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Research Questions

  1. What should surveyors consider when developing a new large-scale survey effort to collect PE data?
  2. What might an alternative approach look like for allocating indirect practice expense?
  3. How could OPPS data be used to inform MPFS PE rate setting?

In this report, the authors address how the Centers for Medicare and Medicaid Services (CMS) can improve the methodology or update data used for setting practice expense (PE) rates for payments made under the Medicare Physician Fee Schedule (MPFS). The current system for setting PE payment rates relies, in part, on data collected in the Physician Practice Information (PPI) Survey, which generally reflects information from 2006. Because of changes in the U.S. economy and health care system since that time, there are concerns that continued reliance on measures that use PPI Survey data might result in misvalued PE rates. To the extent that future payment systems use MPFS rates as a starting point, misvalued PE rates might be problematic if they are not updated.

The research in this report, which is part of the second phase of a study, can be divided into three broad topics. First, the authors consider how updated PE data could be collected through a new large-scale national survey effort to replace the PPI Survey. Second, the authors consider a new framework for allocating PE, which they developed to better capture variation in PE resources that are required to provide services covered in the MPFS. Finally, the authors continue work begun in Phase I of the project and documented in a previous report, Practice Expense Methodology and Data Collection Research and Analysis, investigating the potential to make use of data collected to set rates in the Outpatient Prospective Payment System (OPPS). Throughout the report, the authors focus primarily on indirect PE, which includes such expenses as administration, rent, and other forms of overhead that cannot be attributed to any specific service.

Key Findings

Collecting new data for PE rate setting is likely to be challenging

  • Larger practices and health care systems are more common now than they were a decade ago, and sharing of resources between practices and parent organizations likely will complicate accurate data collection.
  • Getting people to respond to surveys is difficult, and this challenge will be compounded by the complexity of the topic and the need to construct a sample from a population whose members have many demands on their time.
  • Collecting accurate data will be difficult because of inconsistencies across practices in expense terminology, accounting, and record-keeping.

A new data collection effort to measure PE would present a rare opportunity to rethink the methodology that is currently used to allocate indirect PE

  • If new data are collected, it might be possible to improve the PE allocation algorithm itself. For example, the current indirect pool could be split into several subcategories of indirect PE that better capture variation in PE required to provide MPFS services.
  • The current system generally assumes that PE scales as a function of physician work and direct costs. However, some components of PE might be better allocated on the basis of, for example, clinical time per visit or other characteristics of the service being performed.
  • This approach could reduce the importance of physician specialty in rate setting and increase reliance on the indirect PE that is required to perform particular services.
  • However, this approach would also place greater demands on collecting data that conform to precise category definitions.

As an alternative to collecting new PE rate-setting data from scratch, it would also be possible to use hospital cost information that is used for rate setting in the OPPS

  • OPPS information could be used to inform MPFS PE rate setting in various ways, including flagging services that could be scrutinized as potentially misvalued procedures.


  • A large-scale PE survey could be successful with a sufficient investment in pilot testing to optimize the survey for different types of physician practices, such as different specialties or practices that tend to "lump" versus "split" their expenses in their accounting systems.
  • A smaller panel of practices or health care organizations could be recruited to build out data-reporting systems that align with CMS needs for rate setting.
  • To gain support for future rate-setting updates, CMS could seek feedback from organized medicine and other stakeholders in the early stages to achieve consensus on process.
  • A physician-based sampling frame (i.e., the source from which a survey sample is drawn) could be used instead of one that relies on practices.
  • A point of contact for the survey should be clearly identified. Administrative staff within a practice, who have knowledge of necessary records, might be ideal for this role.
  • To balance the need for detail with the need for data reliability and accuracy, survey administrators could administer surveys of different complexities in waves.
  • Splitting the current indirect pool into several subcategories could allow for payment rates to more accurately capture resource utilization.
  • Collecting data that conform to precise category definitions might require CMS to establish ongoing relationships with practices and health care systems to obtain such detailed information.
  • Clinical input, additional data collection, or a combination of both could identify classes of procedures that could be included in an OPPS-informed rate-setting approach and could identify appropriate adjustments for different cost structures between nonfacility and outpatient settings.

Research conducted by

This research was funded by the Centers for Medicare and Medicaid Services and conducted within the Payment, Cost, and Coverage Program in RAND Health Care.

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