Research Questions

  1. What approaches will help increase survey participation?
  2. How can survey burden be reduced?
  3. How can sampling variation in the resulting payment rates be reduced?
  4. How can information from the Outpatient Prospective Payment System be used to inform PE rate-setting?

Each year, Medicare allocates tens of billions of dollars for indirect practice expense (PE) across services on the basis of data from the Physician Practice Information (PPI) Survey, which reflects 2006 expenses. Because these data are not regularly updated, and because there have been significant changes in the U.S. economy and health care system since 2006, there are concerns that continued reliance on PPI Survey data might result in PE payments that do not accurately capture the resources that are typically required to provide services.

In this final report of the second phase of a study on PE methodology, the authors address how the Centers for Medicare & Medicaid Services (CMS) might improve the methodology used in PE rate-setting, update data that inform PE rates, or both. The authors conclude that this information is best provided by a survey; therefore, they focus on the advantages and disadvantages of survey-based approaches. They also describe the use of a lean model survey instrument, as well as partnering with another agency to collect data. Finally, the authors describe a virtual town hall meeting held in June 2021 to give stakeholders an opportunity to provide feedback on PE data collection and rate-setting.

The system of data and methods that CMS uses to support PE rate-setting is complex; thus, CMS must take into account a number of competing priorities when considering changes to the system. With this in mind, the authors offer a number of near- and longer-term recommendations.

Key Findings

  • Instituting a system of recurring data collection—for example, a survey of a rotating panel of practices—would ensure that payment rates reflect current PE cost structures.
  • Both monetary and nonmonetary incentives should be considered as a means of increasing survey response, with potential improvements to data quality, bias due to selective participation and gaming, and attrition.
  • Some specialties are exposed to high levels of sampling variation under a survey design that collects an equal number of observations from the specialties that have been surveyed for PE per hour (PE/HR) values; other specialties experience very low levels of sampling variation.
  • The PE allocation methodology could be updated to confer greater stability in payment rates over the long run than would be achieved by simply making periodic updates to the PE/HR measures in the current system.
  • There are substantial differences in MPFS PE relative values and Outpatient Prospective Payment System (OPPS)–based relative values for procedures. Comparisons of these relative values could be used to identify potentially misvalued procedures in the two systems and help address site-of-service differentials.


  • Make initial data collection detailed enough that the appropriateness of methodological refinements to indirect PE allocation can be studied empirically, and design future data collection to more directly measure facility versus nonfacility PE/HR measures.
  • Institute a system of recurring data collection—for example, a survey of a rotating panel of practices to refresh the data—that can at least support the current methodology with new PE/HR measures in the short term.
  • Compare Medicare Physician Fee Schedule (MPFS) PE and OPPS-based relative values periodically to help identify potentially misvalued services. In cases where the two relative values for the same procedure are substantially different, potentially modify the MPFS or OPPS payments (or both) to reduce the site-of-service differential.
  • Adapt PE data collection and methodology to confer stability across time while adjusting to important changes in PE.
  • Employ a variety of approaches to improve survey participation and reduce attrition, including both monetary and nonmonetary incentives.

Research conducted by

This research was sponsored by the Centers for Medicare and Medicaid Services and conducted by RAND Health Care.

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