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FEBRUARY 14, 2002

Chairman Bilirakis, Congressman Brown, distinguished Subcommittee members, thank you for inviting me to discuss how Medicare pays for physicians' services. I have worked on Medicare physician payment issues since 1989 when I was one of the primary people in the previous Bush Administration negotiating the creation of the resource based relative value physician payment system, sometimes referred to as RBRVS. I personally think that, over the years, this has been the most stable payment system in Medicare, and historically there has been far less controversy in physician payments than we have witnessed with other providers. In fact, the resource-based relative value system has worked reasonably well and often is used by private payors. Last year we encountered a situation where a number of factors combined to cause the formula, as set in law, to produce a negative update. It is important that we fix the mechanism and explain it to doctors so they do not lose confidence in the system, and they continue to provide beneficiaries with the vital care they need.

This year, Medicare will pay about $43 billion for physician fee schedule services. Between 1997 and 2001, Medicare physician spending increased from 17.6 percent to 20.5 percent of total Medicare fee-for-service spending. Each year, Medicare processes about 600,000,000 physician claims. The fee schedule reflects the relative value of the resources involved in furnishing each of 7,000 different physicians' services. By law, we actually establish three components of relative values -- physician work, practice expenses, and malpractice insurance -- for each of these 7,000 services. The actual fee for a particular service is determined by multiplying the relative values by a dollar-based conversion factor. And the payment for each of the services is adjusted further for geographic cost differences among 89 different payment areas across the nation.

Payment rates for physicians' services are updated annually by a formula specified in law. The annual update is calculated based on inflation in physicians’ costs to provide care, then adjusted up or down by how actual national Medicare spending totals for physicians’ services compare to a target rate of growth called the Sustainable Growth Rate (SGR). If spending is less than the SGR, the physician payment update is increased, and if spending exceeds the SGR, the update is reduced. The system was designed to constrain the rate of growth in Medicare physician spending and link it to growth in the overall economy, as well as to take into account physician control over volume and intensity of services. In large part, the formula has been working as designed.

The law that sets this formula is extremely prescriptive. It does not give the Centers for Medicare and Medicaid Services (CMS) the administrative flexibility to adjust physicians' payments when the formula produces unexpected payment updates, as we witnessed last year. The size of the negative update for this year was a surprise when it became apparent last September. As we looked at the actual numbers going into the formula, we explored every issue and every alternative that could have produced a different update, but we concluded that we did not have any flexibility. We made sure that every part of the update was accurate and fully in accord with the law. I know that you, Mr. Chairman, and this Subcommittee, are closely examining the issue and potential alternatives. The Administration is willing to work with you to find a budget-neutral way to ensure that physicians receive appropriate payment for Medicare services, this year and in the future.

Several factors led to the negative update. First, there has been a downturn in the economy, which affected the SGR because it is tied to the growth in the country's Gross Domestic Product. Second, actual cumulative Medicare spending for physicians’ services in prior years was higher than expected. Third, our measure of actual expenditures had to be adjusted to capture spending information on services that were not previously captured in the measurement of actual expenditures. Counting these previously uncounted actual expenses, as required by law, also increased cumulative actual expenditures -- driving down the update. I explain this in more detail later. The combination of a lower target and higher expenditures produced the negative update to physicians' payment for 2002. We are required by law to make a formal estimate of the update for 2003 by March 1 of this year. While we are still finalizing this estimate, our preliminary assessment is that the formula will produce a significant negative payment update again in 2003.

Physicians argue that these negative payment updates will hinder their ability to care for beneficiaries, and may result in some physicians not accepting new Medicare patients. We take these statements seriously, and are taking steps to monitor beneficiary access to care to ensure that our nation's most vulnerable citizens continue to receive the care they need. As we consider how to improve the Medicare physician payment formula, I think it's important to understand, from a historical perspective, how and why the formula operates the way it does today. It is, in fact, operating precisely as it was designed in 1997 -- but we recognize that this has produced some large short-term adjustments.


As the Medicare program has grown and the practice of medicine has changed, Congress and the Administration have worked together in an effort to ensure that Medicare's payments for physicians’ services reflect these changes. As a result, the physician payment system has changed significantly in the past two decades. For many years, Medicare paid for physicians' services according to each doctor's actual or customary charge for a service, or the prevailing charge in the physician's area, whichever was less. From 1970 through the 1980's, spending for physicians' services grew at an unaffordable and unsustainable average annual rate of more than 14 percent. And, because the system was based on historical charges, it produced wide discrepancies in payments among different localities, medical specialties, and services. These payment differences did not necessarily reflect actual differences in the cost of providing services. As a result, the system was roundly criticized in the 1980's as overvaluing specialty services and undervaluing primary care services.

To address these criticisms, Congress directed the Physician Payment Review Commission, an advisory body established by Congress and one of the predecessor organizations of the Medicare Payment Advisory Commission (MedPAC), to examine different ways of paying physicians while protecting beneficiary access to care, as well as slowing the rate of growth in Medicare physician spending. On a bipartisan basis, and with the support of the first Bush administration, Congress accepted these recommendations and passed these and other reforms in the Omnibus Budget Reconciliation Act (OBRA) of 1989, and the new fee schedule was implemented beginning January 1, 1992. The resource-based work component of the fee schedule was phased in between 1992 and 1996.

Specifically, in its 1989 Annual Report, the Commission recommended a number of ways to change how Medicare pays physicians. The Commission first recommended instituting a fee schedule for physicians' payments based on the resources involved with furnishing each physician’s service, rather than on historical charges. The Commission also recommended that the relative value of three separate components of each service -- physician work, practice expense and malpractice insurance -- be calculated, as discussed above.

Under the Commission's recommendations, once the relative values were established, they were adjusted for cost differences, such as in staff wages and supply costs, based on the area of the country where the service was performed. Then the actual fee for a particular service for a year was determined by multiplying the relative value units by a dollar-based conversion factor. The American Medical Association (AMA) provides support for the Relative-Value Update Committee (RUC), a multi-specialty panel of physicians that plays an important role in making recommendations so that the relative values we assign reflect the resources involved with both new and existing services. We generally accept more than 90 percent of the RUC’s recommendations, and our relationship is cooperative and extremely productive.

The Commission’s second recommendation was to provide financial protection to beneficiaries by limiting the amount that a physician could charge beneficiaries for each service.

The Commission’s third major recommendation was to establish a target rate of growth for Medicare physician expenditures, called the Medicare Volume Performance Standard (MVPS). The MVPS target growth rate was based on physicians' fees, beneficiary enrollment in Medicare, legal and regulatory changes, and historical measures of the volume and intensity of the services the physician performed. The MVPS was set by combining these factors and reducing that figure by 2 percentage points, in order to control to growth rate for physicians’ services. OBRA '93 later changed this to minus 4 percentage points. Actual Medicare spending was compared to the MVPS target, which led to an adjustment, up or down, to the calculation to finally determine the update a future year. The law provided for a maximum reduction of 3 percentage points, which OBRA '93 lowered to 5 percentage points.


The Balanced Budget Act of 1997 (BBA) changed the physician payment system in a number of ways based on Commission recommendations. In BBA, the SGR replaced the MVPS. Like the MVPS, the SGR is calculated based on factors including changes in physicians' fees, beneficiary enrollment, and legal and regulatory changes. However, the BBA did away with the historical target for volume and intensity of physicians’ services. Instead, the real per capita Gross Domestic Product, which measures economic growth in the overall economy, was instituted as a replacement.

One other important difference between the old and the new growth targets is that the old method compared target and actual expenditures in a single year. If expenditures exceeded the target in the previous year, the update was adjusted for the amount of the excess in the current year, but there was no recoupment of excess expenditures from the previous year. Under the new SGR, the base period for the growth target was locked in at the 12 months ending March 31, 1997. This is the base period and remains static for all future years. Annual target expenditures for each following year equal the base period expenditures increased by a percentage amount that reflects the formula specified in the law, and they are added to base period expenditures to determine the cumulative target. This process continues year after year, adding a new year of expenditures to the cumulative target. If expenditures in a prior year exceed the target, the current year update is adjusted to make annual and target expenditures equal in the current year and to recoup excess expenditures from a prior year. While the BBRA made some further technical changes to allow these adjustments to occur over multiple years, that is the general way the formula was established in law. The SGR is working the way it was designed.

BBA also increased the amount that the update could be reduced in any year if expenditures exceeded the target. The maximum reduction was increased by 2 percentage points to 7 percentage points. Thus, for example, inflation updates in the range of 2 percent, reduced by the 7 percent maximum reduction, would yield a negative update in the range of 5 percent. BBA also established a limit of 3 percentage points on how much the annual inflation update could be increased if spending was less than the target.

Additionally, BBA created a single conversion factor (previously there were three separate ones for different types of services). BBA also required that the practice expense component of the relative value calculation, which reflects a physician's overhead costs, be based on the relative resources involved with performing the service, rather than the physicians' historical charges. This change made the practice expense component of the calculation similar to the physician work component, and reflected actual resources. The change was phased in over four years, and was fully implemented in 2002. BBA further required that the malpractice insurance expense component of the relative value calculation also be resource-based. The law required that the resource-based practice expense and malpractice relative value systems be implemented in a budget-neutral manner. The BBA provisions affecting physicians accounted for about 3 percent of total BBA 10-year Medicare savings. Because physician payment accounts for about 17.6 percent of program payments in 1997, the physician savings in the BBA represented by these changes were perceived to be relatively modest.

The Balanced Budget Refinement Act of 1999 (BBRA) made further revisions to the SGR in an attempt to help smooth out annual changes to physician payments such as blending cumulative and annual comparisons of target and actual spending. Beginning with the 2000 SGR, the law required us to revise previous SGR estimates based on actual data that became available after the previous estimates. BBRA also required us to make available to MedPAC and the public an annual estimate of the physician payment update for the succeeding year. This estimate is due on March 1 of each year, and is very difficult to make, because none of the claims used to determine actual spending are available by the time we are required to make the estimate. Last year, we estimated that this year's update would be around negative 0.1 percent. However, when we determined the actual update, which was published 7 months later on November 1, revised figures lowered the Gross Domestic Product figures for 2000 and predicted a slower growing economy for 2001 than was previously estimated. Further, 2001 physician spending was higher than our March estimate.

Additionally, in making updates to the list of codes for specific procedures that are included in the SGR, we discovered that a number of codes for new procedures were inadvertently not included in the measurement of actual expenditures beginning in 1998. Therefore, the previous measurements of actual expenditures for 1998, 1999, and 2000 were lower than they should have been. As a result, the physician fee schedule update was higher in 2000 and 2001 than it should have been, had those codes had been included. These updates, which were inadvertently higher in 2000 and 2001, created a partial downward adjustment on the physician fee schedule for 2002, and will require a further downward adjustment for the 2003 physician update. The combination of these factors led to the large negative update for 2002.

In its March 2001 report to Congress, MedPAC recommended a complete repeal of the SGR system. MedPAC recommended replacing the SGR with a different type of annual update system like the one used for hospitals. That recommendation was not enacted in 2001. At its January 2002 meeting, MedPAC voted to make a similar recommendation to Congress in its upcoming March 2002 Annual Report.

As you can see, the process for calculating payments for physicians' services is highly complex. It is the result of years of efforts by Congress, previous Administrations, the Physician Payment Review Commission, and MedPAC to ensure that Medicare pays physicians as appropriately as possible. Today, while the underlying fee schedule and relative value system have been successful, we recognize that the update calculation has produced large short-term adjustments and instability in year-to-year updates. I know that you, Mr. Chairman, and others on this Subcommittee and elsewhere in Congress are involved with legislative efforts to improve the formula. I want to work with you and the physician community to smooth out the yearly adjustments to the fee schedule in a way that is budget-neutral across all providers. Although we cannot adjust the payment formula administratively, we have been working hard to do what we can, independent of the update levels, to help physicians and other providers in a variety of other areas.


I worked in the hospital industry for years, and I know how frustrating it can be for physicians and providers to work with Medicare. We know that in order to ensure beneficiaries continue to receive the highest quality care, we must streamline Medicare's requirements, bring openness and responsiveness into the regulatory process, and make certain that regulatory and paperwork changes are sensible and predictable. This effort is a priority for me personally, as well as for Secretary Thompson and President Bush. And we have a lot of activities underway to make Medicare a more physician- and provider-friendly program.

In June, Secretary Thompson announced that, as a first step in reforming the Medicare program, we were changing the Agency's name to the Centers for Medicare & Medicaid Services. The name-change was only the beginning of our broader effort to raise the service level of the Medicare program and bring a culture of responsiveness to the Agency. These are not hollow words: creating a "culture of responsiveness" means ensuring high-quality medical care for beneficiaries, improving communication with physicians and providers, and increasing our education efforts. To promote improved responsiveness, we have created eleven "Open Door Policy Forums" to interact directly with physicians, as well as beneficiary groups, plans, providers, and suppliers, to strengthen communication and information sharing between stakeholders and the Agency. I chair three groups: long-term care, rural health, and diversity. My Deputy Administrator and Chief Operating Officer, Ruben King-Shaw, chairs the Open Door Policy Forum for physicians, and I participate in the meetings. Ruben listens to physicians' concerns, and tries to fix them where possible. All of these Open Door Policy Forums facilitate information sharing and enhance communication between the Agency and its partners and beneficiaries. My goal is to make CMS an open agency -- one that explains its policies to the beneficiaries and providers who rely on us.

We also are working to alleviate the regulatory and related paperwork burdens that for too long have been associated with the Medicare program. The Secretary has formed a new Regulatory Reform Advisory Committee, comprised of providers, patients and other experts from around the country to identify regulations that prevent physicians, hospitals, and other health care providers from serving Medicare beneficiaries in the most effective way possible. This group will determine what rules need to be better explained, what rules need to be streamlined, and what rules need to be dropped altogether, without increasing costs or compromising quality. To support this group, we have developed a program, focusing on listening and learning, to get us on the right track.

Under this program, we will conduct public listening sessions across the country. We want to hear directly from physicians and health care providers away from Washington, DC, and Baltimore -- out in the areas where real people live and work under the rules we produce and with people who do not have easy access to policymakers to voice their legitimate concerns. Our first regional hearing is on February 25 and 26 in Miami, Florida. Most of you in Congress have these kinds of regular listening sessions with your constituents, and I have already participated in 12 of these with a bipartisan group of Senators and Congressmen. We want to hear from local physicians, as well as seniors, large and small providers, allied health professionals, group practice managers, State workers, and the other people who deal with Medicare and Medicaid in the real world. We are determined to get their input so we can run these programs in ways that make sense for real Americans with real life health care problems. We hear from some of these people now, but we want to get input from many, many more.

Like the physicians, providers, and beneficiaries who live and work with Medicare every day, CMS staff have worked with managing the system for years, and they too have suggestions about how Medicare can operate more simply and effectively. So, another aspect of our plan is to form a group of in-house experts from the wide array of Medicare's program areas. I have asked one of my close friends and advisors, Dr, Bill Rogers, a local practicing emergency room physician, to chair this group and challenge our in-house experts to suggest meaningful changes. This group of in-house experts will look to develop ways that we can reduce burden, eliminate complexity, and make Medicare more "user-friendly" for everyone.

Furthermore, our Physicians' Regulatory Issues Team (PRIT) integrates practicing physicians into our decision making process, allowing us to develop policies that will better serve beneficiaries and physicians. Specifically, PRIT members work within the Agency to serve as catalysts and advisors to policy staff as changes and decisions are discussed. Team members have assisted us with:

  • Streamlining Medicare forms, including the physician enrollment form;
  • Improving operational policies;
  • The PRIT also is working to improve current channels of input from practicing physicians;
  • Clarifying oversight policies; and
  • Identifying and changing excessively burdensome requirements.

The PRIT also has initiated a Physician Issues Project, where they sought and obtained from the physician community their input on those Medicare issues that seem particularly burdensome to them on a day-to-day basis. The PRIT identified 25 issues to address, and where change or elimination of a requirement is not possible, we are looking for creative solutions that, at the very least, provide more information and clarification. I was very pleased that when I was in Tupelo, MS, a few weeks ago with Representative Wicker, the incoming Chair of the AMA,

Dr. J. Edward Hill, who is from Tupelo, gave me unsolicited congratulations for the fine job that Dr. Barbara Paul and the PRIT are doing. So it is working a bit already!

Furthermore, we are participating in and co-sponsoring "preceptorships" with local county medical societies, where our policy staff can get out in the field and "shadow" physicians, watching them provide care, listening to lectures, and even observing operating room procedures. This is a great way for us to observe first-hand their daily work life and the challenges they face in providing care to our beneficiaries.

These outreach efforts will allow us to hear from physicians and all other Americans who deal with our programs. We are going to listen and we are going to learn. But we also are going to change. I am committed to making lots of common-sense changes and ensuring that the regulations governing our program not only make sense, but also are in plain and understandable language. This will go a long way in alleviating physicians' fears and reducing the amount of paperwork that, in the past, has all too often been an unnecessary burden on physicians.


As part of our efforts to reinvigorate the Agency and bring a new sense of responsiveness to CMS, we are enhancing our education activities and improving our contractors' communications with physicians and providers. The Medicare program primarily relies on private sector contractors, who process and pay Medicare claims, to educate physicians and providers and to communicate policy changes and other helpful information to them. We have taken a number of steps to ensure the information our contractors share with physicians and providers is consistent, unambiguous, timely, and accurate.

We recognize that the decentralized nature of our educational efforts has, in the past, led to inconsistency in the contractors' communications with physicians and providers, and we have recently taken a number of steps to improve the process. We have centralized our educational efforts in our Division of Provider Education and Training, the primary purpose of which is to educate and train both the contractors and the physician and provider community regarding Medicare policies. We also are providing contractors with in-person instruction and a standardized training manual for them to use in educating physicians and other providers. These programs help ensure consistency so that our contractors speak with one voice on national issues. We are continuing to refine our training on an on-going basis by monitoring the training sessions

conducted by our contractors, and we will continue to work collaboratively to find new ways of communicating with and getting feedback from physicians and providers.

We also are working to improve the quality of our contractors' customer service to physicians and providers. Last year, our Medicare contractors answered 24 million telephone calls from physicians and providers. We now have toll-free answer centers at all Medicare contractors. To insure that contractors provide correct and consistent answers, we have performance standards, quality call-monitoring procedures, and contractor guidelines in place to make our expectations clear and to ensure that contractors are reaching our expectations.

Additionally, we want to know about the issues and misunderstandings that most affect physician and provider satisfaction with our call centers so that we can provide our customer service representatives with the information and guidance to make a difference. To improve our responsiveness to the millions of phone calls our call centers handle each year, we are collecting detailed information on call center operations, including frequently asked physician questions, the call centers' use of technology, and the centers' training needs. We will analyze this information so we can make improvements to the call centers and share best practices among all our contractors. We also developed a new Customer Service Training Plan to bring uniformity to contractor training and improve the accuracy and consistency of the information that contractor service representatives deliver over the phone. In addition, we are holding regular meetings and monthly conference calls with contractor call center managers to ensure Medicare's customer service practices are uniform in their look, feel, and quality.

Just as we are working with our contractors to improve their physician and provider education efforts, we also are working directly with physicians and other health care providers to improve our own communications and ensure that we are responsive to their needs. We are providing free information, educational courses, and other services through a variety of advanced technologies. We are:

  • Making our Agency website more useful to physicians through a new website architecture tailored to be intuitive for the physician user. We want the information to be helpful to physicians and their office and billing needs. Once this new website is successfully implemented, we will move to organize similar web navigation tools for other Medicare providers. Additionally, we have improved our Frequently Asked Questions section, making it more intuitive and easier to search.
  • Expanding our Medicare provider education website, The Medicare Learning Network homepage, MedLearn, provides timely, accurate, and relevant information about Medicare coverage and payment policies, and serves as an efficient, convenient physician education tool. In recent months, the MedLearn website has averaged over 250,000 hits per month, with the Reference Guides, Frequently Asked Questions, and Computer-Based Training pages having the greatest activity. I encourage you to take a look at the website and share this resource with your physician and provider constituents. We want to hear feedback from you and from your constituents, especially physicians, on its usefulness so we can enhance its value. In fact, physicians and providers can email their feedback directly to the MedLearn mailbox on the site.
  • Providing free computer and web-based training courses to physicians, providers, practice staff, and others. Interested individuals can access a growing number of web-based training courses designed to improve their understanding of Medicare. Some courses focus on important administrative and coding issues, such as how to check-in new Medicare patients or correctly complete Medicare claims forms, while others explain Medicare's coverage for home health care, women's health services, and other benefits.
  • Installing a Satellite Learning Channel to provide Medicare contractors with the latest information on contemporary topics of interest. We recently completed the installation of a network of satellite dishes at all contractor call centers to improve our training efforts with contractor customer service representatives.

These reforms are just examples of the work we are doing. We also have a comparable number of efforts underway to reach out to beneficiaries and to make Medicare a friendlier, easier-to-use program for them. These changes have been my top priority in my nine months at CMS, and I will continue to pursue these types of improvements as long as I am Administrator.


I took this job because I know how important Medicare, Medicaid, and SCHIP are to Americans, and because I want to make a difference in improving our health care system. I am just as frustrated as you and all of the physicians that you hear from when it comes to how confusing and complex these programs are, and I am working hard to improve them. I also am working hard to monitor beneficiary access to care, while ensuring that America's elderly and disabled can receive the high quality care they need and deserve.

The Administration is willing to work with Congress to smooth out the physician payment system, but I know that it will not be easy. Any spending increases will have to be offset by corresponding adjustments in other provider payment systems so that it is budget neutral in both the short- and long-term. Therefore, improvements in physician payments, or any other Medicare payments, likely will lead to declines in Medicare payments for some other group of providers. There will be tough choices to make. The Administration will be helpful to you as you consider them. Thank you for the opportunity to discuss this important topic with you today. I hope that I have helped to explain the issues, and I look forward to answering your questions.

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Last revised: February 14, 2002