Incorporating practice costs into the Resource-Based Relative Value Scale.

Area of Science:

• Health Economics
• Medical Policy

Background:

• Practice costs comprise 41% of Medicare payments for medical services.
• Current Medicare Fee Schedule practice cost payments are based on historical charges, not resources.
• This leads to misaligned incentives favoring procedures over evaluation and management services.

Purpose of the Study:

• To evaluate the Physician Payment Review Commission's proposed method for incorporating practice costs into the Medicare Fee Schedule.
• To propose an improved method for allocating practice costs to enhance incentive neutrality and equity.

Main Methods:

• Analysis of the Physician Payment Review Commission's proposed framework for Medicare practice cost allocation.
• Critique of allocating indirect costs based on physician work plus direct costs.
• Development of an alternative allocation method based on practice characteristics.

Main Results:

• The proposed method's framework suggests indirect costs should be allocated based on time, not physician work.
• Current methods create incentives for physicians to perform more procedures.
• Practice cost payments should align with practice characteristics, not service volume.

Conclusions:

• Reforming Medicare practice cost payments is crucial for equitable reimbursement.
• Allocating costs based on practice characteristics (e.g., office presence, solo vs. group practice) promotes fairness.
• A resource-based approach to practice costs, rather than historical charges, is recommended.