Medicare Announces 2004 Physician Fee Schedule and Payment Policy Changes

WASHINGTON -- The Centers for Medicare & Medicaid Services (CMS) announced today a final rule that will update payment rates under the Medicare physician fee schedule for 2004 and revise a number of other policies affecting Medicare Part B payments under the fee schedule.

The fee schedule contains payment rates for physicians and other providers for more than 7,000 health care services and procedures, ranging from simple office visits to complex surgery. In calendar year 2004, Medicare is expected to pay approximately $48.8 billion to 900,000 physicians and medical professionals for services paid under the fee schedule, up from a projected $48.0 billion in 2003.

The physician fee schedule is updated on an annual basis according to a formula specified by statute that is intended to control the rate of growth in spending for physician services. The formula requires CMS to adjust the update up or down depending on how actual expenditures compare to a target rate, called the sustainable growth rate or "SGR." The SGR, in turn, is calculated based on medical inflation, the projected growth in the domestic economy, increases in the number of beneficiaries in fee-for-service Medicare, and changes in law or regulation.

In 2002, the number of services provided by physicians grew dramatically. The result is an update for 2004 of negative 4.5 percent, though actual spending will rise 1.7 percent.

"The Medicare reform package now pending before Congress contains a provision that would adjust these payments for 2004," said CMS Administrator Tom Scully. "However, CMS has no option other than to base this final rule on the current law. If Congress does pass legislation improving payments to physicians, CMS will implement the new payment rates as quickly as possible."

CMS is adopting several changes to the Medicare payment methodology in 2004. These include rebasing and revising the Medicare Economic Index (MEI), which measures inflation in physician practice costs and general wage levels. The MEI is one of the key components used to update physician payment rates. First, CMS is changing the base year used to determine the structure of costs for physician practices from 1996 to 2000. CMS is also changing the data sources, cost categories and price proxies used in the MEI.

To address concerns about rising premiums for professional liability (or medical malpractice) coverage, the MEI revisions will increase the weight given to the costs of the coverage. In addition, CMS will adjust the proportion of Medicare payments attributable to physician work, practice expense and professional liability insurance to match their weights in the MEI. The change will generally benefit surgical and other physician specialties that have high professional liability rates. CMS is also revising the geographic factors that adjust payments to reflect the cost of malpractice insurance to better reimburse physicians affected by local market changes in insurance premiums.

CMS also is creating a number of new codes to improve the way Medicare reimburses physician care for dialysis patients. Medicare currently pays a monthly composite rate to physicians for medical oversight without regard to the patient's condition or the number of times the physician sees the patient. The new codes will base payment to physicians for care of patients with end-stage renal disease (ESRD) on the level of their involvement in patient's treatment. In response to public comments on the proposed rule, CMS substantially revised the payment amounts in this final rule to recognize the greater amount of physician work that nephrologists perform in addition to the face-to-face visits with their patients.

Also in response to public comments, CMS is creating several new codes for the management of home dialysis patients, and separate codes for home dialysis patients who may be hospitalized during the month. These codes will allow physicians to be paid for daily management of a home dialysis patient for the days the patient is not in the hospital.

While CMS is committed to reforming the way Medicare pays physicians for the administration of drugs, as well as for the drugs themselves, this rule does not address these issues. Congress is currently considering legislation that would reform the Medicare Part B drug payment system.

"CMS is engaged in that legislative activity, which we expect to produce significant reform that we will swiftly implement. If Congress does not act in the coming weeks, CMS is prepared to quickly implement a final rule to address both AWP reform and appropriate physician practice expense adjustments," said CMS Administrator Scully.

The final rule became effective January 1, 2004.