Healthcare Nuts and Bolts: The Medicare Fee Schedule

Go to your happy place.

Over the coming weeks I have a great deal of suggestions for true reform in healthcare and how to implement these reforms but in order for them to be understood you will have to know first and foremost how the current system functions. The most basic building block you will be required to understand is the Medicare Fee Schedule which I have frequently mentioned in many of my previous writings and the purpose of this article to be sure you have a good grasp of what it is. This obviously is an overview of the subject and will by no means be an in depth explanation, the subject is simply too complex to explained in a single article and ironically the needless complexity is part of the problem.

First, just so you can get a look at why no one understands how to fix healthcare let me give you a look at the amount of complication the Federal Government has injected into the industry with Medicare Fee Schedules. What I’m pasting below is the actual payment formula from CMS (Centers for Medicare and Medicaid Services) the actual page for this information can be seen here and no I do not expect you to understand this at all.

The payment formula is as follows:

Budget Neutrality Adjustor Values
Year 2006 & Earlier: N/A
Year 2007: 0.8994
Year 2008: 0.8806
Year 2009: N/A
Non-Facility Pricing Amount =
[(Work RVU * Work GPCI) +
(Non-Facility PE RVU * PE GPCI) +
(MP RVU * MP GPCI)] * Conversion Factor
Facility Pricing Amount =
[(Work RVU * Work GPCI) +
(Facility PE RVU * PE GPCI) +
(MP RVU * MP GPCI)] * Conversion Factor

Now the next time you see a politician or talking head talking about Medicare cuts, you will understand why none of them seem to have any clue what that means.
Every service from an MRI to a doctor entering a room and saying “hi” to you is assigned a procedure code, this is generally a 5 character code that contains alphanumeric characters, and on each of these procedure codes the Federal Government through CMS has designated what they deem to be the value of that service. At this point, I want to emphasize that the value of these services is not determined at all by the medical professional providing the service but by the Federal Government, this is worth noting since they insist on complaining about the cost of healthcare…after all they are the ones who have set the prices. The price that Medicare sets as the value of service drives every aspect of healthcare for example when a private insurance carrier is in contract negotiations with a physician they do not say “we’ll pay you $50 for this service” they say “we will pay you 115% of Medicare Fee Schedule for this service”. No shrewd physician hoping to draw more business can lower his prices in an effort to garner more business because Medicare has set the value and private insurance carriers have to follow suit. I addressed this issue in a bit more detail in my “How Medicare Destroyed the Free Market”  article.
For a more hands on example, we will take a look at an actual sample from the 2009 Medicare fee schedule. For the purpose of our example, we are going to look at G0102 which is in technical terms “a digital prostate exam”, in more crude terms it’s the doctor putting his finger in your rear end to look for cancer and yes I realize it is an oddly appropriate choice when discussing the government’s role in healthcare. Here now is a sample from the Medicare Fee Schedule for procedure code G0102:

PROC CODE     MODIFIER      PAR FEE       NON PAR FEE      LC
     G0102                                                 $9.43                    $8.96               $10.30

It might be helpful at this point to explain what the column headers mean and since we have already discussed procedure codes I’ll go ahead and move to the next populated column:

PAR FEE- This is the allowance for participating providers (providers who choose to accept Medicare also known as “accepting Medicare assignment”) before the application of co-insurance or payment limitations.

NON PAR FEE – Pretty well the exact opposite of Par Fee this is the fee paid to physicians who do not participate with Medicare also known as “not accepting Medicare assignment”.

LC-This is the Limiting Charge. This is the maximum amount that non-participating providers may bill their Medicare patients. For 2009, the limiting charge is always equal to 115 percent of the non-participating allowance.

Every procedure imaginable has a breakdown identical to what I have listed above and this for reasons I have already outlined is what controls all pricing in healthcare today. Store all of this information in the back of your mind because again the Medicare fee schedule will be a central talking point in the reform ideas I am putting forward.

In closing for this first chapter in “Healthcare 101” I want to clarify that I have no intention of setting forth what the government needs to do to fix healthcare. I am not in the truest sense putting forward a “healthcare plan” but rather trying to shine light on what has put us where we are and show how simply we can reverse all of this without more government meddling and by in fact rolling back the current heavy handed intervention by the Federal Government. If I do my job correctly then by the time I have put forth all of my information and reform suggestions you will see that it is not a lack of rules and regulation or even a lack of insurance that has damaged healthcare but a lack of the free market.

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