• W C Hsiao, D L Dunn, and D K Verrilli.
• Department of Health Policy and Management, Harvard School of Public Health, Cambridge, MA 02138.
• N. Engl. J. Med. 1993 Apr 1; 328 (13): 928-33.

BackgroundThe Medicare program fundamentally changed its system of payment for physicians' services in 1992. Controversy over the new Medicare fee schedule has focused on three issues: the adequacy of the conversion factor used to translate resource-based relative-value units into fees; the ability of the new payment system to capture differences in work between surgeons and physicians in other specialties; and the allocation of practice expenses across services.MethodsUsing a standard service in each specialty, we developed simulation methods to assess the implementation of physician-payment reform. With these methods we calculated the potential net income for each specialty, as generated by different payment scenarios, including the Medicare fee schedule.ResultsWe found that Medicare's current monetary-conversion factor yields an unreasonably low level of income for most specialties. Furthermore, the Medicare fee schedule misallocates practice expenses; invasive services are reimbursed for more than actual expenses, and medical services are reimbursed for less. Thus, physicians continue to be paid more generously for invasive services. Finally, the Medicare fee schedule does recognize the wide differences in the intensity of work performed by physicians in various specialties.ConclusionsThe misallocation of practice expenses in the Medicare fee schedule results in serious underpayment for medical services. We think it likely that physicians compensate by performing more lucrative services, such as diagnostic tests. Even if legislation is passed to deal with the misallocation of expenses, the current conversion factor still produces unreasonably low levels of payment overall, which could dissuade those considering a career in medicine from entering the field. Finally, the simulation method we developed can be used as a tool for fee negotiations.

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