Revising Medicare Fees

After a three-year study ordered by Congress, the Physician Payment Review Commission has proposed a basic revision in the way doctors are paid by Medicare. It is a proposal that holds great promise for slowing the rate of increase in Medicare medical costs while establishing new standards of doctor pay that almost certainly would affect the entire profession, not just those serving older and disabled Americans within the Medicare system.

In a preview of the report before members of the Senate and House, the commission has proposed rules that increase fees to family physicians and internists, reduce fees for surgeons, ophthalmologists and radiologists, and limit billings that exceed allowable Medicare fees in a way that will result in significant savings of out-of-pocket expenses for all categories of beneficiaries.

Furthermore, the report proposes controls on overall practice costs and the appropriateness of care that could lead to sanctions against doctors persisting in “care that is inappropriate and does not meet standards of quality.”

The commission is recommending action by Congress this year to initiate the reforms, but has suggested that they be implemented over a three-year period. That transition time would also permit completion of some necessary research and refinement of calculations on compensation. Among the research programs endorsed by the commission is a determination of “medical outcomes and the costs of alternative medical practices and procedures” as well as a study of “the best ways to organize and provide care.”


The basic data for revising physician compensation already have been developed, the commission affirms. The commission endorses the pioneering work completed last year at Harvard University by a team led by William C. Hsiao, an economist, under a grant from the Health Care Finance Administration, which runs Medicare and Medicaid.

The research developed a relative value scale (RVS) for determining the compensation of physicians based on two factors, practice costs and the relative amount of work performed by the physician. The commission has been working with the American Medical Assn. and the medical professional specialty groups to refine the calculations of fees for different services. Geographic differences in medical costs also would be taken into account.

Under the commission proposals, the present Medicare fees to doctors, based on “customary, prevailing and reasonable” charges, would be replaced by a new Medicare Fee Schedule based on the relative-value scale. The impact would be substantial, according to preliminary estimates. Fees for internists would rise as much as 26% for office visits and 35% for hospital visits, while surgical fees would be reduced, down 21% for cataract removal and lens implants, down 19% for a total hip replacement, down 32% for repair of a hernia in the groin area, and there also would be cuts in radiology, including a 31% reduction for CAT scans of the head.

Doctor fees have been the most rapidly rising cost element of Medicare, increasing 17% a year. They now consume 57% of Medicare funds. The increases have seemed to defy all control efforts in the past. Controlled fees, without controlled utilization, will not bring the inflation under control, according to federal officials. So there is obvious utility in the commission move to establish expenditure targets that would serve as an incentive for doctors to conform to established norms of practice, avoiding unnecessary or inappropriate procedures.


The Physician Payment Review Commission is headed by Dr. Philip R. Lee, the respected head of the Institute for Health Policy Studies at the UC (San Francisco) School of Medicine. He expressed the confidence of the commission in testimony to the Senate Finance Committee.

“We believe that a Medicare Fee Schedule will serve to rationalize payments by tying them to resource costs,” Dr. Lee testified. “It will be simpler and easier to understand for both physicians and beneficiaries. It will promote better care and provide additional financial protection for beneficiaries. Expenditure targets will help slow the increase in Medicare expenditures so that we as a society can meet other pressing social needs. And increased effectiveness research and practice guidelines will provide us with knowledge and means to manage available health-care resources more wisely. With these changes, we believe that Medicare can continue to meet the medical needs of our elderly and disabled citizens.”

He made a persuasive argument.