of the two sets of issues as conceptually problematic by making it difficult to distinguish the level of resources being allocated to each objective, which affected the determination of the accuracy of payment.

Accordingly, the committee’s conceptual distinction is reflected in the structure of its reports. The committee’s phase 1 report addresses geographic differences in input prices, focusing on improving accuracy by relying on the best possible input price measures from an independent source. Phase 2 of the committee’s work will address broader policy issues, including workforce supply and access to care in the context of geographic adjustment. For example, physician practices have an increasingly diverse mix of employment arrangements, and advanced practitioners such as nurse practitioners contribute to the work component as well as the practice component of physician work. Accordingly, the phase 2 report will also consider the impact of the committee’s phase 1 report recommendations on geographic adjustment to fee-for-service payment in the context of current market trends toward delivery system integration.


Fee-for-service Medicare payments to practitioners are based on the PFS. The PFS is based on a list of more than 7,000 distinct services defined according to the nomenclature of the Current Procedural Terminology (CPT®) codes developed by the American Medical Association (AMA) (2011a). CMS uses the CPT® codes to create an expanded coding system called the Healthcare Common Procedure Coding System (HCPCS) and assigns HCPCS codes to the 7,000+ procedures that Medicare recognizes in its fee-for-service payment system.

Medicare payment for physicians and other licensed health practitioners for each service is based on submission of a claim using one or more HCPCS codes (CMS, 2011a). Each HCPCS code has an assigned number of relative value units (RVUs) that represents the cost of resources required to provide a particular procedure or service relative to the resources associated with other procedures or services. For example, a follow-up office visit and a cataract removal require different amounts of resources than those needed to perform a colonoscopy, so all are assigned different RVUs (MedPAC, 2008). The total RVUs for a procedure are subdivided into the three components of the PFS: physician work, PE, and MP insurance:

  • Physician work RVUs reflect the time, skill, effort, judgment, and stress associated with providing one service relative to other services.
  • Practice expense RVUs address the direct costs of providing a service and the indirect costs of maintaining a clinical practice, including administrative and clinical staff compensation (salary and benefits), rent, and supplies and equipment (CMS, 2010a). For most services, there are different PE RVUs for services provided in facility settings and in office settings. Practice expenses associated with supplies and equipment are not adjusted geographically because they are typically purchased in a national market with practically uniform prices across areas.
  • Malpractice premium RVUs represent payment for professional liability insurance (PLI), also known as MP insurance (CMS, 2010a). The mean MP premium for each payment area is weighted for state- and insurer-specific specialty mix and adjusted for each insurer’s market share (O’Brien-Strain et al., 2010).

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