Linking Medicare’s physician reimbursement rates to the quality of medical care senior citizens deserve, the Health Care Financing Administration (HCFA) announced on November 1 that physician payments in the federal program will rise 4.5 percent on average in 2001.

Psychiatry did slightly better than average, with a payment increase of 5 percent. Optometrists, who fared the best in this round of payment adjustments, will see a 12 percent boost, followed by dermatologists, whose average increase will be 9 percent. At the other end of the scale are gastroenterologists, who get no increase for 2001 and vascular, cardiac, thoracic, and neurosurgeons, all of whom will see their Medicare payments go up by about 1 percent.

HCFA, the federal agency that administers the Medicare program, expects overall physician-payment expenses to increase from $37 billion this year to $40 billion in 2001.

HCFA noted that the average reimbursement rates, which it published in the November 1 edition of the Federal Register, cover more than 7,000 Medicare-eligible services and will vary by specialty and procedure.

The government arrives at its annual Medicare payment-level decision through a complex formula that considers historical charges, practice expenses, malpractice insurance costs, work values, and geographical adjustments.

Several years ago HCFA implemented a resource-based system that uses a series of statistical analyses to assign a value to the work physicians do in each medical specialty and primary care area. The payment rates for 2001 reflect a transition in the way practice expenses are calculated for Medicare purposes. In the past, practice expenses for each specialty were determined by looking at historical charges for these costs. But HCFA three years ago began a four-year transition in its methodology that will apply a resource-based value system to practice expenses similar to the one already used to assign values to physicians’ work.

For 2001, 75 percent of physician fees will be based on the new system of determining practice expenses, while the remainder will be derived from using historical charges for these expenses. HCFA expects that phase-in of the new system will be complete in time for it to determine the 2002 Medicare reimbursement rates.

Commenting on the changes to the way the government calculates physician payment in the Medicare program, HCFA Acting Administrator Michael Hash said that the agency "will continue working with physicians to refine our methodologies to enhance benefits for seniors and ensure that payments are as accurate as possible when they are completely based on the new, resource-based system."

In general historical charges for office-based practices provided lower reimbursement rates than did the new relative-value system. The reverse was true for most of the surgical specialties. Adjusting for this discrepancy is why physicians in practices that are usually office based will see their Medicare reimbursements rise considerably more than most of their hospital-based colleagues.