Legislative Changes Give Medicare More Authority to Adjust Payments

On April 1, 2014, President Obama signed legislation that delays the scheduled Sustainable Growth Rate (SGR) cut to physician payments for one year.  The legislation contains a number of other provisions, including provisions under Section 220 (Ensuring Accurate Valuation of Services Under the Physician Fee Schedule) that establish alternative approaches for collecting and using information in the determination of relative values, and that instruct the Secretary to examine categories of codes and families of codes that potentially may be misvalued.

Sections 220 (a) and (b) establish alternative approaches for collecting and using information in the determination of relative values.  Under the alternative approaches, information may be collected from any of the following:

  • Surveys of physicians, other suppliers, providers of services, manufacturers and vendors
  • Surgical logs, billing systems, or other practice or facility records
  • Electronic health records
  • Any other mechanism deemed appropriate by the Secretary

The legislation also grants authority to the Secretary to establish or adjust practice expense relative values using cost, charge or other data from suppliers or providers of services.  As an incentive to participate, the Secretary may provide payment to an eligible professional that submits information.

Section 220 (c) amends sections 1848(c)(2)(K)(ii) of the Social Security Act by adding categories for which the Secretary shall identify potentially misvalued codes.  Prior to this legislation, the Secretary examined codes and families of codes based on any of the following criteria:

  • Codes that have experienced the fastest growth
  • Codes that have experienced substantial changes in practice expenses
  • Codes that describe new technologies or services within an appropriate time period (such as three years) after the relative values are initially established for such codes
  • Codes that are multiple codes that are frequently billed in conjunction with furnishing a single service
  • Codes with low relative values, particularly those that are often billed multiple times for a single treatment
  • Codes that have not been subject to review since implementation of the fee schedule
  • Codes as determined appropriate by the Secretary

Section 3134(a) of the Affordable Care Act established these seven criteria and required the Secretary to identify, review and adjust values for potentially misvalued codes that met such criteria.  Since 2009, the Centers for Medicare & Medicaid Services (CMS) has reviewed more than 1,000 potentially misvalued codes to refine work relative value units and direct practice expense inputs.  The recently passed legislation adds new criteria for codes that the Secretary shall examine:

  • Codes that account for the majority of spending under the physician fee schedule
  • Codes for services that have experienced a substantial change in the hospital length of stay or procedure time
  • Codes for which there may be a change in the typical site of service since the code was last valued
  • Codes for which there is a significant difference in payment for the same service between different sites of service
  • Codes for which there may be anomalies in relative values within a family of codes
  • Codes for services where there may be efficiencies when a service is furnished at the same time as other services
  • Codes with high intra-service work per unit of time
  • Codes with high practice expense relative value units
  • Codes with high cost supplies

Section 220 (d) establishes a process by which the Secretary shall determine the net reduction in expenditures under the fee schedule as a result of adjustments to the relative values established for misvalued codes in 2017 through 2020.  The legislation states that if the net reduction in expenditures for the year is equal to or greater than the target for the year, reduced expenditures attributable to such adjustments shall be redistributed for the year in a budget neutral manner, and the amount by which such reduced expenditures exceed the target for the year shall be treated as a reduction in expenditures for the succeeding year, for purposes of determining whether the target has been met with respect to that year.  The target recapture amount is an amount equal to the difference between the target for the year and the estimated net reduction in expenditures for the year.  The target is calculated as 0.5 percent of the estimated amount of expenditures under the fee schedule for the year.  The legislation includes an exemption from budget neutrality if the target is not met.

Section 220 (e) establishes a phase-in of significant relative value unit reductions.  Effective for fee schedules established beginning with 2017, for services that are not new or revised codes, if the total relative value units for a service for a year would otherwise be decreased by an estimated amount equal to or greater than 20 percent as compared to the total relative value units for the previous year, the applicable adjustments in work, practice expense and malpractice relative value units shall be phased in over a two-year period.


  • The establishment of alternative approaches for collecting and using information in the determination of relative values is a key change from current American Medical Association Relative Value Update Committee-based processes that rely on specialty societies to provide input used to calculate relative value units.  The broad wording of the statutory provision gives CMS very broad discretion in finding data to support adjustments to relative value units wherever CMS over-valued code.  The legislation does not make clear how eligible professionals shall be identified, nor does it make clear how and when the information will be used in place of the information gathered via current systems.  If the Secretary uses information collected under the alternative approaches, the Secretary is required to disclose the information source and discuss the use of such information in the determination of relative values through notice and comment rulemaking.  Stakeholders should monitor future rulemaking closely to see whether alternative information sources are used for codes of interest.
  • The legislation expands the categories of codes that the Secretary shall examine for potentially misvalued codes.  The expanded categories signal more attention to services that can be performed in different sites of service, and to high-cost and high-spending codes.
  • The legislation does not specify how the target recapture amount shall be distributed if the target is met.  The target recapture amount could be applied to all codes under the Medicare Physician Fee Schedule, or it could be distributed across only those codes that were not misvalued, or in some other way.  The legislation does not make this clear.