    When a physician or practitioner opts-out of Medicare, no payment 
may be made for the services of the physician or practitioner, 
regardless of whether another entity bills and is paid for those 
services. In our experience, physicians and practitioners frequently 
fail to understand that organizations to which they have reassigned 
benefits are not, under Medicare law, considered to be the entity that 
furnishes the service. Therefore, where a physician reassigns benefits 
to an organization and subsequently decides to opt-out of Medicare, he 
or she no longer has any Medicare benefits to reassign and that 
organization can no longer bill and be paid by Medicare for the 
services of the physician or practitioner. This has been a source of 
confusion for physicians and practitioners since the implementation of 
the private contracting provisions on January 1, 1998, and has resulted 
in some physicians being terminated by organizations that can no longer 
bill and be paid by Medicare for their services. Hence, we believe that 
this important information should be placed in a document that the 
physician or practitioner must sign before opting-out.
    Moreover, we believe that it is important the physicians and 
practitioners understand that opting-out of Medicare means that they 
cannot be paid by a Medicare risk or cost contractor or, after June 1, 
1998, a M+C organization (for example, an HMO, provider service 
organizations, M+C fee for service plans, etc.), since payment by these 
organizations for services to Medicare beneficiaries would constitute 
payment by Medicare and would be a violation of the private contracting 
rules.
    In Sec. 405.420(f), as required by section 1802(b)(3)(B)(ii) of the 
Act, the affidavit must state that the physician or practitioner 
acknowledges that the services provided by the physician or 
practitioner who opts-out of Medicare are not covered by Medicare and 
that no Medicare payment may be made to any entity for those services, 
directly or on a capitated basis. This is important to note since, when 
Medicare does not cover a service, it neither pays for the item or 
service as primary payer nor makes secondary payment when other 
insurers are primary. (Also, many other insurers will not make any 
payment because the service is not covered by Medicare.)
    In Sec. 405.420(g), we specify that the affidavit must bind the 
physician or practitioner to the terms of both the affidavit and the 
private contracts for the 2-year opt-out period. Section 
1802(b)(3)(B)(ii) of the Act requires that the physician or 
practitioner may opt-out for a period of not less than 2 years. 
Accordingly, we have defined the opt-out period to be 2 years and have 
tied the duration of the private contract to the opt-out period.
    In Sec. 405.420(h), we propose that the affidavit must acknowledge 
that the physician or practitioner recognizes that the terms of the 
affidavit apply to all Medicare-covered items and services furnished by 
the physician or practitioner to Medicare beneficiaries, regardless of 
any payment arrangement in which the physician or practitioner 
participates. It is not unusual for physicians and practitioners to 
have multiple sources of income and to reassign benefits to multiple 
entities (for example, multiple HMOs, preferred provider organizations, 
private practice, and part time employment by a facility). When a 
physician or practitioner opts-out, we want to ensure that he or she 
understands that he or she opts-out for all Medicare-covered items and 
services, regardless of where or on whose behalf they are provided. For 
example, a physician who is employed by a facility and who also has a 
private practice cannot opt-out of Medicare with respect to only the 
private practice and not opt-out for services he furnishes on behalf of 
a facility or other organization for which such services are billed to 
a carrier and paid under Part B. If the physician opts-out, no Medicare 
payment can be made either to the private practice or to the facility 
or other organization for the services of the physician. However, if 
the physician is paid by the facility for administrative functions 
which are not billable to individual beneficiaries as physician 
services, such as direction of a department of a hospital or 
administrative oversight of a teaching program, the payment by the 
facility to the physician is not affected.
    In Sec. 405.420(i), we propose that the affidavit must acknowledge 
that the physician or practitioner who has previously signed a Part B 
participation agreement understands that he or she terminates that 
agreement as of the effective date of the affidavit. We believe that 
this is necessary to ensure that the physician or practitioner 
understands that he or she is no longer a Medicare-participating 
physician or practitioner. This is important with regard to post opt-
out billing for emergency and urgent care services. The physician or 
practitioner who provides such care (for which Medicare will pay) will 
be paid as a nonparticipating physician if he or she submits those 
claims for payment, notwithstanding that he or she had a Part B 
participation agreement before he or she opted-out.
    In Sec. 405.420(j), we specify that the affidavit must acknowledge 
that the physician or practitioner understands that a beneficiary who 
has not signed a private contract and who requires emergency or urgent 
care services may not be asked to sign a private contract with respect 
to receiving those services. If a physician or practitioner who opts 
out of Medicare provides emergency or urgent care services to a 
beneficiary who has not previously signed a private contract, the 
physician or practitioner must submit a claim to Medicare for those 
services and may not charge the beneficiary more than the limiting 
charge for those services.
    In Sec. 405.420(k), we propose that the affidavit must be filed 
with each Medicare carrier to which the physician or practitioner has 
submitted claims in the previous 2 years. This is necessary to ensure 
that each Medicare claims payment system that needs to know of the opt-
out is advised promptly so that no Medicare payment is made for the 
services of the opt-out physician or practitioner. This is based on 
sections 1802(b)(1)(B) and 1802(b)(3)(B)(iii) of the Act.
    In Sec. 405.420(l), we specify that in the case of a 
nonparticipating physician or a practitioner, all required affidavits 
must be filed within 10 days after the physician or practitioner signs 
his or her first private contract with a Medicare beneficiary. In the 
case of a participating physician, we specify that all required 
affidavits must be filed in accordance with Sec. 405.410(d), which 
requires that the affidavits be filed no later than 30 days before the 
beginning of a calender quarter and must be effective on the first day 
of the calender quarter. Section 1802(b)(3)(B)(iii) of the Act requires 
that the physician or practitioner file the affidavit within 10 days 
after the physician or practitioner signs his or her first private 
contract with a Medicare beneficiary. As discussed previously in this 
preamble, participating physicians are permitted to opt-out only on a 
quarterly basis because of the systems changes that must be made to 
reverse the effect of the participation agreements they previously 
entered into.
[[Page 30852]]
    Various members of the public have requested we create a standard 
affidavit for submission to the Medicare carrier. We do not see a 
reason to do this. The criteria of a legally sufficient affidavit will 
be clearly specified in regulations, and we are confident that 
physicians and practitioners and their counsel can produce an affidavit 
without needing a Government form to sign.
Effect of Opting-Out of Medicare
    In section Sec. 405.425, we specify the effects of opting-out of 
Medicare. Specifically, we state that, a physician's or practitioner's 
opt-out of Medicare, for the 2-year period for which the opt-out is 
effective, has the following effects:
    <bullet> In Sec. 405.425(a), we state that (except as provided in 
Sec. 405.440), in accordance with section 1802(b)(1)(B) of the Act, no 
payment may be made directly by Medicare or by any M+C plan to the 
physician or practitioner or to any entity to which the physician or 
practitioner reassigns his or her right to receive payment for 
services.
    <bullet> In Sec. 405.425(b), we state that, in accord with section 
1802(b)(3)(B)(ii) of the Act, the physician or practitioner may not 
furnish any item or service that would otherwise be covered by Medicare 
(except for emergency or urgent care services) to any Medicare 
beneficiary except through a private contract that meets the 
requirements of these rules.
    <bullet> In Sec. 405.425(c), we state that the physician or 
practitioner is not subject to the requirement to submit a claim for 
items or services furnished to a Medicare beneficiary (as specified in 
Sec. 424.5(a)(6)), except as provided in Sec. 405.440 with respect to 
emergency and urgent care services.
    <bullet> In Sec. 405.425(d), in accordance with section 
1802(b)(3)(B)(ii) of the Act, we state that the physician or 
practitioner is prohibited from submitting a claim to Medicare for 
items or services furnished to a Medicare beneficiary, except as 
provided in Sec. 405.440 in the case of emergency or urgent care 
services.
    <bullet> In Sec. 405.425(e), we state that, in accordance with 
1802(b)(4) of the Act, the physician who has properly opted-out is not 
subject to the limiting charge provisions of Sec. 414.48.
    <bullet> In Sec. 405.425(f), we state that a physician or 
practitioner who has properly opted-out is not subject to the 
prohibition-on-reassignment provisions of Sec. 414.80. These are the 
rules that restrict when physicians and practitioners can reassign 
Medicare benefits to organizations with which they have financial 
arrangements.
    <bullet> In Sec. 405.425(g), we propose that in the case of a 
practitioner, he or she is not prohibited from billing or collecting 
amounts from beneficiaries in excess of those provided in section 
1842(b)(18)(B) of the Act. This is not specifically provided for by 
section 4507 of BBA 1997; however, we believe that this provision is 
consistent with sections 1802(b)(1) and (2)(B) of the Act, that, when 
read together, permit practitioners to collect more than the deductible 
and coinsurance to which they are limited under section 1842(b)(18)(B) 
of the Act when they provide covered services to Medicare beneficiaries 
under standard Medicare rules. Section 1842(b)(18)(B) of the Act 
specifies that practitioners must take assignment on all claims and may 
not collect more than Medicare deductibles and coinsurance from 
Medicare beneficiaries. We believe that the private contracting 
provisions exempt practitioners from these restrictions.
    <bullet> In Sec. 405.425(h), we propose that the death of a 
beneficiary who (or whose legal representative) has entered into a 
private contract does not invoke Sec. 424.62 or Sec. 424.64 with 
respect to the physician or practitioner with whom the beneficiary (or 
legal representative) has privately contracted. These sections of the 
regulations permit claims to be filed and payment to be made for 
services furnished to a beneficiary who has died. We propose to include 
this section to ensure that it is clear that the terms of a private 
contract are not superseded by the provisions of Sec. 424.62 or 
Sec. 424.64.
    <bullet> In Sec. 405.425(i), we specify that the opt-out physician 
or practitioner may make referrals and may order or certify the need 
for Medicare-covered items and services provided the physician or 
practitioner is not paid directly or indirectly by Medicare for those 
services. A physician or practitioner who has properly opted-out may 
continue to act as a physician or practitioner for purposes of ordering 
Medicare-covered services (for example, laboratory tests), making 
necessary certifications (for example, home health plan of care), 
attestations (for example, hospital inpatient), etc., as long as he or 
she is not being paid directly or indirectly by Medicare for these 
services.
Failure to Properly Opt-Out
    In Sec. 405.430(a), we specify that a physician or practitioner 
fails to properly opt-out if any private contract between the physician 
or practitioner and a Medicare beneficiary does not meet the standards 
of Sec. 405.415 or if the physician or practitioner fails to submit 
affidavit(s) in accordance with Sec. 405.420. Sections 1802(b)(2) and 
1802(b)(3) of the Act specify the criteria that private contracts and 
affidavits must meet in order for the physician or practitioner to 
successfully opt-out of Medicare.
    In section Sec. 405.430(b), we specify that if a physician or 
practitioner fails to properly opt-out as specified in Sec. 405.430(a), 
the following result:
    <bullet> All of the private contracts between the physician or 
practitioner and Medicare beneficiaries are deemed null and void.
    <bullet> The physician's or practitioner's attempt to opt-out of 
Medicare is nullified.
    <bullet> The physician or practitioner must submit claims to 
Medicare for all Medicare-covered items and services furnished to 
Medicare beneficiaries. Section 1802(b)(4) of the Act, which would 
excuse the physician and practitioner from the mandatory claims 
submission requirements of section 1848(g)(4) of the Act, is not 
effective when the opt-out rules are not met.
    <bullet> The physician is subject to the limiting charge provisions 
of Sec. 414.48. Sections 1802(b)(1) and 1802(b)(2)(B)(iii), which 
excuse the physician from the limiting charge rules, do not apply and 
he or she continues to be subject to the limiting charge rules of 
section 1848(g) of the Act.
    <bullet> The physician or practitioner may not reassign any claim 
except as provided in Sec. 424.80. Medicare payment may be made only to 
the beneficiary, to the physician or practitioner under an assignment 
of benefits or to another party for the services of a physician or 
practitioner only when the requirements of the reassignment of benefits 
provision of Sec. 424.80 are met.
    <bullet> The practitioner may neither bill nor collect an amount 
from the beneficiary except for applicable deductible and coinsurance 
amounts. Section 1842(b)(18)(B) of the Act explicitly prohibits 
practitioners from collecting more than the deductible or coinsurance 
from the beneficiary. While this requirement would not apply if the 
requirements to properly opt-out had been satisfied, it does apply when 
the criteria to properly opt-out have not been met.
    <bullet> The physician or practitioner may attempt to properly opt-
out at any time. The statute does not preclude a physician or 
practitioner who has not complied totally with the statute's criteria 
for opting-out of Medicare from subsequently meeting the criteria and 
thus at that time properly opting-out.
Failure to Maintain Opt-out
    In Sec. 405.435(a), we specify four circumstances, under any one of 
which
[[Page 30853]]
the physician or practitioner would be considered to have failed to 
maintain opt-out, that is, failed to remain in compliance with the 
requirements of these rules. Specifically, in Sec. 405.435(a)(1), we 
state that a physician or practitioner would be considered to have 
failed to maintain the opt-out if he or she knowingly and willfully 
submits a claim for Medicare payment (except a claim for emergency care 
services or urgent care services) or receives Medicare payment directly 
or indirectly for services furnished to a Medicare beneficiary (except 
when the services are emergency care services or urgent care services). 
This implements section 1802(b)(3)(C) of the Act.
    In Sec. 405.435(a)(2), we state that the physician or practitioner 
would be considered to have violated the terms of the opt-out if he or 
she enters into private contracts with Medicare beneficiaries for the 
purpose of furnishing items and services that would otherwise be 
covered by Medicare when the contracts fail to meet the requirements of 
Sec. 405.415. This implements section 1802(b)(2) of the Act that 
requires that the physician or practitioner must enter into private 
contracts that meet certain criteria for the opt-out to be valid. This 
provision is also consistent with the enforcement provisions of section 
1802(b)(3)(C) of the Act.
    In addition, in Sec. 405.435(a)(3), we specify that the physician 
or practitioner would be considered to have failed to maintain the opt-
out if he or she fails to comply with the provisions of Sec. 405.440 
regarding billing for emergency care services or urgent care services. 
In part, this provision implements section 1802(b)(2)(A)(iii) of the 
Act that prohibits a physician or practitioner from requesting that a 
beneficiary enter into a private contract when he or she is in need of 
emergency or urgent care services and is otherwise necessary to ensure 
access by Medicare beneficiaries to emergency and urgent care services.
    In Sec. 405.435(a)(4), we propose that the physician or 
practitioner would be considered to have failed to maintain opt-out if 
he or she fails to retain a copy of each private contract that he or 
she entered into for the duration of the opt-out period for which such 
contracts are applicable or fails to permit us to inspect such 
contracts upon request. The issue of retaining copies of private 
contracts is discussed in Sec. 405.415, requirements of the private 
contract.
    We intend to continue the administrative process currently in place 
for dealing with the submission of claims by physicians and 
practitioners who have opted-out of Medicare. Specifically, we have 
instructed carriers to pend claims they receive from physicians and 
practitioners who have filed an affidavit opting-out of Medicare and to 
send the physician or practitioner a letter asking him or her if the 
submission of the claim was intentional or accidental, and if the 
latter by what date the physician or practitioner can remedy the 
problem. We recognize that most physicians and practitioners may be 
somewhat distant from the billing of their claims and that the use of 
automation and billing services increases the chance that one or more 
claims may be accidentally submitted to Medicare for an opt-out 
physician or practitioner. We also recognize that if the problem is 
systematic, it may take some time to correct. Hence, under the current 
process, we give physicians and practitioners 45 days from the date of 
the postmark on the carrier's letter to respond to the carrier and to 
advise them of when they believe the problem can be fixed. Carrier 
notices to beneficiaries will advise them that no payment can be made 
for the services of the opt-out physician, and that there are no limits 
on what the physician or practitioner can charge the beneficiary, 
unless the physician or practitioner does not respond timely to the 
carrier's letter, does not timely correct the billing problem, or 
states that the submission of the claim was intentional. We do not 
believe that any of these scenarios will happen often since physicians 
and practitioner who opt-out of Medicare clearly have an incentive to 
ensure that they abide by the terms of the opt-out and that neither 
they nor any party on their behalf submit claims to Medicare.
    In section Sec. 405.435(b), we specify that the effects of a 
physician or practitioner failing to maintain opt-out as specified in 
paragraph (a) are as follows:
    <bullet> All of the private contracts between the physician or 
practitioner and Medicare beneficiaries are deemed null and void.
    <bullet> The physician's or practitioner's opt-out of Medicare is 
nullified.
    <bullet> The physician or practitioner again becomes subject to the 
mandatory claims submission rule. Therefore, the physician or 
practitioner must submit claims to Medicare for all Medicare-covered 
items and services furnished to Medicare beneficiaries.
    <bullet> The physician or practitioner will not receive Medicare 
payment on such claims for the remainder of the opt-out period. This is 
required by section 1802(b)(3)(C)(ii) of the Act.
    <bullet> The physician is subject to the limiting charge provisions 
of Sec. 414.48. This is required by section 1848(g) of the Act pursuant 
to section 1802(b)(3)(C)(i) of the Act.
    <bullet> The practitioner may neither bill nor collect an amount 
from the beneficiary except for applicable deductible and coinsurance 
amounts. This is required by section 1842(b)(18)(B) of the Act pursuant 
to section 1802(b)(3)(C)(i) of the Act.
    <bullet> The physician or practitioner may not opt-out until the 
now-nullified 2-year opt-out period expires. This is necessary to give 
meaning to the enforcement provisions specified in section 
1802(b)(3)(C) of the Act.
Emergency and Urgent Care Services
    In Sec. 405.440, we specify the rules that apply to furnishing and 
billing for emergency and urgent care services. Specifically, in 
Sec. 405.440(a), we specify that a private contract is not necessary 
for a physician or practitioner to furnish emergency care services or 
urgent care services to a Medicare beneficiary. Accordingly, a 
physician or practitioner will not be determined to have failed to 
maintain opt-out if he or she furnishes emergency care services or 
urgent care services to a Medicare beneficiary with whom the physician 
or practitioner has not entered into a private contract, provided the 
physician or practitioner complies with the Medicare billing 
requirements with respect to emergency care services or urgent care 
services.
    In Sec. 405.440(b), we specify that when a physician or 
practitioner furnishes emergency care services or urgent care services 
to a Medicare beneficiary with whom the physician or practitioner has 
not entered into a private contract, the physician or practitioner must 
submit a claim to Medicare in accordance with 42 CFR Part 424 and 
Medicare instructions issued pursuant to such regulations, including 
instructions on coding emergency or urgent care services. Also, we 
propose that the physician may collect no more than the Medicare 
limiting charge and that the practitioner may collect no more than the 
applicable deductible and coinsurance amounts. We specify these 
requirements because the physician or practitioner cannot ask a 
beneficiary to enter into a private contract when a beneficiary is in 
need of emergency or urgent care services. Therefore, when the 
beneficiary has not previously signed a private contract, the 
beneficiary has not agreed to give up Medicare coverage for the 
services of the physician or practitioner and the services are not 
excluded from coverage under Medicare, nor is the physician or
[[Page 30854]]
practitioner excluded from the mandatory claims submission and charge 
rules that would not apply had he or she been able to sign a private 
contract with the beneficiary.
    In Sec. 405.440(c), we specify that emergency care services or 
urgent care services furnished to a Medicare beneficiary with whom the 
physician or practitioner has previously entered into a private 
contract (that is, entered into before the onset of the emergency 
medical condition or urgent medical condition) are furnished under the 
terms of the private contract. Although section 1802(b)(2)(A)(iii) of 
the Act precludes the physician or practitioner from entering into a 
private contract with a beneficiary when the beneficiary needs 
emergency or urgent care services, the private contracting rules apply 
to a beneficiary who has previously entered into a private contract (at 
a time when the beneficiary was not in need of emergency or urgent care 
services).
    In Sec. 405.440(d), we specify that Medicare may make payment for 
the emergency care services or urgent care services furnished by a 
physician or practitioner who has properly opted-out, provided that no 
private contract has been entered into by the beneficiary to whom 
emergency care services or urgent care services were furnished. 
Although the statute does not explicitly address whether payment may be 
made in these cases, we believe that it is both permissible and 
desirable to do so since this provision will facilitate access to 
needed care in the circumstance when the beneficiary or their legal 
representative has not signed a private contract and the physician or 
practitioner who has opted-out cannot lawfully request that the 
beneficiary or their legal representative now do so.
Renewal and Early Termination of Opt-out
    In Sec. 405.445, we specify the terms of renewal and early 
termination of the opt-out. In Sec. 405.445(a), we specify that a 
physician or practitioner may renew his or her opt-out by filing an 
affidavit with each carrier to which an affidavit was submitted for the 
first opt-out period (as specified in Sec. 405.420) and to each carrier 
to which a claim was submitted under Sec. 405.440 during the previous 
opt-out period, provided such affidavits are filed within 30 days after 
the current opt-out period expires. While section 1802(b)(3)(B)(ii) of 
the Act provides that the physician or practitioner opts-out for a 
period of 2 years, it does not address renewal of opt-out. Our proposal 
is to establish reasonable standards and procedures for the physician 
or practitioner to again opt-out of Medicare for subsequent opt-out 
periods.
    In Sec. 405.445(b), we propose that the physician or practitioner 
may terminate the opt-out for any reason within the 90 days following 
the effective date of the first affidavit filed with Medicare if he or 
she agrees to do the following:
    <bullet>  Notify all Medicare carriers with which he or she filed 
an affidavit to properly opt-out of the termination of the opt-out, no 
later than 90 days after the effective date of the opt-out period.
    <bullet>  Refund to beneficiaries all payment collected in excess 
of the Medicare limiting charge, in the case of physicians, or in 
excess of the deductible and coinsurance, in the case of practitioners.
    <bullet>  Notify all beneficiaries with whom the physician or 
practitioner signed private contracts of the physician's or 
practitioner's decision to terminate opt-out and of the beneficiaries' 
right to have the physician or practitioner file claims on their 
behalf, without charge, with Medicare for the services furnished during 
the period between the effective date of the opt-out and the effective 
date of the termination of the opt-out.
    In Sec. 405.445(c), we propose that when the physician or 
practitioner properly terminates opt-out in accordance with paragraph 
(b), he or she will be reinstated in Medicare as if there had been no 
opt-out and the provisions of ' 405.425 will not apply for the 2 years 
following the signing of the affidavit unless the physician or 
practitioner subsequently properly opts-out again.
    We recognize that there may be cases when the physician or 
practitioner may not have understood the opt-out rules and may want to 
return to Medicare. We believe that it is advantageous to all parties 
to permit a first-time opt-out physician or practitioner to properly 
terminate opt-out. However, we are requiring that to properly terminate 
opt-out, the termination must be accomplished within 90 days following 
the effective date of the first opt-out, and we are permitting only one 
termination of opt-out by the physician or practitioner. We believe 
that it would be a mistake to permit repeated terminations of opt-out, 
since it could be abused to manipulate payment, could create a 
significant expense for Medicare systems, and would be confusing to 
beneficiaries.
Appeals
    In Sec. 405.450, we propose procedures for appeals by physicians or 
practitioners and beneficiaries who believe that they have been 
adversely affected by these rules.
    In Sec. 405.450(a), we address appeals of determinations by 
Medicare that a physician or practitioner has failed to properly opt-
out, failed to maintain opt-out, failed to timely renew opt-out, failed 
to privately contract, or failed to properly terminate opt-out by 
proposing that a determination with respect to any such matter is an 
initial determination for purposes of Sec. 405.803. The effect of this 
provision is that the appeals mechanism found in Part 405, Subpart H is 
made available to physicians or practitioners for the purpose of 
administrative review of Medicare determinations on matters addressed 
in this subpart. Although we believe that these procedures will rarely 
be needed for this purpose, we believe that it is important to provide 
this mechanism because of the potential adverse impact on the physician 
or practitioner of any such determination.
    In Sec. 405.450(b), we propose that a determination by Medicare 
that no payment can be made to the beneficiary as a result of the 
application of any provision of this subpart is a initial determination 
for the purposes of Sec. 405.803. We believe that the beneficiary must 
have the right to appeal a denial of Medicare payment on a claim 
submitted by or on behalf of the beneficiary when the basis for that 
denial is the application of the provisions of this subpart. The effect 
of this provision is that the appeals mechanism of Part 405, Subpart H 
is made available to beneficiaries whose claims for Medicare payment 
are denied on the basis of the opt-out provisions of this rule.
    Under the BBA 1997 requirements, the physician who opts out under 
these provisions must sign an affidavit agreeing for 2 years not to 
furnish services to any Medicare beneficiary without signing a private 
contract. We expect that the vast majority of opt-out physicians will 
fully comply with these terms. Although we expect that physicians will 
tell beneficiaries that they have opted-out, we are concerned that 
there may be cases when an opt-out physician delivers non-emergency or 
non-urgent services to a beneficiary without entering into a private 
contract. The beneficiary may be unaware that the physician has opted 
out. Nevertheless, the beneficiary would be billed for the physician's 
full charges for the service. If the beneficiary seeks reimbursement 
from Medicare, the claim would be denied and the beneficiary would be 
informed that the reason for denial is that the physician has opted-out 
of the Medicare program. We do not believe that the Congress intended 
that beneficiaries who have
[[Page 30855]]
not chosen to sign a private contract would be financially harmed 
because they unknowingly received services from an opt-out physician. 
While the statute does not provide a specific remedy for this situation 
and we expect the physician will tell beneficiaries that they have 
opted-out, we believe that we have authority to develop some 
beneficiary protections in this case in the limited cases when 
physicians do not do so. One possibility would be to indemnify the 
beneficiary for the amount that Medicare would have normally paid, 
ensuring that the beneficiary is informed that the physician is an opt-
out physician. The program would then recoup this amount from the 
physician and the physician would refund to the beneficiary any 
balanced billing amounts above Medicare's limiting charge. The 
beneficiary would remain liable for any coinsurance and deductible 
amounts that would have been paid in the absence of a private contract. 
A means of informing beneficiaries enrolled in M+C organizations may be 
to require that such organizations disclose information on opt-out 
physicians upon request by the beneficiary. We would welcome comments 
on these and other approaches to providing protection for beneficiaries 
in these circumstances.
Medicare+Choice
    In Sec. 405.455, we propose to specify the requirements that are to 
be imposed on an organization that has a contract with us to provide 
one or more M+C plans to beneficiaries (Part 422 of this chapter). The 
location of this section may change to part 422 with the final rule, 
once the M+C interim rules are published. Part 422 will be the location 
of the regulations that govern Part C of Medicare, commonly known as 
M+C.
    In Sec. 405.455(a), we propose that the M+C organization must 
acquire and maintain information from Medicare carriers on physicians 
and practitioners who have opted-out of Medicare.
    In Sec. 405.455(b), we specify that the M+C organization must make 
no payment directly or indirectly for Medicare-covered services 
furnished to an enrolled Medicare beneficiary by a physician or 
practitioner who has opted-out of Medicare. The services of physicians 
and practitioners who properly opt-out are excluded from Medicare under 
section 1862(a)(19) of the Act. Therefore, no payment may be made for 
them as Medicare-covered services.
    In Sec. 405.455(c), we specify that M+C organizations may make 
payment to a physician or practitioner who has properly opted-out if he 
or she furnishes emergency or urgent care services to a beneficiary who 
has not previously entered into a private contract with the physician 
or practitioner. This is consistent with our policy in Sec. 405.440 
where Medicare payment is made by carriers rather than through M+C 
contracts.
C. Payment for Outpatient Rehabilitation Services
    The term outpatient rehabilitation therapy encompasses outpatient 
physical therapy (including speech-language pathology) and outpatient 
occupational therapy.
1. Overview of Policies Before BBA 1997
    a. Coverage. Section 1861(p) of the Act defines outpatient physical 
therapy services as physical therapy services furnished to a 
beneficiary as an outpatient who meets the following criteria:
    <bullet> Is under the care of a physician.
    <bullet> Has a plan of treatment or care established by either a 
physician or by a qualified physical therapist.
    <bullet> Has the plan of treatment or care periodically reviewed by 
a physician.
    The statute also incorporates speech language pathology services 
within the definition of outpatient physical therapy services.
    Section 1861(g) of the Act states that the term ``outpatient 
occupational therapy services'' has the same meaning given the term 
``outpatient physical therapy services'' in section 1861(p), except 
that the word ``occupational'' is substituted for the word ``physical'' 
each time it is used in section 1861(p).
    b. Providers of Outpatient Rehabilitation Services. Outpatient 
physical therapy services (including speech-language pathology 
services) and outpatient occupational therapy services are furnished by 
providers of services, clinics, rehabilitation agencies, public health 
agencies, or by others under an arrangement with, and under the 
supervision of such entities. As defined in section 1861(w) of the Act, 
the term ``arrangements'' is limited to arrangements under which 
receipt of payment by the provider discharges the liability of the 
beneficiary to pay for services.
    Providers that furnish outpatient physical and occupational therapy 
services include hospitals, skilled nursing facilities (SNFs), 
rehabilitation agencies, home health agencies (HHAs), hospices, and 
comprehensive outpatient rehabilitation facilities (CORFs) furnishing 
services to patients other than those who receive SNF or inpatient 
hospital benefits.
    Hospital inpatients who have exhausted their hospital inpatient 
benefits and who are entitled to Part B, and SNF patients who have 
exhausted their SNF benefits and who are entitled to Part B may receive 
outpatient physical therapy services (including speech-language 
pathology services) and outpatient occupational therapy services even 
though they are inpatients of the provider. Section 1861(p) of the Act 
defines outpatient physical therapy services as those services that 
meet the requirements of the first sentence of 1861(p), yet that are 
furnished to a beneficiary as an inpatient of a hospital or extended 
care facility. Section 1861(p) of the Act must be read in conjunction 
with section 1833(d) of the Act. The latter section provides that 
Medicare Part B payments, such as payment for outpatient physical and 
occupational therapy services, may be made only when there is no 
eligibility for Medicare Part A payments for the service, such as 
payments for inpatient hospital or SNF care. Part B payment may be made 
for inpatients only when there is no eligibility for Medicare Part A 
payments; this means only a beneficiary who is not entitled to Medicare 
Part A benefits or who has exhausted his or her Part A benefits. Also 
see Sec. 410.60(b) (Outpatient physical therapy services: Conditions, 
Outpatient physical therapy services to certain inpatients of a 
hospital or a CAH or SNF).
    Outpatient physical therapy (including speech-language pathology) 
and occupational therapy services furnished by a home health agency may 
be covered as ``medical and other health services'' under section 
1861(s) of the Act when the beneficiary is not entitled to receive home 
health benefits under section 1814(a)(2)(C) because he or she is not 
homebound. To qualify for home health benefits, the beneficiary must be 
homebound and need or have needed skilled nursing care on an 
intermittent basis or physical or speech therapy, or in the case of an 
individual who no longer has need for such care or therapy, continues 
to need occupational therapy. Thus, most rehabilitative services 
furnished by home health agencies under section 1861(s)(2)(D) 
provisions are furnished to beneficiaries who are not homebound.
    Section 1861(cc)(1) of the Act defines the services that can be 
provided by a CORF. In addition to outpatient rehabilitation services, 
CORF services include: physician services; respiratory therapy; 
prosthetic and orthotic devices; social and psychological services; 
nursing care; drugs and biologicals that cannot be self-administered; 
supplies
[[Page 30856]]
and medical equipment; and, such other services as are medically 
necessary and are ordinarily furnished by CORFs.
    Services furnished by either a qualified physical therapist or a 
qualified occupational therapist in his or her office or in the 
beneficiary's home, for example, services of a physical therapist in 
independent practice (PTIP) or occupational therapist in independent 
practice (OTIP), are included as outpatient physical therapy services 
and outpatient occupational therapy services. Medicare does not cover 
the services of a speech-language pathologist in independent practice.
    c. Payment for Services. (1) Reasonable Cost-Based Payments 
Outpatient physical, occupational, and speech-language pathology 
services furnished by a provider of services, a clinic, a 
rehabilitation agency or public health agency are paid based on the 
lesser of the charges imposed for the services or the reasonable costs 
of providing the services.
    The reasonable cost of services furnished under arrangements may 
not exceed an amount equivalent to the prevailing salary and additional 
costs that would reasonably have been incurred by such provider or 
other organization had the services been performed by an employee. See 
Sec. 413.106 (Reasonable cost of physical and other therapy services 
furnished under arrangements).
    The salary equivalency guideline amounts currently in effect were 
published as a final rule on January 30, 1998, (63 FR 5106). In that 
final rule, we updated the physical and respiratory therapy guideline 
amounts and introduced new salary equivalency guidelines for 
occupational therapy and speech-language pathology services furnished 
under an arrangement. These guideline amounts are effective for 
services furnished on or after April 10, 1998. The guidelines are used 
by fiscal intermediaries to determine the maximum allowable cost of 
those services. In general, the salary equivalency guideline amounts 
are comprised of a prevailing hourly salary rate based on the 75th 
percentile of the range of salaries paid to full-time employee 
therapists by providers in the geographic area, by type of therapy, and 
a fringe benefit and expense factor; a standard travel allowance and 
additional allowances for costs incurred for services furnished by an 
outside supplier.
    (2) Fee Schedule Payments. Physical and occupational therapy 
services furnished by physicians and certain other recognized 
practitioners are payable by the carriers under the physician fee 
schedule. This includes services of PTIPs and OTIPs. The fee schedule 
also applies to nonphysician practitioners who furnish services that 
would be physician services if furnished by a physician. Nonphysician 
practitioners include physician assistants (section 1861(s)(2)(K)(i) of 
the Act); and nurse practitioners and clinical nurse specialists 
(sections 1861(s)(2)(K)(ii) and 1861(s)(2)(K)(iii) of the Act) 
operating within the scope of their State licenses and within certain 
settings. Physical and occupational therapy services provided incident 
to the services of physicians or incident to the services of the 
recognized nonphysician practitioners cited above are payable by the 
carriers under the physician fee schedule.
    d. Financial Limitation. Outpatient physical therapy services 
provided by a PTIP and outpatient occupational therapy services 
furnished by an OTIP are subject to an annual financial limitation. 
This annual limitation or cap is $900 per beneficiary of incurred 
expenses for physical therapy services and $900 per beneficiary of 
incurred expenses for occupational therapy services. There is a 
beneficiary liability that is comprised of the Part B deductible amount 
and 20-percent coinsurance. If a beneficiary has already satisfied the 
Part B deductible, the maximum amount payable by the Medicare program 
under each of these benefits is $720, for example, 80 percent of $900. 
The limit on expenses applies only to items and services covered under 
the therapy benefit. When a beneficiary exceeds the annual limitation 
or cap, the beneficiary is financially liable for any additional 
therapy services that are furnished during the calendar year.
2. BBA 1997 Provisions Affecting Payment for Outpatient Rehabilitation 
Services
    a. Reasonable Cost-Based Payments. Section 4541(a) of BBA 1997 
added new section 1834(k) of the Act. Section 1834(k)(2) established a 
10 percent reduction in the reasonable cost of therapy services 
furnished during 1998. The 10-percent reduction does not apply to 
outpatient therapy services furnished by hospitals or critical access 
hospitals. In accordance with this provision, we are proposing to make 
payment for outpatient rehabilitation services furnished during 1998 
based upon the lesser of the charges imposed or the reasonable cost 
determined for such services, reduced by 10 percent. The 10-percent 
reduction shall not apply to outpatient physical therapy or 
occupational therapy services furnished by a hospital to an outpatient 
or to a hospital inpatient entitled to benefits under Part A but who 
has exhausted benefits or is otherwise not in a covered Part A stay.
    The salary equivalency guidelines will continue to remain in effect 
until all BBA 1997 provisions regarding a prospective payment system 
for outpatient rehabilitation services are implemented. The prospective 
payment system will negate the need for salary equivalency guidelines 
because providers will no longer be paid on a reasonable cost basis for 
their therapy services. The salary equivalency guidelines were a tool 
used to determine the reasonable cost of therapy services provided by 
practitioners other than physicians.
    b. Prospective Payment System for Outpatient Rehabilitation 
Services. (1) Overview. Section 4541 of BBA 1997 adds a new section 
1834(k) to the Act that provides for a prospective payment system for 
outpatient rehabilitation services and all services provided by CORFs. 
The prospective payment system is effective for services furnished on 
or after January 1, 1999. Section 1834(k)(1)(B) of the Act provides for 
payment for those services to be made at 80 percent of the lesser of 
(1) the actual charge for the services, or (2) the applicable fee 
schedule. Section 1834(k)(3) defines the applicable fee schedule amount 
as the amount determined under the physician fee schedule, or, if there 
is no such fee schedule established for those services, the amount 
determined under the fee schedule established for comparable services 
as specified by the Secretary.
    The physician fee schedule is currently applied to certain 
outpatient rehabilitation therapy services. It is now the basis of 
payment for outpatient rehabilitation services furnished by PTIPs and 
OTIPs, physicians, and certain nonphysician practitioners or incident 
to the services of such physicians or nonphysician practitioners. The 
physician fee schedule has been the method of payment for outpatient 
rehabilitation therapy services provided by such entities for several 
years. Fee schedule payment will now apply when outpatient physical 
therapy, occupational therapy, and speech language pathology services 
are furnished by rehabilitation agencies, public health agencies, 
clinics, SNFs, home health agencies for beneficiaries who are not 
eligible for home health benefits because they are not homebound, 
hospitals (when such services are provided to an outpatient or to a 
hospital inpatient who is entitled to
[[Page 30857]]
benefits under Part A but who has exhausted benefits or is not 
entitled), and CORFs. The fee schedule also applies to outpatient 
rehabilitation services furnished under an arrangement with any of the 
cited entities that are to be paid on the basis of the physician fee 
schedule. The fee schedule will not apply to outpatient rehabilitation 
services furnished by critical access hospitals. Under section 1833 of 
the Act as amended by Section 4541 of BBA 1997, these services will be 
paid on a reasonable cost basis.
    (2) Services Furnished by Skilled Nursing Facilities. Section 
4432(a) of BBA 1997 added a new subsection(e) to section 1888 of the 
Act to establish a prospective payment systems for SNFs. Under the 
statute, effective for cost reporting periods beginning on or after 
July 1, 1998, Medicare pays for covered Part A SNF stays on the basis 
of prospectively determined payment rates which encompass all costs of 
``covered skilled nursing facility services'' furnished to a SNF 
resident. The statute defines covered SNF services to include (1) post-
hospital extended care services paid for under Part A, as well as (2) 
certain services that may be paid under Part B and which are furnished 
to SNF residents receiving covered post-hospital extended care 
services. Section 1888(e)(2) provides for exclusion of specific 
services from the definition of covered SNF services, but the statute 
explicitly states that the exclusions do not encompass ``any physical, 
occupational or speech language therapy services regardless of whether 
or not the services are furnished by, or under the supervision of, a 
physician or other health care professional.'' Thus, if a SNF resident 
is in a covered Part A stay, therapy services furnished to the SNF 
resident are encompassed in the PPS payment and Medicare does not make 
a separate Part B payment.
    Under the new payment system for SNF inpatient services, and 
consistent with current policy (which applied before enactment of BBA 
1997, services furnished to SNF residents that are not covered under 
Part A may nevertheless be covered under Part B. Section 4432(b) of BBA 
1997 amended section 1842(b)(6) of the Act to require that payment for 
most services furnished to an individual who is a resident of a SNF, 
including outpatient rehabilitation services, be made to the facility 
(without regard to whether the service was furnished by the facility, 
by others under arrangement with the facility, or under any other 
arrangement). When the services are not being furnished directly, the 
facility then pays the provider of therapy services. The consolidated 
billing provision is effective for services furnished on or after July 
1, 1998.
    Section 4432(b)(3) of BBA 1997 added a new paragraph (9) to section 
1888(e) of the Act to provide that, with respect to a service covered 
under Part B that is furnished to a SNF resident, the amount of payment 
for the service shall be the amount provided under the fee schedule for 
such item or service. This provision must be read in conjunction with 
the provisions of section 4541 of BBA 1997. Section 4541 added a new 
section 1833(a)(8) to specify that the amounts payable for outpatient 
rehabilitation services furnished by a SNF will be the amounts 
determined under section 1834(k) of the Act. Section 1834(k) of the Act 
provides that payment in 1998 shall be based on adjusted reasonable 
costs and in 1999 and thereafter, the physician fee schedule. Thus, we 
are proposing that SNF Part B inpatient services remain payable on a 
reasonable cost basis until January 1, 1999. Effective January 1, 1999, 
the services will be paid under the physician fee schedule.
    The physician fee schedule amount applicable to services furnished 
in a non-facility setting will apply to the Part B services to 
inpatients and other outpatient rehabilitation services furnished by 
the SNF. The non-facility amount applies because the consolidated 
billing provision requires that the SNF be directly paid for the entire 
therapy service (including facility costs) based on the physician fee 
schedule. This is in contrast to the amount applicable to physician 
services, excluding outpatient rehabilitation services, billed for SNF 
residents. In this case, the physician payment is not intended to cover 
the facility costs associated with the service and the fee schedule 
amount applicable to services furnished in a facility applies.
    (3) Services Furnished by Home Health Agencies. Section 
1833(a)(8)(A) requires that the physician fee schedule applies to 
outpatient rehabilitation services furnished by a HHA to an individual 
who is not homebound. The likelihood is great that most individuals who 
are homebound and are receiving physical therapy, speech-language 
pathology, or occupational therapy are entitled to home health 
benefits. Therefore, most outpatient rehabilitation services furnished 
by a HHA under section 1861(s)(2)(D) is to individuals who are not 
homebound. There may be, however, some individuals who are not 
homebound and have not required a qualifying service for home health 
benefits but who need occupational therapy services. If provided by a 
HHA, these services could be provided under section 1861(s)(2)(D) of 
the Act. Since section 4541 of BBA 1997 did not expressly address these 
services, they remain payable on a reasonable cost basis under section 
1861(v)(1) of the Act. All other services furnished by the HHA will be 
paid under a prospective payment system (effective October 1, 1999 with 
respect to home health services). Section 1861(v)(1) provides that the 
reasonable cost of any service shall be the cost actually incurred, 
excluding any costs unnecessary to the efficient delivery of needed 
health services. Since all other outpatient rehabilitation services are 
to be paid under the physician fee schedule, we believe it would be 
unreasonable for the costs of the services furnished to homebound 
beneficiaries who are not entitled to home health benefits to exceed 
the amount payable under the physician fee schedule. Therefore, we are 
proposing to modify Sec. 413.125 to provide that effective for services 
furnished on or after January 1, 1999, the reasonable cost of 
outpatient rehabilitation services furnished by a HHA to homebound 
patients who are not entitled to home health benefits may not exceed 
the amounts payable under the physician fee schedule.
    (4) Services Furnished by Comprehensive Outpatient Rehabilitation 
Facilities. Section 4541(a)(1) adds a new section 1832(a)(2)(D)(9) of 
the Act to provide that all services furnished by a CORF, and not just 
outpatient rehabilitation services, will be paid the applicable fee 
schedule amount. In cases where there is no physician fee schedule 
amount for the services, section 1834(k) specifies that the applicable 
fee schedule amount will be the amount established for comparable 
services as specified by the Secretary. Therefore, we are proposing 
that the existing fee schedules for prosthetic and orthotic devices, 
durable medical equipment, and supplies, and drugs and biologicals 
apply when these services are furnished by a CORF. We believe that 
these fee schedules, together with the physician fee schedule, will 
encompass all CORF services other than nursing services. The physician 
fee schedule amount applicable to services furnished in a non-facility 
setting will apply to the services furnished by the CORF since no 
separate payment will be made for facility costs.
    To establish a fee schedule amount for nursing services delivered 
within a CORF, we created a new HCPCS code, G0128. We are defining this 
code as
[[Page 30858]]
direct face-to-face skilled nursing services delivered to a CORF 
patient as part of a rehabilitative plan of care. It is a timed code 
and can be billed for 10-minute intervals (when the initial interval is 
longer than 5 minutes). G0128 is to be used for services that are not 
included in the work or practice expense of another therapy or 
physician service. An example might be a nurse who spends 33 minutes 
instructing a patient in the proper procedure of ``in and out'' 
urethral catheterization; in this situation, 3 units of G0128 would be 
billed. We are proposing to set the RVUs for this code at 0.26, based 
upon half the value of the lowest level physician follow-up visit, 
HCPCS code 99211, in the non-facility setting. This results in a 
payment for the time slightly more than the average wage reported by 
the Bureau of Labor Statistics (BLS) for RNs, inflated to reflect 
benefits and overhead (using the fringe benefit and expense factor used 
to establish the salary equivalency guideline).
    (5) Site-of-Service Differential. Providers of outpatient 
rehabilitation services have suggested that we should consider making a 
site-of-service differential, specifically, a payment amount greater 
than that provided by the physician fee schedule for some of the types 
of providers or sites at which outpatient rehabilitation services are 
furnished. We are not proposing such a differential.
    First, the law requires that these services be paid the amount 
determined ``under the fee schedule established under section 1848.'' 
Furthermore, we believe higher payment amounts for certain facilities, 
such as CORFs or rehabilitation agencies, would create payment 
incentives that favor one site or setting over another. We believe the 
statute establishes a ``level playing field'' for these services. We 
find no direction in the statutory language or legislative history that 
we recognize higher costs that some providers argue might be associated 
with furnishing services in a provider setting. To the extent that 
CORFs or rehabilitation facilities provide services to patients who 
need additional care, CORFs or rehabilitation facilities may bill for 
additional, medically necessary services. For these reasons, a site of 
service adjustment or higher payment amount for specific settings is 
not being proposed; however, we welcome any comments that you may 
present regarding differences in services furnished in the various 
settings that would justify a differential payment.
    (6) Mandatory Assignment. Section 1834(k)(6) of the Act, as added 
by BBA 1997, establishes a restraint on billing for outpatient 
rehabilitation therapy services; that is, this provision requires that 
services paid under section 1834(k) of the Act are subject to mandatory 
assignment under the same terms applicable to practitioners under 
section 1842(b)(18) of the Act. We propose, therefore, in accordance 
with this provision to require mandatory assignment for services 
provided under the outpatient rehabilitation prospective payment system 
by hospitals, SNFs, HHAs, rehabilitation agencies, public health 
agencies, clinics, and CORFs. The mandatory assignment provision does 
not apply to therapy services furnished by a physician or ``incident 
to'' a physician's service or to services furnished by a physical 
therapist in private practice or an occupational therapist in private 
practice. However, when these services are not furnished on an 
assignment-related basis, the limiting charge applies.
3. Uniform Procedure Codes for Outpatient Rehabilitation Services
    Section 4541(a)(2) of BBA 1997 added section 1834(k)(5) of the Act. 
This new statutory provision requires that claims submitted on or after 
April 1, 1998 for outpatient physical therapy services, including 
speech language pathology services and outpatient occupational therapy 
services, include a code under a uniform coding system that identifies 
the services furnished.
    The uniform coding requirement is needed to assure proper payment 
under the physician fee schedule. Hospitals, SNFs, HHAs (for 
individuals who are not eligible for home health services), CORFs, and 
outpatient physical therapy providers must use HCPCS codes to report 
outpatient rehabilitation services when furnished to their outpatients. 
Hospitals and SNFs that provide outpatient rehabilitation services to 
their inpatients who are entitled to benefits under Part A but who have 
exhausted their benefits for inpatient services during a spell of 
illness or to their inpatients who are not entitled to benefits under 
Part A are also required to report HCPCS codes.
    In March, 1998, we issued a program memorandum AB-98-8 which 
described the coding for outpatient rehabilitation services. This 
memorandum identifies the HCPCS codes that will be considered to be 
outpatient rehabilitation services and specifies how these codes will 
be reported on the UB-92. We assigned the various codes to revenue 
centers, that is, physical therapy, occupational therapy, and speech-
language pathology, for purposes of applying the financial limitation 
described below. Assigning codes to revenue centers was not intended to 
limit the scope of practice or range of procedures that could be 
furnished by therapists in a particular discipline. We are in the 
process of revising AB-98-8 because we intend to implement the 
financial limitation by using modifiers, as described below, rather 
than assigning the HCPCS codes to revenue centers.
    In the program memorandum, we also identify certain HCPCS codes 
available for billing by CORFs that are not generally rehabilitation 
services, including vaccinations and nursing services.
4. Financial Limitation
    Outpatient rehabilitation therapy services are subject to annual 
financial limitations or caps commencing January 1, 1999. (The amount 
of the current cap is $900.) There will be a $1,500 per beneficiary 
annual limitation or cap on incurred expenses for outpatient physical 
therapy services including outpatient speech-language pathology 
services. A separate $1,500 per beneficiary limitation will apply on 
incurred expenses for outpatient occupational therapy services. The 
annual limitation does not apply to services furnished directly or 
under arrangements by a hospital or critical access hospital to an 
outpatient or to an inpatient who is not in a covered Part A stay. The 
limitation will apply to outpatient rehabilitation services furnished 
by a separately certified hospital-based provider, such as a hospital-
based SNF. The limitation also applies to outpatient rehabilitation 
services furnished by a physician or nonphysician practitioner, or 
incident to a physician's professional services or to a nonphysician 
practitioner's professional services.
    As stated above, there is a single $1,500 limitation for outpatient 
physical therapy services and outpatient speech-language pathology 
services. As amended, section 1833(g) of the Act applies a single 
$1,500 limitation to ``physical therapy services of the type described 
in section 1861(p).'' Section 1861(p) defines outpatient physical 
therapy services and includes speech-language pathology services within 
that definition.
    Outpatient rehabilitation services are subject to a 20 percent 
coinsurance amount. Under the outpatient prospective payment system, 
the beneficiary will be responsible for 20 percent of the applicable 
fee schedule amounts. The $1,500 limitation is on incurred expenses. If 
a beneficiary has already satisfied the Part B deductible, the maximum 
amount payable by the
[[Page 30859]]
Medicare program is $1,200, that is, 80 percent of $1,500. Beginning 
January 1, 2002, the $1,500 annual limitations or caps will be 
increased by the percentage increase in the MEI.
    In addition to outpatient physical therapy services and outpatient 
occupational therapy services (other than those provided by a 
hospital), the limitation applies to physical therapy services 
(including speech-language pathology services) and occupational therapy 
services ``of such type which are furnished by a physician or as 
incident to a physician service.'' As discussed elsewhere in this 
document, Medicare covers under certain conditions services performed 
by nurse practitioners, clinical nurse specialists, and physician 
assistants that would be physicians' services if furnished by a 
physician. We are proposing to apply the financial limitation to 
therapy services furnished by these nonphysician practitioners since 
such therapy services are by definition the same type as are furnished 
by physicians. Similarly, we propose to apply the financial limitation 
to therapy services furnished incident to these nonphysician 
practitioner's services. We have included in Addendum D a listing of 
the specific services that we propose would be subject to the 
limitation when furnished by a physician or practitioner directly or 
incident to their services. Such outpatient rehabilitation services 
included in Addendum D furnished either directly or incident to the 
services of a physician or practitioner are always subject to the 
financial limitation. Other services such as casting, splinting, and 
strapping may be used in the treatment of conditions (for example, 
fractures or sprains) or as part of the postsurgical treatment or 
medical treatment when no other rehabilitation services are delivered. 
If the services are delivered by a physical or occupational therapist, 
speech-language pathologist, therapy assistant or therapy aide, are 
part of a rehabilitation plan of care, or involve services included in 
the aforementioned Addendum D, then the services are subject to the 
cap. These outpatient rehabilitation services are delineated in 
Addendum E and must be identified with a discipline-specific modifier.
    Addendum E contains a listing of outpatient rehabilitation therapy 
codes. Payment for certain HCPCS codes will be made on a basis other 
than the physician fee schedule in hospital outpatient departments. 
Other HCPCS codes are considered as CORF services. Further program 
instructions will be provided in a forthcoming program memorandum 
regarding the use of HCPCS codes for outpatient rehabilitation therapy 
services.
    With regard to ``incident to'' services, we note that section 
4541(b) of BBA 1997 amended section 1862(a) of the Act to require that 
outpatient physical therapy service (including speech-language 
pathology services) and outpatient occupational therapy services 
furnished ``incident to'' a physician's professional services meet the 
standards and conditions (other than any licensing requirement 
specified by the Secretary) that apply to therapy services furnished by 
a therapist. This provision was effective January 1, 1998 and was 
implemented through program instructions.
    The financial limitations apply only to items and services 
furnished by non-hospital providers and therapists under the outpatient 
physical therapy (including speech-language pathology) and the 
outpatient occupational therapy benefit (section 1861(s)(2)(D) of the 
Act) and therapy services furnished by physicians and nonphysician 
practitioners or incident to their services. The limitations do not 
apply to diagnostic tests covered under section 1861(s)(3) of the Act.
    To track the financial limitation or cap, we are proposing to use 
modifiers that will be discipline-specific. Many of the services, for 
example, physical modalities or therapeutic procedures as described by 
HCPCS codes, are commonly delivered by both physical and occupational 
therapists. Other services may be delivered by either occupational 
therapists or speech-language pathologists. For these services, we 
expect the claim to include a modifier which describes the type of 
therapist who delivered the service; if the service was not delivered 
by a therapist, then the type of therapy plan of care under which the 
service is delivered would be specified. If the type of therapy is not 
listed in the modifier field, the claim would be rejected and sent to 
the provider for resubmission.
    As required by section 1833(g) of the Act, as amended by section 
4541 of BBA, we propose to establish two annual per beneficiary limits 
of $1,500. There will be (1) an annual per beneficiary limit for all 
outpatient physical therapy services excluding hospital outpatient 
therapy services and (2) an annual per beneficiary limit for all 
outpatient occupational therapy services excluding hospital outpatient 
therapy services. As stated previously, outpatient physical therapy 
services include speech-language pathology services. A provider of 
outpatient rehabilitation services with a provider agreement under 
section 1866 of the Act as will as physicians, PTIPs and OTIPs will be 
allowed to collect payment from a beneficiary for therapy services 
after the $1,500 limit is reached. This is consistent with current 
policy allowing PTIPs and OTIPs to collect payment from a beneficiary 
for therapy services in excess of the current $900 limit.
    We note that a report to the Congress is due from the Secretary no 
later than January 1, 2001. This report is to include recommendations 
on the establishment of a revised coverage policy of outpatient 
physical therapy services, including speech-language pathology services 
and outpatient occupational therapy services. The revised policy is to 
be based on a classification of individuals by diagnosis category and 
prior use of services in both inpatient and outpatient settings. The 
report should include recommendations on how such durational limits by 
diagnostic category could be implemented in a budget-neutral manner.
5. Qualified Therapists
    Section 1861(p) includes services furnished an individual by a 
physical therapist who meets licensing and other standards prescribed 
by the Secretary if the services meet such conditions relating to 
health and safety as the Secretary may find necessary. The services 
must be furnished in the therapist's office or the individual's home. 
By regulation, we have defined therapists meeting the conditions for 
coverage of services under this provision as physical therapists in 
independent practice. The conditions for coverage are set forth in Part 
486, Subpart D (Conditions for coverage: Outpatient Physical Therapy 
Services Furnished by Physical Therapists in Independent Practice) and 
require that the services be provided by a therapist in independent 
practice under Sec. 410.60. Under Sec. 410.60, a therapist in 
independent practice is one who:
    <bullet> Engages in the practice of therapy on a regular basis.
    <bullet> Furnishes services on his or her own responsibility 
without the administrative and professional control of an employer.
    <bullet> Maintains at his or her own expense office space and 
equipment.
    <bullet> Furnishes services only in the office or patient's home.
    <bullet> Treats individuals who are his or her own patients and 
collects fees or other compensation for the services.
    Under Sec. 486.151 (Conditions for coverage: Supervision), all 
therapy services must be furnished under the direct supervision of a 
qualified therapist in independent practice. In
[[Page 30860]]
other words, the therapist in independent practice must be on the 
premises whenever services are provided to Medicare beneficiaries, 
including services provided by a licensed physical therapist. This 
long-standing requirement has been controversial with therapists in 
independent practice. For example, a therapist in independent practice 
cannot have more than one office open for services at the same time 
since he or she could not be on both premises at once.
    We are proposing to replace the existing ``Conditions for Coverage: 
Outpatient Physical Therapy Services Furnished by Physical Therapists 
in Independent Practice'' (Part 486, Subpart D), which requires survey 
and certification, with a simplified criteria for physical therapists 
in private practice that would use a carrier enrollment process. The 
impetus for this change comes from congressional statements associated 
with the fiscal year 1997 appropriations process. Statements in both 
the House and Senate committee reports accompanying HCFA's fiscal year 
1997 appropriations addressed the issue of requiring that the certified 
physical or occupational therapist in independent practice directly 
supervise all services performed by his or her employees, even if those 
employees are fully licensed therapists. The House committee report 
urged that we modify the regulations so that the certified therapist 
need not be on premises to supervise other licensed therapists. The 
Senate urged us to review this concern and recommend regulatory or 
instructional changes.
    We are proposing to redefine those therapists who are qualified 
pursuant to section 1861(p) of the Act. That is, we would discontinue 
the focus of the regulation on their ``independent'' status (which is 
not statutory) and recognize therapists in private practice who are 
employed by others and therefore, do not meet our current 
``independent'' criteria. This would be consistent with health and 
safety concerns and would conform to normal private sector practice 
standards. The following new requirements would replace the current 
ones for qualified therapists:
    <bullet> The term ``independent'' would be dropped and the benefit 
would be for an individual physical therapist or occupational therapist 
in private practice.
    Private practice would include an ``individual'' whose practice is 
in an unincorporated solo practice, unincorporated partnership, or 
unincorporated group practice. Private practice also would include an 
``individual'' who is practicing therapy as an employee of one of the 
above or of a professional corporation or other incorporated therapy 
practice. However, private practice would not include individuals when 
they are working as employees of a provider. A provider as defined in 
Sec. 400.202 includes a hospital, CAH, SNF, HHA, hospice, CORF, CMHC, 
or an organization qualified under Part 485, Subpart H (Conditions of 
Participation for Clinics, Rehabilitation Agencies, and Public Health 
Agencies as Providers of Outpatient Physical Therapy and Speech-
Language Pathology Services), as a clinic, rehabilitation agency, or 
public health agency.
    <bullet> In implementing the statutory requirement that services be 
furnished to an individual in the therapist's office, or in the 
individual's home, ``in his office'' would be defined as the 
location(s) where the practice is operated, in the State(s) where the 
therapist (and practice, if applicable) is legally authorized to 
furnish services, during the hours that the therapist engages in 
practice at that location.
    A therapist in private practice would not be required to maintain a 
private office, if services always are furnished in patients' homes. 
However, when services are furnished in private practice office space, 
that space would have to be owned, leased, or rented by the practice 
and used for the exclusive purpose of operating the practice. For 
example, because of the statutory restriction on the site of services, 
a therapist in private practice cannot furnish covered services in a 
SNF. Therefore, if a therapist wished to locate his or her own private 
office on site at a nursing facility, special care would need to be 
taken. The private office space could not be part of the Medicare-
participating SNF's space, and the therapist's services could be 
furnished only within that private office space. Neither the therapist 
nor any assistants or aides who help render services could be employed 
by the SNF during the same hours that they are working in the private 
practice. Another example where special attention would be needed is 
space that generally serves other purposes and is only used by a 
therapy practice during limited hours. For example, a therapist in 
private practice may furnish aquatic therapy in a community center pool 
on Wednesday mornings. The practice would have to rent or lease the 
pool for those hours, and the use of the pool during that time would 
have to be restricted to the therapist's patients, in order to 
recognize the pool as part of the therapist's own private office during 
those hours.
    In describing other services that are specifically limited to the 
patient's home, the statute uses qualifying language. For example, the 
durable medical equipment definition in section 1861(n) refers to a 
patient's home as ``including an institution used as his home other 
than an institution that meets the requirements of subsection (e)(1) of 
this section or section 1819(a)(1).'' This definition of home is 
codified at Sec. 410.38(b). The same definition always has been used in 
the Medicare Carriers Manual for purposes of covering therapists' 
services in a patient's home. We propose to continue the current 
practice and to adopt that definition formally in this regulation.
    <bullet> Assistants and aides would have to be personally 
supervised by the therapist and employed directly by the therapist, by 
the partnership or group to which the therapist belongs, or by the same 
private practice that employs the therapist. Personal supervision 
requires that the therapist be in the room during the performance of 
the service. Levels of supervision are defined in Sec. 410.32.
    <bullet> The therapist must be licensed or otherwise legally 
authorized to engage in private practice. We understand that all States 
license or certify physical therapists, so no alternative personnel 
qualifications need to be specified.
    <bullet> Each therapist would enroll ``as an individual'' with the 
carrier.
    There would be no survey and no certification by HCFA. The Medicare 
carrier would verify that the qualifications proposed in 
Sec. 410.59(c)(1) or Sec. 410.60(c)(1) are met. All applicants for new 
enrollment would become subject to these new rules and procedures upon 
the effective date of the final rule. For transition purposes, we 
intend that independent therapists who are certified and enrolled at 
that time would be ``grandfathered'' temporarily and would become 
subject to the new enrollment rules and procedures at the time of their 
next regular periodic reenrollment.
    These changes would address the concern that current rules require 
each independent therapist to personally supervise services performed 
by any other licensed therapists that he or she employs. Under our 
proposal, each individual therapist in a practice could qualify to 
separately enroll, and enrolled therapists would not be required for 
purposes of Medicare to be supervised by their employer. These changes 
also address the concern that current rules prohibit an independent 
therapist from being employed by any entity. Under our proposal, a 
variety of
[[Page 30861]]
employment situations would be permitted. The following examples 
illustrate how our proposals would apply:
    <bullet> Three PTs operate an unincorporated group practice, which 
employs several physical therapy assistants and aides and maintains two 
offices in two towns. Each therapist could enroll as a physical 
therapist in private practice and could furnish services in either 
office, while personally supervising any of the assistants or aides who 
are helping to render therapy.
    <bullet> A corporation operates a physical therapy practice which 
employs four physical therapists and several physical therapy 
assistants and aides. Each therapist could enroll as a physical 
therapist in private practice and could personally supervise any of the 
assistants or aides who help to render therapy. If two additional PTs 
are hired, each must enroll before their services could be covered 
without supervision by one of the enrolled physical therapists.
    A physical therapist works for a hospital's rehabilitation 
department during the day. During evening hours, he operates his own 
incorporated professional practice and goes to patient's homes to 
furnish therapy. He could enroll as a physical therapist in private 
practice for the evening hours and would not need to maintain an office 
for furnishing therapy.
    A physician's professional corporation employs three physical 
therapists and six physical therapy assistants in a private therapy 
practice associated with the physician's office. Each of the PTs could 
enroll as a therapist in private practice. The physician is not 
required to supervise any of the therapy. All physical therapy services 
for which Medicare payment is sought are supervised by one of the 
physical therapists.
    These new requirements would be established in a revised 
Sec. 410.60(c) for physical therapists. To date, the statutory 
requirements for coverage of outpatient occupational therapy services 
have not been codified. We are proposing to codify these requirements 
by establishing a new Sec. 410.59 for outpatient occupational therapy 
services. The proposed regulations section for outpatient occupational 
therapy parallels the Sec. 410.60 requirements for outpatient physical 
therapy, as revised in this proposed rule. We are also proposing to 
make conforming changes in Sec. 410.61 to include occupational therapy.
    Therapists in private practice do not participate in the Medicare 
program in the same way that ``providers of services'' do. Though they 
must be approved as meeting certain requirements, unlike ``providers of 
services,'' they do not execute a formal provider agreement with the 
Secretary as described in Part 489 (Provider Agreements and Supplier 
Approval) of the CFR. Like physicians, they do have the option of 
accepting a beneficiary's assignment of his or her claim for Medicare 
Part B benefits and of becoming a Medicare participating supplier who 
agrees to accept assignment in all cases.
6. Plan of Treatment
    We are proposing to revise Secs. 410.61(e), 424.24(c)(4)(i), and 
485.711(b), which concern the plan of treatment review requirements for 
outpatient rehabilitation therapy services. Section 1861(p) of the Act 
defines these therapy services, in part, as services furnished to an 
individual who is under the care of a physician and for whom a plan, 
prescribing the type, amount, and duration of therapy services that are 
to be furnished, has been established by a physician or a qualified 
therapist and is periodically reviewed by a physician.
    Currently, providers that furnish outpatient rehabilitation therapy 
services are required to have a physician review the plan of treatment 
and recertify the need for care at least every 30 days. We are 
proposing that the physician review and recertify the required plan of 
treatment within the first 62 days and at least every 31 days after the 
first review and recertification. The current requirement for the 
review of a plan of treatment for patients of physical therapists in 
independent practice is similar in that the physician must review the 
plan at least every 30 days. We are proposing to change this review 
requirement as well to require that the physician review and recertify 
the plan of treatment within the first 62 days and at least every 31 
days thereafter.
    We are recommending these changes because it is our understanding 
that an initial 2-month (62 day) review is consistent with usual 
therapy course of treatment. It is also consistent with our current 
therapy requirements in the home health setting. These changes would 
reduce the burden on providers, patients, and physicians by eliminating 
the current requirement for an initial review within the first 30 days. 
After the first 62 days, we believe that patients receiving outpatient 
rehabilitation services are likely to show significant progress that 
warrants subsequent reviews every 31 days. Changes in the patients' 
level of function and need for continued therapy can be expected to 
occur more frequently after the first 2 months of therapy. We believe 
this subsequent review schedule will help control potential over-
utilization that results in excessive therapy to some Medicare 
patients.
    Under our proposal, the therapists would be required to immediately 
notify the physician of any changes in the patient's condition, and 
physicians would retain the ability to review the care at closer 
intervals if necessary.
D. Payment for Services of Certain Nonphysician Practitioners and 
Services Furnished Incident to Their Professional Services
    Nonphysician practitioner services have been covered by Medicare 
since the inception of the program; originally the law did not provide 
for separate payments for these services. Coverage and payment of 
nonphysician services was primarily within the context of section 
1861(s)(2)(A) of the Act as implemented by section 2050 of the Medicare 
Carriers Manual, for the payment of services incident to a physician's 
professional services. In recent years, the Congress has expanded 
Medicare coverage of nonphysician practitioner services in certain 
settings to improve beneficiary access to medical services. Separate 
Part B coverage is specifically authorized for certain nonphysician 
practitioner services and for services and supplies furnished as 
incident to those services.
    For purposes of this proposal as it applies to nonphysician 
practitioners, we define nonphysician practitioners as nurse 
practitioners, clinical nurse specialists, certified nurse-midwives, 
and physician assistants. With respect to services and supplies 
furnished as incident to a nonphysician practitioner's services, we are 
proposing that to be covered by Medicare, the services must meet the 
longstanding requirements in section 2050 of the Medicare Carriers 
Manual applicable to services furnished as incident to the professional 
services of a physician. Therefore, we would specify, in proposed new 
Secs. 410.74(b), 410.75(d), 410.76(d), and 410.77(c) that Medicare Part 
B covers services and supplies (including drugs and biologicals that 
cannot be self-administered) furnished as incident to the 
nonphysician's services only if these services and supplies would be 
covered if furnished by a physician or furnished as incident to a 
physician's professional services. In addition, Secs. 410.74(b), 
410.75(d), 410.76(d), and 410.77(c) would specify
[[Page 30862]]
the various requirements for these incidental services and supplies.
1. Coverage and Payment for Nurse Practitioner Services Before BBA 1997
    Effective for services furnished on or after April 1, 1990, section 
6114 of the Omnibus Budget Reconciliation Act (OBRA) of 1989 (Pub. L. 
101-239) authorized separate payment for the services of nurse 
practitioners when furnished to patients in SNFs and nursing 
facilities. The services of nurse practitioners are covered if they are 
furnished in collaboration with a physician, they are within the scope 
of services authorized by State law, and they are the type of services 
that would be covered when furnished by a physician. The term, 
collaboration is defined as a process in which a nurse practitioner 
works with a physician to deliver health care services within the scope 
of the practitioner's professional expertise, with medical direction 
and appropriate supervision as provided for in jointly developed 
guidelines, or other mechanisms as defined by State law, in the State 
in which the services are performed.
    Section 6114 of OBRA 1989 limited routine visits by nurse 
practitioners who are serving as members of a team to 1.5 team visits 
per month per resident of a SNF or nursing facility. The team must 
include a physician and a physician assistant acting under the 
supervision of the physician, or a nurse practitioner or a clinical 
nurse specialist working in collaboration with a physician.
    Section 6114 of OBRA 1989 requires that payment for nurse 
practitioner services furnished to patients in SNFs and nursing 
facilities be made on an assignment-related basis to the nurse 
practitioner's employer only. This provision also limited the 
prevailing charges for the services of nurse practitioners furnished 
before January 1, 1992, to 85 percent of the prevailing charge rate 
determined for these services when furnished by nonspecialist 
physicians. For services furnished on or after January 1, 1992, OBRA 
1989 limits the payment to 85 percent of the physician fee schedule 
amount for those services furnished by physicians who are not 
specialists.
    The qualifications for nurse practitioners require individuals to:
    <bullet> Be a registered nurse who is currently licensed to 
practice in the State where he or she practices, be authorized to 
perform the services of a nurse practitioner in accordance with State 
law, and have a master's degree in nursing;
    <bullet> Be certified as a nurse practitioner by a professional 
association recognized by HCFA that has, at a minimum, eligibility 
requirements that meet the standards in the paragraph above; or
    <bullet> Meet the requirements for a nurse practitioner set forth 
in the first paragraph, except for the master's degree requirement, and 
have received before 3 years prior to the effective date of a final 
rule, a certificate of completion from a formal advanced practice 
program that prepares registered nurses to perform an expanded role in 
the delivery of primary care.
    Section 4155 of OBRA 1990 (Pub. L. 101-508) extended coverage of 
nurse practitioner services that was previously restricted to SNFs and 
nursing facilities, to all settings in rural areas. Additionally, nurse 
practitioners were authorized to either receive direct payment or 
arrange for payment to be made directly to their employer for services 
furnished in collaboration with a physician in all settings in a rural 
area, with the exception of hospitals. This provision also allowed for 
coverage of services and supplies furnished as an incident to a nurse 
practitioner's services if the services would have been covered if 
furnished as an incident to a physician's professional services.
    The term, ``rural area'' as defined at section 1886(d)(2)(D) of the 
Act means any area outside a Metropolitan Statistical Area or New 
England County Metropolitan Area, as defined by the Executive Office of 
Management and Budget, or outside any similar area the Secretary has 
recognized by regulation as an urban area.
    Sections 4155(b) and (c) of OBRA 1990 imposes a civil monetary 
penalty not to exceed $2,000 on any person who knowingly and willfully 
presents a bill or request for payment to a Medicare beneficiary 
(except for coinsurance and deductible amounts) for nurse practitioner 
services furnished in a rural area, or for services and supplies 
furnished as an incident to those services, and for nurse practitioner 
services furnished in a SNF or nursing facility.
    Section 147(e)(4) of the Social Security Act Amendments of 1994 
(SSAA'94) (Pub. L. 103-432) unbundled payment for nurse practitioner 
services in SNFs and nursing facilities. It also added nurse 
practitioner services to the list of services that are excluded from 
the definition of inpatient hospital services. Accordingly, nurse 
practitioners or their employer or contractor were authorized to bill 
directly for services furnished to patients in SNFs or nursing 
facilities and hospitals located in rural areas.
2. Coverage and Payment for Nurse Practitioner Services Subsequent to 
BBA 1997
    Effective for services furnished on or after January 1, 1998, 
section 4511 of BBA 1997 authorizes nurse practitioners to bill the 
program directly for services furnished in any setting, regardless of 
whether the settings are located in rural or urban areas, but only if 
the facility or other providers of services do not charge or are not 
paid any amounts with respect to the furnishing of nurse practitioner 
services. Accordingly, a new Sec. 410.75 of this proposed rule 
specifies the qualifications for nurse practitioners, lists the 
requirements for the professional services of a nurse practitioner and 
the requirements for services furnished incident to the professional 
services of a nurse practitioner. This new section also proposes a 
definition for the collaboration process that is applicable to the 
provision of nurse practitioner services.
    A new Sec. 405.520(a), (b), and (c) of this proposed rule provides 
the general rule, requirements, and penalties for nurse practitioners. 
A new paragraph (15) is added to Sec. 410.150(b) to authorize payment 
for nurse practitioner services when furnished in collaboration with a 
physician in all settings located in both rural and urban areas. A new 
paragraph (c) is added to Sec. 414.56 of this rule to set forth the 
payment amount for nurse practitioner services.
3. Coverage and Payment for Clinical Nurse Specialist Services Before 
BBA 1997
    In addition to authorizing Medicare coverage of nurse practitioner 
services furnished in rural areas, section 4155 of OBRA 1990 also 
authorized the coverage of services furnished by clinical nurse 
specialists in rural areas. The coverage provisions for clinical nurse 
specialist services furnished in a rural area parallel those 
established for nurse practitioner services furnished in rural areas. 
That is, clinical nurse specialist services must be furnished in 
collaboration with a physician and be the type of physician services 
that would otherwise be covered if furnished by a physician. 
Additionally, the services must be services that the clinical nurse 
specialist is authorized by State law to furnish in the State in which 
they are practicing. Furthermore, services furnished as an incident to 
the professional services of a clinical nurse specialist are covered if 
they are the type of services that would be covered if furnished 
incident to a physician's
[[Page 30863]]
professional services and all the incident to requirements are met.
    A clinical nurse specialist is defined as an individual who is 
legally authorized to perform such services in accordance with State 
law, and who meets training, education, and experience requirements as 
the Secretary may prescribe in regulations.
    Section 147(e)(4) of the SSAA'94 also unbundled payment for 
clinical nurse specialist services furnished in SNFs, nursing 
facilities, and hospitals. The services of clinical nurse specialists 
are now paid under a separate benefit.
    Payment for clinical nurse specialist services is made to the 
clinical nurse specialist or to his or her employer. As is the case 
with nurse practitioners, the services of clinical nurse specialists 
furnished to patients in rural health clinics (RHCs), federally 
qualified health centers (FQHCs), and health maintenance organizations 
(HMOs) are not paid under the respective nurse practitioner or clinical 
nurse specialist benefits. Instead, the services that nonphysician 
practitioners furnish in RHCs, FQHCs, and HMOs education, and 
experience requirements as the Secretary may prescribe in regulations.
    Section 147 (e)(4) of the SSAA'94 also unbundled payment for 
clinical nurse specialist services furnished in SNFs, nursing 
facilities, and hospitals. The services of clinical nurse specialists 
are now paid under a separate benefit.
    Payment for clinical nurse specialist services is made to the 
clinical nurse specialist or to his or her employer. As is the case 
with nurse practitioners, the services of clinical nurse specialists 
furnished to patients in rural health clinics (RHCs), federally 
qualified health centers paid under the respective nurse practitioner 
or clinical nurse specialist benefits. Instead, the services that 
nonphysician practitioners furnish in RHCs, FQHCs, and HMOs are a part 
of the facilities' services and cannot be billed or paid separately.
    The payment provisions for clinical nurse specialist services 
furnished in a rural area parallel those established for nurse 
practitioner services furnished in rural areas. Accordingly, payment 
for services is made on an assignment-related basis, the civil monetary 
penalty provision for violation of the assignment agreement applies, 
and the current Medicare-approved amount for covered clinical nurse 
specialist services furnished in rural areas (other than in hospitals) 
is limited to the lesser of the actual charge or 85 percent of the 
physician fee schedule amount for nonspecialist physician services. For 
covered services furnished in hospitals located in rural areas, the 
Medicare-approved amount is limited to the lesser of the actual charge 
or 75 percent of the physician fee schedule amount for nonspecialist 
physician services.
4. Coverage and Payment for Clinical Nurse Specialist Services 
Subsequent to BBA 1997
    Effective for services furnished on or after January 1, 1998, 
Section 4511 of BBA 1997 authorizes clinical nurse specialists to bill 
the program directly for services furnished in any setting, regardless 
of whether the settings are located in rural or urban areas, but only 
if the facility or other providers of services does not charge or is 
not paid any amounts with respect to the furnishing of nurse 
practitioner services. A new Sec. 410.76(e) of this proposed rule sets 
forth this provision.
    The new Sec. 410.76(b) sets forth new qualifications for clinical 
nurse specialists. Section 410.76(c) describes the conditions of 
coverage for clinical nurse specialists services, defines the 
collaboration process, and paragraph (d) lists the requirements for 
services furnished incident to the professional services of a clinical 
nurse specialist.
    A new Sec. 405.520(a), (b), and (c) of this proposed rule provides 
the general rule, requirements, and civil monetary penalties for 
clinical nurse specialists. A new paragraph (15) is added to section 
410.150(b) to authorize payment for clinical nurse specialist services 
when furnished in collaboration with a physician in all settings 
located in both rural and urban areas. A new paragraph (c) is added to 
section 414.56 of this rule to set forth the payment amounts for 
clinical nurse specialist services.
5. Coverage and Payment for Certified Nurse-Midwife Services
    Certified nurse-midwife services were only covered under the 
Medicare program when furnished incident to the professional services 
of a physician or under the supervision of a physician in RHCs prior to 
these individuals gaining statutory authorization to perform services 
as independent nonphysician practitioners.
    Certified nurse-midwives were defined initially section 1861(gg)(2) 
of the Act and 42 CFR 405.2401 (b) as a registered professional nurse 
who:
    <bullet> Is currently licensed to practice in the State as a 
registered professional nurse;
    <bullet> Is legally authorized under State law or regulations to 
practice as a certified nurse-midwife;
    <bullet> Has completed a program of study and clinical experience 
for certified nurse-midwives, as specified by the State, or, if the 
State does not specify a program--
    + Is currently certified as a nurse-midwife by the American College 
of Nurse-Midwives;
    + Has satisfactorily completed a formal education program (of at 
least 1 academic year) that, upon completion, qualifies the nurse to 
take the certification examination offered by the American College of 
Nurse-Midwives; or
    + Has successfully completed a formal educational program that 
prepares registered nurses to furnish gynecological and obstetrical 
care to women during pregnancy, delivery, and the postpartum period, 
and care to newborns, and practiced as a nurse-midwife for a total of 
12 months during any 18-month period from August 8, 1976, to July 16, 
1982.
    Certified nurse-midwife services are defined at section 1861(gg)(1) 
of the Act as services furnished by a certified nurse-midwife, and 
services and supplies furnished as an incident to those services, that 
the certified nurse-midwife is legally authorized to furnished under 
State law and that would be covered by Medicare if furnished by a 
physician or as an incident to a physician's service.
    Effective for services furnished on or after July 1, 1988, section 
4073 of OBRA 1987 (Pub. L. 100-203) expanded Part B coverage of the 
services of certified nurse-midwives to include services furnished 
independently of the supervision of a physician. Subsequently, section 
411(h)(4) of the Medicare Catastrophic Coverage Act (MCCA) of 1988 
(Pub. L. 100-360) made several technical amendments to section 4073 of 
OBRA 1987 to categorize and cover certified nurse-midwife services as 
medical and other health services, specify that payment for the 
services of a certified nurse-midwife is 80 percent of the lesser of 
the actual charge or the amount determined by a fee schedule 
established by the Secretary, and limit the fee schedule to 65 percent 
of the prevailing charge that would be allowed for the same services 
furnished by a physician. Additionally, section 4073 of OBRA 1987 
requires that payment for certified nurse-midwife services be paid on 
an assignment-related basis and that violators of the assignment 
requirements be subject to civil monetary penalties.
    Section 6102(f)(7) of OBRA 1989 (Pub. L. 101-239) provided that for 
services furnished on or after January 1, 1992, payment is determined 
based on the lesser or the actual charge or 65 percent of the Medicare 
physician fee schedule.
    In 1990, in section 4157 of OBRA 1990 (Pub. L. 101-508) the 
Congress
[[Page 30864]]
recognized certified nurse-midwife services as separate and distinct 
from hospital services. Accordingly, certified nurse-midwife services 
are unbundled from hospital services and are paid separately under the 
certified nurse-midwife benefit.
    Ultimately, section 13554 of OBRA 1993 (Pub. L. 103-66) amended 
section 1861(gg)(2) of the Act to revise the definition of certified 
nurse-midwife. The revision eliminated the limitation on coverage to 
include services furnished by certified nurse-midwives outside the 
maternity cycle. This change was made effective for services furnished 
on or after January 1, 1994.
    A new Sec. 410.77 of this proposed rule lists the qualifications 
for certified nurse-midwives and provides for the conditions for 
coverage of certified nurse-midwife services. Paragraph (d) of 
Sec. 410.77 lists the coverage requirements for the professional 
services of certified nurse-midwives, while paragraph (c) lists the 
requirements for services furnished incident to the professional 
services of a certified nurse-midwife.
6. Coverage and Payment for Physician Assistant Services Before BBA 
1997
    For physician assistant services furnished on or after January 1, 
1987, section 9338(a) of the Omnibus Budget Reconciliation Act (OBRA) 
of 1986 (Pub. L. 99-509) authorized physician assistants to bill the 
Medicare program for the type of services that would be considered as 
physicians' services, provided that the physician assistant is legally 
authorized by the State to furnish such services. Services furnished 
incident to the physician assistant's professional services are also 
covered if these same services would have been covered when furnished 
incident to the professional services of a physician. Under this OBRA 
provision, physician assistants furnished their services under the 
general supervision of a physician in a hospital, SNF, nursing 
facility, or as an assistant at surgery in both rural and urban areas. 
In order to have furnished services under the physician assistant 
benefit, individuals must have met the qualifications as follows:
    1. Be certified currently by the National Commission on 
Certification of Physician Assistants to assist primary care 
physicians;
    2. Have completed satisfactorily a program for preparing physician 
assistants that--
    <bullet> Was at least 1 academic year in length;
    <bullet> Consisted of supervised clinical practice and at least 4 
months (in the aggregate) of classroom instruction that prepared 
students to deliver health care; and
    <bullet> Is accredited by the AMA's Committee on Allied Health 
Education and Accreditation; or
    3. Have completed satisfactorily a formal educational program for 
preparing physician assistants (that does not meet the requirements 
listed above) and assisted primary care physicians for a total of 12 
months during the 18-month period immediately preceding January 1, 
1987. Additionally, effective January 1, 1989, section 4076 of OBRA 
1987 (Pub. L. 100-203) authorized physician assistants to furnish their 
services under the supervision of a physician in all settings located 
in rural areas that were designated under section 332(a)(1)(A) of the 
Public Health Service Act as health professional shortage areas 
(HPSAs).
    Payment for physician assistant services prior to January 1, 1998 
was made only on an assignment-related basis to the actual employer of 
the physician assistant at 85 percent of the physician fee schedule for 
professional services. Payment for the services of a physician 
assistant performing as an assistant at surgery was made at 65 percent 
of the physician fee schedule. The employer of a physician assistant 
might have been a physician, medical group, professional corporation, 
hospital, SNF, or nursing facility.
7. Coverage and Payment for Physician Assistant Services Subsequent to 
BBA 1997
    Effective for services furnished on or after January 1, 1998, the 
majority of the conditions for coverage of physician assistant services 
as indicated by new Secs. 410.74(a) and (b) remain unchanged with the 
exception of the condition for coverage of physician assistant services 
furnished in certain areas and settings. Section 4512 of BBA 1997 
removes the restrictions on the site of services in which physician 
assistants may furnish their professional services, regardless of 
whether the settings are located in rural or urban areas. Physician 
assistants are authorized to furnish their professional services as 
independent nonphysician practitioners to practically all providers of 
services and suppliers of services only if the facility or other 
provider of services does not charge or is not paid any amounts with 
respect to the furnishing of physician assistant professional services. 
Accordingly, separate payment may be made for physician assistant 
services in all settings with the exception of rural health clinics 
(RHCs) and Federally qualified health centers (FQHCs) because Medicare 
payment for their services is included in the all-inclusive payment 
rate that the program makes to these facilities.
    Under new Sec. 410.74(c), we are proposing to amend the 
qualifications for physician assistants to recognize certification of 
physician assistants by the National Board of Certification of 
Orthopedic Physician Assistants. These qualifications will also 
recognize academic programs for physician assistants that are 
accredited by either the Commission on Accreditation of Allied Health 
Education Programs or the American Society of Orthopedic Physician 
Assistants.
    Additionally, effective January 1, 1998, physician assistants have 
the option of furnishing services under a different employment 
arrangement with a physician. They can furnish services as an employee 
of a physician under a W-2 form employment arrangement or they can 
furnish services as an employee of a physician under a 1099 form, 
independent contractor arrangement. Under either arrangement, the 
employer of the physician assistant must bill the program for physician 
assistant services as required under Sec. 410.150(b)(14). However, when 
an individual furnishes services ``incident'' to the professional 
services of a physician assistant, these ancillary services must meet 
the requirements under Sec. 410.74(a)(2)(vi)(B).
    The Medicare payment amount for physician assistant professional 
services as of January 1, 1998, as stated under new paragraph (d) of 
Sec. 414.52, remains at 80 percent of the lesser of either the actual 
charge or 85 percent of the physician fee schedule amount for 
professional services. However, payment for physician assistant at 
surgery services, as also described at new paragraph (d) of 
Sec. 414.52, increased to allow Medicare payment at 80 percent of the 
lesser of either the actual charge or 85 percent of the physician fee 
schedule amount paid to a physician assistant serving as an assistant 
at surgery. Also, new Sec. 405.520 provides the general rule, 
requirements, and civil monetary penalties for physician assistants who 
furnish services under the Medicare program.
IV. Collection of Information Requirements
    Under the Paperwork Reduction Act of 1995 (PRA), agencies are 
required to provide a 60-day notice in the Federal Register and solicit 
public comment before a collection of information requirement is 
submitted to the Office of Management and Budget (OMB) for review and 
approval. In order to fairly evaluate whether an information
[[Page 30865]]
collection should be approved by OMB, section 3506(c)(2)(A) of the PRA 
requires that we solicit comment on the following issues:
    <bullet> Whether the information collection is necessary and useful 
to carry out the proper functions of the agency.
    <bullet> The accuracy of the agency's estimate of the information 
collection burden.
    <bullet> The quality, utility, and clarity of the information to be 
collected.
    <bullet> Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    Therefore, we are soliciting public comment on each of these issues 
for the information collection requirements (ICRs) discussed below.
    <bullet> New ICRs and Related Burden.
Sec. 405.410  (Conditions for opting-out of Medicare.)
    Section 405.410(a) states that each private contract between a 
physician or a practitioner and a Medicare beneficiary must meet the 
specifications of Sec. 405.415.
    The burden associated with these requirements is the time to draft, 
and then read, sign, photocopy and retain the private contract. It is 
estimated that it will take 300 physicians and/or practitioners 2 hours 
each to create a contract for a total of 600 hours. It is estimated 
that it will take 10 minutes for each to read, sign, photocopy and 
retain the private contract for 25,000 beneficiaries for a total of 
4,167 hours. The burden for these ICRs total 4,767 hours.
    Section 405.410(b) states that the physician or practitioner must 
submit to each Medicare carrier with which he or she files claims an 
affidavit that meets the specifications of Sec. 405.420.
    The burden associated with these requirements is the burden to 
draft, sign and submit the affidavit to the Medicare carrier. It is 
estimated that it will take 300 physicians and/or practitioners 
approximately 2 hours each for a total of 600 burden hours.
Sec. 405.445  (Renewal and early termination of opt-out.)
    Section 405.445(b)(2) states that a physician or practitioner must 
notify all Medicare carriers with which he or she filed an affidavit of 
the termination of the opt-out no later than 90 days after the 
effective date of the opt-out period.
    The burden associated with this requirement is the time for the 
physician or practitioner to notify all Medicare carriers of the 
affidavit. It is estimated that it will take 30 physicians and/or 
practitioners 10 minutes each for a total of 5 hours.
    Section 405.445(b)(4) states that a physician or practitioner must 
notify all beneficiaries with whom the physician or practitioner 
entered into private contracts of the physician's decision to terminate 
opt-out and of the beneficiaries' right to have claims filed on their 
behalf with Medicare for the services furnished during the period 
between the effective date of the opt-out and the effective date of the 
termination of the opt-out period.
    The burden associated with this requirement is the time for the 
physician and/or practitioner to notify all beneficiaries of his or her 
decision to terminate opt-out and of the beneficiaries' right to have 
claims filed on their behalf with Medicare. It is estimated that it 
will take 30 physicians and/or practitioners each 2 hours to notify 
their beneficiaries via bulk mailings for a total of 60 hours.
Sec. 405.455  (Medicare+Choice.)
    Section 405.455(a) states that an organization that has a contract 
with HCFA to provide one or more Medicare+Choice (M+C) plans to 
beneficiaries must acquire and maintain information from Medicare 
carriers on physicians and practitioners who have opted-out of 
Medicare.
    The burden associated with these requirements is the time 
associated with acquiring and maintaining information provided by 
Medicare carriers on physicians and practitioners who have opted-out of 
Medicare. It is estimated that 500 organizations will spend 1 hour 
annually to acquire and maintain this information for a total of 500 
hours. The total burden for these ICRs is 500 hours.
                                             Estimated Annual Burden                                            
----------------------------------------------------------------------------------------------------------------
                                                                                                        Annual  
               CFR section                 Responses           Average burden  per response             burden  
                                                                                                        hours   
----------------------------------------------------------------------------------------------------------------
405.410(a)                                                                                                      
    --Draft document....................          300  2 hours.....................................          600
    --Read, sign, photocopy, retain            25,000  10 minutes..................................        4,167
     document.                                                                                                  
                                                                                                    ------------
        Sub-total.......................  ...........  ............................................        4,767
                                                                                                    ------------
405.410(b)..............................          300  2 hours.....................................          600
405.445(b)(2)...........................           30  10 minutes..................................            5
405.445(b)(4)...........................           30  2 hours.....................................           60
405.455(a)..............................          500  1 hour......................................          500
                                                                                                    ------------
        Total...........................  ...........  ............................................        5,932
----------------------------------------------------------------------------------------------------------------
    <bullet> New ICRs Without Burden.
    The ICR below is subject to the Act. However, we believe the burden 
associated with this ICR is exempt since the burden is imposed by 
Sec. 405.410 and meets the specifications in Sec. 405.420.
Sec. 405.445  (Renewal and early termination of opt-out.)
    Section 405.445(a) states that a physician or practitioner may 
renew opt-out by filing an affidavit with each carrier to which an 
affidavit was submitted for the first opt-out period (as specified in 
Sec. 405.420), and to each carrier to which a claim was submitted under 
Sec. 405.440 during the previous opt-out period, provided the 
affidavits are filed within 30 days after the current opt-out period 
expires.
    The ICRs below are subject to the Act. However, we believe the 
burden associated with these ICRs are exempt, as defined by 5 CFR 
1320.3(b)(2), because the time, effort, and financial resources 
necessary to comply with these requirements would be incurred by 
persons in the normal course of their activities. Physicians and 
practitioners routinely develop and update a plan of treatment so the 
patient understands how often and when he or she will require care. In 
addition, physicians and practitioners routinely maintain
[[Page 30866]]
documentation in the patient's medical record.
Sec. 410.61  (Plan of treatment requirements for outpatient physical 
therapy and speech language pathology services.)
    Section 410.61(e) states that the physician review the plan as 
often as the individual's condition requires, but at least within the 
first 62 days and at least 31 days after each previous review.
Sec. 415.110  (Conditions for payment: Medically directed 
anesthesiology services.)
    Section 415.110(b) states that the physician inclusively documents 
in the patient's medical record that the conditions set forth in 
paragraph (a)(1) of this section have been satisfied, specifically 
documenting personal participation in the most demanding aspects of the 
anesthesia plan.
    The ICRs below are subject to the Act. However, we believe the 
burden associated with these ICRs are exempt, as defined by 5 CFR 
1320.3(b)(2), because the time, effort, and financial resources 
necessary to comply with these requirements would be incurred by 
persons in the normal course of their activities. We believe the record 
keeping requirements described below are a reasonable and customary 
part of the plan of treatment described in section 410.61.
Sec. 424.24  (Requirements for medical and other health services 
furnished by providers under Medicare Part B.)
    In summary Sec. 424.24(c)(1)(iii) and (3) requires that the 
services that were furnished under a plan of treatment that meets the 
requirements in Sec. 410.61. If the plan of treatment is established by 
a physical therapist or speech-language pathologist, the certification 
must be signed by a physician who has knowledge of the case.
    Section 424.24(c)(4) states that the first recertification is 
required by no later than the 62nd day and subsequent recertifications 
are required at least every 31 days. The recertification statement must 
indicate the continuing need for physical therapy or speech-language 
pathology services and an estimate of how much longer the services will 
be needed. Recertifications must be signed by the physician who reviews 
the plan of treatment.
    <bullet> Currently Approved ICRs.
    While the ICRs below are subject to the Act; the burden associated 
with this requirement is captured in the HCFA-1500, OMB Number 0938-
0008, Medicare Common Claim Form, which expires on August 31, 1998.
Sec. 405.430  (Failure to perfect opt-out.)
    Section 405.430(b)(3) states that the physician or practitioner 
must submit claims to Medicare for all Medicare-covered items and 
services furnished to Medicare beneficiaries.
Sec. 405.435  (Failure to maintain opt-out.)
    Section 405.435(b)(3) states that the physician or practitioner 
must submit claims to Medicare for all Medicare-covered items and 
services furnished to Medicare beneficiaries.
Sec. 405.440  (Emergency and urgent care services.)
    Section 405.440(b)(1) states that when a physician or practitioner 
furnishes emergency or urgent care services to a Medicare beneficiary 
with whom the physician or practitioner has not previously entered into 
a private contract, the physician or practitioner must submit a claim 
to Medicare in accordance with both 42 CFR Part 424 and Medicare 
instruction (including but not limited to complying with proper coding 
of emergency or urgent care services furnished by physicians and 
practitioners who have opted-out of Medicare).
    We have submitted a copy of this proposed rule to OMB for its 
review of the ICRs described above. These requirements are not 
effective until they have been approved by OMB.
    If you comment on any of these information collection and record 
keeping requirements, please mail copies directly to the following:
Health Care Financing Administration, office of Information Services, 
Information Technology Investment Management Group, Division of HCFA 
Enterprise Standards, Room C2-26-17, 7500 Security Boulevard, 
Baltimore, MD 21244-1850, Attn.: Louis Blank, HCFA-1006,
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 10235, New Executive Office Building, Washington, D.C. 
20503, Attn.: Allison Herron Eydt, HCFA Desk Officer
V. Response to Comments
    Because of the large number of items of correspondence we normally 
receive on Federal Register documents published for comment, we are not 
able to acknowledge or respond to them individually. We will consider 
all comments we receive by the date and time specified in the DATES 
section of this preamble, and, if we proceed with a subsequent 
document, we will respond to the comments in the preamble to that 
document.
VI. Regulatory Impact Analysis
    We have examined the impacts of this proposed rule as required by 
Executive Order (EO) 12866, the Unfunded Mandates Act of 1995, and the 
Regulatory Flexibility Act (RFA) (Public Law 96-354). Executive Order 
12866 directs agencies to assess all costs and benefits of available 
regulatory alternatives and, when regulation is necessary, to select 
regulatory approaches that maximize net benefits (including potential 
economic, environmental, public health and safety effects, distributive 
impacts, and equity). A regulatory impact analysis (RIA) must be 
prepared for major rules with economically significant effects ($100 
million or more annually).
    This proposed rule is expected to have varying effects on the 
distribution of Medicare physician payments and services. With few 
exceptions, we expect that the impact would be limited.
    The Unfunded Mandates Reform Act of 1995 also requires (in section 
202) that agencies prepare an assessment of anticipated costs and 
benefits before proposing any rule that may result in an annual 
expenditure by State, local, or tribal governments, in the aggregate, 
or by the private sector, of $100 million. This proposed rule will have 
no consequential effect on State, local, or tribal governments. We 
believe the private sector cost of this rule falls below these 
thresholds as well.
A. Regulatory Flexibility Act
    Consistent with the provisions of the Regulatory Flexibility Act, 
we analyze options for regulatory relief for small businesses and other 
small entities. We prepare a Regulatory Flexibility Analysis (RFA) 
unless we certify that a rule would not have a significant economic 
impact on a substantial number of small entities. The RFA is to include 
a justification of why action is being taken, the kinds and number of 
small entities the proposed rule would affect, and an explanation of 
any considered meaningful options that achieve the objectives and would 
lessen any significant adverse economic impact on the small entities.
    For purposes of the RFA, all physicians are considered to be small 
entities. There are about 700,000 physicians and other practitioners 
who receive Medicare payment under the physician fee schedule. Thus, we 
have prepared the following analysis, which, together with the rest of 
this preamble, meets all three assessment requirements. It explains the 
rationale for and purposes of the rule, details the costs and benefits 
of the rule, analyzes
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