Special Report: Reimbursement Changes Needed for Physician-Administered Drugs

Reimbursement Changes Needed for Physician-Administered Drugs

Healthcare costs in the United States for 2006 will be approximately $2 trillion. This is roughly equivalent to the gross domestic product (GDP) of China and constitutes 16% of the GDP of the United States.1 Projected Medicare spending for 2005 was $325 billion of which 25% is paid for physicians services. The remainder is spent on inpatient hospital services (40%), managed care (15%), outpatient hospital services (5%), and nursing homes (5%) — the last 10% is distributed between home health, hospice, and drug card services.

In 2004, Medicare expenditures to physicians increased 15% over 2003 levels. This was the largest increase in the past 5 years and was driven by increases in office visits, minor procedures, imaging, lab tests, and physician-administered (Part B) drugs. Part B drugs accounted for 11% of the growth. This increase reflects the availability of new, expensive therapies and an increasing shift from surgery to drug therapy.

This article will discuss how Medicare establishes reimbursement for physician services and the potential effects of Part B drugs on physician reimbursement.


In 1989, the Omnibus Budget Reconciliation Act established the relative value scale and mandated that payment levels for physician services must be resource-based and reflect physician time and effort, practice expenses, and malpractice expenses. Physician work values were established by a survey process in which all physician services were compared to establish a rank order. The Centers for Medicare and Medicaid Services (CMS) contracted out this work to a health policy group at Harvard University. Congress intended the same process to occur for practice expenses and malpractice expenses, but it was not completed in time for the Jan. 1, 1992, implementation. Therefore, historical practice expenses and malpractice expenses of 45% were added on to the valuation of the physician work, and the resource-based relative value system (RB-RVS) was initiated. In 1993, the Omnibus Budge Reconciliation act required resource-based practice and malpractice expenses to begin in 1997. These expenses were established by the Practice Expense Advisory Committee (PEAC), which reviewed every CPT code for actual practice expenses. Ophthalmology did relatively well in this process because of the high cost of ophthalmic equipment. Today, the law requires that all components of physician reimbursement, (physician work, practice expenses, and malpractice expenses) be re-evaluated every 5 years.

The continuing re-evaluation of physician work is performed by the Relative Value Scale Update Committee (RUC). The RUC consists of 24 members, each representing a specialty or subspecialty of medicine or surgery. Ophthalmology is represented by 1 member through the American Academy of Ophthalmology (AAO). The RUC meets quarterly throughout the year to review current valuations or to establish valuations for new procedures. The RUC is a committee of the American Medical Association (AMA) and although the RUC recommendations are not binding on CMS, the agency accepts the RUC values approximately 90% of the time.


The central currency in the valuation process is the relative value unit (RVU). Each CPT code is assigned a total number of RVUs, which is a summation of the RVUs for physician work, practice expenses, and malpractice expenses. The total body of RVUs for ophthalmology is limited by the concept of revenue neutrality. This means that, because the total amount of ophthalmology RVUs remains constant, if 1 procedure increases or a new procedure is added, the remaining procedures are decreased. Since these changes are spread over many procedures, the net effect is often negligible.

The conversion factor is the method for converting RVUs into dollars. Simply put, the total number of RVUs for a procedure is multiplied by the conversion factor to equal the dollar payment for that procedure. The conversion factor is revalued each year based upon a complex formula that measures target and actual expenditures from the preceding year to create the Performance Adjustment Factor (PAF). An important factor in this formula is the Sustainable Growth Rate (SGR). The SGR is determined by changes in the growth of physician services, Medicare enrollment, regulatory requirements, and the per capita GDP. Growth in physician services increases the SGR, which decreases the conversion factor. A decrease in per capita GDP, as occurs in a recession, also decreases the conversion factor. Physician services include evaluation and management services, surgery, and diagnostic testing. Growth in these areas beyond a calculated amount acts to decrease the conversion factor.

Another factor that is included in physician services is physician-administered (Part B) drugs. Until recently, these drugs were primarily used for oncology, but in the past
10 years there has been an explosion in physician-administered drugs across all of medicine including ophthalmology. The cost of these new drugs contributes to the increase in physician services, which in turn, decreases the conversion factor. The relative contribution of physician-administered drugs to the increase in physician services is variable from year to year, but as more new, expensive drugs come online it is likely this effect will increase.

Physician services are also increased by the additional services necessary to administer Part B drugs. These additional services include increased number and intensity of office visits, minor procedures (ie, intravitreal injections) and imaging. The net effect is a decreased conversion factor and decreased physician reimbursement. The adverse effect of physician-administered drugs on the conversion factor is frustrating to physicians because they have no control over the cost of new drugs. Surprisingly, Medicare also has no control over the cost of drugs. The Medicare Modernization Act of 2003 specifically prohibits CMS from negotiating or affecting the price of drugs paid by Medicare. Unlike physicians and hospitals, Medicare has not established cost controls for the pharmaceutical industry.


It is important to understand that although part B drugs do adversely affect physician reimbursement, they do not do so on a dollar-for-dollar basis. In other words, every time verteporfin for injection (Visudyne, Novartis), pegaptanib (Macugen, [OSI] Eyetech, Pfizer), or ranibizumab (Lucentis, Genentech) is administered, money is not directly deducted from physician payments. Unlike with the RUC, there is no ophthalmology-specific drug pool. The effects of physician-administered ophthalmology drugs are global and frankly minimal, compared to the tens of billions of dollars spent on oncology and immunosuppressive treatments.

CMS estimates that if the current SGR formula remains unchanged there will be a 4.6% decrease in the conversion factor for 2007 and a 38% decrease by 2013.2 There is now a consensus that the conversion–factor-update formula must be fixed. The problem is the estimated cost of $50 billion over the next 6 years. The AAO, in partnership with the AMA, is actively working with Congressional leaders to implement a new system which will eliminate physician-administered drug costs from the physician update formula and create a new update formula which realistically and accurately considers physician costs. The sooner this happens, the better for ophthalmologists and our patients.


1. Centers for Medicare and Medicaid Services.

2. American Medical Association, Division of Economic and Statistical Research.

George A. Williams, MD, is chair of the Department of Ophthalmology at Williams Beaumont Hospital and director at Beaumont Eye Institute located in Royal Oak, Mich. Dr. Williams has no financial interest in the information contained in this article. He can be reached by e-mail at