University of Southern California Dissertations and Theses

The 1996 Health Insurance Portability and Accountability Act (HIPAA) and the 1997 Balanced Budget Act (BBA): Implications for organizational change and delivery of care in cardiology group practices

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The 1996 Health Insurance Portability and Accountability Act (HIPAA) and the 1997 Balanced Budget Act (BBA): Implications for organizational change and delivery of care in cardiology group practices

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Content THE 1996 HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT
(HIPAA) AND THE 1997 BALANCED BUDGET ACT (BBA):
IMPLICATIONS FOR ORGANIZATIONAL CHANGE AND
DELIVERY OF CARE IN CARDIOLOGY GROUP PRACTICES
by
James K. Hollister
A Dissertation Presented to the
FACULTY OF THE SCHOOL OF
POLICY, PLANNING, AND DEVELOPMENT
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PUBLIC ADMINISTRATION
May 2003
Copyright 2003 James K. Hollister
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UMI Number: 3103901
Copyright 2003 by
Hollister, James Kleiser
All rights reserved.
®
UMI
UMI Microform 3103901
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UNIVERSITY OF SOUTHERN CALIFORNIA
SCHOOL OF POLICY, PLANNING, AND DEVELOPMENT
UNIVERSITY PARK
LOS ANGELES, CALIFORNIA 90089
This dissertation, written by
James K. H ollister
under the direction o f /z.is.... Dissertation
Committee, and approved by all its
members, has been presented to and
accepted by the Facidty o f the School o f
Policy, Planning, and Development, in
pa rtia l fulfillm ent o f requirements fo r the
degree o f
DOCTOR OF PUBLIC ADMINISTRATION
Dean
Date
1 — 03
DISSERTATION COMMITTEE
Chairperson
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D e d ic a t io n
To my mother, Marilyn N. Hollister,
in loving memory, fo r her love
and devotion to her family.
To my father, Dr. James K. Hollister,
fo r his love, guidance, and many years
o f service to the community.
To my wife, Karen Oda-Hollister,
fo r her support, caring, and patience
while I pursued the doctoral degree.
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A c k n o w l e d g e m e n t s
In pursuing the completion of this dissertation, several people were instrumental in
providing me with support and direction:
❖ First, I would like to thank my committee chair, Dr. Chester Newland, for his
ongoing support, guidance, and caring in assuring that I produced quality work and
attained my doctoral goal at the University of Southern California.
❖ I would also like to acknowledge Dr. Ross Clayton for his advice and direction in
the process of writing the dissertation and during the course of the doctoral
program.
❖ In addition, Dr. Sarah Whitis provided valuable expertise and encouragement
during the process of completing this project.
❖ A special note of gratitude is offered to Dr. Richard Callahan, the Director of the
USC Sacramento Center for Policy, Planning, and Development, for his
consideration and sincerity in assisting me in every way possible to stay on track
and complete the dissertation.
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❖ My appreciation is extended to Dr. Arjun Sharma, Dr. Gearoid O’Neill, and
Margie Parilo, CPA, for their time, expertise, and contributions to my research
efforts.
❖ Also, my thanks to the physicians from the case study who took the time to
complete the questionnaire and to the consultants who agreed to participate in the
interviews.
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T a b l e o f C o n t e n t s
Dedication ..................................................................................................................................................ii
Acknowledgements ................................................................................................................................ iii
List o f T ables............................................................................................................................................xi
List o f Figures ....................................................................................................................................... xiv
Abstract ........................................................................................................................................... xv
Ch a pte r 1: In t r o d u c t io n....................................................................................................1
1.1 Legislative Background................................................................................1
1.2 Research Qu e st io n s......................................................................................... 6
1.3 Medicare Regulatory Reform....................................................................9
1.4 Hypotheses..........................................................................................................12
1.5 Organization of the D issertation..........................................................14
C h a pte r 2: T he H ealth In sur an ce P o rtability and
A c co untability A ct of 1996 (H IPA A )........................................19
2.1 Legislative B ackground............................................................................. 19
2.2 A dministrative Simplification................................................................. 20
2.3 Standard Transactions and Code Se t s ...............................................25
2.3.1 Standardized Transactions................................................................... 25
2.3.2 Standardized Code S ets........................................................................ 28
2.3.2.1 TCD-9 CM..................................................................................29
2.3.2.2 ICD-10-CM ..............................................................................29
2.3.2.3 CPT............................................................................................. 29
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2.3.2.4 Alpha-Numeric H CPCS...................................................... 30
2.3.2.5 CDT-2....................................................................................... 30
2.3.2.6 NDC...........................................................................................31
2.3.3 Health-Care System Impact Analysis............................................. 31
2.3.4 Overall Cost Benefit A nalysis............................................................36
2.4 Privacy Ru l e......................................................................................................37
2.4.1 History and Statutory Background of the Privacy
Component...............................................................................................39
2.4.2 Modifications to Privacy Rule............................................................42
2.4.3 Final Regulatory Impact A nalysis.................................................... 49
2.5 Security r u l e ....................................................................................................53
2.5.1 Provisions o f the Proposed Rule........................................................ 54
2.5.2 Impact A nalysis......................................................................................59
2.6 Sum m ary: HIPAA Regulations.................................................................62
C h a pte r 3: The 1997 B a la nc ed B u dg et A ct (B B A )..............................................64
3.1 Historical Overview......................................................................................64
3.1.1 Medicare and BBA: General Overview.......................................... 64
3.1.2 Balanced Budget Refinement Act o f 1999..................................... 68
3.2 BBA Provisions Relevant to Physician Part B
Reim bursem ent................................................................................................70
3.2.1 Subchapter A, Section 4501: Establishment o f
Single Conversion Factor for 1998................................................... 70
3.2.2 Subchapter A, Section 4502: Establishing Update
for Conversion Factor to Match Spending Under
Sustainable Growth Rate......................................................................71
3.2.3 Replacement o f the Volume Performance Standard
with Sustainable Growth Rate (Section 4 5 0 3 )............................... 71
3.2.4 Implementation o f Resource-Based Methodologies
(Section 4 5 0 5 ).........................................................................................72
3.2.5 Increased Medicare Reimbursement for Nurse
Practitioners (Section 4511) and Physician
Assistants (Section 4 5 1 2 ).....................................................................74
3.3 The Sustainable Growth Rate a n d m edicare
Physician Payment U p d a t e.......................................................................75
3.3.1 Sustainable Growth Rate (SGR) Targets......................................... 76
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3.3.2 Medicare Volume Performance
Standard/Sustainable Growth Rate (M VPS/SG R)........................ 80
3.3.3 Medicare Economic Index (MEI).......................................................86
3.4 CY 2003 Estimate for Physician Fee Schedule
U pdate and Conversion Factor..............................................................89
3.5 The CY 2002 Conversion Factor: A Controversial
Red u c tio n.......................................................................................................... 93
3.6 The Resource-Based Relative V alue Scale (RBRV S).................. 95
3.6.1 Legislative Background........................................................................ 96
3.6.2 RBRVS Components and Calculation M ethodology................... 98
3.6.2.1 Physician W ork....................................................................... 99
3.6.2.2 Practice Expenses....................................................................99
3.6.2.3 Development o f the Resource-Based
Practice Expense Relative Value U nits...........................101
3.6.2.4 Relative Value Updates....................................................... 106
3.6.2.5 Malpractice Insurance......................................................... 108
3.6.2.6 Conversion Factor................................................................ 108
3.6.2.7 Geographic Practice Cost Indexes (GPCIs)....................109
3.6.2.8 RBRVS Fee Schedule Calculation................................. 111
3.7 Sum m ary: Efficacy of the SGR a n d Paym ent U pdate
Fo r m u l a............................................................................................................115
C h a pte r 4: M e th o d o l o g y..............................................................................................128
4.1 Part 1 — Perspectives on Organizational Change....................... 128
4.1.1 Theoretical Considerations................................................................ 128
4.1.1.1 Mohrman et al.: Two Streams o f Literature
Versus Theory for Large-Scale C hange..........................129
4.1.1.2 Narayanan and Nath: Typology for
Organizational Change........................................................ 134
4.1.1.3 Bolman and Deal: Four-Frames M odel..........................139
4.1.1.4 Leavitt Diamond....................................................................145
4.1.1.4.1 Structural approaches...........................................147
4.1.1.4.2 Technological approaches.................................. 154
4.1.1.4.3 Humanistic (people) approaches.......................160
4.1.1.5 Fox-Wolfgramm et al.: First-Order Change................. 164
4.1.2 Summary and Recommendations for Change Model
Developm ent.........................................................................................173
4.1.2.1 Integrated Model for This Study..................................... 173
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4.1.2.2 Propositions........................................................................176
4.2 P a r t 2— R e s e a r c h M e t h o d o l o g y .................................................... 177
4.2.1 Overview of Approaches...............................................................177
4.2.2 Questionnaire Structure................................................................. 178
4.2.2.1 Open-Ended Questionnaire Format................................178
4.2.2.2 Closed-Ended Questionnaire Form at............................ 180
4.2.3 Time-Series D ata............................................................................ 181
4.2.4 Case Study M ethodology..............................................................182
4.2.5 Answering the Research Questions............................................. 186
C h a pte r 5: R e sea r c h F in d in g s................................................................................... 188
5. 1 H y p o t h e s e s a n d In t e r v i e w /Q u e s t i o n n a i r e R e s p o n s e s ..................188
5.1.1 Hypothesis 1 ....................................................................................188
5.1.1.1 Overview............................................................................188
5.1.1.2 Consultant and Physician Responses..............................189
5.1.1.3 Tabulation of Responses................................................. 201
5.1.2 Hypotheses 2 and 7.........................................................................202
5.1.2.1 Overview............................................................................202
5.1.2.2 Consultant and Physician Responses............................. 203
5.1.2.3 Tabulation of Responses................................................. 216
5.1.2.4 Sum m ary............................................................................218
5.1.3 Hypothesis 3 ....................................................................................219
5.1.3.1 Overview............................................................................219
5.1.3.2 Consultant and Physician Responses............................. 220
5.1.3.3 Assessment of Responses................................................225
5.1.4 Hypotheses 5, 6, and 8....................................................................227
5.1.4.1 Overview............................................................................227
5.1.4.2 Consultant and Physician Responses.............................227
5.1.1.3 Tabulation of Responses................................................. 239
5.1.5 Hypotheses 9 and 10...................................................................... 243
5.1.5.1 Overview............................................................................243
5.1.5.2 Consultant and Physician Responses............................. 243
5.1.5.3 Tabulation of Responses................................................. 246
5.1.6 Summary of Consultant and Physician Interviews
Responses.........................................................................................248
5.1.7 Hypothesis 4— Case S tudy...........................................................249
5.1.7.1 Overview............................................................................249
5.1.7.2 Questionnaire Responses................................................. 250
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5.2 A ssessment of Responses from Interviews and Ca se-
Study Questionnaires..............................................................................251
5.2.1..... Analysis Level 1........................................................................... 252
5.2.2.....Analysis Level 2 ........................................................................... 252
5.2.3 Analysis Level 3 ........................................................................... 253
5.2.4.....Analysis Level 4 ........................................................................... 254
5.2.5.....Analysis Level 5 ........................................................................... 256
5.3 S u m m a r y o f R e s e a r c h F i n d i n g s .........................................................259
C h a pte r 6: C a se-S tud y A n a l y sis............................................................................... 261
6.1 Introduction.............................................................................................261
6.1.1 Integrated Concepts........................................................................ 261
6.1.2 The Case-Study Subject.................................................................262
6.2 I n s titu tio n a l L e v e l o f A n a ly s is ...................................................... 262
6.3 Organizational Level of An a ly sis..................................................283
6.3.1 Technological Innovation.............................................................. 283
6.3.2 Organizational Structure.................................................................291
6.3.3 Human Resource Management......................................................295
6.4 Strategic Level of An a l y sis.............................................................. 304
6.4.1 Geographic Expansion....................................................................304
6.4.2 New Procedural Testing.................................................................305
6.4.3 Use of PAs and N P s....................................................................... 307
6.4.4 Cost-Containment Strategies.........................................................309
6.4.4.1 Lease Negotiations...........................................................309
6.4.4.2 Staff Salaries.....................................................................310
6.4.4.3 Job Position Outsourcing and
Consolidations...................................................................310
6.4.4.4 Retirement Plan Changes................................................ 311
6.4.5 Management of Payer Contracts.................................................. 313
6.4.6 HIP AA Compliance........................................................................ 314
6.5 Case-Study Organization: Prospector or D efender
Response? .........................................................................................................318
6.5.1 Proposition 1.................................................................................... 319
6.5.2 Proposition 2.................................................................................... 322
6.5.3 Proposition 3.................................................................................... 323
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C h a pte r 7: Su m m a r y, C o n c lu sio ns and R e c o m m e n d a t io n s...................... 324
7.1 Su m m a r y ........................................................................................................... 324
7.1.1 Purpose..................................................................................................324
7.1.2 Research Instruments....................................................................... 3 24
7.1.3 R esults...................................................................................................325
7.1.4 Analysis................................................................................................ 327
7.1.4.1 Questionnaire Responses.................................................... 327
7.1.4.2 Theoretical Frameworks and Levels o f
Analysis...................................................................................328
7.1.4.2.1 Institutional level..................................................328
7.1.4.2.2 Organizational level.............................................330
7.1.4.2.3 Strategic level........................................................332
7.1.4.2.4 Prospector or defender orientation...................332
7.2 Con c lu sio n s.................................................................................................... 333
7.2.1 Research Question 1 .......................................................................... 333
7.2.2 Research Question 2 .......................................................................... 334
7.2.3 Research Question 3 .......................................................................... 334
7.2.4 Theoretical Considerations for Organizational
Change.................................................................................................... 337
7.3 Recom m endations........................................................................................ 338
BIBL IO G R A PH Y .............................................................................................................................. 341
A PPE N D IX ES..................................................................................................................................... 355
A ppendix A: Consultant Interview Questions........................................356
A ppendix B : Physician Interview Qu e stio n s............................................358
A ppendix C: Cardiologist Survey (Case Study) ....................................360
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L ist o f T a b l e s
Table 1: Sustainable Growth Rates............................................................................................ 78
Table 2: Physician M VPS/SGR..................................................................................................81
Table 3: Allowed Expenditures for Physician Services..........................................................82
Table 4: Actual Expenditures Under the SG R ......................................................................... 84
Table 5: MEI Expenditure Categories/Weights/Price Proxies...............................................89
Table 6: Current Estimate of the CY 2003 Physician Conversion Factor............................93
Table 7: CY 2002 GPCIs for Selected Regions..................................................................... I l l
Table 8: RBRVS Fee Schedule Amounts for CPT Codes 99213 and 93510-26............. 113
Table 9: Correlation of Interview Questions with Hypotheses............................................187
Table 10: Hypothesis 1— Consultant Interview Responses.................................................. 202
Table 11: Hypotheses 2 and 7— Consultant and Physician Interview
Responses................................................................................................................217
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Table 12: Hypotheses 5, 6, and 8— Consultant and Physician Interview
Responses................................................................................................................239
Table 13: Hypotheses 9 and 10— Consultant and Physician Interview
Responses................................................................................................................247
Table 14: Hypotheses 1 Through 10— Supported/Not Supported/Not
Determined..............................................................................................................248
Table 15: Case-Study Questions 1 Through 23 Tabulations................................................251
Table 16: Case-Study Question Numbers 1 Through 23 Arranged by
Responses to the Categories of Agree / Disagree / No Impact /
Not Determined......................................................................................................253
Table 17: Case-Study Questionnaire Results— Agreement with Hypotheses...................255
Table 18: Questionnaire and Survey Results— Level of Support for
Hypotheses 1 Through 10......................................................................................257
Table 19: Medicare Reimbursement (1997-2002)—Area 99............................................ 264
Table 20: Medicare RVUs for Specific Services (1997-2002)........................................... 265
Table 21: Income and Production Comparisons for the Years 1997 Through
2001— Case-Study Versus MGMA.....................................................................270
Table 22: Income and Production Comparisons— Case Study Versus
MGMA—Additional D ata................................................................................... 273
Table 23: Physician Median Compensation by Geographic Section— MGMA
2001 Survey D ata...................................................................................................276
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Table 24: Linear Regression A nalysis.................................................................................... 281
Table 25: Year 2002 Comparisons—Actual Data Versus Regression
Estim ates.................................................................................................................282
Table 26: Practice Costs Comparisons— Case Study Versus M GM A.................................300
Table 27: Linear Regression Results........................................................................................303
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L ist o f F ig u r e s
Figure 1. Sources and types of organizational change..........................................................135
Figure 2. Time-Series Graph 1. Medicare payments for 1997 through 2002..................267
Figure 3. Time-Series Graph 2A. Relationship between income and
production from the case-study data and MGMA surveys for the
invasive cardiology category for the years 1997 to 2001.................................277
Figure 4. Time-Series Graph 2B. Trend lines for 1997 through 2001
showing the relationship between income and production from
the case-study data and MGMA surveys for the invasive
cardiology category................................................................................................278
Figure 5. Graph 3 A. Case study vs. MGMA surveys for the years 1997
through 2001, showing dollars of income and production for the
invasive cardiology category................................................................................ 279
Figure 6. Graph 3B. Income and production data for the case study and
MGMA surveys for the years 1997 through 2001 in the invasive
cardiology category................................................................................................280
Figure 7. Time-Series Graph 4. Staff and total practice expenses.................................... 301
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A b s t r a c t
Background: The 1996 Health Insurance Portability and Accountability Act (HIPAA)
and the 1997 Balanced Budget Act (BBA) are two of the most significant pieces of federal
legislation enacted over the past forty years. The specific legislative foci in this research
are Title II, Sections 262 and 264 of HIPAA, and Subtitle F, Chapter 1, of the BBA.
Study Design: This research focuses on implementation costs and potential efficiencies
in the health system resulting from HIPAA and revenue impacts of the BBA. Together,
these considerations are analyzed in terms of the implications for organizational change
and delivery of care in cardiology group practices. The research model utilizes
institutional, organizational, and strategic levels of analysis. Prospector and defender
strategic-orientation response patterns are assessed.
Three research questions are addressed. First, the question is presented regarding the
extent to which HIPAA and the BBA have impacted organizational change in cardiology
group practices. Second, the impacts on delivery of care are assessed. Third, research
focuses on whether HIPAA and the BBA have contributed to enhanced or diminished
patient access to care in cardiology group practices.
Selected Findings: The research findings suggest that prospector and defender strategic-
orientation characteristics contribute to change dynamics. Expansion of geographic
markets and utilization of current and new clinical modalities provide new revenue sources
and expand access to quality patient care. Technological innovation applied to information
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systems implies improved processing and access of patient information as well as
increased charge capture. The use of non-physician providers potentially enhances
efficiencies in providing faster patient scheduling access and allows physicians more time
to see consults and hospital patients.
Conclusions: Recent findings nationally indicate an increasing trend for physicians to
discontinue seeing Medicare and Medicaid patients due to reduced reimbursements.
Although cardiology groups generally continue to see Medicare patients, other payer
contracts that provide inadequate reimbursement are likely to be rejected or discontinued,
resulting in patients being unable to see non-contracted physicians unless paying higher
out-of-pocket costs.
Dissertation Committee:
Chester A. Newland, Ph.D., Committee Chair
Frances R. and John J. Duggan Distinguished Professor in Public Administration
School o f Policy, Planning, and Development, University of Southern California
Sacramento, California
Ross Clayton, Ph.D.
Dean Emeritus and Professor Emeritus, Distinguished Professor in Public Administration
School o f Policy, Planning, and Development, University o f Southern California
Sacramento, California
Sarah E. Whitis, D.P.A., R.N., R.D.
Director, Sutter Neuroscience Institute
Sutter Medical Center
Sacramento, California
Adjunct Professor
School of Policy, Planning, and Development, University of Southern California
Sacramento, California
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Chapter 1
In t r o d u c t io n
1.1 L e g is l a t iv e B a c k g r o u n d
The 1996 Health Insurance Portability and Accountability Act (HIPAA) and the
Balanced Budget Act of 1997 (BBA) are two of the most influential pieces of federal
legislation enacted over the past forty years. The significance of HIPAA and BBA is
exemplified in the expansion of power and regulatory authority of the federal government
and the potential impacts on provision of health care in this country.
The purpose of this dissertation is to analyze the impacts of HIPAA and BBA on
organizational change and delivery of care in cardiology group practices. Therefore,
within this research framework, HIPAA and BBA are independent variables while
organizational change and delivery of care are dependent variables, with the caveat that the
analytical approach is primarily qualitative. To accomplish the research goals presented,
various analytical tools are utilized, including interviews with individuals possessing
particular expertise in cardiology and group practice dynamics, survey questionnaires,
comparative analyses of survey findings from other research, and case-study analysis.
The scope of HIPAA and BBA is extremely large. HIPAA, for example, amended
the Internal Revenue Code of 1986 to improve portability and continuity of health
insurance coverage in the group and individual markets. The overriding goal of HIPAA
1
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was to increase the number of persons who have and maintain health insurance (Nichols
and Blumberg, 1998). HIPAA also included provisions to combat waste, fraud, and abuse
in the health-care system and to assure for privacy, security, and standardization of
electronic transactions of health information. The BBA, on the other hand, was
implemented as a five-year plan to balance the federal budget, utilizing mechanisms for
impacting changes in federal revenues and expenditures (Olson, 1997). The passage of the
BBA created the most far-reaching changes to Medicare since its inception (MedPAC,
2000).
This dissertation focuses on specific provisions of HIPAA and BBA and the
impacts of these provisions on organizational change and delivery of care in cardiology
group practices. The specific focus for HIPAA is Title II Administrative Simplification,
Sections 262 and 264 (“Transactions, Security, and Privacy of Health Care Information”).
The focus for BBA is Subtitle F: Provisions Relating to Part B Only, Chapter 1
(“Establishment of the Sustainable Growth Rate [SGR] and Implementation of Resource-
Based Methodologies”).
Other provisions and statutes may have peripheral relevance to this research and
are addressed at this point to convey the collateral health-care regulatory impacts of these
two pieces of legislation with respect to the research’s central focus. For example, HIPAA
and BBA have important relationships to other federal statutes and applicable federal
agencies. An illustration is the impact of increased funding provided through HIPAA on
health-care fraud and abuse enforcement. Title II, Subtitle A, Section 201 of HIPAA
amended the Social Security Act, Title XI (42 U .S.C .1301 et seq.), by creating section
1128C for establishing the Fraud and Abuse Control Program. Specifically, section
2
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201(b)(3) appropriated funding for fraud and abuse programs. The Department of Justice
(DOJ), the Department of Health and Human Services (HHS), the Office of Inspector
General (OIG) of HHS, and the Federal Bureau of Investigation (FBI) were appropriated
increased funding from Fiscal Year (FY) 1997 through FY 2003 to combat fraud and
abuse. The FBI, for example, was appropriated $47 million in 1997, primarily for the
FBI’s health-care fraud enforcement efforts. Funding was increased 13% each year
thereafter, capping at $114 million in FY 2003.1 HIPAA’s influence on fraud enforcement
is also noted in numerous statutes that contribute to improved enforcement capabilities
(Title 18 U.S.C., sections 669, 2347, 1518, and 1935).2
Another illustration of federal influence was the creation of the Medicare Integrity
Program (MIP). MIP was created under section 202 of HIPAA as an amendment to Title
XVIII of the Social Security Act. This program was established to provide the former
Health Care Financing Administration (HCFA)— now known as the Center for Medicare
and Medicaid Services (CMS)— with assured levels of funding for Medicare program
safeguards. CMS is the Agency within the Department of Health and Human Services
(HHS) that administers the Medicare program. Before enactment of HIPAA on August 21,
1996, program safeguard activities were funded from the contractors’ general program
management budget, which also covered contractors’ costs for processing claims.
Additionally, only these contractors performed safeguard activities. Now, under HIPAA,
1 See Public Law (PL) 104-191. For internet address access: http://frwebgate.access.gpo.gov/cgi-
bin.cgi?Ipaddress=162.1.. ./104_cong_public_law
2
Lecture by Joseph Ways, Unit Chief, Health Care Fraud Unit, FBI. Presented at the 5th Annual Compliance
Strategies 2001, March 15-16, Las Vegas, NV. Sponsored by Medicare Compliance Alert, 11300 Rockville
Pike Rd., Suite 1100, Rockville, MD 20852.
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CMS is provided dedicated funding for its anti-fraud and abuse activities as well as the
authority to enter into contracts with MIP contractors to promote the integrity of the
Medicare program.
A third illustration is the relationship to legislation impacting the Office of
Inspector General (OIG) in the U.S. Department of Health and Human Services (HHS).
The OIG was established to identify and eliminate fraud, waste, and abuse in the
Department’s programs and to promote efficiency and economy in operations. The OIG
also has the authority to exclude individuals and entities that have engaged in fraud and
abuse from participation in federal programs, including Medicare and Medicaid, and to
impose civil monetary penalties (CMPs) for certain misconduct pursuant to sections 1128
and 1128A of the Social Security Act (the Act). HIPAA and BBA further expanded the
OIG’s sanction authorities and extended the application and scope of the current CMP and
exclusion authorities beyond programs funded by HHS to all federal health care programs.
The BBA, under Subtitle D, Chapter 1, authorized a new CMP authority to be imposed
against health-care providers or entities that employ or enter into contracts with excluded
individuals for the provision o f services or items to federal program beneficiaries (section
1128A[a][6] of the Social Security Act; 42 CFR 1003.102[a][2]). Under CMP authority,
providers such as hospitals and medical group practices may face CMP exposure if they
submit claims to a federal health-care program for health-care services provided, directly
3
United States General Accounting Office (GAO), Report to the Ranking Minority Member, Subcommittee
on Labor, Health and Human Services, Education, and Related Agencies, Committee on Appropriations, U.S.
Senate, B-282114, August 14, 1999 (reprinted in Health Care Compliance Programs in California.
Conference in Sacramento, CA, February 6, 2001. Presented by Lorman Education Services, P.O. Box 509,
Eau Claire, WI 54702-3944), p. 380.
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or indirectly, by excluded individuals or entities.4 This expansion of federal authority
created direct and indirect implications for medical practices in terms of human resource
management, payer contracting, and development of formalized compliance programs.
Although the impacts of HIPAA and BBA on fraud and abuse and CMPs are
important concepts in relation to regulatory expansion and authority, as previously stated,
those provisions are not the focus of this research. For HIPAA, the focus is on the
requirements for implementation of the transactions, privacy, and security provisions. For
the BBA, the focus is on the provisions that impact Part B physician reimbursement,
specifically the sections pertaining to the phase-in of resource-based payments for the
practice-expense component of the Resource-Based Relative Value Scale (RBRVS) and
the implementation of the sustainable growth rate (SGR) system. At this point, it will
suffice to summarize the research objectives for HIPAA in terms o f implementation costs
and anticipated improved efficiencies in the healthcare system as HIPAA is phased in over
a three-year period. For BBA, the emphasis is on the revenue side, specifically focusing
on legislated changes instituting potential declines in Medicare reimbursement. Together,
the projected costs and efficiencies associated with HIPAA plus the projected revenue
impacts of decreased Medicare reimbursement to specialists (cardiologists) resulting from
the BBA serve as the foundation for analyses pertaining to organizational change and
delivery of care in cardiology group practices. Assessments of the role o f public policy
and the efficacy of the current health care regulatory environment are also presented,
4
Federal Register 64(189) (30 September 1999). Department o f Health and Human Services (HHS), Office of
Inspector General (OIG), “OIG Special Advisory Bulletin on the Effect o f Exclusion from Participation in
Federal Health Care Programs.”
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particularly as these issues relate to the ability of CMS to administer the Medicare program
and implement programmatic changes effectively. These concepts are further developed in
the chapters to follow.
1.2 R e s e a r c h Q u e s t io n s
In this dissertation, the research focuses on the impacts of HIPAA and BBA on
cardiology group practices within the context of organization theoretical frameworks and
patient-care considerations. The following research questions are addressed:
1. To what extent have HIPAA and BBA impacted organizational change in
cardiology group practices?
To answer the first question, this research focuses on issues pertaining to
cardiology group size, group structure, group consolidations, centralization versus
decentralization of operations, expansion versus contraction of geographical coverage,
changes in internal operations (e.g., restructuring, operational efficiencies), and
technological impacts.
2. To what extent have HIPAA and BBA impacted delivery o f care in cardiology
group practices?
In terms of delivery of patient care, several areas are addressed. With the potential
for more pronounced reimbursement decreases for diagnostic and interventional procedural
work in comparison to evaluation and management services, the volume of work
performed for specific procedures in the hospital and office is analyzed. The
6
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implementation of additional revenue sources and new, cutting edge procedures are also
examined. To illustrate, hospital-based procedures including peripheral artery stenting,
beta-radiation therapy, and laser catheter combined with office- or outpatient-based
procedures including nuclear imaging, electron-beam computerized tomography (EBT),
trans-thoracic bio-impedance testing, peripheral vascular diagnostic scanning, and on-site
laboratory services provide the potential for increased revenues and enhanced diagnostic
and interventional capabilities for improvements in patient care. Other clinical practices
assessed include adaptations of physician time management in terms of allocating
scheduling times for hospital work versus office work. In addition, the significance of
technology and the Internet is analyzed, particularly in reference to access to patient
information and transmission of patient data and procedure images between computer links
at different locations.
3. Have HIPAA and BBA enhanced or diminished patient access to care in
cardiology group practices?
Medicare patients make up a high percentage of the total reimbursement in
cardiology group practices. The added costs of HIPAA implementation plus reductions in
Medicare reimbursement, exacerbated by legislated practice-expense changes from cost-
based to resource-base values, raise concerns about rising overhead in medical group
practices. With Medicare reimbursement as the reference for comparison, an analysis is
performed to determine whether a tendency is increasing for cardiologists to reject
contracts paying at percentages of M edicare rates or reduced rates upon contract renewals,
thus impacting access to care for certain populations of patients. Also, the impacts on
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organizational processes and staffing are investigated pursuant to Research Question 2. An
Action Alert from the Medical Group Management Association (MGMA) on November 1,
2001, demonstrates these concerns. According to the MGMA, many physician group
practices have contracts with private payers linking their payment rates to the Medicare fee
schedule. A drop in Medicare payments is forecasted to result in a commensurate drop in
reimbursement from numerous other sources, diminishing the ability of physician group
practices to provide care to both Medicare beneficiaries and privately insured patients. The
MGMA Alert states that the November 1, 2001, Federal Register announcement regarding
across-the-board cuts in Medicare physician payments will have immediate negative
consequences for patient access to physician services.5 The MGMA argues that surveys
indicate an increasing trend for physicians over the age of 50 planning to retire early, with
patients in some localities having difficulty finding physicians who are willing to accept
new Medicare patients. With the current economic climate, the possibilities for curtailing
the hiring of new staff, freezing pay raises, or actually reducing staff negatively impact the
delivery of care in physician practices. MGMA further argues that these problems will
worsen with the latest across-the-board reimbursement reductions.6
Statistical analyses and analytical assessments of information from interviews, data
from the Centers for Medicare and Medicaid Services (CMS), and Medical Group
Management Association (MGMA) costs and compensation surveys are utilized in
addressing the issues associated with this research question.
5 Federal Register 66(212) (November 1, 2001):55246.
6 MGMA Action Alert, November 1, 2001, MGMA Department o f Government Affairs, Internet access via
MGMAWashingtonConnexion@mgma.com
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1.3 M e d ic a r e R e g u l a t o r y R e f o r m
Medicare regulatory reform is a subject that warrants additional comments because
of its relationship to the three research questions, particularly the applicability to physician
reimbursement issues. In 2001, Medicare reform— including regulatory relief for
beneficiaries and providers and responses to Medicare payment mandates— was addressed
in both the Senate and the House of Representatives. For example, The Medicare
Education and Regulatory Fairness Act of 2001 (MERFA) was introduced March 5, 2001,
under Senate Bill 452 (S. 452) and related House of Representatives Bill 868 (H.R. 868).
The impetus for this regulation was to amend Title XVIII of the Social Security Act to
ensure that the Secretary of Health and Human Services provides appropriate guidance to
physicians and other providers of health services that are attempting to submit claims
properly under the Medicare program and to ensure that the Secretary does not target
inadvertent billing errors. An additional provision proposes reforms in the calculation of
the sustainable growth rate (SGR), including an addition to the impacts of regulatory costs
*7
on physicians’ services and subsequent reimbursement.
Another bill addressing Medicare regulatory relief—the Medicare Regulatory and
Contracting Reform Act of 2001 (H.R. 3391)— includes measures for the following:
• Requiring written responses upon request to provider
questions from carriers and intermediaries within 45
business days;
7 U.S. Congress, Senate, Congressional Record (March 5, 2001): S 1819— S 1823.
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• Prohibiting retroactive application of substantive changes in
Medicare regulations, manual instructions, interpretative
rules, and statements of policy or guidelines;
• Limiting promulgation of new regulations to once per
month; and
• Requiring the Secretary of Health and Human Services to
monitor the accuracy and timeliness o f written and verbal
responses to provider questions from Medicare carriers and
intermediaries.8
In response to Medicare Part B reimbursement reductions of 5.4 percent
announced in the November 1, 2001, Federal Register, legislation was introduced in both
houses of Congress to mitigate the effects of this payment reduction on physicians. The
Medicare Physician Protection Act of 2001 (H.R.3318) was introduced to amend section
1848(d) of the Social Security Act (42 U.S.C. 1395w-4[d]). The primary provision is the
proposal for no change in the conversion factor component of the RBRVS calculation from
2001 to 2002.9 The Medicare Physician Payment Fairness Act of 2001 (s. 1707), also
introduced to amend Title XVIII, establishes a conversion factor for 2002 of 0.9 percent
less than 2001 (versus the November 1, 2001, Federal RegAter-mandated reduction of 5.4
percent) and directs the Medicare Payment Advisory Commission (MedPAC) to conduct a
study on replacing the use of the sustainable growth rate (SGR) as a factor in determining
payment updates in subsequent years.1 0 The Medicare Physician Payment Fairness Act of
MGMA Department o f Government Affairs, Internet posting, December 12, 2001,
MGM A W ashingtonConncexion@MGM A. com
9
U.S Congress, House o f Representatives, Congressional Record, November 16, 2001.
10 U.S Congress, Senate, Congressional Record, November 15, 2001.
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2001 introduced in the House of Representatives (H.R. 3351) also proposes a conversion
factor decrease of 0.9 percent and implementation of a study by MedPAC for replacing the
use of the SGR in determining payment updates in subsequent years.11 Finally, subsequent
legislation, the Medicare Modernization and Prescription Drug Act of 2002 (H.R. 4954),
was introduced and passed in the House of Representatives on June 28, 2002. In addition
to adding a drug benefit to the Medicare program, this legislation would increase physician
payments approximately two percent per year for years 2003-2005. However, the bill was
defeated in the Senate during the July 2002 session of Congress. Since H.R. 4954 included
the physician payment reform measures, the reimbursement issue was put on hold until
12
Congress was to reconvene in September 2002.
On July 21, 2001, the General Accounting Office (GAO) submitted a report to
1 3
Congress describing the challenges CMS faces in managing the Medicare program. The
legislative proposals summarized above serve as examples of actions for addressing the
needs for policy changes and restructuring of the Medicare program, particularly in terms
of improvements in payment mechanisms and responsiveness to beneficiaries and
providers’ needs.
11 U.S. Congress, House o f Representatives, Congressional Record, November 27, 2001.
12
MGMA Washington Connexion, July 31, 2002 (from the Medical Group Management Web site:
MGMAWashingtonConnexion@MGMA.com).
13
United States General Accounting Office (GAO), Report to Congressional Requesters, “Medicare
Management: CMS Faces Challenges to Sustain Progress and Address Weaknesses,” GAO-Ol-817, July 21,
2001.
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1.4 H y p o t h e s e s
To provide a foundation within the analytical framework for assessment of the
three research questions presented in this chapter, ten hypotheses are introduced. The
hypotheses integrate the pertinent issues from HIPAA and the BBA for the level of inquiry
developed in this dissertation.
Hypothesis 1: The cost of implementing mechanisms for compliance with HIPAA
security, transactions, and privacy regulations will increase the tendency
for consolidation of internal operations to increase efficiency.
Hypothesis 2: The HIPAA security, transactions, and privacy regulations will increase
information technology (IT) requirements for data access control
mechanisms such as virtual private networks (VPN).
Hypothesis 3: Decreased reimbursement resulting from BBA provisions impacting
physician payment calculations will not result in increased merger activity
between cardiology group practices.
Hypothesis 4: Decreased reimbursement resulting from BBA provisions impacting
physician payment calculations will accelerate the tendency for cardiology
groups to undergo geographic expansion to capture additional referral
sources.
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Hypothesis 5:
Hypothesis 6:
Hypothesis 7:
Hypothesis 8:
Hypothesis 9:
Decreased reimbursement resulting from BBA provisions impacting
physician payment calculations will accelerate the implementation of new
procedural testing to compensate for declining revenues.
Decreased reimbursement resulting from BBA provisions impacting
physician payment calculations will not lead to an increased tendency to
increase the volume of services performed to compensate for declining
revenues.
Decreased reimbursement resulting from BBA provisions impacting
physician payment calculations will result in an increased tendency for
consolidation of internal operation to increase efficiency in cardiology
group practices.
Decreased reimbursement resulting from BBA provisions impacting
physician payment calculations will result in an increased tendency for
physicians to rearrange office hours to enhance efficiencies between office
and hospital scheduling.
Decreased reimbursement resulting from BBA provisions impacting
physician payment calculations will increase the probability that
cardiologists w ill reject proposals for managed-care contracts paying at
current (2002) Medicare rates.
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Hypothesis 10: Decreased reimbursement resulting from BBA provisions impacting
physician payment calculations will increase the probability that
cardiologists will discontinue current contracts paying below current
(2002) Medicare rates.
1.5 O r g a n iz a t io n o f t h e D is s e r t a t io n
Chapter 1: Chapter 1 provided a statement of the purpose of this dissertation and
an overview of the legislative variables (HIPAA and the BBA) proposed to impact
organizational change and delivery of care variables. Ten hypotheses and three research
questions were introduced to guide the direction for this study.
Chapter 2: In this chapter, Title II, Subtitle F, Sections 261 through 264, of the
1996 Health Insurance Portability and Accountability Act (HIPAA) is summarized, with
emphases on three major areas under the Administrative Simplification provisions
including (1) transactions and codes sets standardization, (2) privacy rules, and (3)
security regulations. The focus of HIPAA in this dissertation is the cost impacts on group
practices. Federal estimates for cost-benefits and impact analyses are presented for the
three areas within the context of the health-care system overall. The statutory background
and modifications to the initial privacy final mle are reviewed. An implication of the
HIPAA regulatory requirements is that, in addition to technological considerations,
development, implementation, and monitoring of policies and procedures are needed to
assure compliance with the provisions for the transaction standards, privacy rules, and
security regulations.
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Chapter 3: Chapter 3 begins with a historical overview of the 1997 Balanced
Budget Act (BBA) and a general overview of the relationship between the Medicare
program and the BBA. The Balanced Budget Refinement Act of 1999 (BBRA) is also
mentioned within the context of the adjustments made by the BBRA to the BBA. The
BBA provisions relevant to this study are Subchapter A, Section 4501 through 4505, and
Sections 4511 through 4512. Particular emphases are given to Section 4503 (replacement
of the volume performance standard with the sustainable growth rate [SGR]) and Section
4505 (implementation of resource-based methodologies). Under the SGR system for
determining Medicare payments to physicians, fees to physicians are updated annually
based on an inflation factor and a performance adjustment factor. This methodology
resulted in a controversial reduction in payments to physicians in 2002 and 2003. The
four-year phase-in of resource-based versus cost-based methodologies also resulted in fee
reductions for procedural work. An in-depth look at the methodology used for physician
reimbursement based on the resource-based relative value scale (RBRVS) is presented in
this chapter in supplement to the payment provisions influenced by the BBA.
Chapter 4: Chapter 4 is divided into two parts. In Part 1, theoretical
considerations pertaining to organizational change dynamics are presented. The work of
selected researchers is introduced, focusing on those aspects of proposed change models
that are applicable to change processes affecting cardiology group practices. An integrated
approach is proposed, with emphases on research articles from Leavitt (1965) and Fox-
Wolfgramm et al. (1998). Particular importance is assigned to the technological,
structural, and human variables presented by Leavitt, and the m ulti-level approach
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incorporating institutional, organizational, and strategic analytical frames promoted by
Fox-Wolfgramm and co-authors.
Part 2 of Chapter 4 presents an overview of the research methodology utilized in
this dissertation. Four general approaches were incorporated for data collection and the
analytical process in this research. First, questionnaire techniques including both an open-
ended format with telephone interviews and a closed-ended survey format were utilized. A
second method included the use of time-series data analysis. A third approach
incorporated previous research findings and previous techniques— including survey data
from the Medical Group Management Association (MGMA) and the study format
presented by Fox-Wolfgramm and her associates—to create a platform for analysis and
data assessment. Finally, case-study methodology was performed as an integrative
mechanism, incorporating the first three general approaches and providing comparative
analyses with the above-mentioned survey results and Medicare Part B reimbursement
data.
Chapter 5: Chapter 5 presents the findings from the interviews and survey
questionnaire. Interview and survey questions were subjectively correlated with the
hypotheses presented in Chapter 1. Responses were quantified and summarized in tabular
form. The findings from the interviews and survey were also combined to assess overall
response comparisons. Although limitations in terms of statistical validity and reliability
are evident with respect to the data, observations of specific findings present interesting
arguments. For instance, the contention that physicians’ production is increasing while
income is decreasing warrants consideration. A lso, the impact of payer reimbursement
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rates that are determined to be inadequate and subsequent relationship to patient access to
care is analyzed.
Chapter 6: The case-study analysis is organized into a separate chapter (Chapter
6) to enhance the focus on the organizational-change framework and unique research
comparisons with Medicare reimbursement data and MGMA survey data. Response
findings from the case-study survey were integrated into the case-study analysis. A three-
level analytical framework utilizing the research approach presented by Fox-Wolfgramm et
al. (1998) was incorporated for assessment of adaptive change dynamics. This framework
includes institutional, organizational, and structural levels of analysis. Leavitt’s (1965)
analytical approach utilizing technological, structural, and human resource variables is also
included at the organizational level of analysis. Chapter 6 concludes with a determination
of the case-study organization’s strategic orientation response characteristics (prospector
versus defender). Three propositions are presented reflecting the overall case-study
adaptive change response to HIPAA and the BBA.
Chapter 7: Chapter 7 summarizes the research framework and findings from the
various research techniques incorporated in the writing of this dissertation. Conclusions
are presented pertaining to the three research questions presented in Chapter 1. The
coexistence of both prospector and defender characteristics is implied in relation to the first
research question. Enhanced efficiencies in the health-care system and expansion of access
to quality patient care are suggested by the second research question. The third research
question elicits two counter-arguments. On the one hand, enhanced efficiencies promoted
by the HIPAA regulations should improve patient information processing along with
privacy and security of patient information, thus improving the process of delivery of
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patient care. On the other hand, short-term cost issues associated with HIPAA and
Medicare reimbursement issues associated with the BBA present concerns for patient
access to care.
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Chapter 2
T h e H e a l t h In s u r a n c e P o r t a b il it y a n d
A c c o u n t a b il it y A c t o f 1 9 9 6 (H IPA A )
2.1 L e g is l a t iv e B a c k g r o u n d
On August 21, 1996, the 104th Congress enacted the Health Insurance Portability
and Accountability Act (HIPAA).1 4 HIPAA amended the Internal Revenue Code of 1986
to improve portability and continuity of health insurance coverage in the group and
individual markets (Nichols and Blumberg, 1998). HIPAA also included provisions for
regulating health-care fraud and abuse and provisions to assure for privacy, security, and
standardization of electronic transactions of health information. HIPAA has been praised
and criticized for its potential role in expansion of federal authority to regulate health
insurance. Although concerns have been expressed regarding the legislative potential
inherent in HIPAA for extension of federal regulation,1 5 Nichols and Blumberg (1998)
counter that HIPAA is less of a departure from traditional federal authority than it is an
application of existing tools to meet evolving health policy goals.
14
Public Law 104-91, “The Health Insurance Portability and Accountability Act o f 1996.” Additional
information accessed via Internet at http://frwebgate.access.gpo.gov//cgi-bin/useftp.cgi?Ipaddress=162.1.../
104_cong_public_law
15 Moffit, R. E., “What to Do About the Kassebaum-Kennedy Bill,” Heritage Foundation Issues Bulletin 226
(5 June 1996). In Nichols, Len, and Blumberg, Linda (1998), “A Different Kind o f New Federalism: The
Health Insurance Portability and Accountability Act o f 1996,” Health Affairs (May-June 1998): 25^42.
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2.2 A d m in is t r a t iv e S im p l if ic a t io n
Title II, Subtitle F, Sections 261 through 264 of HIPAA, titled “Administrative
Simplification,” called for steps to improve “the efficiency and effectiveness of the health
care system by encouraging the development of health information system through the
establishment of standards and requirements for the electronic transmission of certain
health information.” To achieve that goal, Congress required the Department of Health
and Human Services (HHS) to promulgate a set of interrelated regulations establishing
standards and protections for health information systems. The Administrative
Simplification regulations outline three major purposes: (1) to protect and enhance the
rights of consumers by providing them access to their health information and controlling
the inappropriate use of that information; (2) to improve the quality of health care in the
United States by restoring trust in the health-care system among consumers, health-care
professionals, and the multitude of organizations and individuals committed to the delivery
of care; and (3) to improve the efficiency and effectiveness of health-care delivery by
creating a national framework for health privacy protection that builds on efforts by states,
health systems, organizations, and individuals.1 6
The three major areas addressed under the Administrative Simplification
provisions include (1) the standardization of electronic transactions and codes sets, (2) the
privacy regulations, and (3) the security regulations. Two additional rules have also been
proposed: a rule establishing a unique identifier for employers to use electronic
16 Federal Register 65(250) (December 28, 2000): 82463.
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transactions and a rule for establishing a unique identifier for providers for such
transactions. These rules establishing unique identifiers are not treated as major headings
for purposes of this analysis. Section 262 of HIPAA amended Title XI of the Social
Security Act (42 U.S.C. 1301 et seq.) by adding a new Part C, sections 1171 through 1179.
These sections form the foundation of the Administrative Simplification provisions and are
summarized below.1 7
Section 1171 provides definitions for several terms and entities impacted in Part C,
Administrative Simplification. For example, under section 1171 (1), the term code set is
defined as “any set of codes used for encoding data such as tables of terms, medical
concepts, medical diagnostic, or medical procedure codes.” Section 1171 (3) defines a
health care provider as “a provider o f services (as defined in section 1861 [u]), a provider
of medical or other health services (as defined in section 1861 [s]), and any other person
furnishing health care services or supplies.” Section 1171 (4) defines health information as
any information, whether oral or recorded in any form or
medium, that: (A) is created or received by a health care
provider, health plan, public health authority, employer, life
insurer, school or university, or health care clearinghouse; and
(B) relates to the past, present, or future physical or mental
health or condition of an individual, the provision of health care
to an individual, or the past, present, or future payment for the
provision of health care to an individual.
In section 1171 (7), the term standard is defined as “any data element or transaction that
meets each of the standards and implementation specifications adopted or established by
Public Law 104— 91. For Internet access, use address: frewebgate.access.gpo.gov/cgi-bin/
useftp.cgi?Ipaddress=162.. ./104_cong_public_law.
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the Secretary (of HHS) with respect to the data element or transaction under sections 1172
through 1174 (42 U.S.C. 1320d). Additionally, any standard adopted under section 1172 is
applicable to health plans, health-plan clearinghouses, and health-care providers who
transmit any health information in electronic form in connection with a transaction referred
to in section 1173 (a) (1). Transactions (under section 1173 [2]) refer to financial and
administrative transactions including health claims or encounter information, health-claims
attachments, health-plan eligibility, health-care payment and remittance advice, premium
payment, referral certification and authorization, and other financial and administrative
transactions determined by the Secretary to be consistent with the goals of improving the
operation o f the health-care system and reducing administrative costs.
Under section 1176, the Secretary is granted authority to impose civil monetary
penalties for violations under provisions of Title XI, Part C. Penalties range from $100 per
violation to a cap of $25,000 per person in a calendar year, with specific limitations
outlined under 1176 (b). Section 1177 provides for penalties (under [b]) for a person or
persons who knowingly (1) uses a unique health identifier, (2) obtains individually
identifiable health information relating to an individual, or (3) discloses individually
identifiable health information to another person in violation of provisions of 42 U.S.C.
1320d-6. Penalties include (1) a fine of not more than $50,000, imprisonment of not more
than 1 year, or both; (2) a fine of not more than $100,000, imprisonment o f not more than 5
years, or both if the offense is committed under false pretenses; and (3) a fine of not more
than $250,000, imprisonment of not more than 10 years, or both if the offense is committed
with intent to sell, transfer, or use individually identifiable health information for
commercial advantage.
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Under section 1178, the provisions of Title XI, Part C of the Social Security Act
generally supersede contrary provisions of state law including those state law provisions
that require medical or health-plan records (including billing information) to be maintained
or transmitted in written rather than electronic form. Exceptions to this include state law
provisions that are necessary to combat fraud and abuse, provisions that are necessary to
ensure state regulation of insurance and health plans, provisions required for state reporting
on health care delivery or costs, provisions addressing controlled substances, and,
18
provisions subject to section 264 (c) (2) of HIPAA.
Section 1179 allows for the activities of a financial institution (as defined in
section 1101 of the Right to Financial Privacy Act of 1978) to be inapplicable to the
standards adopted under Part C for (1) the use or disclosure of information by the entity for
authorizing, processing, clearing, settling, billing, transferring, reconciling, or collecting
health-care payments; and (2) the request for, or the use or disclosure of information by the
entity with respect to a payment as described in (1) above.
Following the enactment of HIPAA, HHS began the process of implementing the
new provisions in the statute by proposing and publishing rules and regulations in the
Federal Register. The process of finalizing a rule begins with the rule proposal from HHS.
The public is then given the opportunity to comment on the proposal. Those comments are
given consideration in the development of the final rule. When the final rules are
published in the Federal Register, health-care organizations must comply within 24
18
Section 264 (c) (2) states that a regulation promulgated under paragraph (1) (Regulations) shall not
supersede a contrary provision o f state law if the provision o f state law im poses requirem ents, standards, or
implementation specifications that are more stringent than the requirements, standards, or implementation
specifications imposed under the regulation.
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months (or 36 months for small health plans) of the effective date. The effective date is
normally 60 days after the final rule is published. To date, only two of HIPAA’s rules
under Title II have been finalized. The final rule and notice for the Transaction and Code
Set Standards Regulations was published in the Federal Register on August 17, 2000. The
effective date was October 16, 2000. The final rule for the Standards for Privacy of
Individually Identifiable Health Information was published in the Federal Register on
December 28, 2000. After a delay, the privacy regulation became effective April 14, 2001.
The security rule is expected to be finalized sometime in 2002 (Lanser, 2001; Keohane,
2002).
The original deadline for compliance with the electronic transactions rule was
October 16, 2002 for all covered entities except small health plans, which by law have an
additional year. Congress provided a one-year extension under the Administrative
Simplification Compliance Act—to October 16, 2003— for those covered entities required
to comply in 2002. To obtain the extension, a covered entity must submit a compliance
plan on or before October 15, 2002. The plan must include (1) an analysis outlining the
reasons why the person or entity is not in compliance; (2) a budget, work plan, and
implementation strategy for achieving compliance; (3) whether the person or entity plans
to use an outside contractor to assist in achieving compliance; and (4) a time frame for
testing that begins not later than April 16, 2003. Covered entities (except for small health
plans) that do not submit a compliance plan must comply with the HIPAA electronic
transactions rule by October 16, 2002. Small health plans with less than $5 million in
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receipts already have until October 16, 2003, to comply and do not need to submit a
compliance plan.1 9
The deadline for compliance by most covered entities for the Standards for Privacy
of Individually Identifiable Health Information (Privacy Rule) is April 14, 2003. Small
health plans have until April 14, 2004, to comply with the rule. The Department of Health
and Human Services (HHS) submitted a proposed rule modification to the Privacy Rule on
March 21, 2002 (published in the Federal Register March 2 7 ,2002).20
2.3 S t a n d a r d T r a n s a c t io n s a n d C o d e S e t s
2.3.1 Standardized Transactions
The implementation of national standards for electronic health-care transactions
creates a substantial opportunity for health-care providers to realize cost savings and
increase efficiency in claims processing. Currently, providers and payers use anywhere
from 140 to 400 different formats for processing and submitting claims for payments.
Under the HIPAA Transaction and Code Set Regulation, all providers who collect and
submit electronic health information will be required to use a common format (Lanser,
2001; Gordon, Odom & Davis, 2001).
19
Department o f Health and Human Services (HHS), Public Affairs Office, March 29, 2002. “CMS Issues
Model Plan to Extend Deadline for Compliance with Electronic Transactions Rule.” MEDICARE NEWS.
(Also, see Public Law 107-105, December 27, 2001, 115 ST AT. 1003-1008).
20
Department o f Health and Human Services (HHS), HHS Press Office, March 21, 2002. “Standards for
Privacy o f Individually Identifiable Health Information— Proposed Rule Modification.” HHS Fact Sheet.
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Health-care providers are expected to benefit from a standardized format.
Potential benefits include reductions in manual paper work, more efficient claims and
eligibility verification, faster claims processing with shorter payment cycles, and reduction
in claims errors and payment write-offs. HHS predicts that the savings gained through
transaction standardization could total $29.9 billion over 10 years. To achieve these
savings, providers will be required to make significant investments in time and resources
during the first five years of implementation. However, the sooner providers prepare and
invest for HIPAA implementation, the greater the potential for cost savings to be realized
(Lanser, 2001).
Congress created a standardization mandate within the HIPAA legislation by
amending section 1173 of the Social Security Act. Section 1173 provides authority for the
Secretary of HHS to adopt standards for transactions and data elements to enable health
information to be exchanged electronically. Transactions are defined as those related to
health claims or equivalent health encounter information, health claims attachments (e.g.,
clinical reports), enrollment and disenrollment in a health plan, eligibility for a health plan,
health care payment and remittance advice, health plan premium payments, injury
reporting, health claim status, referral certification and authorization, and other financial
and administrative transactions determined appropriate by the Secretary, consistent with
the goals of improving the operation of the health-care system and reducing administrative
+ 21
costs.
21
Public Law 104-91. See section 1173, subsection (a), paragraphs (1) and (2).
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Paragraphs (c) through (f) under section 1173 require the HHS Secretary to adopt
standards for code sets for each data element for covered electronic health-care
transactions, standards for transmission and authentication of electronic signatures (in
coordination with the Secretary of Commerce), and standards for the transmission of data
elements needed for coordination of benefits and processing of claims. Compliance with
the adopted standards must satisfy federal and state statutory requirements for written
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signatures with respect to the transactions in paragraph (a) of section 1173.
Section 1174 requires the Secretary to adopt standards for all of the above
transactions, except claims attachments, within 18 months after enactment. The standards
for claims attachments must be adopted within 30 months after enactment. Modifications
to any established standard may be made after the first year, but not more frequently than
once every 12 months. The Secretary may, however, modify an initial standard at any time
during the first year of adoption if it is determined that the modification is necessary to
23
permit compliance with the standard.
Section 1172 also includes requirements concerning standard setting. Under this
section, the HHS Secretary may adopt a standard developed or modified by a standard
setting organization (including an organization accredited by the American National
Standards Institute [ANSI] that has consulted with the National Uniform Billing
Committee [NUBC], the National Uniform Claim Committee [NUCC], the Workgroup for
Electronic Data Interchange [WEDI], and the American Dental Association [ADA]). The
22
Federal Register 65(160) (August 17, 2000): 50313.
23 I.bid.
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Secretary may adopt a standard other than one established by a standard setting
organization if the different standard will reduce costs for health-care providers and health
plans, the different standard is promulgated through negotiated rule-making procedures,
and the Secretary consults with each of the above-named groups. If no standard has been
adopted by any standard-setting organization, the Secretary is to rely on the
recommendations of the National Committee on Vital and Health Statistics (NCVHS) and
consult with the above-named groups before adopting a standard.2 4
2.3.2 Standardized Code Sets
The Secretary must also ensure that procedures exist for testing, maintenance, and
expansion of code sets, and that there are crosswalks from prior versions. Any
modifications to a code set must be implemented in a manner that minimizes the disruption
25
and the cost of compliance.
As defined previously, a code set is any set of codes used for encoding data
elements, such as tables of terms, medical concepts, medical diagnosis codes, or medical
procedure codes. The code sets impacted by the HIPAA standards are already in use by
most health plans, health-care clearinghouses, and health-care providers. These code sets
are summarized below as described by Keohane (2002):
24
Federal Register 65(160), op. cit.: 50312.
25
Federal Register 65, loc. cit.: 50313.
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2.3.2.1 ICD-9 CM
The International Classification of Diseases, 9th Revision, Clinical Modification, is
the most common system used by health-care providers to classify diagnoses (Volumes 1
and 2) and procedures (Volume 3) for administrative transactions. Volumes 1 and 2 are
used by hospitals and ambulatory care settings to identify diseases, injuries, impairments,
and other health-related problems. Volume 3 is used by hospitals for actions taken for
diseases, injuries, and impairments including prevention, diagnosis, treatment, and
management.
2J.2.2 ICD-10-CM
ICD-10-CM is touted as a possible future replacement for the current ICD-9-CM
system. However, the system needs additional testing and revision prior to making a
decision regarding its use by HHS as a national standard. The system is significantly
different from the ICD-9-CM, containing more digits and greater detail. A transition to
ICD-10-CM is not expected in the near future.
2.3.2.3 CPT
The Current Procedural Terminology (CPT) coding system has been in use for
over 40 years. CPT was originally developed by the American Medical Association in
1966 to facilitate proper documentation of physician procedures and services. The CPT
system is updated annually to reflect changes in procedures and physician services. The
current edition of the CPT manual, the Current Procedural Terminology Fourth Edition
(CPT-4), contains 7,928 codes and descriptors.
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Under the CPT system, each procedure or service is identified with a five-digit
code. For example, a treadmill performed by a physician in the physician’s office is
typically billed by the physician as a 93015 code. If the physician performs the treadmill
in a hospital setting (using hospital staff and equipment), the treadmill portion is billed by
the physician using a 93018 code, which is reimbursed at a lower amount. Modifiers are
also used for those codes that are designated with a technical and professional component.
To illustrate, a left heart catheterization procedure (code 93510), when performed in the
hospital by a physician, is billed by the physician with a professional component modifier
(-26) because the physician is performing a procedure designated by Medicare with
technical and professional components. Because the physician is utilizing the facility’s
equipment and staff, the technical component (-TC) is billed by the facility.
Adoption of the CPT as a standard for electronic transactions should not pose
many difficulties for providers because it is already in current widespread use.
2.3.2.4 Alpha-Numeric HCPCS
The alpha-numeric Health Care Financing Administration Procedure Coding
System (HCPCS) includes codes for medical equipment, injectable drugs, transportation
services, and other services not found in CPT-4.
2.3.2.5 CDT-2
The Current Dental Terminology (CDT) is used for reporting dental services.
CDT-2 codes are also included in alpha-numeric HCPCS with a first digit o f D.
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2.3.2.6 NDC
National Drug Codes (NDC) are used for reporting prescription drugs in pharmacy
transactions and some claims by health-claim professionals. HHS Secretary Tommy
Thompson has indicated his intention to remove the NDC code from the HIPAA
regulations (Keohane, 2002).
2.3.3 Health-Care System Impact Analysis
An impact analysis outlining proposed costs to the health-care system of
implementing most of the administrative simplification standards is detailed in the August
17, 2000, Federal Register (including electronic data interchange (EDI) standards,
standards for security and unique identifiers, but not including the costs of privacy
standards, which are analyzed separately).
EDI is the electronic transfer of information, such as electronic media health
claims, in a standard format between entities. EDI allows these entities within the health
care system to exchange medical, billing, and other information and to process transactions
in a manner that is fast and cost effective. With EDI, there are significant reductions in
processing time compared to paper, and the risk of misplacing or losing paper is greatly
reduced. EDI can reduce or eliminate the inefficiencies of handling and processing paper
documents, resulting in reduced administrative costs, lower operating costs, and
improvements in overall data quality. Many health-care entities have developed
proprietary EDI formats. Currently, approximately 400 formats for electronic health
claims are being used in the United States. The lack of standardization makes it difficult
and expensive to develop and maintain computer software. Additionally, the lack of
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standardization reduces the ability of health-care providers and health plans to achieve
26
efficiency and cost savings.
HHS estimated that the impact of the proposed rules would result in net savings to
health plans and health-care providers of $1.5 billion during the first five years. There was
some question regarding the validity of the projected cost of implementing EDI because it
was largely based on data compiled by WEDI in 1992. The WEDI report (presented in
1993) projected implementation costs ranging between $5.3 billion and $17.3 billion, with
annual savings projected to be between $8.9 billion and $20.5 billion. The discrepancy in
the WEDI annual savings projections is explained by the assumption that the HIPAA
compliance process will be spread out over a longer period of time than is provided in the
statute. The HIPAA standards will require additional data elements, will replace local
coding schemes with national standards, and will affect many business processes
associated with health plans and health-care providers. The modifications to existing
systems will be extensive and time consuming, with much uncertainty regarding projected
benefits. Also, HHS subsequently obtained more current data and information on costs and
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market trends, which were used in the final cost analysis.
The impact analysis includes expected costs and benefits of the administration
simplification regulations related to electronic systems for ten years. The costs of
implementing the standards specified in the statute are primarily one-time or short-term
costs related to conversion. These costs include system conversion/upgrade costs, start-up
26 Federal Register 65: 50312.
22 Federal Register 65: 50345.
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costs of automation, training costs, and costs associated with unexpected problems related
to implementation. A significant portion of these costs is assumed to be incurred during
the first three years of implementation. Maintenance costs must also be factored in,
although vendors may include such costs as part of the purchase price. System upgrades
should also be accounted for over time as technology develops or improves. Since the rule
only requires an initial systems upgrade, the costs of future upgrades are not included in
the cost estimate of the rule. The benefits of EDI include reduction in manual data entry,
elimination of postal service delays, elimination of the costs associated with the use of
paper forms, and the enhanced ability of participants in the market to interact with each
other.2 8
In the analysis, HHS used what it termed “conservative assumptions” and has
taken into account the effects of the trend in recent years toward electronic health-care
transactions. Based on this analysis, HHS determined that the benefits attributable to the
implementation of administrative simplification regulations will accrue almost
immediately, but benefits will not exceed costs incurred by health-care providers and
health plans until after the second year of implementation. After the second year, the
benefits are forecasted to continue to accrue for an extended period o f time. The total
predicted net savings for the period 2002-2011 is $29.9 billion (a net savings of $13.1
billion for health plans, and a net savings of $16.7 billion for health-care providers). The
single year net savings for the year 2011 is forecasted at $5.6 billion ($2.5 billion for health
plans and $3.1 billion for health-care providers). The discounted present value of these
28
Federal Register 65: 50351.
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savings is $19.1 billion over the ten-year period. Not included in these estimates are the
potential added benefits that are likely to occur through expanded e-commerce resulting
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from standardized systems.
The regulation outlining the proposed standards and benefits analysis was
submitted to the Office of Management and Budget (OMB) for review in accordance with
information collection requirements under the Paperwork Reduction Act of 1995 (PRA)
30
and regulatory philosophy under Executive Order 12866 (September 30, 1993). To be
designated as a standard, a proposed standard should meet the following criteria:
• Improve the efficiency and effectiveness of the health-care
system through cost reductions or improvements in benefits
from electronic HIPAA health-care transactions. This
principal supports the regulatory goals of cost-effectiveness
and avoidance of burden.
• Meet the needs of health data standards users, particularly
health-care providers, health plans, and health-care
clearinghouses. This principle supports the regulatory goal
of cost-effectiveness.
• Be consistent and uniform with the other HIP AAA standards
(i.e., code and data element definitions, privacy
requirements, and security requirements). This principle
supports the regulatory goals of consistency and avoidance
of incompatibility, and establishes a performance objective
for the standard.
• Maintain low subsequent development and implementation
costs relative to the benefits of using the standard. This
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Federal Register 65: 50351.
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principle supports the regulatory goals of cost-effectiveness
and avoidance of burden.
• Be supported by an ANSI-accredited standard setting
organization or other private or public organization that will
ensure continuity and efficient updating of the standard over
time. This principle supports the regulatory goal of
predictability.
• Provide appropriate time frames for development, testing,
implementation, and updating procedures to achieve
administrative simplification benefits faster. This principle
establishes a performance objective for the standard.
• Provide technological independence of computer platforms
and transmission protocols used in HIPAA health
transactions, except when they are explicitly part of the
standard. This principle establishes a performance objective
for the standard and supports the regulatory goal of
flexibility.
• Incorporate a standard that is precise, unambiguous, and
simple. This principle supports the regulatory goals of
predictability and simplicity.
• Minimize data collection and paperwork for users as much a
possible. This principle supports the regulatory goals of
cost-effectiveness, avoidance of duplication, and reducing
burden.
• Incorporate system flexibility to better adapt to changes
occurring within the health-care infrastructure (including
new services, new organizations, and new provider types)
and changes in information technology. This principle
supports the regulatory goals of promoting innovation and
flexibility.31
31 Federal Register 65: 50351-50352.
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2.3.4 Overall Cost Benefit Analysis
The projected costs and benefits for implementation of the HIPAA administrative
simplification provisions, particularly related to standardized electronic transactions, are
presented as a final-rule action in the Federal Register of August 17, 2000. In addition to
the cost/benefit assessment, closely related factors are integrated into the analysis including
projected implementation costs, projected benefits resulting from increased use of EDI, the
role of standards in increasing the efficiency of EDI, and assumptions relating to the
growth of electronic claims submission, savings per claim, inflation adjustments, and
overall impacts.
In their updated analysis published in the August 17, 2000, Federal Register, HHS
projected the gross costs of the new rule from $5.8 billion to $7.0 billion over ten years.
The original impact analysis indicated gross savings of $30 billion and net savings of $24.2
billion over ten years while the revised impact analysis forecasts gross savings of $36.9
billion and net savings of $29.9 billion over ten years. The discounted present value of the
savings is $19.1 billion over ten years. According to HHS, the updated impact analysis is
still a conservative estimate of the impact of administrative simplification. For example,
the revised impact analysis assumes that over the ten-year post-implementation period,
•22
only 11.2% of the growth in electronic claims will be attributable to HIPAA.
32
Federal Register 65: 50355.
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2.4 P r iv a c y R u l e
As summarized in the final rule published in the Federal Register, December 28,
2000, Congress, in enacting HIPAA, recognized that protection of the privacy and
confidentiality of personal health information is imperative if the administrative
simplification provisions are to be successful. The provision of high-quality health care
requires the availability and access of personal health information between patients and
providers of health care. The concern is that shared information is not adequately
protected. Among the factors adding to this concern are the growth in the number of
organizations involved in the provision of care and processing of claims, the growing use
of electronic information technology, increased efforts to market health care and related
products to consumers, and the increasing ability to collect highly sensitive information
33
regarding an individual’s health status as a result of advances in scientific research.
Rules requiring the protection of health privacy in the United States have been
enacted primarily by the states. While privacy laws are present in virtually every state,
laws are not consistent and vary from state to state. Many states have adopted laws that
protect the health information relating to certain health conditions such as mental illness,
communicable diseases, cancer, HIV/AIDS, and other conditions that have attached
stigmas. However, a majority of state laws do not extend comprehensive protections to an
33 Federal Register 65(250) (December 28, 2000): 82463.
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individual’s medical records. Many state rules fail to provide basic protections such as
ensuring a patient’s legal right to see a copy of his or her medical records.3 4
Prior to this final rule, virtually no federal rules existed to protect the privacy of
health information and to guarantee patient access to this information. HHS states that this
final rule establishes a set of basic national privacy standards and fair information practices
that provides patients with a basic level of protection that is essential to their full
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participation in their care.
HHS provides further justification in the December 28, 2000, Federal Register for
implementation of the Privacy Rule. One argument set forward is that privacy is a
fundamental right and, therefore, must be viewed differently than any ordinary economic
good. The costs and benefits of the regulation, however, must still be considered as a
means of weighing and identifying options. Also presented is the contention that a right to
privacy has precedence in American law. All fifty states today recognize in tort law a
common law or statutory right to privacy. Some states, California and Tennessee for
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example, have a right to privacy as a matter o f state constitutional law.
Implications for privacy are also inherent within the Constitution of the United
States. For example, the Fourth Amendment to the Constitution guarantees that “the right
of the people to be secure in their persons, houses, papers and effects, against unreasonable
searches and seizures, shall not be violated.” According to HHS, this implies that the
34
Federal Register 65:82464. Also see, Health Privacy Project, “The State o f Health Privacy: An Uneven
Terrain” (Institute for Health Care Research and Policy, Georgetown University, July 1999). Internet access:
http://www.healthprivacy.org (“Georgetown Study”).
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Fourth Amendment promotes American law values that relate to privacy. The need for
security in “papers and effects” underscores the importance of protecting a person’s
information that may be contained in sources such as medical records. The need for
security of “persons” is consistent with obtaining patient consent before performing
invasive medical procedures. An individual’s right to privacy regarding his or her own
information is not absolute, however. It does not, for instance, prevent reporting of public
health information on communicable diseases or prevent law enforcement from obtaining
37
information with appropriate due process.
2.4.1 History and Statutory Background of the Privacy Component
A significant portion of the first Administrative Simplification section debated on
the Senate floor in 1994 (as part of the Health Security Act) included privacy provisions.
In the version of HIPAA passed by the House of Representatives in 1996, the requirement
for privacy standards was included in the same section of the bill (section 1173) as the
requirements for the other Administrative Simplification standards. The requirement for
privacy standards was subsequently moved to a separate section in the same part of
HIPAA— section 264— so that Congress could link the privacy standards to Congressional
38
action.
Subsections (a) through (d) within section 264 outline the recommendations with
respect to privacy of certain health information. Subsection (a) states that not later than the
38
Federal Register 65: 82469.
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date that is 12 months after the date of enactment of HIPAA, the Secretary of HHS shall
submit to the Committee on Labor and Human Resources, the Committee on Finance of
the Senate, the Committee on Commerce, and the Committee on Ways and Means of the
House of Representatives detailed recommendations on standards with respect to the
privacy of individually identifiable health information. These recommendations— stated in
subsection (b)— include
1. The rights that an individual should have,
2. The procedures that should be established for the exercise of
these rights, and
3. The uses and disclosures of such information that should be
authorized or required.
Under subsection (c), the general regulations state that if legislation governing
standards with respect to the privacy of individually identifiable health information
transmitted in connection with the transactions described in section 1173(a) of the Social
Security Act (as added by section 262) is not enacted by the date that is 36 months after the
date of the enactment of this Act, the Secretary of HHS shall promulgate final regulations
containing such standards not later than the date that is 42 months after the date of
enactment. Such regulations shall address at least the subjects described in subsection (b).
The regulation also provides that state law will not be preempted if the state requirements
are more stringent than the federal requirements.
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Finally, in subsection (d), it is recommended that the Secretary of HHS shall
consult with the National Committee on Vital and Health Statistics (NCVHS) and the
39
Attorney General in carrying out the requirements of section 264.
The passage of HIPAA required the Clinton Administration, through HHS, to
develop uniform standards for electronic exchanges of health information if Congress
failed to enact a comprehensive privacy act by August 21, 1999. When Congress did not
meet the deadline, HHS responded with proposed regulations on November 3, 1999
(Baumer et al., 2000).
The basic tenet of the proposed rule was to prohibit covered entities from using or
disclosing protected health information except as provided in the rule. Covered entities
could use or disclose protected health information without authorization from the patient
for treatment, payment, and health-care operations. Covered entities would be allowed to
disclose health-care information without authorization only under narrowly specified
circumstances including the following: disclosure to law enforcement agencies, disclosure
in personal injury and medical malpractice cases to appropriate judicial and administrative
proceedings, disclosure to coroners and medical examiners, disclosure for medical research
under sanctioned protocols and institutional review boards, and disclosure for use by
government health data systems. According to HHS, a central aspect of the proposed rule
is the principle of “minimum disclosure” (Baumer, 2000).
The Clinton Administration released the final rule for the Standards for Privacy of
Individually Identifiable Health Information (Privacy Rule) on December 28, 2000
39
Public Law 104-91. Additional information accessed via Internet at http://frwebgate.access.gpo.gov//cgi-
bin/useftp.cgi?Ipaddress=162.1.. ,/104_cong_public_law
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(Lanser, 2001). After publication of the Privacy Rule, HHS received many inquiries and
unsolicited comments through e-mails, letters, and other contacts regarding the impact and
operation of the Privacy Rule on numerous sectors of the health-care industry. In response
to these communications and to ensure that the provisions of the Privacy Rule would
protect patients’ privacy without creating unanticipated consequences that negatively
impact patients’ access to health care or quality of health care, the Secretary of HHS
requested comment on the Privacy Rule in March 2001. After an expedited review of the
comments by HHS, the Secretary decided that it was appropriate for the Privacy Rule to
become effective on April 14, 2001. At the same time, the Secretary directed the
Department (HHS) to immediately begin the process of developing guidelines on how the
Privacy Rule should be implemented and to clarify the impact of the Privacy Rule on
health-care activities. In addition, the Secretary charged HHS with proposing appropriate
changes to the Privacy Rule during the next year to clarify the requirements and correct
potential problems that could threaten access to, or quality of, health care.40
2.4.2 Modifications to Privacy Rule
On July 6, 2001, HHS issued its first guidance to answer common questions and
clarify certain of the Privacy Rule’s provisions. In the guidance, HHS also committed to
proposing modifications to the Privacy Rule to address problems arising from unintended
effects of the rule on health-care access and delivery of care. In addition, the National
40
Federal Register 67(59) (March 27, 2002): 14777. Also, see Federal Register 66: 12738 and Federal
Register 65: 12433.
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Committee for Vital and Health Statistics (NCVHS), Subcommittee on Privacy and
Confidentiality, held public hearings on the implementation of the Privacy Rule on August
21-23, 2001, and January 24-25, 2002, and provided recommendations to the Department
(HHS) based on these hearings. Based on the information received, HHS— in the March
27, 2002, Federal Register, “Notice of Proposed Rule-Making (NPRM)”— proposed
modifications in provisions or areas related to the following: consent, including other
provisions for uses and disclosures of protected health information for treatment, payment,
and health-care operations; notice of privacy practices for protected health information;
minimum necessary uses and disclosures, including oral communications; business
associates; uses and disclosures for marketing; parents as the personal representatives of
“un-emancipated” minors; uses and disclosures for research purposes; uses and disclosures
of protected health information for which authorizations are required; and de-identification
of protected health information. Given that the compliance date of the Privacy Rule for
most covered entities is April 14, 2003, and any revisions to become effective by October
13, 2002, HHS provided a 30-day only period for public comment for the proposed
modifications.4 1
Some of the responses from the political arena and health-care community to the
March 27, 2002, Notice of Proposed Rule-Making (NPRM) regarding the modifications to
the Privacy Rule warrant consideration. The most controversial change is the proposed
removal of the written consent provision that requires health-care entities, including
physicians, to obtain a patient’s consent before using or disclosing his or her medical
41 Federal Register 67: 14777-14778.
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information for routine purposes (Armstrong, 2002; Landa, 2002). HHS Secretary Tommy
Thompson stated that the new rules were needed to fix problems that otherwise would
make it more difficult for patients to obtain quality care in a timely manner. The
Administration also argued that the current provision could needlessly interfere with access
to medical care. For instance, under the current rule, patients could be required to visit a
pharmacy in person before a pharmacist could fill their prescriptions. Also, patients being
referred to specialists might have to sign new consent forms for each new doctor they see,
and doctors might refuse to sign their privacy consent forms. Under the modified rule,
HHS proposes to remove the consent forms as a requirement for treatment, payment, and
health-care operations. The modification would, instead, require that physicians and other
“health-care entities” provide patients a notice of their privacy rights and ask patients to
acknowledge its receipt in writing (Armstrong, 2002; Landa, 2002).
The proposed elimination of the rule regarding written consent has been praised by
health insurers, hospital organizations, and some medical-group organizations. According
to Dick Davidson, President of the American Hospital Association, the current rule would
have created a “paperwork hassle without providing any additional privacy rights or
protections for patients” (Landa, 2002, 1). Davidson further acknowledged that the
Administration’s decision would restore a balance between privacy and quick access to
health care (Armstrong, 2002).
The Medical Group Management Association (MGMA) has shown support for the
proposed modification to the consent rule. According to William Jessee, President and
CEO of MGMA, the proposed rule reflects many changes recommended by MGMA to
HHS and provides safeguards for protecting patient privacy. Jessee also points out that
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medical group practices will still be permitted to obtain written consent if they so choose
(Armstrong, 2002). Another group representing medical groups, The American Medical
Group Association (AMGA), also concurs with the proposed rule modification. The
AMGA lobbied strongly with HHS to eliminate the requirement that providers obtain
written consent from patients before routine use of their information—before providing
treatment, billing for services rendered, or conducting quality assurance and health-care
operations. AMGA argued that the requirement that patients give prior written consent
before receiving treatment would create problems for medical groups in scheduling
appointments, making referrals, phoning in prescriptions, and arranging for outpatient
surgeries (Froelich, 2002).
Privacy advocates, on the other hand, showed discontent with the proposed
changes in the consent rule. Senator Edward Kennedy (D.-Massachusetts), who co
sponsored HIPAA in the Senate, responded to the rule changes by stating, “The
Administration has effectively gutted the cornerstone of the medical-records privacy
regulation. This is part of an unfortunate pattern of putting the interests of corporate
America first and the interests of American families last.” Although Senator Kennedy
acknowledged that there were legitimate concerns about the operation of the consent rule,
he contends that difficulties could have been addressed without rejecting the whole concept
of written consent. For example, an exception could have been made for relatives to pick
up a phoned-in doctor’s prescription. He says that HHS went too far in eliminating the
entire provision and has vowed to hold hearings on the issue and introduce legislation
restoring the consent requirement (Armstrong, 2002).
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Janlori Goldman, privacy advocate and Director of the Health Privacy Project at
Georgetown University in Washington, D.C., stated that, without a prior written consent
requirement, “patients will have no control over how their medical information may be
used or disclosed” (Landa, 2002, 2).
The American Medical Association (AMA) has also expressed concerns regarding
the elimination of the prior consent requirement, according to spokesperson Donald J.
Palmisano, M.D., the AMA’s Secretary-Treasurer. In the AMA’s view, simply providing a
written notice of privacy practices does not offer patients a real choice in how their medical
information may be used or disclosed. The AMA has urged HHS to retain prior consent
but to make it more flexible so that a very sick patient in the hospital would not be denied
medical treatment because he or she has not signed a consent form that allows use of
personal health information (Landa, 2002).
HHS also clarified the ’’minimum necessary” provision in the NPRM. The rule
currently requires that covered entities limit oral communications and disclosure of
personal health information to the minimum information required. Concerns were
expressed that routine conversations between physicians and patients, nurses, and other
health care providers involved in a patient’s care could violate the regulation. The rule
modification clarifies that as long as a provider takes reasonable safeguards to protect
patient medical information— including disclosure incidents such as a patient overhearing
parts of a conversation regarding another patient—then the provider will not be subject to
penalties (Froelich, 2002).
The A M A is also concerned that the Bush Administration proposed rule
modification for “business associates agreements” does not go far enough. Under the
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existing regulation, covered entities—health-care providers, health plans, and health-plan
clearinghouses— are responsible for the actions of their business associates (such as
lawyers, third-party billing entities, and consultants) who may have access to or potential
for disclosure of patients’ health information. The rule requires physicians and other
covered entities to rewrite contracts with business partners to ensure that patient privacy is
protected. If the business partner violates patients’ privacy, than the physician or covered
entity is required to correct the violation, terminate the contract with the business associate,
or report the violation to HHS. Dr. Palmisano of the AMA argues that these provisions
“place significant burdens on physicians.” The modification to the rule proposed by the
Bush Administration extends for one year—until April 14, 2004—the deadline for
physicians and others to rewrite contracts with their “business associates” to address
privacy issues. In addition, HHS offers model language that physicians and other covered
entities can insert into contracts to ease the burden of contracting writing and reduce
additional incurred costs (Landa, 2002).
The MGMA also strongly urges HHS to remove the business associates provisions
from the medical privacy regulations. Although improvements have been made to the
provision, MGMA continues to be concerned about its implications. The final regulation
requires covered entities to “take reasonable steps to cure a breach ... if they know of a
material violation by a business associate.” This means that covered entities must “have
substantial and credible evidence of a violation.” MGMA expressed concerns regarding
the implications for physician practices, particularly the potential liability due to the
actions of their business partners. MGMA recommends that, if HHS does not eliminate the
provision, the Department should clarify the knowledge requirement under the rule, limit
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the responsibility of a covered entity if a business partner violates its obligations under a
contract, and provide an option to require a business associate to ensure by certification, in
lieu of a contract, that obligations for medical privacy are understood and complied with.4 2
The MGMA supported HHS for proposing changes to the research provision of the
regulation, particularly modifications in the clarification and simplification of waiver
criteria, compound authorization, and transition provision. In addition, the MGMA is in
favor of the change being considered by HHS to permit uses and disclosures of a limited
data set that does not include personally identifiable information but maintains certain
identifiers. According to MGMA, the current regulation regarding de-identification of
protected health information could “hamper” important research. The current regulation
requires 18 characteristics to be removed from data to meet criteria for de-identification.
Some of the characteristics— including admission, discharge and service dates, date of
death, age, AIP code, and one or more geographic units smaller than a state— do not
directly identify an individual, although they are key elements for conducting research.4 3
Finally, in reference to the proposed changes in the marketing rule, the AMA
commended the administration for proposing stronger restrictions on how patients’ medical
information can be used for marketing. The new rule proposal allows medical information
to be used for marketing only if the patient has specifically authorized it beforehand, rather
than allowing the patient to “opt out” after information has been disclosed (Landa, 2002,
2). According to Robert Gellman, a physician-practice consultant, the marketing rule
42
MGMA Government Affairs Department, Washington Link, “MGMA Expresses Support for Medical
Privacy Changes,” MGMA Connexion (May-June 2002): 25.
43 Ibid.
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change has a more significant impact than the proposed changes in the consent rule
(Versel, 2002).
The final privacy rule was adopted by the Bush Administration in August 2002.
The key difference from the Clinton Administration rules is that hospitals and physicians
will be allowed to share private information regarding a patient’s health with HMOs and
insurance companies without the patient’s permission. The Bush rules, however, still
require physicians and other health-care providers to notify patients of privacy policies and
make a “good faith effort” to obtain written acknowledgement (Pear, 2002). The final rule
is found in the Federal Register, Vol. 67, No. 157, August 14, 2002, 53182-53273.
2.4,3 Final Regulatory Impact Analysis
Results from the Privacy Rule regulatory impact analysis (RIA) are presented in
the final rule published in the Federal Register, December 28, 2000. The following is a
summary of the process and findings.
Section 251 (5 U.S.C. 804[2]) of Public Law 104-21, the Small Business
Regulatory Enforcement and Fairness Act, specifies that a “major rule” is any rule that the
Office of Management and Budget (OMB) determines is likely to result in
• An annual effect on the economy of $ 100 million or more;
• A major increase in costs or prices for consumers, individual
industries, federal, state, or local government agencies or
geographic regions; or
• Significant adverse effects in competition, employment,
investment productivity, innovation, or on the ability of
United States based enterprises to compete with foreign-
based enterprises in domestic and export markets.
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The impact of this final rule is projected to be over $1 billion in the first year of
implementation. Therefore, according to 5 U.S.C. 840(2), this is defined as a major rule.44
Executive Order 12866 directs agencies to assess all costs and benefits of available
regulatory alternatives and, when regulation is necessary, to select regulatory approaches
that maximize net benefits (including potential economic, environmental, public health and
safety effects, distributive impacts, and equity). According to Executive Order 12866, a
regulatory action is “significant” if it meets any one of a number of specified conditions
including (1) having an annual effect on the economy of $100 million or more; (2)
adversely affecting a sector of the economy, competition, or jobs; or, (3) if it raises unique
legal or policy issues. In accordance with Public Law 104-121, the Administrator of the
Office of Information and Regulatory Affairs of the Office of Management and Budget
(OMB) determined that this rule is a major rule for the purpose of congressional review 4 5
HHS determined that measuring both the economic costs and benefits of health
information privacy is difficult. Traditionally, privacy has been addressed by state laws,
contracts, and professional practices and guidelines. In addition, changes have evolved in
these practices as advances in computer technology have increased the potential use of
medical data. The scope or form of medical data may also change over the next ten years.
Thus, the final rule is intended to address changes in current health information privacy
practices and future changes as electronic uses expand.46
44
Federal Register 65(250) (December 28, 2000): 82758.
45 Ibid.
46
Federal Register 65: 82760.
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To estimate costs, HHS used information from published studies, trade groups,
public comments from proposed regulation, and staff research and analysis. Cost analyses
focused on major policy areas in the regulation that would result in significant costs.
Because of the number of institutions affected and variations in practices, the reliability of
data and information was questioned. Due to this uncertainty, HHS used a conservative
approach in developing assumptions regarding cost estimates, arguing that conservative
assumptions would overstate rather than understate the true cost of implementation.47
HHS further identified the difficulty of measuring the benefits of the privacy
regulation. As explained in the final rule published in the December 28 Federal Register,
48
benefits are perceived by the public as a right rather than a commodity. A difference in
perception exists between what people think to be the level of privacy regarding the use of
their health information versus what actually occurs with the use of that information. HHS
contends that the “cost” of the privacy regulation is the amount necessary to bring health
information privacy to these perceived levels. The benefits that accrue to privacy
protections are significant, but difficult to quantify. HHS focused on economic and health
benefits that might accrue on both the societal and individual levels. The benefits of
improved privacy protection are assumed to increase in the future as patients gain trust in
health care practitioners’ ability to maintain the confidentiality of their health information.
47
Ibid.
48
Ibid.
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Confidentiality is a key component of trust between patients and providers, and it is argued
that a lack of privacy may deter patients from obtaining preventive care and treatment.4 9
The final Privacy Rule is estimated to produce net costs of $18.0 billion, with net
present value costs of $11.8 billion (in 2003 dollars, using a discount rate of 11.2 percent
[7 percent real discount rate plus a projected 4.2 percent inflation rate]) over ten years
(2003-2012). This estimate is based on some costs already having been incurred due to the
requirements of the Transactions Rule, which included an estimate of a net savings to the
health-care system of $29.9 billion over ten years (in 2002 dollars) and a net present value
of $19.1 billion. The first-year costs for the Privacy Rule are estimated at $3.2 billion,
representing about 0.23 percent of projected national health expenditures for 2003. By
2008, the rule is estimated to cost 0.07 percent of projected national health expenditures.
The largest cost items include the requirement to have a privacy official and the
requirement that disclosures of protected health information only involve the minimum
amount necessary. These costs reflect the changes that affected organizations will have to
undertake to implement and maintain compliance with the requirements of the rule and to
achieve enhanced privacy of protected health information.50 HHS expects that the savings
and costs generated by all administrative simplification standards should result in a net
49
65 Federal Register 82776. HHS cites the 1994 Equifax-Harris Consumer Privacy Survey on this point.
50 65 Federal Register 82760. HHS estimated the cost o f compliance at $17.6 billion compared with the net
cost of the Privacy Rule o f $18.0 billion. This cost reflects the cost o f all the major requirements for the rule.
The $18.0 billion figure is based on some costs already incurred due to the requirements o f the Transactions
Rule.
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savings to the health-care system.5 1 Additional cost/benefits analyses and comparisons
with case study data are addressed in the Methodology section.
2.5 S e c u r it y R u l e
HHS published the notice of proposed rule-making (NPRM) for the Security Rule
in the Federal Register on August 12, 1998. Officials from the Centers for Medicare and
Medicaid Services (CMS) have indicated that, due to the events of September 11, several
HIPAA measures, including the final rule for the security provisions, were delayed. The
final Security Rule is scheduled for release sometime in 2002 (Wagner, 2002).
As stated in the August 12, 1998, Federal Register, federal and state agencies,
private health plans, health-care providers, and health-care clearinghouses must provide
assurance to their patients and other entities that the confidentiality and privacy o f health
care information they electronically collect, maintain, use, or transmit is secure.
Confidentiality is threatened by the risk of improper access to electronically stored
information or electronically transferred information. Also, there is a potential need to
associate signature capability with information being electronically stored or transferred.
Currently, there are numerous forms of electronic signatures, ranging from biometric
devices to digital signature. However, to accommodate the legal and other “time-tested”
characteristics of a written signature, an electronic signature must meet the following
V • 52
criteria:
5^ Federal Register 63(155) (August 12, 1998): 43234.
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• Appropriately identify the individual signature;
• Assure the integrity of a document’s content; and,
• Provide for “nonrepudiation”— in other words, significant
evidence that will make it difficult for the signer to claim
that the electronic representation is not valid.
HHS states in the proposed rule that, currently, the only technically mature
electronic signature meeting the above criteria is the digital signature. There is no national
standard for security or electronic signatures. Out of necessity, health-care providers and
53
other health-care entities have defined their own security requirements.
2.5.1 Provisions of the Proposed Rule
The proposed security provisions add a new part 142 to title 45 of the Code o f
Federal Regulations. This rule establishes that covered entities (health plans, health-car
providers, and health-care clearinghouses) must have the security standard in place to
comply with the statutory requirement that health-care information and individually
identifiable health-care information be protected to ensure privacy and confidentiality
when health information is electronically stored, maintained, or transmitted. Congress
mandated a separate standard for electronic signature. Therefore, this proposed security
standard also addresses the selected standard for electronic signature. The proposed
security standard does not require the use of an electronic signature, but specifies the
standard for an electronic signature that must be followed if such a signature is used. If an
^ Federal Register 63:43243.
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entity elects to use an electronic signature, it must comply with the electronic signature
standard.5 4
Section 262 of HIPAA applies to any health plan, health-care provider, and health
care clearinghouse that transmits any health information in electronic form in connection
with transactions referred to in section 1173(a)(1) of the Act. The security provisions of
section 262 of HIPAA apply to any health plan, health-care provider, and health-care
clearinghouse that electronically maintain or transmit any health information relating to an
individual. The proposed rules apply to health plans and clearinghouses, but a clarification
is made in the statutory language as it pertains to health-care providers. With the exception
of the security regulation, HHS proposes that the regulations apply to any health-care
provider only when electronically transmitting any of the transactions to which section
1173(a)(1) refers.5 5 The rule proposal applies to electronic data stored on a computer
system or transmitted from one computer system to another. This is a key difference from
the Privacy Rule, which applies to both electronic and paper records. The Security Rule
does not affect paper records, and it does not apply if electronic records are printed and
then mailed-out (Keohane, 2002).
According to the proposed rule, electronic transmissions include transactions using
all media, even when the information is physically moved from one location to another
using magnetic tape, disk, or compact disc (CD) media. Transmission over the Internet
(wide-open), Extranet (using Internet technology to link a business with information only
54 Federal Register 63: 43245.
55 Ibid.
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accessible to proprietary entities), leased lines, dial-up lines, and private networks are all
included. Telephone voice response and “faxback” systems (a request for information
made via that same machine as a fax) are not included. HHS is soliciting public comments
regarding the voice response and faxback exclusion due to concerns for unintended
consequences that may impact security of health information under this scenario.5 6
57
HHS has divided the proposed rule into four categories:
• Administrative procedures to guard data integrity,
confidentiality and availability—this category relates to the
development and documentation of practices to protect data
and the conduct of personnel accessing or processing data.
• Physical safeguards to guard data integrity, confidentiality,
and availability— includes safeguards related to the use of
locks to secure buildings and procedures to control access to
computer systems and facilities, as well as protections from
other potential hazards such as fires or floods.
• Technical security services to guard data integrity,
confidentiality, and availability— includes the processes that
are put in place to control and monitor information access.
• Technical security mechanisms— includes the processes that
are implemented to prevent unauthorized access to data that
is transmitted over a communications network.
The Security Rule proposal— and also the Transactions and Code Sets Rule and
Privacy Rule— includes numerous procedures and headings, all of which cannot be
addressed in this analysis. Some areas, however, warrant mention. For instance, under the
category for administrative procedures to guard data integrity, confidentiality, and
56 Ibid.
5^ Federal Register 63:43250.
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availability, twelve requirements are listed with implementation features. An example is
the requirement for a contingency plan that includes implementation features for
applications and data analysis, a data backup plan, a disaster recovery plan, an emergency
operation plan, and testing and revision plans. Another example under this category is the
personnel security requirement, with implementation features including supervision of
maintenance personnel, personnel clearance procedures, policies and procedures for
personnel, and access and training requirements for users. A third example is the training
requirement. The implementation features for this requirement include awareness training
for all personnel (including management), periodic security reminders, user education
regarding computer virus protection, user education regarding log monitoring and error
58
reporting for security documentation, and user education in password management.
The category for technical security mechanisms to guard against unauthorized
access to data that are transmitted over a communications network is also noteworthy,
given the importance of computer networking and relevance of Internet technology in
today’s world. Under this category, there is the requirement for each organization that uses
communications or networks to protect health information that is transmitted electronically
over open networks so that this information cannot be easily intercepted and interpreted by
individuals or entities other than the intended recipient(s). Protection is also required for
information systems from intruders (“hackers”) trying to access systems from external
communication points. Implementation features in this category include message
authentication, data integrity controls, access controls, encryption, and others depending
58
Federal Register 63: 43251.
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upon the type of communication system in place (e.g., open-systems such as Internet or
dial-up lines; networks).5 9
The electronic signature standard is also an area of interest that deserves
comment. In the proposed rule, HIPAA directs the Secretary of HHS to coordinate with
the Secretary of the Department of Commerce in adopting standards for the electronic
transmission and authentication of signatures with respect to the transactions referred to in
the law. The proposed rule requires that whenever a HIPAA specified transaction requires
the use of an electronic signature, the standard must be used. It is also noted that an
electronic signature is not required for any of the currently proposed standard
transactions.6 0
A future consideration that may have relevance relates to physicians who currently
utilize (or, in the future, plan to utilize) electronic medical records with integrated
transcription systems, requiring some type of electronic signature format. In the electronic
environment, the same legal weight associated with an original signature on a paper
document may be needed for electronic data. Use of an electronic signature refers to the
process of attaching a signature by electronic means. The process involves authentication
of the signer’s identity, a signature process according to system design and software
instructions, binding of the signature to the document, and measures to prevent alteration
of the signature after it is affixed to the document. HHS proposes that digital-signature
technology be used because it is the only technique that provides for the necessary security
59 Federal Register 63: 43255.
60 Federal Register 63: 43256.
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requirement of “non-repudiation” (a computerized process applying mathematical
functions and encryption that matches and confirms the identity of an electronic signature)
in a network environment.6 1
2.5.2 Impact Analysis
Specific impact analyses have been addressed previously in the sections
summarizing the Standard Transactions and Code Sets and Privacy Rule. HHS presents
the argument— in both the May 7, 1998 Federal Register rule proposal for the National
Standard Health Care Provider Identifier and the August 12, 1998, rule proposal for the
Security Rule— that it can be misleading to discuss the impact of one standard by itself
without assessing the implementation of other standards and their impacts on any one
standard. Therefore, at that time, HHS performed an analysis on the total effect of all the
62
HIPAA standards. HHS further stated that the Department could not determine the
specific economic impact of the standards being proposed in the Security Rule. HHS did
state that, although individually each standard may not have a significant impact, the
overall impact analysis makes it clear that, collectively, all the standards are forecasted to
have a significant impact on the economy of over $100 million.6 3
Federal Register 63: 43257. HHS states in the proposal that if a digital signature is employed, then three
implementation features must be used: message integrity, non-repudiation, and user authentication. Other
implementation features are optional.
62 Federal Register 63: 43262. Also see Federal Register 63(88) (May 7, 1998): 25320.
63
Federal Register 63: 43260.
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HHS provides general comments regarding costs and benefits related to the
security standard. As previously stated, HIPAA requires that all health plans, health-care
providers, and health-care clearinghouses that transmit health information electronically
establish and maintain reasonable and appropriate administrative, technical, and physician
safeguards to ensure the integrity, confidentiality, and availability of the information. For
instance, health-care providers that conduct electronic transactions with health plans would
need to comply with recommendations for security protection. There is no requirement in
the proposed rule to maintain health records electronically or transmit information
electronically. However, if a provider submits claims on paper but archives records
electronically, security measures will be required. According to HHS, there are benefits to
electronic record-keeping and transmittal. Therefore, no small entity is expected to incur
direct costs that exceed benefits as a result of this rule.6 4
HHS further states that most organizations that currently have security measures in
place should need few modifications to their systems to comply with the proposed security
standard. There is an exception, however, for those entities that transmit information over
insecure, public media such as the Internet. Additional costs may need to be incurred to
implement acceptable forms of encryption to protect transmitted health information from
illegal access and potential misuse.6 5 The applicability in updating computer systems and
instituting encryption formats pertaining to electronic medical records, transcription
64
Ibid.
65
Ibid.
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modalities and services, Internet utilization and virtual private networks is addressed later
in this dissertation.
Although HIPAA does not require electronic signatures, this capability would be
required in a “paperless” environment. For example, the use of digital signatures requires a
certain infrastructure that provides for message integrity, non-repudiation, and
authentication of the signature (Public Key Infrastructure). HHS predicts that this will
require both initial and on-going costs for users, although these costs were not estimated by
HHS due to the lack of data and use prevalence.6 6
Other cost considerations include system conversions (including software and
hardware upgrades), consultant costs (if applicable), security training for in-house staff,
and additional staffing considerations (including security officers, if needed, depending on
the size and structure of the organization). In the proposed rule published August 12,
1998, per entity costs were not estimated due to lack of available information regarding the
extent that providers, plans, and clearinghouses were deficient in their security practices.
HHS does believe that the cost of developing and implementing security systems and
procedures is a portion o f the costs associated with converting to the transaction standards
that are required by HIPAA.6 7
66 ibid.
67
Federal Register 63: 43263.
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2.6 S u m m a r y : H IP A A R e g u l a t io n s
The three major rules under the HIPAA Administrative Simplification provisions
are the Standard Transactions and Code Sets Rule, the Privacy Rule, and the Security Rule.
Additional rules outlining unique employer and provider identifiers are not treated as major
headings for purposes of this analysis. The overall purposes inherent in these provisions
are to protect the privacy rights of consumers, to promote improvements in health care on a
national scale, and to improve efficiency and effectiveness in the delivery o f health care.
The Transaction Rule and Privacy Rule have been finalized, with an additional proposed
rule making recently published for specific features of the Privacy Rule. The Security Rule
was scheduled for finalization by the end 2002.
The Transaction Rule requires the Secretary of HHS to adopt standards for
transactions involved in the transmitting and receiving of electronic health information.
All providers who transmit and receive electronic health information will be required to
use a common format. For example, a physician submitting a claim for services would use
CPT coding to identify the service, ICD-CM coding to identify the reason for the service or
diagnosis, and submit claims under the ASC X12N 837, Version 4010 format. Health-care
providers are expected to benefit form a standardized format due to reductions in manual
paper work, more efficient claims and eligibility verification, faster claims processing,
shorter payment cycles, reduced claims errors, and decreased payment write-offs.
The argument that privacy is a right is inherent within the Fourth Amendment of
the United States Constitution. The Privacy Rule recently experienced proposed
modifications from HHS in areas or provisions covering written consent, minimum
necessary disclosures, parental representation of minors, research disclosure and de-
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identification requirements, and protected information use in marketing. The proposed
modifications are not without controversy. For example, the proposed removal of the
written consent provision has been supported by many entities in the health field including
hospital organizations and some medical groups. On the other hand, privacy advocates
have strongly criticized the proposal as undermining the foundation for the privacy
legislation. In terms of compliance, implementation of privacy requirements will require
the development and implementation of administrative policies and procedures that are
integrated with technological requirements that assure compliance with electronic
transmission and reception of protected health information and the security of that
information.
Although the Security Rule is not yet finalized, the basic premise of protecting the
confidentiality, access, and use of protected health information requires the development
and implementation of security measures to assure that these protections are maintained.
As implied for the privacy regulation, not only are technological and computer upgrade
considerations important, but more importantly, the development and implementation of
policies and procedures are needed to assure that the requirements set forth in the HIPAA
regulations for health information transactions, privacy, and security are met. Therefore,
implementation of the HIPAA requirements is as much (or more) a policy and procedure
issue as it is a technological issue.
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Chapter 3
T h e 1997 B a l a n c e d B u d g e t A c t (BBA)
3.1 H is t o r ic a l O v e r v ie w
On July 28, 1997, United States Congressional leaders and President Clinton
announced that an agreement had been reached to bring the federal budget into balance by
fiscal year (FY) 2002. This five-year plan to balance the federal budget included
recommended changes in federal revenues and expenditures (Olson, 1997). O f particular
concern was the solvency of the Medicare program. In what has been described as a
“bipartisan miracle,” Congress and the President enacted the Balanced Budget Act of 1997
(BBA), with the signing of the law on August 5, 1997 (Kahn III and Kuttner, 1999). The
BBA instituted the most far-reaching changes to the Medicare program since its inception
(MedPAC, March 2000).
3.1.1 Medicare and BBA: General Overview
The Centers for Medicare and Medicaid Services (CMS)— formally the Health
Care Financing Administration (HCFA)— is the Agency within the Department of Health
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and Human Services (HHS) that administers the Medicare program.68 Medicare was
established as part of the Social Security Amendments of 1965. Under Title XVIII of the
Social Security Act, the Medicare legislation— designated as Health Insurance fo r the
Aged and Disabled—established a health insurance program for aged persons to
complement the retirement, survivors, and disability insurance benefits under Title II of the
Social Security Act. Medicare has traditionally consisted of two parts: (1) Hospital
Insurance (HI), also known as Part A, covering hospital inpatient, skilled nursing facility,
and certain home- health services; and (2) Supplementary Medical Insurance (SMI), also
known as Part B, which covers physician services and hospital outpatient services. A new
third part of Medicare (Part C) is the Medicare + Choice Program, established by the BBA
and which expanded beneficiaries’ options for participation in private-sector health-care
plans.
When Medicare was implemented on July 1, 1966, approximately 19 million
people enrolled. In 2001, about 40 million people were enrolled in one or both of Parts A
and B of the Medicare program, and 5.7 million of those enrollees were participating in a
Medicare + Choice plan. In 2000, Part A covered about 39 million enrollees with benefit
payments of $128.5 billion, while Part B covered 37 million enrollees with benefit
payments of $88.9 billion. Administrative costs were about two percent of Part A and
about two percent of Part B disbursements. Total disbursements in 2000 were $222
68 Under the current Bush Administration (as o f June 2002), the Secretary o f HHS is Mr. Tommy Thompson.
The Administrator o f CMS is Mr. Tom Scully.
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69
billion. The majority of Medicare beneficiaries receive their benefits under the fee-for-
service program. Under Medicare fee-for-service, physicians, hospitals, and other
providers submit claims to Medicare and receive payment for services they have provided
beneficiaries. Claims are processed and paid by a network of claims administration
contractors— such as Blue Cross, Blue Shield, or CIGNA. Contractors that process Part A
claims are called intermediaries, while those that process Part B claims are called carriers.
70
In fiscal year 1998, for example, contractors processed about 900 million claims.
The Medicare provisions in BBA resulted from a reaction to mounting fiscal
pressures including rapid growth in Medicare spending, ominous projections of future
growth, and the then-projected depletion of the Medicare Hospital Insurance Trust Fund by
FY 2001. There was, also, increasing evidence of overpayments to some Medicare
providers and the need for better incentives than those provided under cost-based
reimbursement. In addition, policy-makers saw the need to reform the program to offer
beneficiaries greater choice among managed care plans and more coverage for preventive
services (MedPAC, March 2000).
The BBA provisions slowed the growth in payments to virtually all fee-for service
(FFS) providers and managed-care plans and increased beneficiary premiums, for an
estimated savings of $112 billion between 1998 and 2002. These savings, combined with a
69
Accessed via the Health Care Financing Administration (now Centers for Medicare and Medicaid Services)
Web site: http://www.hcfa.gov/pubforms/actuary/ormedmed/default3.htm
70
United States General Accounting Office (GAO), Report to Ranking Minority Member Subcommittee on
Labor, Health and Human Services, Education, and Related Agencies, Committee on Appropriations, U.S.
Senate, B-282114, August 4, 1999 (reprinted in Health Care Compliance Programs in California, conference
in Sacramento, CA, February 6, 2001, presented by Lorman Education Services, p. 380).
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shift in the financing of many home health services from Part A to the Part B trust,
extended the projected depletion date of the Hospital Insurance Trust Fund by
approximately six years. In addition, new types of managed-care products were
authorized, and Medicare coverage was expanded for several preventive-care services.
Reductions across provider groups were also achieved through reductions in annual update
adjustments for providers paid under existing prospective payment methods. Another $13
billion was saved through an increase in beneficiary premiums, which resulted from an
increase in the percent of Part B costs paid by premiums and from the transfer of many
home health services from Part A to Part B (MedPAC, 2000).
Despite the magnitude of the implementation of BBA, the long-term financing
needs of the program were still not met. The BBA did create the savings necessary to
allow Congress more time to consider longer-term solutions to address the problem
inherent in the mismatch between spending projections and expected revenue growth.
However, within two years, and before many of the provisions of the BBA had been put
into place, many provider groups persuaded Congress to revisit several issues represented
in the BBA. These groups were concerned that many provisions had unintended
consequences and that access to Medicare services might be compromised. The result was
the Balanced Budget Refinement Act of 1999 (BBRA) (MedPAC, 2000). The BBRA is
discussed briefly here because of its connection and its modifications to specific provisions
of the BBA.
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3.1.2 Balanced Budget Refinement Act of 1999
The BBRA increased Medicare spending by about $16 billion over five years (FY
2000-2004), albeit this was a small fraction of the approximately $1.3 trillion expected to
be spent by Medicare over the same period. The BBRA increased payments for hospitals,
nursing homes, managed care plans, and other providers. The types of policy changes
were relatively similar across provider categories and were largely motivated by concerns
that access to care was adversely affected and providers were overly burdened. The BBRA
made several adjustments to BBA provisions, including modifying the sustainable growth-
rate (SGR) provisions to limit oscillations in the annual update to the conversion factor,
and requiring that the SGR be calculated on a calendar-year basis (the SGR will be
discussed in more detail subsequently in this chapter). The BBRA also required the
Secretary of Health and Human Services (HHS) to conduct a study of the utilization of
physicians’ services by Medicare beneficiaries, including the effects of improvement in
medical capabilities, advancements in scientific technology, and other factors. Additional
provisions of the BBRA required the Secretary of HHS to correct estimates in previously
issued SGR’s with the best available data. The Secretary also must make available to
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MedPAC and the public each year an estimate of the SGR and the conversion factor
applicable to physician payments for the succeeding year. Finally, the BBRA required the
Secretary to establish a process for considering supplemental practice expense data
(MedPAC, 2000; Wilensky, 2000).
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The Medicare Payment Advisory Commission (MedPAC) is an independent federal body that advises the
U.S. Congress on issues affecting the Medicare program. MedPAC was established by the Balanced Budget
Act o f 1997 (Public Law 105-33), which merged the Prospective Payment Assessment Commission (ProPAC)
and the Physician Payment Review Commission (PPRC).
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The primary focus in this analysis regarding the impacts of BBA is centered on the
resulting effects on Part B payments for physician services (specifically, cardiology
services). Through 1991, Part B reimbursement to physicians was based on the concept of
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“reasonable charges.” However, beginning on January 1, 1992, physicians’ payment
under Medicare was changed to a resource-based relative value scale (RBRVS). The
potential impacts of the RBRVS were to decrease payments for surgical and diagnostic
procedures and increase payments for office visits (Gapenski, 1993). The BBA required a
phase-in of resource-based payments for physician practice expenses and clarified
physician practice costs. The BBA replaced the Medicare Volume Performance Standard
(MVPS)— established under the Omnibus Budget Reconciliation Act o f 1989, to update
physicians’ fees— with a new sustainable growth-rate (SGR) system. The BBA also
introduced a single conversion factor for all physician services, which reduced payments
for some services and increased payments for others (MedPAC 2000; Wilensky, 2000).
The specific provisions of BBA relevant to this analysis are addressed in the following
section, with particular discussions on the effects of the SGR, RBRVS, and impacts of the
practice expense component phase-in as all pertain to the physician reimbursement issue.
Medicare defined a “reasonable charge” as: (1) the actual charge for the service performed; (2) the
physicians’ customary charge; and (3) the prevailing charge for that service in the community. Medicare then
paid providers 80 percent o f the reasonable charge after the Medicare patient paid his or her portion o f the
deductible. The patient was responsible for the 20 percent co-payment (Gapenski, 1993; see p. 99).
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3.2 BBA P r o v is io n s R e l e v a n t t o P h y s ic ia n P a r t B
R e im b u r s e m e n t
The relevant provisions of the BBA for this analysis are found in the Medicare and
Medicaid Provisions section under Subtitle F —Provisions Relating to Part B Only,
Chapter 1— Services o f Health Professionals, Subchapter A— Physicians Services.
Additional provisions concerning Medicare reimbursement changes for mid-level
practitioners (nurse practitioners and physician assistants) are found at Subchapter B—
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Other Health Care Professionals. The sections applicable to this discussion are
presented here.
3.2.1 Subchapter A, Section 4501: E stablishm ent o f Single C onversion
Factor for 1998
The BBA instituted a single conversion factor7 4 effective January 1, 1998, based
on the 1997 primary care conversion factor, updated by the HHS Secretary’s estimate of a
weighted average of the current three separate conversion-factor updates that would occur
in the absence of legislation. In subsequent years, the single conversion factor would be
updated by the mechanism provided in section 4502 (below).
73
See Public Law 105-33 (1997), “The Balanced Budget Act o f 1997.” Internet access available at:
www.hcfa.gov/regs/budget97.pdf
74
To calculate the reimbursement for a specific Part B services procedure, the conversion factor (an assigned
dollar value) is multiplied by the designated relative value unit(s) for that procedure. The components and
calculation methodology are presented in more detail in the section summarizing the resource-based relative
value scale (RBRVS).
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3.2.2 Subchapter A , Section 4502: E stablishing U pdate for C onversion
Factor to M atch Spending U nder Sustainable G row th R ate
Section 4502 establishes the update to the conversion factor for years beginning
January 1, 1999 (unless otherwise provided by law) to be the Medicare Economic Index
(MEI), adjusted to match spending under a sustainable growth rate (SGR). The adjustment
could not exceed the MEI by more than three percentage points, nor could it be more than
seven percentage points less than the MEI (the SGR and MEI are discussed in more detail
under separate headings later in this chapter). The adjustment would be determined by
estimating the difference between the cumulative sum of allowed expenditures for April 1,
1997, through March 31 of the year involved and the cumulative sum of actual
expenditures for April 1, 1997, through March 31 of the preceding year. This amount
would be divided by the actual expenditures for the 12-month period ending March 31 of
the preceding year, increased by the sustainable growth rates for the fiscal year which
begins during that 12-month period. For the 12-month period ending March 31, 1997,
allowed expenditures are defined as actual expenditures for the period, as estimated by the
Secretary of HHS. For a subsequent 12-month period, allowed expenditures are defined as
allowed expenditures established for the previous period, increased by the SGR for the
fiscal year which begins during that 1 2 -month period.
3.2.3 R eplacem ent o f the V olum e Perform ance Standard w ith Sustainable
G row th R ate (Section 4503)
The BBA replaced the Medicare Volume Performance Standard with the
“sustainable growth rate” (SGR). The SGR for fiscal year 1998 included four factors: (1)
the estimate of the weighted average percentage changes in fees for all physicians; services
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in the fiscal year; (2 ) the estimated percentage change in the average number of
beneficiaries enrolled in Part B (other than Medicare + Choice enrollees) from the previous
fiscal year; (3) the Secretary’s estimate of the percentage growth in real gross domestic
product (GDP) per capita from the previous fiscal year; and (4) the Secretary’s estimate of
the percentage change in expenditures for all physicians’ services in the fiscal year
(compared to the previous fiscal year) that would result from changes in law and
regulations (excluding changes in the volume and intensity resulting from changes in the
update to the conversion factor). The Secretary was required to publish the SGR not later
August 1 before each fiscal year, except for fiscal year 1998 due to the requirement that the
SGR was published by November 1, 1997.
As mentioned above, the BBRA made several changes involving the SGR
including modifications to limit oscillations in the annual update to the conversion factor,
providing calculations of the SGR on a calendar-year basis, correcting estimates of
previous SGR data with the best available data, and providing MedPAC and the public
with yearly estimates of the SGR and conversion factor applicable to physician payments
for the succeeding year.
3.2.4 Im plem entation o f R esource-B ased M ethodologies (Section 4505)
Section 4505 consisted of five main provisions. The first provision provided a
delayed implementation of resource-based practice expense relative value units (RVUs)
until January 1, 1999. This section defined a phase-in of practice expense RVUs during
the four-year period of 1999 through 2002. The phase-in included a blend of current
practice expense RVUs (75 percent in 1999, 50 percent in 2000, 25 percent in 2001) and
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resource-based practice expense RVUs (25 percent in 1999, 50 percent in 2000, 75 percent
in 2 0 0 1 ), with a 1 0 0 % resource-based system in 2 0 0 2 .
The second provision of section 4505 required the General Accounting Office
(GAO) to review and evaluate the Secretary’s proposed rule on resource-based practice
expenses and report to Congress within six months of enactment. The GAO was required
to analyze the adequacy of the data used in preparing the rule, categories of allowable
costs, methods of allocating direct and indirect expenses, potential impacts on beneficiary
access, and other matters related to the appropriateness of the resource-based methodology
for practice expenses.
The third provision specified that the Secretary of HHS develop new resource-
based RVUs. In developing these RVUs, the Secretary was required to (1) utilize (within
practical means) generally accepted cost accounting principles which recognize all staff,
equipment, supplies, and expenses, not just those tied to specific procedures, and use actual
data on equipment utilization and other key assumptions; (2 ) consult with organizations
representing physicians regarding methodology and data to be used; and (3) develop a
refinement process to be used during each of the four years of the transition to the
resource-based system. The Secretary was also required to report to Congress by March 1,
1998, on the revised practice expense RVUs and issue a new proposed rule by May 1,
1998, allowing for a 90-day comment period. The proposed rule was to consider impact
projections comparing new proposed payment amounts on data on actual physician
practice expenses and impact projections for hospitals based on other specialties,
geographic payment localities, and urban and rural localities. The 1999 BBRA required
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the Secretary of HHS to establish a process for considering supplemental practice expense
data.
The fourth provision required an adjustment to practice expense RVUs in 1998
which would reduce payments for high practice-expense procedures and use the savings to
increase payments for office visit procedure codes. Procedures subject to the reduction
would be those where practice expense RVUs exceeded 110 percent of work RVUs and
which were not performed at least 75 percent of the time in the office setting. The
aggregate amount of reduction was estimated to be $390 million, and procedures were not
reduced if the in-office or out-of-office practice expense RVU increased under the
Secretary’s June 18, 1997 proposed rule.
The fifth provision under section 4505 required the implementation o f resource-
based malpractice relative value units, in a budget-neutral manner, for years beginning with
2000.
3.2.5 Increased M edicare R eim bursem ent for N urse Practitioners (Section
4511) and Physician A ssistants (Section 4512)
Effective for services provided on or after January 1, 1998, restrictions were
removed on settings and services furnished by nurse practitioners (NP’s) and physician
assistants (PA’s). Payments were allowed for services provided in all settings, but only if
no facility or other provider charges were paid in connection with the service.
Reimbursement was designated as equal to 80 percent of the lesser of the actual charge or
85 percent of the physician fee schedule. Payment could be made directly to the NP. Also,
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payment was allowed to a PA as an independent contractor to qualify as an employment
relationship (since PA payment is made only to the employer).
3.3 T h e S u s t a in a b l e G r o w t h R a t e a n d M e d i c a r e P h y s ic ia n
P a y m e n t U p d a t e
Under the sustainable growth rate (SGR) system for determining Medicare
payments to physicians, physician fees are updated each year by an inflation factor—the
Medicare Economic Index (MEI)— plus or minus a performance adjustment factor (PAF).
Section 4503 of the BBA amended section 1848(f) of the Social Security Act (the Act) to
replace the Medicare Volume Performance Standard (MVPS) with an SGR provision (the
MVPS is explained in more detail later in this section). Section 1848(f)(2) of the Act
specifies the formula for establishing yearly SGR targets for physicians’ services under
Medicare. Section 211 of the 1999 BBRA amended section 1848(d)(1)(E) of the Act to
require that the Secretary of HHS make available to the Medicare Payment Advisory
Commission (MedPAC) and the public by March 1 of each year (beginning with 2000)
estimates of ( 1 ) the sustainable growth rate, (2 ) the conversion factor that will apply to
physicians services for the succeeding year, and (3) the data used in making the estimates.
The actual values for the year are based on subsequent data from that year and published in
the Federal Register by November 1 (for example, the actual values for the year 2002 were
75
published in the Federal Register by November 1, 2001).
75
Methodology for estimated SGR and conversion factor for Medicare payments to physicians accessed via
the Internet at www.hcfa.gov/pubforms/actuary/sgr/. Additional information may be obtained from the Office
o f the Actuary, Centers for Medicare and Medicaid Services. Also, Internet access for Section 1848 of the
Social Security Act is available at www.ssa.gov/OP_Home/ssact/titlel8/1848/.
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3.3.1 Sustainable Growth Rate (SGR) Targets
The goal for use of SGR targets is to control the growth in aggregate Medicare
expenditures for physicians’ services. The SGR targets are not direct limits on
expenditures. Therefore, payments for services are not withheld if the SGR target is
exceeded by actual expenditures. Instead, the fee schedule update, as specified in section
1848(d)(3) of the Act, is adjusted to reflect the comparison of actual expenditures to target
expenditures. If expenditures exceed the target, the update is reduced. If expenditures are
less that the target, the update is increased. Under the statute, the update for a year is
determined by comparing cumulative actual expenditures to cumulative target expenditures
(referred to as “allowed expenditures” in the statute) from April 1, 1996, through the end of
the year preceding the year that the fee schedule is being determined. For example, the
2 0 0 2 update would reflect a comparison of cumulative actual to cumulative target
expenditures from April 1, 1996, through December 31, 2001. The 2003 update will
reflect the comparison of actual to cumulative target expenditures from April 1, 1996,
through December 31, 2002. Target expenditures for each year are equal to target
expenditures from the previous year increased by the SGR, a percentage figure calculation
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based on changes in the following four factors:
1. The estimated percentage change in fees for physicians’
services.
2. The estimated change in the average number of Medicare fee-
for-service beneficiaries.
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3. The estimated projected growth in real gross domestic
product (GDP) per capita.
4. The estimated change in expenditures due to changes in law
or regulations.
As previously stated, the 1999 BBRA amended section 1848(d)(1)(E) of the Act to
require the Secretary to make available to MedPAC and the public by March 1 of each year
(beginning with 2000) the estimates of the SGR, conversion factor, and data that apply to
the physician services payment update for the succeeding year. Section 1848(d)(1)(E) was
also amended to require publication in the Federal Register no later than November 1 of
each year (beginning with year 2 0 0 0 ) of the actual conversion factor, update, and allowed
expenditures that will apply to physicians’ services for the succeeding year. Section
1848(f)(1) of the Act requires the SGR to be published in the Federal Register no later
than November 1 for the preceding year, the current year, and the following year, using the
best available data as of September 1. The law includes special provisions for the year
2000. By November 1, 2002, HHS (CMS) is required to publish the SGR for calendar year
(CY) 2001, CY 2002, and CY 2003 using the best available data as of September 1, 2002.
Estimates of SGRs are provided in Tables 1A, IB, and 1C. Note that estimates
differ between tables. Table 1A is based on information available as of March 1, 2002.
Table IB reflects information available as of March 1, 2001. Table 1C provides estimates
as of September 1, 2000. 7 7
77
Ibid. Tables are reproductions and presented in different sections o f the Web site reference corresponding
with the year that the SGR estimate is provided (e.g., 2001, 2002, or 2003).
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Table 1: Sustainable Growth Rates
Table 1A
CY 2001 CY 2002 CY 2003
Factor 1: Increase in Fees 2.0% 2.4% 1.7%
Factor 2: Increase in Enrollment 3.0% 2.7% 1.3%
Factor 3: Increase in Real Per Capita GDP 0.0% -0.2% 2.9%
Factor 4: Increase due to changes in Law or 0.4% 0.8% 0.0%
Regulations
Total Sustainable Growth Rate (SGR) 5.5% 5.8% 6.0%
Table IB
FY 2000 CY 2000 CY 2001 CY 2002
Factor 1: Increase in Fees 2.1% 2.1% 1.9% 1.5%
Factor 2: Increase in Enrollment 0.8% 0.7% 2.9% 0.4%
Factor 3: Increase in Real Per Capita GDP 4.5% 4.2% 1.5% 2.4%
Factor 4: Increase due to changes in Law or
Regulations
0.3% 0.5% 0.5% 1.5%
Total Sustainable Growth Rate (SGR) 7.9% 7.7% 7.0% 6.0%
Table 1C
FY 2000 CY 2000 CY 2001
Factor 1: Increase in Fees 2.1% 2.1% 1.9%
Factor 2: Increase in Enrollment 0.8% 1.0% 0.9%
Factor 3: Increase in Real Per Capita GDP 4.5% 4.3% 2.7%
Factor 4: Increase due to changes in Law or 0.3% 0.5% 0.0%
Regulations
Total Sustainable Growth Rate (SGR) 7.9% 8.1% 5.6%
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Differences in estimates are explained primarily by the time frames in which data
are accumulated and updated. The SGR for a given year is estimated at three different
times using the latest available data. No further revisions are made to a year’s growth rate
after publication of the third estimate (Grimaldi, 2002). The March 1 estimates are early
estimates and may change based on later updated information. More complete data on the
four factors that comprise the SGR are available as of September 1 of a year for publication
in the November 1 notice than are available by March 1. For example, for the 2003 SGR
estimate made as of March 2002, HHS (CMS) must estimate the percent change in fee-for-
service Medicare enrollment for 2003 although there is little information available on the
change in enrollment in fee-for-service enrollment for 2002. Similarly, an estimate of the
percent change in real GDP per capita for 2003 made by November 1, 2002, is likely to be
more accurate than an estimate made by March 1, 2002. In addition, an estimate of the
changes in law and regulation affecting expenditures for physicians’ services for 2003
would require an estimate of the financial impact of any policy changes several months
before the physician fee schedule proposed rule is published. There also may be
differences between an SGR for a year specified by November 1 and the SGR for the same
year as subsequently revised based on later data. Section 211 of the BBRA authorizes the
adjustment of prior years’ SGR component factors to reflect later data, beginning with the
SGR for FY 2000. The two SGR factors that have shown the most volatility are the fee-
78
for-service enrollment numbers and real GDP per capita.
78
Ibid.
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3.3.2 M edicare V olum e Perform ance Standard/Sustainable G row th Rate
(M V PS/SG R )
The SGR system was created in the BBA in 1997 and revised in the BBRA in
1999. The SGR replaced the initial system of spending targets, implemented in 1992,
known as the Medicare Volume Performance Standard (MVPS). The MVPS was created
under section 6102 of the Omnibus Budget Reconciliation Act of 1989 (OBRA 89), which
amended Title XVIII of the Social Security Act by adding a new section 1848, “Payment
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for Physicians’ Services.” The MVPS was a mechanism for assessing rates of increase in
Medicare expenditures for physicians’ services and for controlling physician spending.
However, even as early as the first year of implementation of the Resource-Based Relative
Value System (RBRVS), statutory limitations of the MVPS were recognized that predicted
the MVPS would be ineffective in controlling the rate of increase in payments to
physicians. 8 0
The MVPS/SGR targets for periods prior to FY 2000 are considered to be final,
since no legislative authority exists to adjust the promulgated amounts using later data.
These targets are listed in Table 2 . 8 1
7 9 Federal Register 57(228) (November 25, 1992): 55916.
8 0 Federal Register 56(227) (November 25, 1991): 59582.
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Table reproduced and available on the HSS/CMS (HCFA) Web site at www.hcfa.gov/pubforms/actuary/
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Table 2: Physician MVPS/SGR
Year MVPS/SGR
FY 1990 9.1%
FY 1991 7.3%
FY 1992 1 0 .0 %
FY 1993 1 0 .0 %
FY 1994 9.4%
FY 1995 7.5%
FY 1996 1 .8 %
FY 1997 -0.3%
FY 1998 1.5%
FY 1999 -0.3%
FY 2000 6.9%
CY 2000 7.3%
Section 1848(d)(3)(C) of the Social Security Act defines allowed expenditures for
the period April 1, 1996, through March 31, 1997, to be equal to actual expenditures for
physicians’ services during that period. Annual allowed expenditures for subsequent
periods are equal to annual expenditures for the previous year increased by the SGR. The
SGR was determined on a fiscal year basis through FY 1999. Beginning with calendar
year (CY) 2000, the SGR is determined on a calendar year basis as defined in the 1999
BBRA.
In Table 3 (below), quarterly and cumulative expenditures for the period from
April 1, 1996, through December 31, 2003, are given. The law requires revisions of SGRs
beginning with the FY 2000 SGR. The quarterly and cumulative allowed expenditures for
the last three quarters for CY 1999 are based on the FY 2000 SGR. These figures are
estimated and may change based on more recent information affecting the FY 2000 SGR.
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The year 2000 figures (based on the CY 2000 SGR), the 2001 figures (based on the CY
2001 SGR), and the 2002 figures (based on the 2002 SGR) may also change based on
revisions to these SGRs. 8 2
Table 3: Allowed Expenditures for Physician Services
Quarter Applicable
SGR
Quarterly Allowed Expenditures
(in $ billions)
Cumulative Allowed Expenditures
(in $ billions)
2Q 1996 $12.3 $12.3
3Q 1996 $ 1 2 . 0 $24.3
4Q 1996 $ 1 2 . 2 $36.5
IQ 1997 $12.3 $48.9
2Q 1997 1.5% $12.5 $61.4
3Q 1997 1.5% $ 1 2 . 1 $73.5
4Q 1997 1.5% $12.4 $8 6 . 1
IQ 1998 -0.3% $12.5 $98.6
2Q 1998 -0.3% $12.5 $ 1 1 1 . 1
3Q 1998 -0.3% $ 1 2 . 1 $123.1
4Q 1998 -0.3% $12.4 $135.6
IQ 1999 6.9% $12.5 $148.1
2Q 1999 6.9% $13.4 $161.5
3Q 1999 6.9% $13.0 $174.4
4Q 1999 6.9% $13.2 $187.7
IQ 2 0 0 0 7.3% $13.4 $2 0 1 . 1
2Q 2000 7.3% $14.3 $215.4
3Q 2000 7.3% $13.9 $229.3
4Q 2000 7.3% $14.2 $243.5
IQ 2001 5.5% $14.1 $257.7
2Q 2001 5.5% $15.1 $272.8
3Q 2001 5.5% $14.7 $287.5
4Q 2001 5.5% $15.0 $302.5
IQ 2 0 0 2 5.8% $15.0 $317.4
2Q 2002 5.8% $16.0 $333.4
3Q 2002 5.8% $15.5 $349.0
4Q 2002 5.8% $15.9 $364.8
IQ 2003 6 .0 % $15.9 $380.7
2Q 2003 6 .0 % $17.0 $397.7
3Q 2003 6 .0 % $16.5 $414.1
4Q 2003 6 .0 % $16.8 $430.9
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Allowed expenditures per quarter are equal to allowed expenditures for the same
quarter in the previous year increased by the SGR for the year in which that quarter occurs.
For example, from Table 3, quarterly allowed expenditures of $16.8 billion in the 4th
quarter of 2003 (4Q 2003) are equal to the quarterly allowed expenditures of
approximately $15.9 billion (4Q 2002) increased by the SGR o f 6.0 percent ($15.9 billion
x 1.060 = $16.8 billion). Cumulative allowed expenditures for a quarter are equal to the
sum of cumulative allowed expenditures from the previous quarter for the same year and
quarterly allowed expenditures for that quarter. For example, cumulative allowed
expenditures in 4Q 2003 of $430.9 billion are equal to the sum of cumulative allowed
expenditures through 3Q 2003 of $414.1 billion plus estimated allowed expenditures in 4Q
2003 of $16.8 billion. 8 3
In Table 4 (below), actual expenditures and cumulative actual expenditures are
presented on a quarterly basis for the period April 1, 1996, through December 31, 2001.
These expenditures represent reimbursement amounts tabulated by the quarter in which the
service was furnished. Due to a lag between the date that the service is furnished and the
date that the payment is made, the most recent quarters represent incomplete data. The
total reimbursement amounts for these quarters are estimated by approximating the level of
completeness of the data. This approximation is determined using historical trends.
Amounts are updated periodically when more complete data are accumulated
(approximately six months after the end of a quarter). Actual expenditures are presented
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on a quarterly basis to reflect any seasonal variation in expenditures that occurs over the
year. Estimated and cumulative total expenditures are less likely to change as the
approximate completeness approaches 100 percent. Totals do not necessarily equal the
sum of rounded components. 8 4
Table 4: Actual Expenditures Under the SGR
Calendar
Quarter
Benefits Processed
Through 12/31/01
[in billions]
Approximate
Completeness
Estimated Total
Expenditures
[in billions]
Cumulative Total
Expenditures
[in billions]
2Q 1996 $12.3 1 0 0 .0 % $12.3 $12.3
3Q 1996 $ 1 2 . 0 1 0 0 .0 % $ 1 2 . 0 $24.3
4Q 1996 $ 1 2 . 2 1 0 0 .0 % $ 1 2 . 2 $36.5
IQ 1997 $12.3 1 0 0 .0 % $12.3 $48.9
2Q 1997 $12.5 1 0 0 .0 % $ 1 2 . 6 $61.5
3Q 1997 $ 1 2 . 1 1 0 0 .0 % $ 1 2 . 2 $73.7
4Q 1997 $ 1 2 . 2 1 0 0 .0 % $ 1 2 . 2 $85.8
IQ 1998 $12.3 1 0 0 .0 % $12.5 $98.4
2Q 1998 $12.3 1 0 0 .0 % $ 1 2 . 6 $ 1 1 1 . 0
3Q 1998 $ 1 2 . 0 1 0 0 .0 % $12.3 $123.3
4Q 1998 $ 1 2 . 2 1 0 0 .0 % $12.5 $135.8
IQ 1999 $12.7 1 0 0 .0 % $13.1 $148.9
2Q 1999 $ 1 2 . 8 1 0 0 .0 % $13.3 $162.2
3Q 1999 $ 1 2 . 6 1 0 0 .0 % $13.0 $175.2
4Q 1999 $12.7 1 0 0 .0 % $13.2 $188.4
IQ 2 0 0 0 $14.5 99.9% $14.5 $202.9
2Q 2000 $14.6 99.8% $14.6 $217.5
3Q 2000 $14.4 99.7% $14.5 $232.0
4Q 2000 $14.5 99.2% $14.6 $246.5
IQ 2001 $16.0 98.5% $16.3 $262.8
2Q 2001 $16.3 97.5% $16.8 $279.6
3Q 2001 $15.5 94.4% $16.4 $296.0
4Q 2001 $11.4 68.7% $16.5 $312.5
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As summarized above, the SGR system now sets the spending targets for physician
services and adjusts payment rates to bring spending in line with those targets. The SGR
target for total spending is based on spending in an initial (base) year and the estimated
growth in real per capita GDP each year plus other factors that affect overall spending on
physician services—the changes in the cost of inputs used to produce physicians’ services
(as measured by the Medicare Economic Index [MEI]), the number of Medicare
beneficiaries in the traditional fee-for-service program, and expenditures that result from
changes in laws or regulations. The spending target for physician payments is applied by
incorporating it into the adjustment to the conversion factor that determines the payment
amount per service. The conversion factor is updated annually by adjusting the previous
year’s conversion factor by the change in the MEI (Scanlon, 2002).
It was emphasized in the November 2, 1998, Federal Register that the
establishment of the SGR for any year involves the use of projected values for the four
factors used in determining the SGR. Again, the four factors are Factor 1 changes in fees
for physician services, updated by the MEI; Factor 2 changes in Medicare beneficiary
fee-for-service enrollment; Factor 3 estimated changes in real gross domestic product per
capita; and Factor 4 the percentage increase in expenditures for physicians’ services
resulting from changes in legislation. The 1997 BBA clearly anticipated the use of
estimates of the four factors by the Secretary of HHS. Concerns were noted that there
would be differences between initial estimates and later estimates in some of the
components of the SGR by as much as one percentage point. A projection difference of
one percentage point equates to approximately $400 m illion in spending under the
Medicare physician fee schedule. The apparent instability in the SGR system was also
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noted, given that future forecasts of the SGR were in progress, and that mismatched time
periods and lags between measurement periods incorporated a potential problem in the
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SGR calculation, requiring future legislative or regulatory fixes.
3.3.3 M edicare Econom ic Index (M EI)
In 1972, Congress mandated the development of the Medicare Economic Index
(MEI) to measure the changes in costs of physicians’ time and operating expenses. The
MEI is a fixed-weighted sum of annual price changes for various inputs needed to produce
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physicians’ services with an offset for productivity increases. Similar to a traditional
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Laspeyres index, the MEI is developed in two stages. First, a base period is selected
(1996 for the MEI), cost categories are identified, and the 1996 expenditure shares by cost
category are determined. Second, price proxies are selected to match each relative
expenditure category. These proxies are weighted by the category weight determined from
expenditure amounts and summed to produce the composite MEI. Unlike a traditional
oc
Federal Register 63(211) (November 2, 1998): 59188-59190.
^ A general definition o f the MEI is available on the HSS/ CMS Web site at www.hcfa.gov/stats/indicatr/.
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The Laspeyres price index, also known as a base-weighted index, incorporates a weighted index number that
utilizes base-year weights. For example, in calculating a Price Index, the respective quantities o f various
products bought in the base year are noted and the prices of these products are combined to develop a single
price index number. Subsequently, the new prices of the products are combined to form a new price index
number with no allowance made for changes in relative quantities o f the goods bought over time and their price
changes. A Paasche index, or current-weighted index, on the other hand, makes allowances for changes in the
relative quantities o f the products bought over time as their prices change. It is argued that a Laspeyres
physicians’ price index provides a better measure o f “pure” price increases for inputs into physicians’ care, or
in other words, how much the cost o f producing care increases due to price increases in fixed quantity and mix
o f production inputs. The Paasche method requires quarterly updates in creating new weights, making it
difficult to separate increases in production costs due to changes in prices of inputs from changes in quantities
o f inputs over a period o f several years. For definitions, see Pass et al. (1991), The Harper Collins Dictionary
o f Economics, pages 110, 294-295. A detailed comparison o f the Laspeyres index and Paasche index is also
found in the Federal Register 57: 55899.
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Laspeyres index, the compensation portion of the MEI is adjusted for productivity so both
economy-wide productivity and physician practice productivity are not both included in the
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update (in order to avoid double-counting of productivity).
The MEI consists of two components: (1) physician net income (reflecting the
input of the physician’s own time into the production of physicians’ services in physicians’
offices) and (2) physician practice expenses. Physician net income includes wages,
salaries, and benefits. The physician practice expense component includes six categories:
( 1 ) non-physician employee compensation, including the wages, salaries, and benefits of
non-physician employees in physicians’ offices; (2) office expenses; (3) medical materials
and supplies; (4) professional liability insurance; (5) medical equipment; and (6 ) other
professional expenses. 8 9
The structure of the MEI consists of weights associated with each of the cost
categories, price proxies for each of the cost categories, and an overall adjustment for
changes in productivity. The physician fee schedule is updated by a statutory-specified
formula equal to the MEI plus or minus an update adjustment factor (calculations used for
the 2002 and 2003 physician fee schedules are given later in this section). The purpose of
the MEI is to recognize the aggregate “pure price” increase of providing physicians’
services. Therefore, all input costs across all specialties are considered when determining
the appropriate cost weights. The resulting cost weights, together with the price proxies
and productivity adjustment, are used to calculate a national average percent change in the
8 8 Accessed via the HSS/ CMS Web site at www.hcfa.gov/stats/indicatr/.
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Federal Register 63(211) (November 2, 1998): 58846.
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inputs used to provide physicians’ services. This national average percent change is used
to update the national payments under the fee schedule. Differences in regional and
specialty costs, including malpractice liability costs and specialty cost differences, are
accounted for by the geographic practice cost index (GPCI) or the relative value unit
(RVU) weight (to be detailed more in the discussion of the Resource-Based Relative Value
Scale). Numerous data sources were researched and five primary sources were utilized in
determining 1996 base-year and revised MEI expenditure weights. The five data sources
were (1) the 1997 American Medical Association Socioeconomic Monitoring System
(AMA SMS) survey using 1996 data, (2) the March 1997 Bureau of Labor Statistics
(BLS) Employment Cost Index (ECI), (3) the 1992 Bureau of the Census Asset and
Expenditure Survey, (4) the 1996 Bureau of the Census Current Population Survey, and
(5) the 1997 Medical Economics Survey (using 1996 data) . 9 0 Table 5 (below) summarizes
quarterly index levels and four-quarter moving-average percent changes in the CMS
Medicare Economic Index with forecast assumptions by expense category for 1999—
2003.9 1
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Federal Register 63: 58846-58847.
91
Available on the HSS/ CMS Web site at http://www.hcfa.gov/stats/indicatr/tables/pdf. Data sources include
the Centers for Medicare & Medicaid Services (CMS), Office o f the Actuary; National Health Statistics Group;
and Global Insights Inc., DRIW EFA. Also see the November 2, 1998 Federal Register for data sources
utilized to estimate the index relative weights and choice o f price proxies.
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Table 5: MEI Expenditure Categories/Weights/Price Proxies
Expense
Category
Price
Prox
ies
Base
Year
Weight
1996
1999
Q3
1999
Q4
2000
Q1
2000
Q2
2000
Q3
2000
Q4
2001
Q1
2001
Q2
2001
Q3
2001
Q4
2002
Q1
2002
Q2
2002
Q3
2002
Q4
2003
Q1
2003
Q2
Index Levels
Total Cost Weiaht (%1 100.00 106.2 107.1 108.2 108.6 109.1 110.0 110.7 111.3 111.5 112.1 112.7 113.6 113.8 114.5 115.1 116
Physician Earnings 54.46 106.0 106.9 107.8 108.0 108.2 109.3 110.0 110.2 110.6 111.5 112.0 112.2 112.4 113.3 113.7 114
Wages/Salaries AHE 44.20 106.6 107.6 108.3 108.3 108.5 109.9 110.5 110.6
Benefits ECI 10.26 102.6 103.2 105.2 106.0 106.6 106.8 108.2 108.8
Practice Expenses 45.54 106.9 107.4 108.2 109.1 110.0 110.4 111.7 112.4 112.8 113.3 113.9 114.6 115.3 115.7 116.6 117
Non-Phy. Comp. ECI 16.81 105.2 105.8 107.0 107.6 108.2 108.8 109.4 110.0 110.5 111.1 111.7 112.3 112.9 112.9 113.5 114
Office Expenses CPI-U 11.58 108.0 107.9 109.3 110.3 111.9 112.4 114.4 115.3
Materials/ PPI/ 4.52 112.1 112.6 113.4 113.5 113.9 114.7 115.2 115.8
Supplies
Prof. Liability Ins.
CPI
CMS 3.15 110.8 112.1 113.7 113.7 116.0 116.4 118.0 118.0 118.1 118.3 118.6 119.0 119.8 120.7 121.8 123
Medical Equipment PPI 1.88 96.6 96.3 96.6 96.4 96.5 96.7 97.4 97.4
Other Prof. Expenses CPI-U 7.60 106.6 106.6 107.9 109.2 109.2 110.5 110.5 111.8 111.8 111.8 113.2 113.2 114.5 115.8 115.8 117
Four-Quarter Moving-Average % Change
Total Cost Weiaht (%) 100.00 2.0 1.9 2.1 2.3 2.5 2.7 2.6 2.6 2.4 2.2 2.1 2.0 2.0 2.0 2.1 2.0
Physician Earnings 54.46 1.7 1.7 1.8 2.0 2.0 2.2 2.2 2.1 2.1 2.1 2.0 2.0 1.8 1.7 1.7 1.5
Wages/Salaries AHE 44.20 2.0 1.8 1.8 1.7 1.7 1.9 1.9 2.0
Benefits ECI 10.26 0.7 1.0 1.7 2.5 3.2 3.7 3.5 3.2
Practice Expenses 45.54 2.3 2.2 2.4 2.6 2.7 2.8 3.0 3.0 2.9 2.9 2.5 2.3 2.2 2.0 2.1 2.2
Non-Phy. Comp. A24 ECI 16.81 1.6 1.6 1.7 1.8 2.3 2.5 2.5 2.5 2.4 2.2 2.2 2.2 2.2 2.0 1.9 1.7
Office Expenses CPI-U 11.58 2.2 2.2 2.4 2.6 3.0 3.5 3.9 4.2
Materials/ PPI/ 4.52 3.9 2.2 1.7 2.0 1.9 2.0 1.8 1.8
Supplies
Prof. Liability Ins.
CPI
CMS 3.15 5.8 7.2 7.3 7.3 6.4 5.3 4.6 4.0 3.3 2.7 1.9 1.2 1.1 1,2 1.8 2.3
Medical Equipment PPI 1.88 -0.3 -0.5 -0.8 -1.0 -0.8 -0.4 0.1 0.6
Other Prof. Expenses CPI-U 7.60 1.9 2.2 2.2 2.8 2.8 3.1 3.1 2.8 2.7 2.1 2.1 1.8 1.8 2.4 2.3 2.9
Note: Table 5 (above) is adapted from Table 13 listed on the CM S W eb site at http://www.hcfa.gov/stats/indicatr/tables.pdf
Table 5 is com pressed to list only the two primary categories under physicians ’ earnings and the six primary categories under
practice expenses. Several sub-categories are not listed for presentation purposes only. Price proxies’ acronyms: AHE
(Average Hourly Earnings); ECI (Em ploym ent Cost Index); CPI-U (Consum er Price Index for all urban consumers); PPI
(Producer Price Index); CM S (Centers for M edicare and M edicaid Services).
3.4 CY 2003 E s t im a t e f o r P h y s ic ia n F e e S c h e d u l e U p d a t e a n d
C o n v e r s io n F a c t o r
As previously stated, the law requires that the physician fee schedule conversion
factor be updated each year by the percentage in the MEI, which measures the weighted
average price change for various inputs involved with producing physicians’ services. The
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fee schedule update is adjusted by a performance adjustment factor (PAF) which compares
target and actual expenditures. Paragraphs (3) and (4) of section 1848(d)(3) of the Social
Security Act (the Act) indicate that the physician fee schedule update is equal to the
product of the MEI and “an update adjustment factor” (the PAF). The update adjustment
factor is applied to the inflation update to determine the success or failure in meeting the
expenditure target, referred to as allowed expenditures. Allowed expenditures are equal to
actual expenditures in a base period updated each year by the SGR. Beginning with 1999,
the BBA required that the updated adjustment factor be determined under section
1848(d)(3) to equal the difference between (1) the sum of the allowed expenditures for
physicians’services for the period beginning with April 1, 1997, and ending on March 1 of
the year involved; and (2 ) the amount of actual expenditures for physicians’ services
furnished during the period beginning April 1, 1997, and ending on March 31 of the
preceding year; divided by the actual expenditures for physicians’services for the 1 2 -month
period ending on March 31 of the preceding year, increased by the SGR for the fiscal year
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which begins during such 1 2 -month period.
The BBRA made changes to the methodology for determining the physician fee
schedule update beginning in 2001. Specifically, the BBRA required that the methodology
used in section 1848(d)(3) only be used for determining the physician fee schedule update
for 1999 and 2000. Beginning in 2001 and subsequent years, the update is determined
under section 1848(d)(4). The general principle of adjusting the inflation update (the MEI)
based on a comparison of actual and target expenditures (the update adjustment factor) was
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Federal Register 66(212) (November 1, 2001): 55313.
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continued, but changes were instituted for calculation of the update adjustment factor.
These changes have two impacts. First, measurement of actual expenditures now occurs
on the basis of a calendar year rather than the twelve-month period from April 1 through
March 31. Second, deviations between cumulative actual expenditures and cumulative
allowed expenditures will be corrected over several years rather than in a single year. The
rationale is that corrections over several years will result in less year-to-year volatility in
the physician fee schedule update than will occur if adjustments to the update are made to
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bring expenditures in line with the target in one year.
Under section 1848(d)(4)(A) of the Act, the physician fee schedule update for a
given year is equal to the product of (1) 1 plus the Secretary’s (HHS) estimate of the
percentage increase in the MEI for the year, and (2) 1 plus the Secretary’s estimate of the
update adjustment factor for the year. Under section 1848(d)(4)(B) of the Act, the update
adjustment factor— or performance adjustment factor (PAF)— for the 2003 physician fee
schedule update is calculated using the following formula: 9 4
_ Target2QQ2 - Actual2oo2 x q 7 5 + Target4 /9 6 .12/o2 - Actual 4/96.12/02 x q 3 3
2 0 0 3 Actual2 0 0 2 ' Actual2 0 0 2 x (l + SGR2 0 o 3)
Substituting the estimated figures from Tables 1A, 3, 4 (above) and current CMS
projections of actual expenditures for 2 0 0 2 into this formula provides the current estimate
of the PAF for 2003:
93
Federal Register 66: 55313-55314.
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Federal Register 6 6 : 55314. Calculations were reproduced from the HSS/ CMS Web site
http://www.hcfa.gov/pubforms/actuary/ (“Estimated Sustainable Growth Rate and Conversion Factor for
Payments to Physicians in 2003”).
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Target2 o o 2 = Estimated Allowed Expenditures for CY 2002 = $62.4 billion ($15.0 + $16.0 +
$15.5+ $15.9)
Actual2 o o 2 = Estimated Actual Expenditures for CY 2002 = $67.7 billion
Target4/96-i2/02 = Estimated Cumulative Allowed Expenditures from 4/1/96-12/31/2002 =
$364.8 billion
Actual4/96-i2/02 = Estimated Cumulative Actual Expenditures from 4/1/96-12/31/2002 =
$380.3 billion
S G R 2oo3 = Estimated Sustainable Growth Rate for 2003 = 6.0 percent (0.060)
62.4 - 67.7 A„c , 364.8 - 380.3 A O O A10l
PAF7 n n - , = ----------------- x 0.75 + x 0.33 = - 0.131 = -13.1%
2003 67.7 67.7 x 1.060
Sections 1848(d)(3)(D) and 1848(d)(4)(D) of the Act require that the update
adjustment factor determined under subparagraph (B) (under paragraphs [3] and [4],
respectively) may not be less than -7.0 percent or greater than 3 percent. Therefore, the
current estimate for the update adjustment factor (PAF) for 2003 is -7.0 percent. 9 5
The estimated physician fee schedule update for CY 2003 is determined by
multiplying (1) the estimated MEI; (2) the estimated adjustment factor; and (3) other
factors pursuant to section 1848(d)(4)(F) requiring an adjustment to the conversion factor
of -0.2 percent in 2001 through 2004 and +0.8 percent in 2005 as shown in Table 6 (1.016
x 0.930 x 0.998 = 0.943). This calculation, when applied to the CY 2002 conversion factor
of $36.1992, results in an estimated conversion factor for CY 2003 of $34.1355 (pending
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Ibid.
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the updated estimates presented by November 1, 2002). Table 6 (below) summarizes the
96
calculation estimate for the CY 2003 conversion factor:
Table 6: Current Estimate of the CY 2003 Physician Conversion Factor
CY 2002 Conversion Factor $36.1992
Medicare Economic Index (MEI) 1.6% (1.016)
Performance Adjustment Factor (PAF) -7.0% (0.930)
Other Statutory Factors -0.2% (0.998)
Total Increase -5.7% (0.943)
CY 2003 Conversion Factor $34.1355
3.5 T h e CY 2002 C o n v e r s io n F a c t o r : A C o n t r o v e r s ia l
R e d u c t io n
The CY 2002 conversion factor was reduced by 5.4% from the previous year.
This, of course, resulted in vehement opposition from those representing the interests of
physician medical groups. Continued controversy is guaranteed, given the additional
reductions currently calculated for CY 2003. The 2002 reduction reflects the complexity
in setting the fee schedule under current regulations. For example, a number of factors
changed between March 1, 2001, and September 1, 2001 (for November publishing), that
lowered estimates o f allowed expenditures and increased estimates for actual expenditures.
Allowed expenditures declined because real per capita gross domestic product (GDP)
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Federal Register 66: 55314. Calculations were reproduced from the HSS/ CMS Web site
http://www.hcfa.gov/pubforms/actuary/ (“Estimated Sustainable Growth Rate and Conversion Factor for
Payments to Physicians in 2003”).
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growth for 2000 was lower than the March estimates. Also, the (then) current estimates of
real CDP growth for 2001 and 2002 were lower than in March. Additionally, the March
2001 estimate for actual expenditures was $61.9 billion compared to $65 billion estimated
by November 2001. These expenditures differed for two reasons. First, expenditures were
found to have increased as more information was received during the year. Second, a
number of new procedure codes were not included in the measurement of actual
expenditures beginning in 1998. This resulted in the measurement of actual expenditures
being under-estimated for 1998, 1999, and 2000. Consequently, the physician fee schedule
update factor was higher in 2 0 0 0 and 2 0 0 1 than it would have been if the newer codes had
been included. The update factor (PAF) was calculated at -1.5 percent with the March
2001 data estimates. Section 1848(d) of the Act requires that these codes must be included
in the measurement of actual expenditures for historical, current, and future periods.
Therefore, corrections were instituted. Utilizing the equation for calculation of the PAF
(see above) based on the most current data as of September 1, 2001 (to be published by
November 1, 2001), the update factor for 2002 was calculated at -10.9%. Due to the
statutory requirements limiting the PAF between -7.0% and +3.0%, the PAF for 2002 was
set at -7.0% (or, under sections 1848(d)(4)(A) and 1848(d)(4)(B); 1.0 + -0.07 = 0.930).9 7
Two additional adjustments also impacted the CY 2002 conversion factor
decrease. First, a budget-neutrality adjustment of -0.46 percent (0.9954) (required under
section 1848(c)(2)(B)(ii) for changes in relative value units) was applied to accommodate
for the increase in work relative value units (RVUs) resulting from the recently completed
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Federal Register 66: 55314. Also, for Internet access, see http://www.hcfa.gov/pubforms/actuary/sgr/
background.htm
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five-year review of work units for physician services. Second, a volume and intensity
adjustment of -0.18 percent (0.9982) was applied to account for the final year of the
transition to the resource-based practice expense system. Multiplying all of these factors
together, and then multiplying that product by the previous year (CY 2001) conversion
factor ($38.2581) yielded the conversion factor for CY 2002 ($36.1992)— a 5.4%
reduction. 9 8
3.6 T h e R e s o u r c e -B a s e d R e l a t iv e V a l u e S c a l e (RBRVS)
This chapter has focused on the impacts of the 1997 Balanced Budget Act (BBA)
on Part B Medicare physician reimbursement. The rationale for the focus of this study on
the BBA (in addition to HIPAA) is due to the scope of the BBA legislation, the
relationship of this legislation to other pertinent Congressional mandates, and the resulting
associations with other legislative amendments and subsequent impacts on physician
reimbursement. Although the BBA was not the primordial legislation that significantly
changed Part B Medicare physician reimbursement, its importance and relevance to this
study is, unquestionably, warranted. In this section, an overview of the legislative
background, development, and general structure of the Resource-Based Relative Value
Scale (RBRVS) is presented. An overview of the RBRVS is necessary in order to correlate
and understand the legislative rationales and payment mechanisms discussed previously in
this chapter.
From the HSS/ CMS Web site, Internet access at: http://www.hcfa.gov/pubforms/actuary/sgr/
background.htm
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3.6.1 L egislative Background
Prior to January 1, 1992, physicians were compensated on a reasonable charge
basis. The reasonable charge for a physician’s service was defined as the lowest of (1) the
physician’s actual charge for that service, (2) the physician’s customary charge, or (3) the
prevailing charge in the locality for similar services. The customary charge was calculated
as the median charge by the physician for the service during the July through June data
collection period preceding the current calendar year (CY). These charges were then
arrayed in ascending order, and the median charge data were selected as the customary
charge. The prevailing charge limit for a particular service in a locality was an amount set
high enough to cover the full customary charges of the physicians whose billings
accounted for at least 75 percent (the 75th percentile) of the charges in the locality for that
service. From 1975 through 1991, changes in prevailing charge limits from year to year
were limited by statute to the amount of inflation in medical costs as measured by the
M E I."
The development of a physician fee schedule that was based on a relative value
scale was mandated by Congress under Public Law 99-272 (Consolidated Omnibus
Reconciliation Act [COBRA] of 1985), Public Law 99-272 (OBRA of 1986), and Public
Law 100-203 (OBRA of 1987). The goals of the relative value scale system were to slow
the rising volumes and cost of physician services, broaden access to care, and develop a
formal mechanism for valuing physician services to align reimbursement with the costs to
" Federal Register 56(227) (November 25, 1991): 59504.
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provide these services (Okunade and Miles, 1999). Assisting with the research and
implementation of this project was the research team from the Harvard University School
of Public Health, headed by Dr. William Hsiao. 1 0 0 On December 19, 1989, a major change
in the Medicare physician payment rules was enacted as part of the Omnibus
Reconciliation Act of 1989 (Public Law 101-239). Section 6102 of Public Law 101-239
amended Title XVIII of the Social Security Act by adding a new section 1848, “Payment
for Physician Services.” The new section included three major parts: (1) the creation of
Medicare volume performance standards (MVPS), (2) replacement of the reasonable
charge payment mechanism with a fee schedule for physicians’ service, and (3)
replacement of the maximum actual allowable charge (MAAC) with a new limiting charge
for Medicare non-participating providers. Several modifications and clarifications were
enacted under Public Law 101-508 (OBRA of 1990) including revisions to payment
amounts in 1991 in compliance with budget neutrality requirements and transition rules.
Implementation of the RBRVS was accomplished by a transition schedule from 1992
through 1995. Transition provisions included the blending of old payment amounts with
new amounts. 1 0 1 Budget neutrality is currently subject to section 1848(c)(2)(B)(ii)(II) of
the Act, which requires that changes to relative value units (RVUs) cannot cause
expenditures to increase or decrease by more than $ 2 0 million from the amount of
1 0 2
expenditures that would have been made had these adjustments not occurred.
1 0 0 Federal Register 56: 59505.
1 0 1 Federal Register 56: 59504.
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Federal Register 66(212) (November 1, 2001): 55320.
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3.6.2 RBRVS Components and Calculation Methodology
The Medicare RBRVS reflects the relative cost of each of the approximately 7,500
CPT Codes (services) compared to the cost of the average or reference service. Initially,
this service, with a relative value of 1.00, was defined as the mid-level, or Level 3, office
visit (CPT code 99213). This reference was chosen arbitrarily (by HHS/HCFA) because it
was a service that was utilized by most physician specialties, and, therefore, was one of the
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services that was most meaningful to the majority of Medicare physician providers. For
the current 2002 physician fee schedule, the Level 2 office visit (CPT code 99212) non
facility RVU total is now 1.00. The Level 3 office visit is currently assigned a non-facility
RVU total of 1.39 (non-facility versus facility reimbursement is discussed below).1 0 4 A
service with 1.20 RVUs is defined as one that is 20 percent more costly to render than the
reference, or average, service. A service that is assigned 0.85 total RVUs is 15 percent less
costly to provide than average. RVUs are uniform nationally. No adjustment is made for a
physician specialty, board certification, or additional credentials (Grimaldi, 2002).
The total RVUs per service are calculated based on three components: physician
work, practice expenses, and malpractice insurance. Over time, studies have been carried
out to determine estimates of the cost of the resources associated with each component.
Initially, relative values for physician work— based on the time required for the physician
to render the service—were resource-based. The relative values for practice expenses and
malpractice insurance were calculated from physician charge data due to the lack of
1 0 3 Federal Register 56: 59571 and 59763.
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Federal Register 66: 55465.
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resource-based cost information. Beginning in 1999, the practice expense transition from
cost-based to resource-based values was implemented. This is discussed in greater depth
later in this section. Also, effective January 1, 2000, the relative values for malpractice
insurance were converted to a resource-based system. Grimaldi’s (2002) description of the
three components is paraphrased here:
3.6.2.1 Physician Work
Physician work includes pre-service, intra-service, and post-service physician time,
effort, skill, and stress associated with provision of a service. Pre-service work occurs
prior to the encounter with the patient. It typically involves tasks such as medical record
review, completion of forms, communications with other professionals, pre-procedure
work-up, and scrubbing (for surgeries). Intra-service work entails the actual patient
encounter and hands-on treatment of the patient. Post-service work occurs after the
physician’s encounter with the patient. The tasks usually involve documentation of care,
dictation of notes, writing orders, development of plans of care, and referrals of patients to
other practitioners.
3.6.2.2 Practice Expenses
Physicians incur various expenses to provide services in office settings. Practice
expenses include non-physician wages, salaries, benefits, rent, supplies, and equipment
costs. Practice expenses vary as a proportion of a physician’s gross practice income,
depending on the physician’s specialty, geographic location, and service mix. The
American Medical Association (AMA) Socioeconomic Monitoring System (SMS) survey
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data were used to calculate specialty-specific hourly practice expenses. Examples of total
hourly practice expense by specialty are psychiatry ($25.30), emergency medicine
($33.00), family practice ($67.10), cardiac/thoracic surgery ($68.80), cardiovascular
disease ($81.60), and ophthalmology ($125.30).1 0 5
The RBRVS fee schedule now includes two practice expense RVUs: (1) facility
practice expense RVUs, and (2) non-facility practice expense RVUs (exceptions
encompass major surgical procedures and visits and consultations furnished exclusively in
one setting). The units that apply to a service depend on whether the physician service is
provided in a hospital inpatient or outpatient facility setting, or in the physician’s office. In
general, the non-facility practice expense RVUs are higher than the facility practice
expense RVUs. This “site-of-service” differential is due to the fact that in a facility setting,
the physician does not incur all of the expenses associated with the service. The hospital
pays the cost of staffing and supplies for a particular service that is supervised by a
physician not employed by the hospital. This is accounted for within the Medicare
reimbursement for that service. Without this fee differential, Medicare would pay
duplicate reimbursement for the hospital charges and the physician portion. For example,
cardiologists typically perform heart catheterizations in the hospital. Certain codes
associated with the procedure are designated as facility codes. When the physician submits
a bill for his or her portion of the test, the Medicare payment for codes designated as
facility or non-facility services are reimbursed at the lower facility rate for the physician
portion.
1 0 5 Federal Register 66(149) (August 2, 2001): 40377^10378.
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Separate RVUs are also assigned to professional and technical components of
various diagnostic services. The professional component (designated by a modifier -26)
encompasses the physician’s supervision and interpretation of a service or procedure
performed in a hospital setting or utilizing equipment not owned by the physician. The
technical component (designated by modifier -TC ) reflects the performance of services by
a physician in his or her office with his or her equipment, but utilizing outside physicians
to provide interpretation of results.
3.6.2.3 Development o f the Resource-Based Practice Expense Relative Value Units
The background and methodology for computing practice expense RVUs warrants
a more detailed discussion, given the impacts of the practice expense phase-in on
reimbursement for office visits compared with procedural services. Section 121 of the
Social Security Act Amendments of 1994 (Public Law 103— 432) required HHS to develop
a methodology for a resource-based system for determining practice expense RVUs for
each physician’s service beginning in 1998. The development of the methodology was
based on identifying the resources of staff, supplies, and equipment used in providing
medical and surgical services in various settings (e.g., physicians’ offices). The legislation
specifically required that the implementation of the new practice expense RVU system
apply the same budget-neutrality provisions that were applied to other adjustments under
the fee schedule. 1 0 6
1 0 6 Federal Register 6 6 : 55249.
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Section 4505(a) of the BBA amended section 1848(c)(2)(ii) of the Act and delayed
the effective date of the resource-based practice expense RVU system until January 1,
1999. In addition, section 4505(b) of the BBA provided for a four-year transition period
from charge-based practice expense RVUs to resource-based RVUs. Thus, the practice
expense RVUs for CY 1999 were the product of 75 percent of charge-based RVUs and 25
percent of the resource-based RVUs. For CY 2000, RVUs were 50 percent charge-based
and 50 percent resource-based. For CY 2001, RVUs were 25 percent charge-based and 75
percent resource-based. In CY 2002, the practice-expense phase-in was completed, with
RVUs 100 percent resource-based. 1 0 7 Section 4505(d)(1)(C) of the BBA directed HHS to
develop a refinement process to be used during each of the four years of the transition
• A 108
period.
Section 4505(e) of the BBA amended section 1848(c)(2) of the Act by requiring
that 1998 practice expense RVUs be adjusted for certain services in anticipation of
implementation of resource-based practice expenses beginning in 1999. This resulted in an
increase in practice expense RVUs for office visits. For other services in which practice
expense RVUs exceeded 110 percent of the work RVUs and were furnished less than 75
percent of the time in an office setting, the statute required HHS/HCFA (now CMS) to
reduce the 1998 practice expense RVUs to a number equal to 110 percent of the work
RVUs. This reduction did not apply to services that had proposed resource-based practice
1 0 7 Ibid.
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expense RVUs that increased from their 1997 practice expense RVUs. Further data
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collection refinements were included in the BBRA of 1999.
Actual practice expense data were obtained from two primary sources— the
Clinical Practice Expert Panel (CPEP) data and the American Medical Association’s
(AMA) Socioeconomic Monitoring System (SMS) data. The methodology was based on
an assumption that current aggregate specialty practice costs provided reasonable initial
estimates of relative resource costs for physicians’ services across specialties. The
methodology allocated these aggregate specialty practice costs to specific procedures—
defined as a “top-down” approach. Actual practice expense data by specialty obtained
from the 1995 through 1998 SMS survey data were used to create six cost pools: (1)
administrative labor, (2) clinical labor, (3) medical supplies, (4) medical equipment, (5)
office supplies, and (6 ) all other expenses. The six practice expense pools were further
divided into direct and indirect cost groups for each specialty. For CY 2002, 1999 SMS
data were also incorporated. 1 1 0
Three steps were involved in the creation of the cost pools. In the first step, SMS
data were used to determine practice expenses per hour by cost category. Practice
expenses per hour for each physician respondent’s practice were calculated as the practice
expenses for the practice divided by the total number of hours spent in patient-care
activities. Average values per specialty were utilized as the practice expense per hour for
that specialty. The second step included a determination o f the total number o f physician
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1 1 (W
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hours by specialty involved in treating Medicare patients. This was calculated from
physician time data for each procedure code and from Medicare claims data. In the third
step, practice expense pools were calculated by cost category (per specialty) by multiplying
the specialty practice expenses per hour for each category by the total physician hours. For
services with work RVUs equal to zero, a separate practice expense pool was created using
CPEP data. 111
Concerns were expressed that potential errors in the specialty utilization data could
have an effect on the calculation of the practice expense RVUs. Specialty societies
representing internal medicine, family practice, and other subspecialties were opposed to
using the 1999 SMS data in the calculation of the practice expense RVUs due to small
sample sizes and unrepresentative responses for some specialties. Particular comments are
noteworthy. For example, one commenter noted that the practice expense per hour for
cardiology dropped by 15 percent in one year and expressed doubts that the actual change
in practice expense of this magnitude could have occurred. Another commenter indicated
that the cardiology subspecialty of electrophysiology was most likely not represented at all
in this “flawed” data set. HCFA (now CMS) responded to comments that the SMS data
was not a perfect data source for developing practice expense RVUs by noting that the
SMS survey was the best data available for multispecialty practice costs. Although
limitations in the data were acknowledged, HCFA indicated that there were no better
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alternative data sources for this purpose.
1 1 2 Federal Register 6 6 : 55253.
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In March 2000, the AMA informed HCFA that, due to the increasing cost of data
collection and low response rates, it was discontinuing the traditional SMS survey
indefinitely. In addition, the AMA discontinued future administration of the practice-level
practice expense survey that was piloted in 2000 (response rates were 22 percent). The
AMA has assigned a committee to decide the future of the SMS survey based on the costs
and benefits of the survey (Dobson et al. [the Lewin Group], 2000). Given that the AMA
is no longer conducting the survey, CMS has solicited input from physician specialty
societies and other organizations affected by Medicare fee schedule payments regarding
the best approach in obtaining practice expense data and updating the methodology for
determining practice expense RVUs. CMS stated that it has been beneficial to use five
years of SMS data to develop practice expense RVUs, but it may not be necessary to make
annual updates to aggregate specialty practice cost data if relative practice expenses do not
change significantly from year to year. However, it may be beneficial to periodically
review aggregate practice expenses and make changes when necessary. For instance, one
public commenter suggested that technological innovation may change relative expenses
among services. For this reason, CMS believes that a review of practice costs every five
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years is necessary, which is also required by statute. CMS utilizes a wide array of
resources in evaluations and updates including recommendations from the General
Accounting Office (GAO), the Medicare Payment Advisory Commission (MedPAC), and
the Practicing Advisory Council (PPAC). The efforts of the AMA’s Specialty Society
Relative Value Update Committee (RUC) and multispecialty sub-committee, the Practice
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Expense Advisory Committee (PEAC), have been favorably recognized by both CMS and
those representing physician group reimbursement interests for their work in reviewing and
recommending refinements for practice expense inputs. 1 14
3.6.2.4 Relative Value Updates
The Secretary of HHS is obligated under section 1848(c)(2)(B)(i) of the Act to
review work RVUs at least once every five years, taking into account several factors
including changes in medical practice, technological developments, and updated data. The
review is conducted in two separate parts. One part is an annual review that focuses
primarily on the development of new codes. The other part is a five-year review of
existing codes. Under section 1848(c)(2) of the Act, adjustments to RVUs may not cause
the amount of Medicare physician payments to differ by more than $20 million from the
amount such payments would have been without the adjustments. In the June 8 , 2001,
Five-Year Review o f Relative Value Units Under the Physician Fee Schedule, 1 1 5 HHS
estimated that the increase in physician work RVUs would increase expenditures
(payments) by more than $20 million without an offsetting adjustment to either the RVUs
or the conversion factor. Therefore, HHS proposed a 0.3 percent reduction in the
conversion factor to meet budget neutrality requirements. Practice expense RVUs were
also impacted since they are based, in part, on physician work. For example, the five-year
review for cardiac surgery indicated a five percent increase in work RVUs and a
1 1 4 Federal Register 6 6 : 55250, 55251, 55254.
1 1 5 Federal Register 6 6 : 40396. Also see Federal Register 6 6 : 31028.
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corresponding one percent increase in practice expense RVUs. General surgery saw a 3
percent work RVU increase and one percent practice expense increase while no increases
in work or practice expense RVUs were assigned to cardiology. 1 1 6 Budget neutrality is
maintained when aggregate Medicare payments are the same both before and after changes
have been made to RVUs. However, aggregate Medicare payments within and across
physician specialties may change. Thus, ongoing efforts to accurately measure and update
RVUs may result in the same amount being divided numerous ways, but with no increase
in the overall amount itself (Grimaldi, 2002).
Because collection of information requirements are mandated under the Paperwork
Reduction Act (PRA) of 1995, HHS is required to provide a 30-day notice in the Federal
Register and solicit public comment before a collection of information requirement is
submitted to the Office of Management and Budget (OMB). Also, a regulatory impact
analysis is required by Executive Order 12866, the Unfunded Mandates Reform Act of
1995, the Regulatory Flexibility Act of 1995, and Executive Order 13132 of 1999. A
regulatory impact analysis must be prepared for major rules with economically significant
effects— $100 million or more annually. HHS/CMS states that the changes in the
Medicare physician fee schedule are, for the most part, budget-neutral. However, these
changes do involve redistribution of Medicare spending among procedures and physician
specialties. For the published final rule with comment period for the CY 2002 fee
schedule, HHS/CMS indicated that the redistributive effect of the rule on any particular
1 1 6 Federal Register 6 6 : 40397.
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specialty was likely to exceed $100 million for at least one specialty group. Therefore, it
was considered a major economic rule. 1 17
3.6.2.5 Malpractice Insurance
The third RVU component, malpractice insurance, is identified separately from
other practice expenses because of the wide variation across specialties and changes over
time consistent with fluctuations in dollar amounts of malpractice awards. Surgeons
generally pay higher malpractice premiums than generalists, whose practices primarily
consist of consultations and office visits.
3.6.2.6 Con version Factor
The conversion factor represents the dollar value of one RVU. Multiplying the
conversion factor by the total RVUs for a particular service equals the Medicare payment
amount for that service. In general, CMS establishes the conversion factor annually by
dividing the projected aggregate fee schedule amount by the projected aggregate number of
RVUs. According to this approach, if the aggregate fee schedule amount is expected to
equal $100 million and the projected aggregate number of RVUs is two million, the
conversion factor would equal $50 ($100 million - s - 2 million) (Grimaldi, 2002). O f course,
this is a simplified explanation. The actual calculation of the conversion factor for
physician services, except anesthesia, for CY 2002 is $36.20 (rounded), down from $38.26
in CY 2001. A separate conversion factor has applied to anesthesia since the RBRVS
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108
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system was implemented. In years prior to 1998, as many as four conversion factors were
utilized separately for primary-care services, surgical services, anesthesiology, and other
physician services. The implementation of one conversion factor for all physician services
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(except for anesthesia) was implemented January 1, 1998, as required by the 1997 BBA.
The calculation of the conversion factor utilizing SGR estimates and other factors has been
detailed previously in this chapter.
3.6.2.7 Geographic Practice Cost Indexes (GPCIs)
Because of geographic variations in costs of labor, supplies, and other resources
required for physicians to deliver medical services, the RBRVS payment mechanism
includes a geographic adjustment to reflect the differences in costs by region in the United
States in providing patient care. Higher costs are translated into higher Medicare
reimbursement. To accomplish this adjustment, geographic practice costs indexes (GPCIs)
have been established for physician work, practice expenses, and malpractice insurance.
The GPCI for physician work reflects changes in the earnings of professionals with at least
a college education. The GPCI for practice expenses is based on cost changes affecting
non-physician labor and non-labor resources. The GPCI for malpractice insurance
measures changes in the cost of specific types of insurance policies for various risk classes
(Grimaldi, 2002). Section 1848(e)(l)(A)(iii) of the Act requires HHS/CMS to develop
geographic adjustment factors (GAFs) for all physician fee schedule areas. The total GAF
for a fee schedule area is equal to the weighted average of the individual GPCIs for each of
1 18
Federal Register 62(211) (October 31, 1997): 59049.
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the three RVU components of a service. In accordance with the statute, however, the GAF
for physician’s work reflects one-fourth of the relative cost of physician’s work compared
with the national average. 1 1 9 Section 1848(e)(1)(C) requires the review, and if necessary,
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the update of the GPCIs every three years. The law also requires that updates be
phased-in equally over a two-year period if more than one year has elapsed since the last
revision. Since the last update was in 2001, the next update will occur in 2004. The
GPCIs for CY 2002 are the fully revised indexes for the third update (Grimaldi, 2002).
On January 1, 2002, there were GPCIs for approximately 90 payment localities,
one-third of which were statewide areas. Table 7 (below) illustrates the apparent variations
in the cost of providing patient care, not only in different regions of the country, but also
within the same state. For example, the practice expense (PE) GPCI in San Francisco,
California (1.458) is approximately 6 8 percent higher than the PE GPCI for Alabama
(0.870), 6 6 percent higher than the PE GPCI for South Dakota (0.878), 28 percent higher
than the PE GPCI for Los Angeles, California, and 41 percent higher than the PE GPCI for
Sacramento, California (95 miles away). Malpractice insurance costs also demonstrate
wide variations. For example, the malpractice GPCIs for Miami, Florida (2.528) and
Detroit, Michigan (2.738) are 580 percent to 628 percent, respectively, of the cost of
malpractice insurance in Portland, Oregon.
Regional cost variations are much less for physician work GPCIs. For most areas,
the index ranges between 0.96 and 1.05. This is primarily due to the legislative
Federal Register 6 6 : 55248.
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Federal Register 57(228) (November 25, 1992): 55917.
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requirement that the GPCI for physician work reflect one-fourth (25 percent) of the relative
cost or observed cost variation compared to the national average. The GPCIs for practice
expense and malpractice insurance, on the other hand, reflect the full cost variation. In
addition, the GPCIs for physician work are the same for all physicians, regardless of
specialty and service mix, although service mix may show variations within and among
specialties (Grimaldi, 2002).
Table 7: CY 2002 GPCIs for Selected Regions
Locality Name Physician Work Practice Expense Malpractice Insurance
Alabama 0.978 0.870 0.807
Detroit, Michigan 1.043 1.038 2.738
Los Angeles, California 1.056 1.139 0.995
Miami, Florida 1.015 1.052 2.528
Portland, Oregon 0.996 1.049 0.436
Sacramento, California 1.007 1.034 0.748
San Francisco, California 1.068 1.458 0.687
Sources: Grimaldi (2002), p. 98. Federal Register, Vol. 66, No. 212, November 1, 2001, p. 55499.
3.6.2.8 RBRVS Fee Schedule Calculation
Section 1848(b)(1) of the Act sets forth the formula for Medicare payment
amounts for particular services under the physician fee schedule. Payments are calculated
based on the product of three factors: (1) the relative value for the service, (2) the GAF
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for the fee schedule area, and (3) a nationally uniform dollar conversion factor (CF). The
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general equation is the following:
Payments = RVUts x GAFts a x CF, where
RVUt = Total relative value units (RVUs) for the service
GAFt = Total geographic adjustment factor for the fee schedule area
CR = Uniform national conversion factor
s = Service
a = Fee schedule area
The GAF is equal to a weighted average of the three GPCIs (discussed above).
Thus, when the GAF is expressed as the sum of its three components, the formula becomes
Payments = RVUts x [(GPCIwa x ws%) + (GPCIpea x pes%) + (GPCIma x ms%)] x CF, where
GPCIwa = GPCI value reflecting one-fourth o f geographic variation in the value of
physician work applicable in the fee schedule area
GPCIpea = GPCI value for practice expense applicable in the fee schedule area
GPCIma = GPCI value for malpractice expense applicable in the fee schedule area
ws% = Work percentage for service
pes% = Practice expense percentage for service
ms% = Malpractice percentage for service
A final derivation— as described in the November 25, 1991, Federal Register—
into an algebraic equivalent of the formula above results in the following equation:
Payments = [(RVUws x GPCIwa ) + (RVUpes x GPCIpea ) + (RVUms x GPCIma ) x CF, where
RVUws = Physician work relative value units for the service
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Federal Register 56(227) (November 25, 1991): 59525-59526.
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RVUpes = Practice expense relative value units for the service
RVUms = Malpractice relative value units for the service
Table 8 illustrates the calculation methodology and differences in payments based
on geographic location and code-specific relative values for CY 2002 payments. A
comparison is presented for an office-based evaluation and management service (Level 3
office visit— 99213) and a hospital-based procedural service (Left-heart catheterization—
primary code 93510-26). Calculation amounts are rounded, which may result in small
differences between the calculations in Table 8 and actual provider profiles received from
carriers in specific localities.
Table 8: RBRVS Fee Schedule Amounts for CPT Codes 99213 and 93510-26
RBRVS Detroit, MI Miami, FL Portland, OR San Francisco, CA
Component 99213 93510-26 99213 93510-26 99213 93510-26 99213 93510-26
Physician Work
x GPCI
0.67
1.043
4.33
1.043
0.67
1.015
4.33
1.015
0.67
0.996
4.33
0.996
0.67
1.068
4.33
1.068
(Adjusted Units) 0.70 4.52 0.68 4.39 0.67 4.31 0.72 4.62
Practice Expense 0.69 1.82 0.69 1.82 0.69 1.82 0.69 1.82
x GPCI 1.038 1.038 1.052 1.052 1.049 1.049 1.458 1.458
(Adjusted Units) 0.72 1.89 0.73 1.91 0.72 1.91 1.01 2.65
Malpractice Ins. 0.03 0.26 0.03 0.26 0.03 0.26 0.03 0.26
x GPCI 2.738 2.738 2.528 2.528 0.436 0.436 0.687 0.687
(Adjusted Units) 0.08 0.71 0.08 0.66 0.01 0.11 0.02 0.18
Total Adj. Units 1.52 7.12 1.49 6.96 1.40 6.33 1.75 7.45
x 2002 CF $36.20 $36.20 $36.20 $36.20 $36.20 $36.20 $36.20 $36.20
= Medicare
Payment per
Procedure
$55.02 $257.74 $53.94 $251.90 $50.68 $229.15 $63.35 $269.69
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Table 8 provides a comparison of Medicare reimbursement for services assigned
different relative values and in different geographic localities. Note that office visit
payments are 25 percent higher and left-heart caths 18 percent higher in San Francisco,
California, than in Portland, Oregon. Again, this reflects the differences geographically in
costs o f labor, supplies, and other resources needed to deliver patient care. Also note that
the left-heart catheterization universally pays higher than the office visit. This reflects the
differences in the contribution of the physician work component, which constitutes higher
relative value units than office visits due to the comparatively greater requirements in
specific skills, physician service time, intensity, effort, and stress in providing the service.
Medicare has also allowed for a 10 percent payment bonus to physicians who
provide covered services in areas designated as a rural or an urban Health Professional
Shortage Area (HPSA), which is defined in terms of the ratio of the population to primary
care physicians. Services may be rendered in the patient’s home, physician’s office, or in
an HPSA-eligible hospital. The bonus is paid in addition to the fee schedule amount for a
service. Therefore, if a level-3 office visit normally is paid $55.00 in the region, then the
HPSA fee would equal $60.50. Bonus payments may be made to primary care physicians
and specialists. Nurse practitioners (NPs) and physician assistants (PAs) are not eligible
for the bonus, even though they provide a significant amount of primary care in rural areas
and some urban areas. The bonus payment is intended to attract more physicians to
shortage areas, but its success has not been determined. Because the average bonus is not
large, it is questionable whether the bonus is effective in attracting physicians to areas
where they otherwise would not go to provide services. Grimaldi (2002) notes that in
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1996, for example, about 75 percent of the rural physicians who signed up for the bonus
program averaged less than $1,520 in bonus payments for the year.
3.7 S u m m a r y : E f f ic a c y o f t h e SG R a n d P a y m e n t U p d a t e
F o r m u l a
The overall theme of this chapter has been on the importance of the 1997 Balanced
Budget Act (BBA) and its specific relationships to the mechanisms and associated
legislation affecting updates and adjustments to the Medicare physician fee schedule. The
primary focus is on section 4303 of the BBA—Replacement o f the Volume Performance
Standard with the Sustainable Growth Rate (SGR)—and section 4505—Implementation o f
Resource-Based Methodologies. First, in referring to the implementation of resource-
based methodologies, the transition from a cost-based to a resource-based system includes
goals that are inherent in the RBRVS— that is, to address the rising volume and cost of
physician services and develop a mechanism to align reimbursement with the costs of
providing those services. In doing so, some services received increasing practice-expense
RVUs resulting in higher payments, while other procedures were reduced. The five
provisions in section 4505 include a four-year phase-in of practice expense RVUs, analyses
of data accuracy and practice-expense categories by the GAO, the development of new and
revised practice expense RVUs, an adjustment to RVUs in 1998 that reduced payments for
high practice-expense procedures and increased payments for office visits, and the
implementation of resource-based malpractice relative value units in a budget-neutral
manner.
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The implementation of the SGR under section 4503 of the BBA and subsequent
modifications under the 1999 BBRA warrants further discussion. The application of the
SGR system for the CY 2002 physician fee schedule resulted in a 5.4 percent reduction in
physician payments, despite an estimated 2 . 6 percent increase in the costs of inputs utilized
to provide physician services. The reduction occurred because estimated cumulative
physician services spending since 1996 exceeded the target for cumulative spending by
approximately $8.9 billion, or 13 percent of projected 2002 spending. The determination
of annual targets is a function of changes in four factors: (1 ) the number of fee-for-service
beneficiaries, (2) real per capita GDP, (3) input costs, and (4) legislative or regulatory
changes. Changes affecting any of these four factors or to estimates for prior spending can
impact the spending estimate. In setting the payment rates for 2002, CMS updated its
estimates of prior-years’ spending and recalculated past targets. These two revisions
resulted in the $8.9 billion Medicare overspending estimate. As a result, payment rates
were lowered for 2 0 0 2 and for future years, primarily as a correction for inaccuracies in
previous estimates. CMS’ initial estimates of spending since 1998 were too low, in part
because the agency had not included all appropriate claims in the estimates. In addition,
the initial spending targets for 2 0 0 0 and 2 0 0 1 were too high, primarily due to subsequent
revisions in GDP and GDP growth estimates for those years by the Bureau of Economic
Analysis in the Department of Commerce. Thus, in both 2000 and 2001, payment rates
increased by more than the change in input prices because the information available at the
time indicated that physician spending was below the targets. For example, in 2000,
payment rates increased by 5.4 percent, while input costs increased 2.4 percent. In 2001,
payment rates increased 4.5 percent, while input costs increased by 2.1 percent. The
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reason that 2002 payment rates were reduced by 5.4 percent, in spite of a 2.6 percent
increase in input prices, is that the revised estimates indicated that spending exceeded
targets in previous years. The reduction would have been almost 4 percentage points
higher, but the SGR system limits payment adjustments to no more than 7 percentage
points below or 3 percentage points above the percentage change in input prices (Scanlon,
2002).1 2 2
On February 28, 2002, the House of Representatives’ Ways and Means
Subcommittee on Health met to address issues regarding physician payments and Medicare
reform. The Chairman of the Subcommittee, Hon. Nancy L. Johnson, Republican from
Connecticut, opened the session with an overview of the issues and the need to modernize
Medicare. Representative Johnson pointed out that the unpredictability of Medicare
payments to physicians was another reason to pursue reform in the Medicare system. She
argued that when payments oscillate from a 4.8 percent increase in 2001 to a 5.4 percent
reduction in 2 0 0 2 with additional cuts projected for the future, “something is wrong.”
Representative Johnson further noted that the cost of practicing medicine will continue to
get more expensive. If the sustainable growth rate payment formula is not reformed, the
result may be seen in problems related to access of care for senior patients and demoralized
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physicians when it comes to dealing with Medicare.
122
Scanlon, William, Director o f Health Care Issues, United States General Accounting Office (GAO) (2002),
“Medicare Physician Payments: Spending Targets Encourage Fiscal Discipline, Modifications Could Stabilize
Fees.” Testimony before the Subcommittee on Health, Committee on Energy and Commerce, House o f
Representatives, February 14, 2002.
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U.S. Congress, House o f Representatives (2002), Subcommittee on Health of the Committee on Ways and
Means, 107th Congress, 2n d sess., “Physician Payments,” February 28, 2002, Serial 107-70.
Web site access: http://www.house.gov/ways_means/health/107cong/2-28-02/107-70final.htm
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Representative Pete Stark, Democrat from California, agreed that the formula for
the system of reimbursement to physicians should be revisited. However, Representative
Stark also implied that he maintains an adversarial position on physician reimbursement
interests. Representative Stark noted “two years of record increases in payments to
physicians” and “tax cuts that we have so generously bestowed on the richest Americans,
which would include those physicians.” His position was to focus more on the concern for
the 70 percent of the 40 million Medicare beneficiaries whose incomes are below $40,000
and who have no access to pharmaceutical benefits, and to the 1 2 million children in the
United States who have no health insurance and, therefore, no health care at all. 1 2 4
Dan L. Crippen, Director of the Congressional Budget Office (CBO), stated that
the discussion regarding payment reform cannot be addressed as an isolated issue.
According to Director Crippen, physician fees, or prices, are only one part of the equation.
Instead, he recommends that payments and payment policies need to be examined in the
context of both the history and the future of the program. For example, with respect to
price controls, administered prices are difficult to establish and difficult or impossible to
control. There is much historical evidence of the failure of price controls, particularly as
related to physician services. According to Director Crippen, that failure has a unique
aspect because physicians are able to adjust the volume of services they provide. No
matter what price controls have been in place, spending for physician services has almost
always gone up. Throughout the 1980s, despite fee schedules and regulation, Medicare
spending per beneficiary increased at an average annual rate of 12 percent. Even in those
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years following the enactment of the BBA of 1997 when hospital and total spending
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declined, physician payments increased.
Director Crippen further noted that current spending on Medicare, Medicaid, and
Social Security (as of February 2002) was running at approximately 7 percent of GDP.
The number of recipients will literally double from the estimated 39 million 2002 to about
80 million in the year 2030. The single biggest increase is from Medicare. The CBO
assumes that Medicare costs are going to rise faster than the economy. Director Crippen
makes the point that the future suggests that the total federal budget itself—which is
currently about 18 percent of GDP— will be consumed largely by these three programs.
The implication is that there will be the need to increase taxes dramatically or increase
government debt dramatically. Anything added to these payments, whether it is higher
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fees for physicians or higher pharmaceutical benefits, will only exacerbate that outcome.
Director Crippen further confirmed the calculation errors that led to physician fee
schedule over-payments in 2000 and 2001. He noted that, if the correct data had been
used, the updates would have been much less volatile, with a 2 . 1 percent reduction (instead
of 5.4 percent) in 2002, a 4.9 percent reduction in 2003, and positive updates thereafter.
The updates paid in 2000 and 2001 would have been smaller, but still positive. Other parts
of the adjustment were due to volume increases, which put total spending above the target,
and the slowdown in the economy. He also made the Committee aware that not all
physicians have been impacted equally over the past three years, primarily to other changes
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taking place in the Medicare fee schedule. For example, family practice physicians
experienced a 3 percent reduction in fees in 2002 but an overall increase of 19 percent in
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the prior three years.
Director Crippen draws several conclusions from the issues presented regarding
the Medicare payment updates. First, he suggests that the SGR can probably be modified
to reduce volatility. Second, he contends that physicians’ revenues are not declining.
Spending for physicians’ services will go up even with the past and projected reductions in
physician fees. CBO projects that total spending for physicians will increase 5.9 percent in
2002, despite the reductions in the 2002 fee schedule. Third, even if Congress does not
increase physician compensation or change current law, holding total physician spending
to per capita growth in GDP will still result in probable unsustainable costs for taxpayers
for the next generation. The primary reason for the negative impacts on reimbursement for
2002 is due to the unjustifiably large increases to physicians in 2000 and 2001. Finally,
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not all physicians’ fees have been reduced by as much as the current updates.
Glenn Hackbarth, J.D., Chairman of the Medicare Payment Advisory Commission
(MedPAC), stated to the Committee that MedPAC recommends the SGR be repealed and
replaced with a system under which the Secretary (HHS) would update fees annually,
based on an estimated change in the prices that physicians need to pay for their inputs
minus an adjustment for improved productivity. Although controlling spending is a goal of
MedPAC, Chairman Hackbarth outlined other goals as well. One is to assure access to
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quality care for seniors, which is the overriding purpose of the Medicare program. A
second goal is developing a system in which payments are matched with efficient providers
of services. A third goal is providing fairness to providers by rewarding good behavior and
punishing poor behavior. This is an area where the current SGR system fails because if
spending increases above the target, the punishment is distributed across all providers
without regard to who contributed to the excess spending. A fourth goal is to assure that
clinical considerations, not payment policy, guide decisions about where particular services
should be provided. Here, again, the system needs improvement because the SGR only
applies to certain services. The fifth goal is to fix the variability and unpredictability in the
SGR system. According to MedPAC, current estimates of updates (as of February 2002)
using the SGR formula show three more years of negative updates for a total decrease of
approximately 17 percent over the 2002-2005 period. In addition, updates under the SGR
will remain below estimated increases in the cost of providing physician services
thereafter. The SGR system controls total spending, but it does not constrain volume— it
fails to provide appropriate incentives at the level of the individual physician. Because the
SGR is current law, MedPAC’s recommendations— or any other action that corrects this
problem— will require large budgetary costs. However, MedPAC recommends that action
be taken because maintaining access for Medicare beneficiaries and assuring that
physicians continue to participate in the program and accepting new patients is of primary
importance. 1 2 9
129
Ibid.
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Dr. Paul Ginsburg, President of the Center for Studying Health System Change, a
nonpartisan research organization funded by the Robert Wood Johnson Foundation,
presented data to the Committee from household surveys, physician responses, and site
visits with health plan executives. The collection of information focused on patient
timeliness in obtaining care, physicians’ acceptance of new patients and time spent in
patient care, and how much health plans pay physicians in relation to Medicare payment
rates. According to Dr. Ginsburg, there is a trend for a tightening of physician capacity in
relation to demand that is resulting in a greater inability for patients to access care without
delay. More people are reporting delays in getting care. The time to schedule an
appointment with a physician is increasing. Physicians are spending more hours per week
in patient care and fewer physicians are accepting all new patients. One likely factor
contributing to this is the recent growth in demand associated with the loosening of
restrictions of managed care throughout the medical care system. Also, physicians,
particularly specialists, have been exerting greater leverage with managed care plans and
are likely to get higher payment rates. Physicians’ willingness to accept all Medicare
patients is declining, but so is physician willingness to accept all new privately insured
patients. In those areas where market rates for payments are higher for private or other
plans than Medicare, reductions in Medicare rates pose a potential threat to Medicare
patient access, particularly if physicians discontinue seeing Medicare patients in favor of
seeing those with better paying insurances. The “bottom line,” according to Dr. Ginsburg,
is that there are greater risks of deterioration and access to care from sharp cuts in
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Medicare physician rates today than in the past because of the stresses on physician
.. 130
capacity.
Dr. Ginsburg summarized his presentation to the Committee by stating that
physician capacity to meet the demands of patients appears to be tightening and could be
tightening even further in the future. At the same time, payment rates in private insurance
have been increasing, particularly for specialists. Attention needs to be paid to Medicare
beneficiaries’ ability to command services in an environment of tightening capacity. Dr.
Ginsburg agreed that MedPAC’s recommendation of tying updates in payments rates to
trends in input prices would avoid cuts in the short term. However, given the trends in
private markets, there would be an expected widening in the gap between Medicare rates
and private rates over the next few years, even under the MedPAC recommendation.
Therefore, just fixing the formula may not be enough to protect access to care for Medicare
beneficiaries. This will need to be monitored both on the national and local level. 131
Dr. Donald J. Palmisano, M.D., J.D., Secretary-Treasurer of the American Medical
Association (AMA), presented his views to the Committee on behalf of the AMA. Dr.
Palmisano communicated support MedPAC’s new framework for physician updates. In
his view, the SGR does not work because it uses estimates that are nearly impossible to
predict accurately. Dr. Palmisano argues that inaccurate SGR predictions have
shortchanged physicians and other health professionals by over $20 billion since 1998.
Inaccurate enrollment projections mean that every year physicians care for nearly one
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million Medicare patients whose costs are not counted in the update. Under the current
formula, those errors are compounded annually. In addition, physicians’ updates, unlike
any other category of providers, are linked to changes in the GDP, even though the medical
needs of Medicare patients do not decrease when the economy is in a recession. The SGR
is highly unpredictable and allows severe payment cuts without adequate warning or the
opportunity for action by Congress. Finally, if practices continue to lose money due to low
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Medicare payments, patient access is threatened.
On June 28, 2002, the House of Representatives passed H.R. 4954, the Medicare
Modernization and Prescription Drug Act of 2002, introduced by the Representative Bill
Thomas, R-Califomia, Chairman of the House Committee on Ways and Means, and
Representative Billy Tauzin, R-Louisiana, Chairman of the House Committee on Energy
and Commerce. In addition to adding a prescription drug benefit to the Medicare program,
this bill would increase physician reimbursement under Medicare by approximately $21
billion over the next five years. Therefore, instead of 4.4 percent, 5.7 percent, and 2.8
percent cuts, respectively, for years 2003-2005, payments would increase approximately 2
percent in each of those three years. At about the same time, CMS published the 2003
proposed Medicare physician fee schedule. In the proposed rule, CMS modified the
methodology used to calculate the MEI. As a result of this change, CMS estimated the
payments for 2003 would be reduced by an average of 4.4 percent. Original projections
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were for a 5.7 percent reduction in 2003 without congressional action.
133
MGMA Washington Connexion, June 28, 2002, from the Medical Group Management Association Web
site: MGMAWashingtonConnexion@MGMA.com
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On July 31, 2002, the Senate defeated the fourth and final prescription drug bill,
making it unlikely that the Senate will pass a prescription drug proposal in 2002. Although
Senate Majority Leader Thomas Daschle (D-South Dakota) indicated that provider
payments were to be addressed as part of the prescription drug debate, the Senate’s failure
to pass a prescription drug plan placed the Medicare physician payment legislation on hold
until Congress was to return in September 2002. 1 3 4 However, Congress subsequently
adjourned fo r the year without passing legislation making it possible fo r CMS to change
the current Medicare decreases fo r 2002 and 2003.1 3 5
Where does the Bush Administration stand on this issue? According to the
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Medical Group Management Association (MGMA) and Dr. W. Bruce Fye, President of
137
the American College of Cardiology, the administration acknowledges problems with
the physician payment formula and with the Medicare program in general. The MGMA
contends that the president’s proposed budget plan reflected the need for revision in the
formula used to update Medicare physician payments. The principal problem with the
update formula, from the MGMA’s point of view, is that it is linked to movement in the
134
MGMA Washington Connexion (July 31, 2002). See also U.S. Congress, House o f Representatives (2002),
Subcommittee on Health o f the Committee on Ways and Means, 107t h Congress, 2n d sess., “Physician
Payments,” February 28, 2002, Serial 107-70. Web site access: http://www.house.gov/ways_means/health/
107cong/2-28-02/107-70final.htm
133 MGMA Washington Connexion (November 20, 2002), from the MGMA Web site at http://
www.mgma.com)
*3(* MGMA e-Connexion (March 5, 2002), from the MGMA Web site at http://www/mgma.com
137
Fye, W. Bruce, MD, FACC (June 5, 2002), “Presidents Page: Managing the Medicare Mess: What’s
Next?” Journal o f the American College o f Cardiology 39(11): 1876-1877.
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national GDP as opposed to medical inflation. As a result, updates to physician payments
do not necessarily reflect real changes in practice costs. Cost survey data gathered by the
MGMA indicate that practice costs have risen significantly faster than Medicare payments
over the past decade. Since most private-sector payers adjust their reimbursement rates in
line with the Medicare fee schedule, revisions of the update formula directly affect the vast
majority of MGMA members.
Dr. Fye’s editorial communicates that Medicare reimbursement has gone down,
particularly in 2002. He argues that the current payment system fails to account adequately
for actual physicians’ costs, and the system has been compromised by projection errors
made by CMS. The latest payment cuts were far more than the physician community
expected. For cardiologists, the average fee cuts were 8 . 6 percent. Several specific cardiac
tests and procedures were hit even harder.
Dr. Fye states that the administration has acknowledged many problems with
Medicare and has proposed investing $190 billion to “modernize the program.” However,
he also cites a letter from HHS Secretary Tommy Thompson to federal lawmakers that
indicates that there is no compelling evidence of a problem with provider payments,
although it was acknowledged that short-term adjustments have been substantial in the
system Medicare uses to pay physicians. The letter also illustrates that the Bush
administration has decided that any changes to providers must be “budget neutral,”
meaning that any upward adjustment in specific physician payments must be balanced by
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138
cuts in payments to other Medicare providers. This letter, according to Dr. Fye, is a
sobering statement. The solution to the problem is a complex one. Whatever that solution
is, it will significantly impact the access to care of many patients and structure and delivery
of care for many physicians.
138
Thompson, Tommy; and Daniels, M. E. (March 14, 2002). Letter to United States Representatives Bill
Thomas and Nancy Johnson.
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Chapter 4
M e t h o d o l o g y
4.1 P a r t 1— P e r s p e c t iv e s o n O r g a n iz a t io n a l C h a n g e
4.1.1 Theoretical Considerations
The phenomenon of organizational change presents multiple considerations that
encompass a range of theoretical frameworks. Researchers have taken varied approaches
in describing and analyzing the organizational change concept. The methods utilized by
organizations as they undergo fundamental change present important questions for owners
and managers in an era of globalization, Internet technology, intense competition, and
unpredictability. Organizational change raises important research questions and should be
a central concern in organizational studies (Sastry, 1997; Perrow, 1994).
In this section, different theoretical perspectives— including five selected research
approaches that focus on organizational change— are presented and analyzed. The
researchers include the following: (1) Allan Mohrman and co-authors (1989), (2) V. K.
Narayanan and Raghu Nath (1993), (3) Lee Bolman and Terrence Deal (1997), (4) Harold
Leavitt (1965), and (5) Susan Fox-Wolfgramm and co-authors (1998). The premise of
this research is to utilize those aspects of the change models that are applicable to the
current change process affecting cardiology group practices. Utilizing an integrative
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approach similar to, but not duplicating, the strategy presented by Donaldson (1995), a
change model that emphasizes the strengths from different theoretical platforms is
proposed for cardiology group practices within the framework of this dissertation.
4.1.1.1 Mohrman et al.: Two Streams o f Literature Versus Theory fo r Large-Scale
Change
Mohrman and his co-authors (Mohrman, Mohrman, Ledford, Cummings, Lawler
and Associates) published a book in 1989 entitled Large-Scale Organizational Change.
Although large-scale change, by itself, is not the single focus on organizational change in
this dissertation, theoretical considerations presented by the authors are important and
provide insights that are applicable for this analysis.
Mohrman et al. (1989) contend that the literature (through the 1980s) was of
limited help in addressing the theoretical questions and practical issues relevant to large-
scale change. They define two major streams of literature on change in organizations. One
stream, organizational development (OD), is based in the planned-change tradition, which
includes literature on the implementation and process of change (Huse and Cummings,
1985; Porras and Robertson, 1987), and “contemporary” focuses including quality of work-
life (Kolodny and van Beinum, 1983; Mohrman and Lawler, 1985), strategic human
resource management (Fombrum, Tichy, and Devanna, 1984; Mohrman, Ledford, Lawler,
and Mohrman, 1986), and socio-technical systems (Trist, 1981). The OD literature focuses
on specific interventions and structures including team building, survey feedback,
transition management, participative management, and autonomous work groups.
Mohrman et al. state that the OD tradition includes many normative frameworks that focus
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on mechanisms of change to improve organizational effectiveness and employee well
being.
The authors criticize the OD tradition for its focus on change at the lower-level
subunit of an organization— for example, a smaller unit or department within a larger
organization. To these researchers, it is not clear if what is learned from change in a
smaller unit or department can be generalized to more complex organizations. There are
also reservations concerning the relationship between theory and practice. Concerns are
expressed regarding weak research designs and vague specifications for change treatments
or processes, making interpretation and practical learning difficult. Again, much of the
concern is biased toward the applicability to large-scale organizational change. This
dissertation attempts to assess the change process as it affects both the smaller subunits and
organizations as a whole. For example, legislated privacy standards requiring updated
policies in the medical records department may also apply to other departments and
personnel such as back office technologists or front office receptionists. At the same time,
other pressures such as increased overhead and decreased reimbursement may dictate
operational changes emphasizing efficiency, which may subsequently impact physician
scheduling. Also, monetary concerns affect the strategies conducted by higher
management levels and physician board members in terms of purchasing new equipment
and practice expansions or consolidations. Thus, change may affect all levels, with the
potential for cumulative effects on the larger organizational complex.
The second stream, according to Mohrman et al. (1989), is the organizational
theory (OT) tradition, which is based on differing assumptions regarding human nature and
organizational phenomena. Four major OT approaches are defined. The first is the
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population ecology perspective (Hannan and Freeman, 1977), which applies theories of
biological evolution to organizations and argues that the environment selects entire groups
of organizations for survival based on the organizational form. The second approach is
concerned primarily with organizational structure and includes several theories. Examples
include open-systems theories (Katz and Kahn, 1978), structural contingency theory
(Lawrence and Lorch, 1967), institutional theory (Meyer and Rowan, 1977; Meyer and
Scott, 1983), resource dependency theory (Pfeffer and Salancik, 1978) and transaction-
costs theory (Williamson, 1975). Open-systems theories and structural contingency
theories focus on relationships between organizational structure and design to different
environmental pressures. Resource dependency theory emphasizes that organizations
address uncertainty created by dependence on the environment for resources. Institutional
theory focuses on the response of organizations to other organizations’ adaptations to
environmental challenges, and the adoption of structures that are deemed legitimate in
maintaining access to key resources and organizational viability. The transaction-cost
theoretical approach defines organizational structure in terms of firm efficiencies and
preferred approaches to internal versus external control of resources presented by
environmental opportunities and threats. The third approach emphasizes the varied degrees
of “randomness” related to organizational behavior (see March and Olsen, 1976— view of
organizations as “organizational anarchies”). Finally, the fourth approach focuses
primarily on organizational culture and the impact of social interactions and shared
meanings in organizations (Frost, 1985).
Mohrman et al. also see limitations in the OT perspectives. They contend that
these theories are not intended to explain system change. Instead, they are meant to
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explain various dimensions of organizational structure, process, strategy, and effectiveness.
Resource dependence theory, for example, has been used to explain the distribution of
power within organizations. Institutionalization theory explains why organizations adopt
and maintain structures that represent accepted views of good management practice.
Mohrman et al. argue that neither perspective offers a comprehensive theory of the
stmcture and functioning of organizations or an explanation of organizational change and
stability. Other models are also criticized. Contingency models are useful in assessments
of how organizational structures need to change in a changed environment, but they are
weak in describing how to effect the change. The population ecology perspective, from the
standpoint of survival of the species, even suggests that major organizational changes are
more likely to reduce rather than improve the organization’s prospects for survival.
Ultimately, according to Mohrman and his co-authors, the OT tradition is a literature that is
concerned with the forest, but with the trees either absent or irrelevant. The OD tradition,
on the other hand, focuses on the trees, not the forest. Thus, neither the OT nor the OD
approach focuses on change in entire organizational systems. The OD approach tends to
focus on specific interventions; the OT approach emphasizes specific causes affecting
concepts such as organizational survival, performance, or structure.
For purposes of this dissertation, both traditions provide potentially useful
perspectives. As previously mentioned, the OD perspective provides for analysis of
change on the division or departmental level, focusing on specific interventions. This
approach is applicable— in terms of this research— for assessing interventions that impact
operational efficiencies, for example. Also, physician responses to time management for
office versus hospital scheduling, or utilization of new technologies to enhance clinical
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diagnostic and interventional capabilities as well as income capabilities may fall under this
theoretical realm. The OT perspective, on the other hand, may also contribute. For
example, Mohrman and his co-authors convey several approaches, including strategic
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choices for changing organizations and processes for organizational change over time.
The compilation of these approaches results in proposals that warrant consideration.
Large-scale change encompasses a lasting change in the character of an organization that
significantly alters its performance. This implies that change is deep and pervasive. In
terms of depth of change, change requires competent leadership. Change requires a
combination of top-down, bottom-up direction and involvement. The change process
requires resolution of conflict. In terms of pervasiveness of change, change involves all
levels of the organization. Change involves the organization in relation to its environment.
Change requires congruency between the organization and the environment and among its
various subsystems. Change is driven by the internal and external stakeholders of the
organization. Change is ultimately concerned with a multitude of factors in the
organization including behavioral, financial, technological, and legal considerations. 1 4 0
The theme derived from this research is that the major organizational challenge of
today’s post-industrial society is confronting the uncertainty of the new environment. The
uncertainty is characterized by increasing complexity and the need to adapt to rapid and
constant environmental changes. The change methodology that is most appropriate is one
of organizational design. It is, in large part, a response mechanism rather than a proactive
139
See Chapter 12 (by Edward E. Lawler, III) and Chapter 13 (by Mohrman and Mohrman) (1989), Large
Scale Organizational Change (San Francisco: Jossey-Bass).
140
Mohrman, Allan, and Mohrman, Susan (1989), op. cit., pp. 293-299.
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approach. The organizational design must be congruent with the requirements of a
changing environment. Organizations must develop structures and processes that facilitate
or enhance effective performance.
4.1.1.2 Narayanan and Nath: Typology fo r Organizational Change
Narayanan and Nath (1993) state that change is endemic to all organizations.
Their concept of organizational change refers to changes that impact an entire organization
or a major part of it. Examples include the redesigning of organizational structure,
installing a new information system, or inducing a change in organizational culture.
Narayanan and Nath propose that all contemporary organizational change theorists
subscribe to the open-systems model. This approach emphasizes the interdependence
between organizations and environments on the one hand, and the internal interdependence
among organizational subsystems on the other. However, there are differences among
change theorists. Narayanan and Nath propose a typology of organizational change to
account for these differences (see Figure 1 below). These differences are explained along
two dimensions: ( 1 ) source of change— internal versus external, and (2 ) type of change—
natural versus adaptive. With respect to the first dimension, different researchers may
focus on different sources of change. The emphasis may be on internal processes (e.g.,
problems of coordination, managerial communication and control), or on changes triggered
by the external environment (e.g., economic conditions, government regulations). The
type of change may present differing viewpoints as well. Natural system theorists focus on
predictable changes that occur in organizations, exclusive of whether those changes are
impacted by managerial intervention. Adaptive theorists emphasize the concept of
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different organizational responses contingent on different variables, and they view
managerial discretion as important.
[TYPE]
Natural
Adaptive
Adapted from Narayanan and Nath (1993), Organization Theory: A Strategic Approach, p. 137.
Figure 1. Sources and types o f organizational change.
As shown in Figure 1 above, the various combinations of sources of change and
types of change reflect different organizational change dynamics. For instance, the
combination of internal (source of change) and natural (type o f change) can reflect a
situation in which some physicians in a medical group practice may be nearing retirement
age and struggling philosophically with younger members of the group in terms of
production and future directions of the organization. An external-natural combination
may describe the impacts of legislation reducing Medicare reimbursement, directly
affecting physician incomes. An external-adaptive mechanism may describe the responses
by managers to reductions in reimbursement and increased overhead as a result of
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[SOURCE]
Internal External
Internal dynamics of
organizations create
life cycles
Environments induce
changes outside managerial
control
Managerial action
brings about changes
Environments and managerial
responses to them
create change
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legislation or increased competition. Finally, an internal-adaptive change may occur
through management action to implement a restructuring in operations or change in
physician compensation methodology to address the need for maintaining organizational
viability.
This typology, although limited in scope, is useful to an extent in analyzing
potential change actions applicable to this dissertation. The uses and limitations may be
argued more as a matter of degree than concept validity. For example, in a cardiology
group practice, physician interactions and group dynamics do create changes in group
make-up and structure. To an extent, life cycle stages may be impacted when physicians
leave the group or new physicians are added to the group. However, these may or may not
impact the total organizational viability depending on the number and timing of physician
turnovers or additions. For example, in a five-member group, if three physicians leave to
join another group, and the two remaining physicians are required to close the practice and
join another group as well, then, obviously, there is a major impact on the overall life cycle
of the organization. On the other hand, in a 17-member group, if three physicians leave,
but two new physicians are recruited to replace them, then the impacts on the organization
may be more in adjusting for call-coverage and implementing operational changes rather
than a total organizational decline. Narayanan and Nath point out that the organizational
life-cycle model proposed by Greiner (1972) partially addresses this scenario. Greiner’s
model implies that, as organizations grow or are confronted with crises, each growth level
or crisis level confronts the possibility of adversity and organizational decline. It is
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management’s (or physician owners’) responsibility to correct or prevent organizational
decline, if possible, as crises are presented. 1 4 1
Narayanan and Nath (1993) summarize the theoretical frameworks describing
organizational change under six models— population ecology model, resource dependence
model, institutional theory model, life-cycle model, innovation model, and planned-change
model. Each of these models provides different perspectives on the various way
organizations undergo change. The population ecology model focuses on the environment
as the source of change and implies that the mechanism of selection determines the success
or failure of certain organizational forms over others. The resource dependence model
defines the strategies by which organizations can utilize or acquire scarce resources to
enhance organizational effectiveness. Institutional theory promotes the imitation of other
successful or competing organizational forms to adapt to uncertain economic or regulatory
environments. The life-cycle model describes the phenomenon of organizational aging and
the internal dynamics that occur in the change process. Both the innovation and planned-
change models focus on managerial innovation and decision-making as important
contributing mechanisms to organizational change. 1 4 2
Narayanan and Nath conclude that the organizational change models provide
several implications for managerial action. Environmental changes and organizational
growth may provide the impetus for change without deliberate managerial action.
141
Greiner, Larry E. (July-August 1972), “Evolution and Revolution as Organizations Grow,” Harvard
Business Review 50: 37— 46.
142
Narayanan, V. K., and Nath, Raghu (1993), Organization Theory: A Strategic Approach (Boston, MA:
Richard Irwin, Inc.), p. 151.
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However, managers need to be aware of environmental conditions (economic, political,
and competitive threats and opportunities) and the appropriate mechanisms and approaches
in addressing changing environments. Managers must also pay attention to internal
problems in the organization, since an inability to effectively address conflict can lead to
organizational failure. Effective assessment and imitation of successful organizations is an
effective way of addressing uncertainty. However, the mission, ethics, culture, and
capabilities of the organization must also be taken into consideration before emulating
other organizational forms or business approaches.
HIPAA and the BBA provide examples of how the regulatory environment can
create the need for change in an organization. As previously stated, provisions of these
two laws potentially impact medical group practices with increased operational costs and
decreased revenues. Specialists such as cardiologists are particularly impacted due to the
2002 reimbursement changes. Strategic action on the parts of both physician owners and
operations managers is required to adapt to the threats and opportunities presented. Change
options may include internal consolidation of operations, geographic expansion in search
of new referral markets, and utilization of new procedures and technologies. These options
reflect characteristics inherent in the various change models (imitation of other
organizations’ responses in consolidating operations; increase utilization of market
[environmental] and clinical resources; managerial innovation in identifying and
implementing additional cost-savings techniques and revenues sources).
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4.1.1.3 Bolman and Deal: Four-Frames Model
Bolman and Deal (1997) state that the most basic change strategy is to improve
management and leadership. They contend that managers are supposed to be responsible
for the viability of the organization. However, managers have not always achieved the
competency to meet the necessary requirements for assuring organizational health and
productivity. Thus, consultants are hired, most with a specialty in techniques such as
reengineering, mergers, human resource management, information technology,
organization development, and many more. Sometimes consultants do not give the best
advice. When managers and consultants fail to achieve expectations for organization turn
around, government frequently responds to the public or constituent voice for change with
legislation and regulations. However, Bolman and Deal point out that a sizable body of
research documents the many ways that policy implementation can result in unintended
consequences.
Bolman and Deal (1997) propose a consolidation of major schools of
organizational thought into four perspectives, which they define as frames. These four
frames are (1) the structural frame, (2) the human resource frame, (3) the political frame,
and (4) the symbolic frame. Each of these perspectives is briefly summarized in the
following paragraphs. 1 4 3
143 d
See Bolman and Deal (1997), Reframing Organizations: Artistry, Choice, and Leadership (2 ed.) (San
Francisco: Jossey-Bass Publishers), pp. 8-15, 320-321, 339.
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The structural frame, in Bolman and Deal’s view, is a perspective that emphasizes
goals, specialized roles, and formal relationships. Structures— commonly depicted by
organization charts— are designed to fit an organization’s environment and technology.
Organizations allocate responsibilities to participants in the form of division of labor,
creation of policies and procedures, and reporting relationships or hierarchies to coordinate
different work areas or activities. Conflicts develop when the structure and the situation
are not aligned. Some level of change or reorganization is then needed to correct the
malalignment.
The human resource fram e views an organization in the sense of a family, with
individuals possessing needs, feelings, prejudices, skills, and limitations. Great potential
for learning exists, but also a greater potential for holding on to established beliefs and
attitudes. The key challenge is to fit the organization to people— to assure that employees
perform their jobs appropriately while providing a foundation for employee job
satisfaction.
The political fram e sees organizations as arenas, contests, or jungles. Conflict is
pervasive due to differences in needs, perspectives, and lifestyles among individuals or
groups. Negotiation, coercion, and compromise are the norm in everyday life. Coalitions
form in response to specific interests. Problems arise when power is either concentrated in
the wrong places or so broadly dispersed that the decision-making process is compromised.
Solutions occur through political skillfulness.
The symbolic fram e treats organizations as tribes, theaters, or carnivals. It
abandons assumptions of rationality that are more prominent in the other frames. Of
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particular importance in this frame is the concept of culture. The impetus is on ritual,
ceremonies, heroes, and myths rather than rules, policies, and managerial authority.
Problems arise when individuals have difficulty connecting with the organization’s culture,
when symbols lose their meaning, and when rituals become unimportant or obsolete.
Bolman and Deal’s model for reframing organizational change implies that the
four frames work in concert, although each frame addresses a different set of barriers and
strategies involved in the change process. Thus, each frame, in itself, does not provide for
an all-encompassing understanding of the dynamics of organizational functioning and the
change process. The structural fram e manages confusion and chaos through the
reestablishment of lines of communication and realignment of policies and procedures with
organizational objectives. The human resource fram e focuses on barriers to change that
affect the individual in terms of uncertainty, feelings of incompetence, and anxiety. The
essential strategies to address change encompass the need for training and development of
new skills, involvement in the work design process, and support from co-workers and
management. The political fram e addresses conflict and power struggles through the
development of new arenas for resolution, where issues can be renegotiated and new
coalitions formed. The symbolic fram e confronts barriers associated with clinging to the
past with the creation of transitional mindsets and rituals that lay the foundation for
developing a new culture. In essence, effective change requires a purposeful, well-
organized, integrated design that addresses individual and organizational requirements for
learning, realignment, negotiation, and individual adjustment. 1 4 4
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Bolman and Deal, op. cit., pp. 321, 339.
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The Bolman and Deal approach provides implications for managerial responses to
organizational change using the four-frame model as the basis for problem analysis and
organizational improvement. There are applications of these four frames to the dynamics
involved in organizations such as cardiology group practices. For example, Bolman and
Deal describe the problems and solutions to the structural fram e scenario in a high school
as a systemic rather than an individual problem. Their example, points out that there may
be sufficient division of labor, but little coordination, particularly if a matrix structure
exists whereby teachers have a dual reporting relationship (“to department chairs and
housemaster”), resulting in ill-defined loyalties and confusion in decision-making. The
solution requires a clear definition of roles and responsibilities, with lines of authority
clearly established, responsibilities defined, and formalized policies and procedures
developed. 1 4 5 In a cardiology group practice, particularly a large group, lines of authority
may also be blurred, both at the operational level impacting employees and at the level of
physician-group decision making. For instance, the medical-records clerk may have a
reporting relationship to the medical-records supervisor but also be required to respond to
the nurse supervisor’s requests for records. In addition, the clerk reports to the office
manager. If conflicts arise between work areas, there is a need for established lines of
authority, with conflict resolution mechanisms in place to address work priorities.
Therefore, if the medical-record clerk is working on a filing project for the medical-records
supervisor and the nurse supervisor requests charts to be pulled “staf ’ for specific patient
problems, then established protocols address how to prioritize the response by the medical-
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Bolman and Deal, op. cit., p. 364.
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records clerk. If the two supervisors disagree, then the office manager has the authority to
intervene and institute the appropriate decision and conflict resolution. At the
administrative and physician owners’ decision-making level, the process and dynamics
may differ, but decision-making and conflict resolutions are still enhanced by in-place
mechanisms that formally define reporting relationships and decision-making authority.
For example, in the corporate bylaws or partnership agreement, an accepted organizational
chart designating specific committees (e.g., an executive committee) and defined authority
(e.g., the executive committee has authority without the full partnership vote for capital
purchases not exceeding $50,000) enhances the decision-making process and provides
formal authority for action.
Another applicable example from Bolman and Deal is their description of issues
and options affecting the political frame. The authors focus on what they see as the basic
elements of the political frame— enduring differences, scarce resources, conflict, and
power. They refer to the power conflict between housemasters and department chairs:
Housemasters want to run their houses and guard their turf.
Department chairs want to run the faculty and expand their
territory. One group wants to close the doors and bring in
guards. Another wants to keep out the guards and throw open
the doors. 1 4 6
In a cardiology group practice, as in any organization, physicians have differences
of opinions that range from how resources are utilized (e.g., the numbers and types of staff)
to how revenues are spent and disbursed (e.g., what equipment needs to be purchased this
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Bolman and Deal, op. cit., p. 367.
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year; what method should be used for overhead calculation— direct or variable).
Disagreements may arise that require resolutions through group meetings, negotiation,
coalition building, and the appropriate wielding of power. With the appropriate forum for
conflict resolution, the group can make decisions and move forward. If no mechanism
exists to address political issues, then the decision-making process is negatively impacted,
potentially leading to a decline in group unity and organizational disarray.
The human resource fram e and symbolic fram e also contribute to the dynamics of
the organization, as Bolman and Deal assert. Effective personnel management and
interpersonal relations on all levels are important components that contribute to the
effectiveness and success of an organization. The history and culture of the organization
are also significant. What is the mission and goals of the organization? Does the
organization focus on ethical business practices? What is the position of the organization
in the community? How is the focus, for example, on delivery of quality patient care
incorporated into the group culture for physician owners and employees? How is that
focus on quality care relayed to patients?
The Bolman and Deal model argues that the four frames are interactive and work
in concert with one another. This implies that organizational functioning is dependent on
more than one variable. The structure, the human component, the political component, the
history and culture— all contribute to varying degrees. When organizational change is
presented, each frame has barriers to overcome and strengths to enhance for change to be
effective and result in an improved organization. Bolman and Deal are correct in their
implication that the four frames work in concert and that one frame in itself does not define
the entire dynamics of organizational function, or for the concerns of this research, the
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entire change process. The model has been criticized for its weakness in not emphasizing
the systems approach in comparison with the other four frames. 1 4 7 The value of systems is
useful from the perspective of organizational learning and adaptation. For the purposes of
this research, systems analysis is not focal but is understood as contributory to the larger
scope of variables involved in the change process.
4.1.1.4 Leavitt Diamond
Similar to the implications for frame interaction in the change process the Bolman
and Deal model posited, Leavitt (1965) proposes four variables that interact in the process
of organizational change: structure, technology, people (actors), and tasks. Mohrman et al.
(1989) described the inter-relationship between these four variables as the “Leavitt
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Diamond.” Leavitt points out that the four variables are not mutually exclusive. They
are, in fact, highly interdependent. A change in one variable usually results in a
compensatory (or retaliatory) change in others. Leavitt argues that usually, but not
necessarily, efforts to effect change are ultimately designed to influence the task variable.
For example, structural change toward decentralization may result in change in the
performance of certain organizational tasks. At the same time, decentralization may bring
about technological change (e.g., changes in accounting procedures; changes in
equipment), as well as changes in numbers, attitudes, and motivation of people in the
organization. Similarly, the introduction of new technology, such as computers or new,
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Whitis, Sarah (1999), “Managing Change, Market and Value: Reengineering Cardiac Care in a Tertiary
Care Academic Medical Center,” Dissertation, University o f Southern California, pp. 41, 52-54.
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Mohrman et al. (1989), op. cit., p. 73.
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innovative testing equipment, may cause changes in structure (e.g., the communication
system or decision hierarchy of the organization), changes in people (e.g., changes in
number of staff, skills, attitudes, and activities), and changes in performance or task
definition.
Leavitt contends that most organizational change efforts are too narrowly focused.
In changing task performance, managers and consultants often use a structural approach, a
strategy based on a technology, such as computers, or a human systems approach. Each
approach is emphasized to the exclusion of others, resulting in a narrow focus that
compromises effective change. Leavitt’s argument is based on the presumption that
successful change involves changes to the structure, the technology, and the human system
simultaneously. The premise is that an effective organization is one whose strategy,
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structure, decision systems, and human systems are all in alignment.
Although it has been over 35 years since Leavitt published his “state-of-the-art
overview of organizational change” 1 5 0 —Applied Organizational Change in Industry:
Structural, Technological, and Humanistic Approaches— the basic premises of the three
approaches (with reference to the assumption that the three variables usually impact task
performance) are still relevant and warrant further discussion.
1 4 9 Mohrman et al. (1989), ibid.
15°Leavitt (1965), from “Applied Organizational Change in Industry: Structural, Technological, and
Humanistic Approaches,” in James G. March (ed.), Handbook o f Organizations (Chicago: Rand McNally), p.
1144-1170. Reprinted by permission o f James G. March in J. Stephen Ott’s Classic Readings in
Organizational Behavior (Belmont, CA: Wadsworth Publishing Company, 1989), p. 518.
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4.1.1.4.1 Structural approaches.
Leavitt proposed four categories relating to applied efforts to change organizations
via structural change. The first category defines structural change as the major mechanism
promoted by classical organization theorists. Utilizing the deductive, rational-analytical
approach, theorists established principles for enhanced organizational performance through
the development of optimal organization structures. The early structural approaches
primarily mediated organizational activities through people to task. The implication is that
task performance is improved by clarifying and defining the jobs of employees and
identifying job inter-relationships in terms of authority, responsibility, and coordination
mechanisms. The emphasis is focused on internal consistency, orderliness, discipline, and
hierarchical authority. Leavitt points out that early structural approaches were abstract,
formal, legalistic, and deficient in support from empirical data. However, he also notes
that classical concepts are still utilized by consultants and planning departments to redefine
areas of responsibility and authority, and he adds that debates still occur on the validity of
classical structural concepts like span of control. 1 5 1 This argument is still supported (over
35 years later) with requirements in organizations, including medical groups, to design and
redesign hierarchical organizational charts, maintain policy and procedure manuals, and
write job descriptions specific to different work areas or subunits.
Leavitt’s second class, although functionally a subclass of the first, is the
mechanism of decentralization. According to classical theory, decentralization reduces the
cost of coordination and enhances oversight of smaller work units. Decentralization also
151Leavitt (1965), in Ott (1989), op. cit., pp. 551-552.
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affects the performance of tasks, partially through its intervening effects on local
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employees and managers. By creating local profit centers, autonomy in terms of
decision making, use of applicable technology, and variation in work tasks may be
promoted at the particular departmental or work-site level. For example, larger medical
groups utilize smaller satellite offices strategically located in outlying areas to enhance
patient access and convenience. Physicians and office managers typically maintain local
control over office operational matters and equipment use. O f course, bigger decisions
affecting the entire organization as well as the local office are subject to more centralized
decision mechanisms such as executive committee or board of directors’ approvals.
A third structural change class proposed by Leavitt is an “engineering” approach
(Gouldner, 1956) that focuses on modifying the behavior of employees in order to improve
task performance through modification of the structure of work flow (Chappie and Sayles,
1961). The assumption with this approach is that work designed by task and technical
variables, only, fails to take into account human variables. Through the planning of work
flows and groupings by specialties, it is assumed that the morale, attitude, behavior, and
output of employees are affected. This approach could also be classified under Leavitt’s
human variable, but it is categorized under the structural approach because of the
manipulation of the task and work components leading to effects on the human component.
The implication here is that employees should have input into the organization, methods,
and design of work on the day-to-day operational level. For example, in the nursing
department, the office manager should elicit input from the nursing staff and nurse
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Leavitt (1965), in Ott (1989), op., cit., p. 552.
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supervisor regarding clinical requirements and patient flow processes for blood clotting
time (protime) checks or other nurse-specific duties. On the other hand, the office manager
needs to oversee coordination and appropriate oversight of the work areas to assure that
work functions and tasks are carried out appropriately and that area supervisors are
providing the appropriate level of oversight and quality control.
Leavitt’s fourth class, although not specifically categorized in his article, describes
the implications of communication networks. Leavitt suggests that appropriate
communication structures may vary considerably within a complex organization depending
upon the type of task that any subunit of the organization undertakes. For programmed,
repetitive tasks, centralized communication structures seem to operate most efficiently, but
with some trade-off in human costs. For less structured tasks, more wide-open
communication networks with larger numbers of channels and less differentiation among
participants are preferred. 1 5 3 To extrapolate this concept to medical practices, consider,
first, the application to different office operational work areas. Suppose that the medical
records clerical position represents the scenario for programmed, repetitive tasks.
According to this structural change model, a centralized system of communication is the
most effective structure. This implies a hierarchical authority structure, whereby a
reporting relationship exists from the medical records clerical person to the medical records
supervisor to the office manager to the administrator, and so on. The office medical
records supervisor has expertise in a particular area (i.e., knowledge of filing protocols,
record copying, patient file maintenance, confidentiality of records) and supervises
1 5 3 Leavitt (1965), in Ott (1989), op. cit., p. 553.
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employees who primarily file and retrieve medical records. An efficient repetitive system
is established, but with little room for employee growth in this particular work area. Thus,
the point is taken from Leavitt that efficiency is maintained, but with some human costs (in
terms of skill development).
Now consider a situation that is presented when the office copy machine breaks
down. For argument sake, assume that the administrator is the lowest level person who can
approve maintenance on equipment. If the organization maintains a rigid policy of
communication through the chain of command, the clerical person would first be required
to communicate the problem to the medical-records supervisor. The medical records
supervisor then informs the office manager who in turn communicates to the administrator,
who then takes the action to contact the equipment company to provide services to fix the
equipment. This, of course, is an extreme interpretation of the centralized, hierarchical
decision process. If the company policy is to strictly follow this rule of chain of command,
several problems may arise. One problem is the availability of managerial or
administrative staff. Company functions, particularly in medical offices, cannot come to a
standstill if the copy machine needs minor repairs and the administrator is out of town.
Thus, some authority at lower levels is usually assumed to address minor issues. This
dissipates the rigid concept of a totally centralized authority model to an extent, but still
allows for the hierarchical approach as decision-making requires higher-level authority. If
the copy machine requires a very high cost service or equipment replacement, then
someone of higher authority in the organization, such as a physician or administrator,
needs to provide the approval.
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Leavitt’s description of ill-structured tasks utilizing more wide-open
communication nets with larger numbers of channels and less differentiation among
members is somewhat more difficult to analyze. Perhaps a better way to assess this
concept is through analysis of “programmed, linear tasks versus “non-programmed, non
linear tasks (Pava, 1986).1 5 4 Programmed tasks are routine, involving some kind of
unvarying procedure. Programmed tasks tend to be linear, following a sequential
conversion process of input to output, thereby requiring a stepwise progression of routine,
pre-programmed activities leading to task completion. Conversely, non-programmed tasks
involve non-routine, non-sequential activities that require more knowledge-based
intervention. Programmed, linear tasks are more applicable in manufacturing, but they also
apply in office settings for units involved in activities such as forms processing or recurrent
transactions. Nonlinear work systems rely more heavily on non-programmed tasks such as
decision making, diagnosing system malfunctions, or work that typically involves highly
specialized, professional people. In reality, many work systems include a mixture or
routine and non-routine tasks, blurring the distinction between linear and non-linear
systems (Pava, 1986; Cummings, 1986).
The medical-records file clerk example described above represents the
programmed, linear scenario, although there may be instances when the medical records
person is faced with situations that require more than stepwise filing procedures. For
example, he or she may need to decipher if a report needs immediate attention to the
physician’s receptionist for sign-off or follow-up scheduling. The medical records person
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Pava cites March, J. H., and Simon, H. A. (1958), Organizations (New York: Wiley), in defining
programmed versus unprogrammed tasks.
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may need to check the computer to ascertain the location of a file at a satellite office for
future scheduling of a procedure at another office. Thus, some tasks may not clearly be
defined as either programmed or non-programmed, but they may include a mixture of
linear and non-linear components.
The nurse, on the other hand, may perform job duties that are primarily non-
programmed, non-linear. For instance, when a patient calls with a clinical problem, the
call may be initially transferred to a nurse. The nurse will determine the nature and extent
of the problem and proceed either to give advice to the patient, schedule the patient to be
seen within a particular time frame in the office, contact the physician for instructions, or
recommend that the patient come into the office or emergency room immediately. The
nurse’s role requires a more knowledge-based approach that may require analysis and
decision making, resulting in a problem solution.
Leavitt does not pursue an explanation to this extent regarding the comparison of
programmed versus non-programmed tasks, or linear versus non-linear systems.
Therefore, his concept is vague in differentiating what communication structures are most
effective under specific scenarios. However, he does propose that appropriate
communication structures might vary within a complex organization depending upon the
type of task that any subunit of the organization undertakes. This leaves room for the
premise— to be developed in this dissertation— that a contingency model utilizing a
combination of centralized and decentralized mechanisms is the most effective structural
approach contributing to the organizational change process.
Before leaving Leavitt’s discussion of structure, a review of other selected
references that address organizational change in terms of the importance of structure is in
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order. Ranson et al. (1980), for example, assess five possibilities for change that are
implicit in the analysis of organizational structure and stress the need for a unified
methodological and theoretical approach. Fombrun (1986) contends that structure is
produced and reproduced through human interactions. He further argues that structure is
both the medium and outcome of a dynamic interaction between infrastructure (productive
activities), sociostructure (exchange relationships), and superstructure (shared values).
Jennings and Seaman (1994) propose that organizations with particular levels of adaptation
tend to have specific strategy-structure arrangements that yield certain performance results.
The research from Hrebiniak and Joyce (1985) indicates that organizational adaptation is a
dynamic process that is generated from both the internal organization and the environment.
One possibility is that any given organization might be expected to attempt to reduce its
vulnerabilities through competitive actions to further differentiate its products or services
(e.g., new procedures) or through political actions such as cooperation (e.g., merger).
Environmental elements— competitors, regulators, and consumers— in turn, may exercise
their influence in similar attempts to increase competitive or political advantage.
Khandwalla (1973) questions what constitutes an effective organizational design. Is it the
configuration of the organizational structure that is most important, or is it the
manipulation of its individual elements such as controls, decentralization, or participative
management? His findings suggest that the configuration may be more important if it fits
the organization’s particular situation. Additionally, as Donaldson (1987, 1995) points out,
managers are interested in attaining higher levels of performance, not just in the survival of
the corporation. His research promotes the theoretical logic that strategy leads to structure
and that organizations adapt their structures in order to maintain a fit with contingency
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factors such as size, technology and strategy so as to attain high performance.1 5 5 On the
other hand, theoretical models such as resource-dependency theory emphasize securing
stability and maintaining survival while shifting the focus away from organizational
performance (Donaldson, 1995). Sastry (1997) also notes that the concept of fit may be as
important as the interpretation of improved performance in shaping successful
organizational change.
The above research writings focus on some of the same structural issues that
concerned Leavitt, particularly the relationship between structure and performance. Also
noted are concerns with the concepts of fit, organizational stability, and the environment’s
impact. Leavitt’s premise is one of variable interactions in the change process. Thus,
some concepts overlap under the structural, technological, and human approaches.
4.1.1.4.2 Technological approaches.
Leavitt (1965) alludes to the critical role of technology in effecting organizational
change by stating that, in many instances, organizations have changed themselves, not in
response to great ideas, but in response to the development of intervening technology that
stimulates implementation of those ideas. He further states that information theory did not
significantly change organizations until the development of computers and programming
could serve as carriers of operational change.
Leavitt’s analysis focuses on the impacts of technology within the historical
framework of Frederick Taylor’s Scientific Management (1911), operations research, and
155 Donaldson (1995) provides two citations on this point: Chandler, Alfred (1962), Strategy and Structure:
Chapters in the History o f the American Enterprise (Cambridge, MA, MIT Press); and Blau, Peter (1970), “A
Formal Theory o f Differentiation in O rganizationsAmerican Sociological Review, 35: 201-218.
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other computer-based simulation techniques that were being utilized at the time of his
writing this article in 1965. Leavitt’s view is that Scientific Management was the first
entry into the technological category. Its technique was empirical work measurement and
included none of the abstract introspective character of the structural approaches. Like the
early structuralist approaches, Scientific Management was, arguably, “ahuman.” 1 5 6 It
created a separate planning specialist who organized and planned the work, while the lead
worker lost that role and became the “doer” of work. In spite of early attacks against this
concept as demeaning to mankind, Scientific Management flourished, radically changing
structure, people, and the ways that work was accomplished. Most manufacturing firms
eventually embraced the techniques created by Scientific Management, including time-
motion studies, work standards, job classification schemes, and more. Although Scientific
Management’s dominance subsided somewhat during the late 1930’s and 1940’s,
technological approaches as a class were by no means obsolete. The development of the
techniques of operations research out of World War II and the more or less simultaneous
invention of computers enhanced the importance of the technological approach. Leavitt
explains that Scientific Management, operations research, and other human engineering
methods for changing organizational problem-solving can reasonably be placed in the same
category. Each approach has developed a body of technical methods for solving work
problems, and utilizing similar concepts including the separation o f planning of problem
solving programs from the routine carrying-out of solutions. Although operations research
and information-processing techniques appear to be applicable to large classes of tasks that
156 Leavitt (1965), in Ott (1989), op. cit., p. 554.
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Scientific Management could not encompass, the overall similarity between the two is still
apparent. As Leavitt points out, if tasks are changed from simple muscular labor to
complex scheduling decisions, recast the worried laborer with the worried media executive,
replace the time and motion study with linear programming or PERT, and replace the stop
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watch with the computer, ,..“[t]he story line can remain intact.
Despite the arguments that focus on the dehumanizing potential for technological
progress, Leavitt concludes that, in the long run, better solutions do get accepted because
competitive pressures force individual organizations to accept technological innovations
that enhance efficiency and effectiveness.
Again, Leavitt’s analysis was current with early 1960’s technology and focused
primarily on the manufacturing sector. For this dissertation, an analysis o f more recent
research focused on the service sector must take into account the advent of Internet
technology and those technologies that are specific to efficiencies and effectiveness in
medical group practices (e.g., new testing devices; electronic medical records [EMR]).
Here, the technological approach addresses, on the one hand, the impacts of new or
enhanced technology for improved clinical testing capabilities and generation of additional
revenue sources and, on the other hand, the utilization of computer or information
technology to improve internal operations and access to information. The literature lists
several references that address issues related to technological change. Barnett (1990)
investigated the impacts of technological change on competition and organizational
viability. His research particularly focuses on the prevailing thought that technological
157 Leavitt (1965), in Ott (1989), op. cit., p. 555.
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change generates competition and that this competition works to the benefit of
technologically-superior organizations. His findings, however, indicate that organizational
dominance and viability are complicated by other technologically advancing competitors in
the same niche. Whether this applies to medical groups in the same market requires
additional empirical testing and is not confirmed by this study.
According to Thach and Woodman (1994), the impact o f information technology
(IT) on organizational change and development has been significant. Effects on
organizational structures are particularly important. Organizations not only increase
process efficiency but also enhance the locus of knowledge and power. Employees are
provided with the means to perform their jobs more effectively. Thach and Woodman
have identified three major change approaches that have been used to introduce IT into
organizations: (1) a technical installation model, (2) a systems approach, and (3) gap
analysis. In addition, successful implementation methods depend on identification of the
change agent, systems for measuring results, and determining choices regarding structure
(centralization versus decentralization). These methods or criteria may be applicable in
analyzing the efficacy of medical record computer systems and development of security
measures that will be required by HIPAA. Current literature in ambulatory care and
medical group management confirms strong support for the importance of computer-based
information systems in the clinical arena. Anderson (2000) suggests that computer-based
information systems can increase access to clinical information, improve physician
performance, enhance quality of care, and facilitate outcomes research. At the same time,
Anderson contends that there are still significant behavioral and legal barriers to the
widespread use of computer-based ambulatory information systems. Computer-based
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systems that collect, store, and manage clinical information may not change physicians’
practice behavior. Although these systems may have clinical value, the medical
community has been slow to accept them, citing problems with burdensome record keeping
and questionable improvement in quality of care. Anderson further explains that
computer-based information systems change traditional practice patterns. These systems
structure how clinical data are recorded, organized, and displayed. Their implementation
frequently affects professional relations between individual caregivers and professional
groups within the organization. The responses of physicians and their health-care
professionals are shaped by their perceptions of how the system affects their work relations
and the accomplishment of their professional goals. On the other hand, computer-based
information systems that provide caregivers access to critical information from the
literature, clinical guidelines at the point of care, decision support in the form of reminders
and alerts, patient-specific information, and programs that facilitate order entry are likely to
be readily accepted and used. These forms of operational support that improve the
efficiency and effectiveness of patient care have been found to be effective in changing
practice behavior.
Information technology (IT), including electronic medical records (EMR), hand
held devices, and the Internet, will impact the process of patient care, now and in the
future. Prince (2000) explains that many academic medical centers and large health-care
providers have EMR that are used by some physicians in accessing patient data from
various remote locations and in enterprises-wide scheduling of patient services. Some of
these major health-care providers have a significant proportion o f physicians using EMRs
from their medical offices and homes.
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Prince also states that many physicians working in ambulatory care clinics are
using hand-held devices in a wireless network to access clinical data at the point of care in
a paperless environment. Physicians have fingertip access to a patient’s entire medical
history and can review medical texts, drug interaction information, and treatment protocols
easily through information storage in the hand-held device. Documentation of a current
patient encounter can be recorded in a hand-held device using IT assistance that quickly
displays multi-step choices for classifying and specifying the primary and secondary
medical reason for the visit. By clicking or pen-point entry, the physician can select from a
display of descriptive factors, conditions, and complications of the descriptive materials for
documenting the encounter. Also, tape recording capability in the hand-held device is
available for dictation.
The Internet is now being used by customers to access information on patient
education, wellness, pharmaceutical products, alternative medicines, and disease diagnosis.
Medical libraries and health-care references can be easily accessed over the Internet. Web
sites exist for private physician practices, medical clinics, hospitals, and health systems.
Customers have increased patient access through the Internet. Patients can access
educational materials, schedule their own appointments, request prescription refdls, and
“chat” on-line with a health care provider, outside of normal hours of operation.
According to Prince (2000), information via the Internet has empowered patients and their
families to the extent that the traditional physician-patient relationship is being replaced by
a customer-centered paradigm in which physicians provide health-care services and
educational guidance in a “connected world.”
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4.1.1.4.3 Humanistic (people) approaches.
Leavitt’s third category is the humanistic, or people, approach. His analysis of the
research on organizational change during the period indicated a people-oriented emphasis.
Leavitt describes the people approaches as attempts to change organizations by first
changing the behavior of the organization’s members. The argument is that, by changing
human behavior, one can create new tools or modifications in structure (especially power
structure). By these means, changing human behavior will cause changes in task solutions
and task performance and also cause changes toward human growth and fulfillment.
According to Leavitt, the focus is on the change process itself, which constitutes one of the
major distinguishing features of people approaches. Structural and technological
approaches, on the other hand, focus primarily on problem-solving mechanisms and not on
the internal operations of the organization.
Leavitt’s (1965) primary focus of attention in his article is on power-equalization
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approaches. Under the power-equalization approaches, ideas and operational
techniques are utilized for changing individuals. Although the distribution of power is the
primary variable where efforts to effect change are instituted, several other organizational
variables are also addressed. One variable is the determination of goals. The premise is
that goal-setting should be shared by as many members of the organization as possible.
However, Leavitt argues that, realistically, the size and complexity of the organization may
set limits on who can actually participate in setting specific aspects of the organization’s
goals. Leavitt states that the decentralization concept at least partially resolves this goal-
1 SR
Leavitt (1965), in Ott (1989), op. cit, pp. 565-574.
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setting dilemma. In small units, it is more reasonable for everyone to provide input in
setting unit goals. In a medical office practice, for example, to increase patient flow and
back office efficiency, the medical assistants may provide input to management regarding
the optimum use of exam room time and allocations of medical assistant personnel per
physician. The medical assistants have a better awareness than management of the minute-
to-minute nuances that are required by the physicians in seeing their patients. The
physicians, on the other hand, also know what needs to be accomplished, and their input
should be valued. Therefore, a combination of bottom-up, top-down feedback provides for
participative goal-setting, which is optimum at the unit level, or, in this case, at the level of
back-office patient flow.
A second variable in the power-equalization models is communication. Leavitt
presents six basic arguments regarding the importance of communication. First, two-way
communication produces more positive results than one-way communication. Second, the
change process is enhanced more in two-way interaction situations than one-way
situations. Third, more communication channels are better than fewer communication
channels. Fourth, effective change is more readily accomplished in systems with many
communication channels than in systems with few channels. Fifth, more valid
communication in an organization is better than less valid communication. Finally, valid
change takes place more readily in interactions where there is valid communication than
where there is not valid communication. Leavitt comments on the “duality” of these
statements. He contends that on the one hand, they reflect organizational ideals and, on the
other hand, they are statements about methods for inducing change. His view is that the
power-equalization models regard change itself as a measure of organizational quality. In
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other words, the organization’s capacity to change itself is a criterion for evaluating the
quality of the organization. This is in contrast to the industrial engineer’s criteria of
efficiency and controllability. 1 5 9
A third variable in the power-equalization approaches consists of concepts of
group pressure, cohesiveness, and conformity. This can have both positive and negative
connotations. The positive role for group pressure, cohesiveness, and conformity is that
commitment and involvement are enhanced. If groups set high standards for performance
and quality, but allow for individuality and creativity, then benefits may be seen for
effective change. If the individual is constrained and forced to adhere to group norms that
are inconsistent with quality and effective performance, then the concept of uniformity
may not necessarily be compatible with a productive and creative workplace.
The last variable is decision-making. Leavitt proposes that the ideal from the
power-equalization perspective is a sufficiently open and valid communication system that,
given time, results in the achievement of consensus. 1 6 0 Thus, the power-equalization
models work from the following premises to move groups toward consensual decision
making: (1) Involvement in decision making results in commitment to the decision and,
since most decisions become meaningless in their execution unless they are supported,
commitment becomes a necessary condition for effective decision making. (2) It is useful
159 Leavitt (1965), in Ott (1989), op. cit., p. 568.
160 Leavitt (1965), in Ott (1989), p. 571.
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to lower decision points in the organization. (3) It is reasonable for groups to make
decisions. It is not necessary that decisions be made only by individuals. 1 6 1
The validity of these proposals in application to medical group practices is
equivocal. Leavitt’s opinion is that the models are mostly right and mostly insufficient.
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Furthermore, the ideas are over-generalized to apply to all situations, which is unlikely
in the real world. Moving a group of physicians to consensus is a difficult task in many
situations. Some points, however, are valid. Effective decision making is enhanced with
support of the important actors. Lowering decision making in the organization is useful
when criteria are specifically outlined. For instance, a general partnership of physicians
may approve the formation of an executive committee with specific decision-making
authority (e.g., a specific dollar limit on capital purchases without a formal vote of the
entire partnership). In terms of the reasonableness of group decisions versus decisions by
individuals, this is true in the sense that medical groups are organizations, and
organizations need some mechanism for group decision making to maintain a sense of
order and control. However, physicians also make individual decisions regarding their
daily schedules, how their offices are run, what equipment is needed, and evaluations of
support staff. O f course, there is a threshold level of approval from the group that
individual physicians are subject to when making decisions that impact the entire
organization. Otherwise, conflicts can occur that threaten intra-group collaboration, and
ultimately, organizational stability.
162 Leavitt (1965), in Ott (1989), p. 572.
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Overall, the Leavitt Diamond provides a useful foundation for assessing
organizational change. The obvious limitations of this approach in terms o f relevance to
the current research topic are twofold. First, the emphasis is placed on applications in the
manufacturing sector with little consideration of potential pitfalls in application to the
service sector. Second, the methodologies and technologies that prevailed during social
and organizational movements in the 1960s are often not compatible with needs and trends
occurring in the year 2 0 0 2 and beyond.
4.1.1.5 Fox-Wolfgramm et al.: First-Order Change
Fox-Wolfgramm, Boal, and Hunt (1998) investigated strategic adaptation patterns
of change in two banks over a seven-year period in response to the Community
Reinvestment Act of 1977, revised in 1989 and 1990 (CRA). This study was chosen for
review because it has some relevance to the basic research premise and methodology
utilized in this paper. For example, the analysis of change in response to an important
regulatory issue— mandated legislation—parallels this dissertation’s emphasis on the
impacts of federal regulation (HIPAA and BBA) on organizational change and delivery of
services (medical care) in an organization (cardiology group practices). Also, the use of
interviews and case study analysis align with the approach used in this paper.
Fox-Wolfgramm et al. (1998) present several concepts that warrant assessment.
One area of interest is the authors’ focus on first-order change. The authors define first-
order change as that which occurs within the system, versus second-order change, in which
the system itself changes. Bartunek (1993) comments on first-order versus second-order
change within the context o f “schemata”— change that reinforces already present
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organizational schemata versus change that includes shifts in schemata. 1 6 3 Bartunek
defines schemata as generalized cognitive structures or frameworks that people use to
impart meaning to some particular event or situation. He further describes schemata as
data reduction devices derived from an individual’s perceptions and past experiences.
Schemata guide how one reacts to current experiences and how one conducts subsequent
behavior. While individuals have their own schemata, group and organizational-level
schemata represent shared meanings or frames of reference for the entire organization or
for its subunits. Thus, first-order change refers to incremental modifications that are
concurrent within an organization’s already shared schemata. It can be quantitatively
measured by changes in mean scores on some scale. For example, in a medical practice,
this may be reflected by additional patients accommodated due to expanded hours of
service or by increased revenues due to implementation of a new testing procedure or new
testing equipment in the office. Second-order change refers to qualitative, discontinuous
shifts in the schemata organizational members use to understand significant dimensions of
the organization. For example, a restructuring may occur in an organization that impacts
the concepts of employee productivity and quality of work life (QWL) . 1 6 4 To achieve a
synthesis of these concepts, a change in the system of communication and problem-solving
may be required in the organization in order to reconcile corporate needs for enhanced
163 Bartunek, Jean (1993), “The Multiple Cognitions and Conflicts Associated with Second Order
Organizational Change,” Chapter 15 in Social Psychology in Organizations: Advances in Theory and
Research, edited by J. Keith Mumighan (Prentice Hall, Englewood Cliffs, New Jersey). Bartunek cites several
references associated with the terms schemata, organizing frameworks, frames o f reference, and interpretive
schemes (see p. 327).
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Bartunek (1993), in Mumighan (ed.), op. cit., pp. 334-336. Bartunek lists several schema in a QWL
intervention involving second-order change. Examples include control as a schema for corporate management,
dependence as a schema for line employees, and cooperation as a schema for consultants.
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productivity with employees’ needs for challenging and satisfying work. In a medical
practice, for instance, the need for change may be recognized for improving the process of
patient flow in the office. Suppose that an existing system is based on a culture where
specific employees are responsible for specific work areas and assigned to take care of
specific physicians. In addition, assume that that system fosters a culture of competition
among staff and between physicians for utilization of limited resources such as exam
rooms and equipment. An intervention leading to second-order change would require a
shift in schema from specialization to generalization in work routines, and a shift in
schema from competition to cooperation in how work is managed. Additionally, the
schema of control for the physicians would be altered or challenged. To accomplish a shift
from specialization to generalization, a system of cross-coverage could be instituted,
establishing the need for additional training for some or all employees depending upon the
current competencies and versatility of the employees. This cross-coverage may result in
greater employee work satisfaction due to more challenging responsibilities and the
acquisition of new job skills or enhancement of current job skills. Productivity may also
be enhanced if cross-coverage results in greater availability of staff to cover more work
areas, particularly during times of reduced staff due to sickness, vacation, or downsizing.
The movement from a competitive to cooperative work environment may require
not only process changes, but changes in organizational and individual mindsets as well.
Change could include a reformatting of the performance review system to emphasize, not
only individual productivity, but also professionalism, interpersonal skills, and
collaborative teamwork. Change could also focus on physician com pensation methods that
promote equal sharing and collaboration rather than individual production. This, of course,
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is difficult to accomplish due to differences in work effort and competencies among
individuals.
The schema of physician control is impacted by changes occurring in movements
from staff specialization to generalization and from a competitive to cooperative work
environment. If the physicians individually controlled their schedules and those staff who
performed the work for them prior to the change intervention, then having to accept other
staff rooming their patients and performing procedures on them implies a loss of control
over staff utilization. Also, if processes are implemented that designate times for physician
scheduling and exam room utilization, the implication is that the individual physician has
compromised in a collaborative manner to allow for sharing of resources and sharing of
control in the decision-making process. This does not mean that change intervention is
always successful. Bartunek (1993) points out that when multiple groups are present, a
cooperative, facilitative intervention that assumes shared interests and schemata is more
likely to generate competitive conflict than promote conflict resolution and cooperation.
When conflict occurs, a comparatively powerful perspective, such as corporate
management— or a strong, outspoken physician or group of physicians— is likely to
dominate. A negotiation approach that builds on different perspectives is then needed for
successful conflict resolution.
Several research articles are cited by Fox-Wolfgramm et al. (1998) that imply
second-order change is the norm . 1 6 5 Examples include research suggesting that second-
Fox-Wolfgramm, Susan; Boal, Kimberly; and Hunt, James (1998), “Organizational Adaptation to
Institutional Change: A Comparative Study o f First-Order Change in Prospector and Defender Banks,”
Administrative Science Quarterly 43: 87-126 (see p. 87).
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order change is a response to environmental upheavals (e.g., Hrebiniak and Joyce, 1985).
Other research observes such changes in the organization’s strategic orientation (Zajac and
Shortell, 1989), organizational structure (Meyer and Rowan, 1997), organizational identity
(Dutton, Dukerich, and Harquail, 1994), and even in the mindset of top-level managers
(Barr, Stimert, and Huff, 1992).
However, Fox-Wolfgramm and her co-authors point out that more substantial
research suggests that second-order change— a shift from one strategic orientation to
another (cf. Greenwood and Hinings, 1988)— is atypical even in times of environmental
upheaval (Tushman and Romanelli, 1985). Fox-Wolfgramm et al. imply that research
findings have noted the tendency for organizations to converge around a prevailing
archetype, 1 6 6 and that strategic orientation and inertia tend to bound organizational change
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to that which is consistent with the archetype, representing first-order change. Inertia is
consistent with retention of the existing design archetype. Starbuck, Greve, and Hedberg
(1978) argue that the most likely response to environmental changes, even those that create
a crisis for the organization, is for the organization to retain its current values and structural
modes. Fox-Wolfgramm et al. also note the empirical findings by Meyer and colleagues
(Meyer, Brooks, and Goes, 1990; Meyer, Goes, and Brooks, 1994) that second-order
change occurred only 30 percent of the time in the organizations that they studied.
166 For a definition o f archetype, Fox-Wolfgramm et al. (1998, p.88) cite Greenwood, Royston, and Flinings,
C.R. (1993), “Understanding Strategic Change: The Contribution o f Archetypes,” Academy o f Management
Journal 36: 1052-1081. Organizational structures and management systems are best understood as design
archetypes or holistic patterns. These “patterns” are a function o f the ideas, beliefs, and values— the
components o f an ‘interpretive scheme’— that is an integral part o f organizational structures and systems. A
design archetype is thus a set of structures and systems that reflects a single interpretive scheme.
167 Fox-Wolfgramm et al. (1998), op. cit., p. 87.
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Fox-Wolfgramm et al. (1998) state that there are several reasons for expecting
either similar or different modes of adaptation. Institutional theory holds that
organizational structures are shaped by preconceived notions in the community about
forms of organization that are effective and rational (Donaldson, 1995; Powell and
DiMaggio, 1991; Meyer and Scott, 1983). Fox-Wolfgramm et al. contend that an
organization may follow similar modes of adaptation due to coercive, mimetic, or
normative pressures to remain legitimate. 1 6 8 Coercive isomorphism occurs if an
organization’s responses to institutional mandates (i.e., government regulation, legislation)
resembles those of other organizations. For example, if certain hospitals or physician
groups show increased merger activity in a region due to economic pressures resulting
from government reimbursement constraints, other hospitals or medical groups may follow
suit to remain competitive. Mimetic isomorphism occurs if an organization copies
characteristics of other organizations’ processes that are perceived to be successful in an
uncertain economic or institutional environment. If other organizations are downsizing or
instituting new medical procedures to cut costs and enhance revenues, respectively, then
organizations would be pressed to mimic these strategies to maintain competitive viability.
Finally, normative isomorphism exists if an organization’s adaptation reflects the
requirements for professional standards and normative structure that is present within the
institutional context. Organizations need to adapt to regulatory constraints. Hospitals and
medical groups are subject to oversight in the ways that they conduct business, their
168 Dimaggio, Paul J., and Powell, Walter W., “The Iron Cage Revisited: Institutional Isomorphism and
Collective Rationality in Organization Fields,” American Sociological Review 48: 147-160.
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interactions and the type of information they can share with competitors, their legal
structures, their credentialing standards, their billing practices, and so on.
Fox-Wolfgramm and co-authors note that the history of an organization can affect
how it responds or adapts to change. One way that history is important relates to the
organization’s identity and image. The organization’s identity— the perception of how
organization members view themselves— and the organization’s image—how organization
members think that they are viewed by the community— can impact change and
differentiate the organization from other organizations. A medical group may focus on its
perception that its physicians provide high quality clinical care and provide good service.
The physician members may maintain that identity through an internal mechanism of
quality control and review. To promote the image, the physicians may require certain
standards of service in addition to 24 hour/7 days per week call coverage such as
immediate response to physician referrals for patients needing immediate clinical attention
or defined office-scheduling slots for priority patients.
Fox-Wolfgramm and co-authors also note that an organization’s history, and its
adaptation to change, may be influenced by its strategic orientation. The authors place a
particular focus on what are termed prospector and defender strategic orientations to
differentiate two banks that they studied. 1 6 9 Prospectors are dynamic organizations that
focus on product innovation and market opportunities. They tend to emphasize creativity
over efficiency. Prospectors adapt by monitoring shifts and trends in the environment and
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Fox-Wolfgramm et al. (1998), p. 90, cite several studies that describe prospector and defender orientations
including Miles and Snow (1978); Daft and Weick, (1984); Doty, Glick, and Huber (1993); Hambrick (1982);
Meyer (1982); Ginsberg and Venkatraman (1992); and Gio and Thomas (1996).
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identifying opportunities for developing new products or markets that will enhance the
chances for organizational viability and success. Structurally, prospectors maintain high
levels of decentralization, with low levels of specialization and formalization. Defenders,
on the other hand, are less dynamic and focus on efficiency of existing operations.
Structurally, defenders are more mechanistic, centralized, specialized, and formalized
compared to prospectors. These differences suggest that prospectors are more responsive
to changes in their environment and, thus, more open to change, and that prospectors and
defenders will have different patterns of adaptation.
In their study, Fox-Wolfgramm et al. (1998) put forth three prerequisites for
studying processes of first-order change. First, the organization must be facing an
environmental change that requires an organizational response that is
significant— classified as a strategic issue. Second, any study of change should adopt a
multilevel perspective that simultaneously examines the institutional and organizational
contexts within which change occurs. Finally, there must be evidence that the organization
did not adapt to the environmental change by undergoing a second-order change.
Fox-Wolfgramm et al. (1998) studied adaptive change in two banks (one defined
as a prospector and the other a defender) in response to the Community Reinvestment Act
(CRA). The authors utilized three levels of analysis: the organizations’ institutional
setting, where the strategic issue associated with the CRA originated; the organizational
level, where structures and roles were changed; and, the strategic issue level, where the
issue was interpreted, processed, and addressed.
Although the study findings from Fox-Wolfgramm and her co-researchers support
the basic approaches to change that prospectors and defenders take, some of the results
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were contrary to expectations. For example, prospectors, like defenders, resisted pressures
for change, but for apparently different reasons. The defender bank appeared to resist
change because it did not fit its hometown bank identity. The prospector bank, on the
other hand, apparently resisted change because top management believed that the bank was
already meeting institutional expectations consistent with its “first to lead the way”
identity, and, therefore, did not think that change was needed. In addition, evidence of
performance failure— failing the CRA examination or non-compliance— was necessary to
counter this belief in meeting institutional expectations and to bring about a more proactive
attitude about change, as well as an increased level and intensity of activity in the
prospector bank. However, this activity change was both lower in intensity and more
incremental than the change displayed by the defender bank, despite stronger institutional
inclination to change.
Fox-Wolfgramm and co-authors provided several propositions from their findings,
some of which are applicable to this discussion and summarized here. One conclusion
implies that organizations whose identity and image are inconsistent with institutional
pressures for change will resist change attempts. To sustain organizational change, it is
necessary to change an organization’s envisioned identity and envisioned image.
Furthermore, an organization’s identity and image are stronger forces in sustaining change
than is success. Also, second-order change is not necessarily permanent. Organizations
that believe they are already meeting society’s demands will resist calls for change. When
there is resistance to change, an organization will be unresponsive to calls for change
unless there is clear evidence of inconsistencies between identity and image.
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4.1.2 Summary and Recommendations for Change Model Development
4.1.2.1 Integrated Model fo r This Study
Five research approaches for organizational change have been presented, each with
strengths and weaknesses in relation to their applications to this study. Donaldson (1995)
offers an approach that can be utilized in this study to develop a change model that
attempts to explain the dynamics of change in an organization in response to regulatory
and legislative pressures. In his attempt to develop a unified theory of organizational
structure, Donaldson analyzed five major theoretical models including structural
contingency theory, population-ecology theory, institutional theory, resource dependence
theory, and organizational economics theory. His analysis resulted in a synthetic model
that utilizes structural contingency theory as the foundation onto which elements of the
other theories are added. Donaldson argues that there can be no complete integration of the
different theories as they are presented. Each model has certain strengths and weaknesses.
In Donaldson’s view, it is not desirable to retain all of the weaker elements of each theory.
However, it is advantageous to selectively incorporate the applicable elements from each
theory to build the synthesis. This parallels the approach to be instituted in this study.
The research from Mohrman et al. (1989) is useful in the background literature
information provided and the implications for large-scale organizational change.
Undoubtedly, contributions from the organizational development (OD) and organizational
theory (OT) schools provide useful insights to the phenomenon of organizational change.
The authors also point out the weaknesses inherent in both approaches. Large-scale change
implies pervasive change on the greater organizational level. Although this is important,
particularly in larger organizations, the focus of this dissertation takes into account change
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affecting both the sub-units and organization as a whole. The OD perspective does provide
for analysis on the departmental level, focusing on specific interventions. The OT
approach emphasizes specific causes affecting variables such as organizational
performance or structure. The theme derived from Mohrman et al. is that the major
challenge is managing uncertainty in the environment, and that change is ultimately
concerned with a multitude of factors in the organization including behavioral, financial,
technological, and legal considerations. These points are useful elements that can be
applied in this dissertation. However, as a foundation for model development for this
study, Mohrman et al. are not preferred due to their primary focus on large-scale change
only.
Narayanan and Nath (1993) also provide useful background literature information.
The authors propose that all contemporary organizational change theorists subscribe to the
open-systems model. They also propose a typology to account for the differences among
change theorists. As noted earlier in this analysis, the four combinations of sources of
change and types of change can be applied to particular situations in a medical group that
reflect different organizational change dynamics. The authors provide analyses of various
models and different perspectives on the various ways that organizations undergo change.
Their conclusions focus on how organizational change models impact managerial action.
Thus, from operational and managerial viewpoints, Narayanan and Nath provide
contributions that are useful. However, like Mohrman et al., their approach is applicable
for specific elements that contribute to an understanding of change within the context of
this study, but not preferred as a foundation for model development. Their typology could
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provide for a useful assessment tool, but the confirmation of its application and validity is
beyond the empirical scope of this study.
Bolman and Deal (1997) also analyze the importance of change strategies to
improvements in management and leadership. Bolman and Deal’s four-frames approach
provides for an interesting premise that could be useful as a foundation for model
development. One point that is particularly relevant is the assumption that, in reframing
organizational change, the four frames work in concert, although a different set of barriers
to change and strategic foci is addressed in different ways by each frame. Bolman and
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Deal also utilize an interesting technique in matching frames to situations. For example,
the question is presented: “Is the technical quality of a decision important?” The answer,
according to the authors, pertains to when a good decision needs to be technically correct,
then the structural frame is appropriate because of its emphasis on rationality and logical
procedure. However, if the decision must be acceptable to major constituents in the
organization, then the human resource, political, or symbolic frames are more applicable.
Although Bolman and Deal’s four frames model is worthy of consideration, the
direction that this dissertation takes is not specifically focused on the conceptual approach
of matching frames to situations. The structural, human resource, and political frames do
contribute to the assessment of change dynamics in this study, but in a somewhat varied
context compared to the framework utilized by Bolman and Deal.
In this paper, the foundation for development of an integrated model for change is
contributed primarily by the work previously cited by Leavitt (1965) and Fox-Wolfgramm
170
Bolman and Deal, op. cit., p. 271.
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and her co-authors (1998). Although the Bolman and Deal model shows some similarity to
the Leavitt Diamond, Leavitt’s approach is more congruent with the premise for addressing
the research questions and hypotheses presented in this dissertation. Given the two
weaknesses of Leavitt’s article, specifically its time frame and focus on the manufacturing
sector, Leavitt’s thesis is still central to this research in terms of the implications of change
dynamics involving structure, technology, and human variables and their impacts on task
performance.
The important contributions from Fox-Wolfgramm et al. are the emphases on
multilevel analysis (institutional, organizational, strategic), the similar methodological
approach (interviews, case analysis), and parallel research context (organizational response
to regulatory pressure). The comparative framework between prospector and defender
organizations also provides for a useful base for analysis of organizational dynamics.
4.1.2.2 Propositions
Together, Leavitt’s model and Fox-Wolfgramm and co-authors’ research approach
provide a platform for assessing the structural and functional responses of an organization
to environmental influence, or, in this study, the responses of a cardiology group practice
to provisions of government legislation (HIPAA, BBA). With this model platform in
place, three propositions were developed from the results obtained from the case-study
analysis, which is detailed in Chapter 5. The three propositions are:
Proposition 1: Organizational change is supported by a combination o f
both prospector and defender strategic perspectives.
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Proposition 2: The magnitude o f adaptive change in the organization is
directly related to the regulatory impacts on revenue and
expenses.
Proposition 3: The prospector characteristic o f technological innovation
and the defender characteristic o f efficiency provide
prominent contributions to the adaptive change process.
4.2 P a r t 2— R e s e a r c h M e t h o d o l o g y
4.2.1 Overview of Approaches
The research methodology utilized for data collection in this dissertation included
four general approaches. One approach was the use of both open-ended and closed-ended
questionnaire techniques. A second approach included analyses o f time-series data. The
third approach incorporated previous research study findings and research techniques. For
example, a portion of the overall methodology was influenced by the approach utilized by
Fox-Wolfgramm et al. (1998), although research for this broadly connected dissertation did
not require their depth and specialized conceptualization. Finally, the use of case-study
methodology provided comparative analyses incorporating the first three approaches. An
overview of the application of these general approaches is presented in this section.
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4.2.2 Questionnaire Structure
Survey techniques incorporating both open-ended and closed-ended questionnaire
formats were utilized in this study. The type of questions presented for the open-ended
studies are most closely defined as a blend of opinion questions and knowledge questions
1 *7 1
(O’Sullivan and Rassel, 1995). Opinion questions typically inquire of respondents what
they think or what their attitudes are about issues or events. Knowledge questions are used
to determine what respondents actually know about issues or events. The closed-ended
questionnaire utilized a Likert-type format for measuring respondents’ degree of intensity
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regarding their attitudes toward particular issues or events.
4.2.2.1 Open-Ended Questionnaire Format
Surveys were conducted with consultants and physicians using a combination of
phone survey responses and individually dictated responses. The process was very similar
to that utilized by Fox-Wolfgramm et al. (1998), except the interview process occurred on
a face-to-face basis in the Fox-Wolfgramm study, whereas this study utilized phone
interview responses, at least for the consultants’ portion. For the consultants’ survey, the
process included six steps. First, the consultants were contacted for approval to conduct
the interview. Second, with approvals, the open-ended questionnaire was e-mailed to each
consultant for review prior to the phone interview, which was scheduled at a mutually
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See O’Sullivan, Elizabeth; and Rassel, Gary (1995), Research Methods fo r Public Administration (White
P lains, N ew York: Longman Publishers), p. 187.
172
See Issac, Stephen; and Michael, William (1987), Handbook in Research and Evaluation: For Education
and the Behavior Sciences (San Diego, California. EdITS Publishers), p. 142.
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agreed upon time between the author and the respondent. Third, the phone surveys were
conducted. The survey times varied between 20 minutes to 50 minutes in length,
depending on the respondents’ time to answer questions and intermittent clarifications that
occurred on an individual basis. Fourth, the consultants’ responses were recorded during
the interview on Sony dictation equipment using micro-cassette tapes. All respondents
were informed of the procedure for recording their responses, and all were agreeable.
Fifth, responses were transcribed by the author or, in three instances, by a transcriptionist.
Transcribed responses were typed verbatim except for minor editing to enhance sentence
structure or sentence clarification. Finally, transcribed responses were submitted by e-mail
to each respondent for final review, clarification, or editing, if needed. One additional
consultant interview was performed on a face-to-face basis. This interview did not utilize
the written questionnaire but focused on questions of a more technological nature. The
same process was used for recording and transcribing the responses, but no written
questionnaire was used. This interview is detailed in the Results section.
The survey questionnaire that was used for consultant interviews consisted of ten
questions (see Appendix A). The questions were devised and structured to address the
research questions, in general, and the hypotheses, in particular, that were presented in
Chapter 1.
Seven consultants, including the consultant participating in the face-to-face
interview, participated in the phone survey. Consultants were selected by the author based
on their availability and, most importantly, on their knowledge and understanding of
HIPAA, the BBA, and current health care trends affecting medical group practices.
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For the physician interviews, the survey process was very similar to the process
used for consultants. There were two differences. First, the questionnaire, although very
similar to the questionnaire submitted to consultants, was altered slightly to include a
question to allow physicians to address their clinical opinions on the utilization of new
cutting-edge procedures by cardiologists. Also, there were nine questions instead of ten on
the physician interview questionnaire (see Appendix B). Second, phone interviews were
not utilized with physician respondents. Instead, the questionnaire was submitted to
physicians, and they were allowed to directly dictate their responses. This option was
provided to better accommodate the physicians’ very busy schedules. Once dictated, the
responses were typed, and the physicians were provided the opportunity to review the
transcribed responses for editing purposes in the same manner as the process described
above for consultants.
Two physicians participated in the open-ended physicians’ survey format.
Questionnaires were submitted to two additional physicians who agreed to participate.
However, due to their time constraints and other variables, those two physicians were
unable to complete the survey within the time frame needed to incorporate their responses
into the analysis. In addition, one other physician who was approached to participate in the
interview declined to be included in the survey.
4.2.2.2 Closed-Ended Questionnaire Format
The closed-ended format was instituted specifically for the case-study portion of
the study. The questionnaire was submitted to each of 17 physicians in the cardiology
practice participating in the case study. The questionnaire consisted of 23 questions,
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constructed in a Likert-type format (see Appendix C). The questions were structured to
address the research questions and hypotheses previously presented. Only four responses
were received within the time frame needed to incorporate the results in the data analysis.
4.2.3 T im e-Series D ata
Multiple data sets using time-series data were analyzed in this study. Data sets
included
• Physician practice costs comparisons between 1997 to 2001.
• Changes in Medicare procedure relative value units between 1997 to 2002.
• Changes in Medicare procedure reimbursement between 1997 to 2002.
• Changes in physician practice revenue and expenses between 1997 to 2001.
• Changes and comparisons in physician production and reimbursement between
1997 to 2001.
Time-series designs are defined as either simple or interrupted. In the simple time-
series design, the values of a variable are described over time without explaining the
changes in those values. The interrupted time series provides researchers with a tool that
can be conveniently used to track the impact of a public policy. This type of design
introduces an independent variable that is used to track the subsequent effects of that
variable on other variables or values. The interrupted time series design requires
observations prior to the introduction of the independent variable. These observations
serve to demonstrate that introduction of the independent variable resulted in a change in
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the dependent variable that cannot be attributed to long-term trends, cycles, or seasonal
events. In this study, the implementation point of 1999 was used to assess subsequent
changes in variables compared to previous years’ data for impacts on relative values and
physician production and reimbursement. The year 1999 marked the first year of the
phase-in of resource-based versus cost-based relative value units. The year 1997 was used
as the first year for time-series data due to data availability and case-study applicability,
which is detailed below.
4.2.4 C ase-Study M ethodology
The case study incorporated the use of a closed-ended survey questionnaire, time-
series data, and general observation by the author for assessing organizational change and
providing comparative analyses with a broader range o f data, primarily provided from
Medical Group Management Association (MGMA) surveys and from the Centers for
Medicare and Medicaid Services (CMS). The data sets listed in the paragraph on time-
series data (above) were incorporated in the case-study analysis in a comparative manner
with the broader databases from the MGMA and CMS, and they were also utilized for
assessments of any causal relationships impacting organizational change. Data sets
utilized time frames from 1997 to 2001. In addition, annual totals for 2002 were included
for certain analyses. The year 1997 was used as the starting point for time-series data for
case-study purposes because 1997 was the first complete year that the cardiology practice
was formed as a result of a merger between two previously separate cardiology groups.
As mentioned above, some similarities in methodological approach are noted
between the study by Fox-Wolfgramm and her co-authors (1998) and the methodological
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approach used in this study. First and foremost, both studies analyzed the impacts of
specific legislation on patterns of organizational change. Second, in both studies, open-
ended and closed-ended questionnaire survey analyses were applied. Third, both
approaches incorporated time-series data into the research methodology. Finally, case
study analysis was utilized. Overall, a general similarity between the two research studies
arguably occurred for assessing organizational change at the institutional level, the
organizational level, and the strategic issues level.
However, there are also significant differences in the methodological approaches.
For instance, although the processes for interviews, tape recording, verbatim transcription,
and interviewee review of transcribed responses are similar, the case-study structures are
very different. The Fox-Wolfgramm study involved interviews with representatives from
two banks. The two banks selected were required to meet certain criteria that defined these
organizations under defender or prospector strategic orientation categories specified under
previous research models (Fox-Wolfgramm et al., 1998). The case analysis in this study,
on the other hand, is confined to a single cardiology group practice with no pre-determined
defender or prospector categorization based on previous models. Furthermore, the Fox-
Wolfgramm study assessed the predicted and actual responses of the defender and
prospector banks, whereas the analysis in this study focused more on whether the group
practice demonstrated responsive characteristics that could define the organization as either
defender or prospector, both in specific situations and in general terms. Finally, although
the general approach for obtaining data through interviews, questionnaires, documentation,
and observation occurred in both studies to an extent, the Fox-Wolfgramm study involved
a more formalized experimental research design, relied on theoretical tracks discussed by
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previous researchers (Hingus and Greenwood, 1988), and incorporated patterns of change
coded by intensity of data (Fox-Wolfgramm, 1998). In contrast, this study focused more
on basic comparative analysis of the data as it was presented without mimicking theoretical
tracks based on previous models or coding for intensity of responses.
The basic premise for use of the case study was to provide data that may confirm
or refute information obtained from a broader base of information derived from other
research databases. With this premise in mind, it was assumed that the case study could
provide real-life numbers and situations that can be accessed and longitudinally analyzed.
For example, analyzing a group practice’s net income per physician over a six-year period
and assessing that group’s percentage contribution from Medicare reimbursement can give
indications of the impacts of the reimbursement provisions directly related to the 1997
BBA. Comparing this data with compensation data from other sources such as the MGMA
Compensation/Production Survey can then provide comparative cross-sectional analyses.
The weakness of the single case-study methodology, of course, is that the data and
subsequent findings from one cardiology group practice cannot be universalized to the
population of all cardiology group practices, particularly in the absence of a formal
experimental design incorporating appropriate pre- and post-testing techniques for data
validation and other measures to assure research-level predictive value.
Ragin (1999) notes that it is common in discussions of methodology to focus on
two techniques of data collection— qualitative and quantitative. Techniques in the
qualitative group typically include observation, in-depth interviewing, and focus groups,
among others. Techniques in the quantitative group include surveys, analysis of records,
and census data. In general, this distinction is useful because the most basic prerequisite
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for the use of sophisticated quantitative techniques of data analysis is a large number of
cases. Thus, data collection techniques that generate large numbers of observations are
usually grouped as quantitative methods. Additionally, most quantitative analyses are
primarily concerned with the problem of making inferences from a sample to a population.
Small, unrepresentative “samples” generated by qualitative methods are generally
acknowledged as offering a weak basis for making such inferences.
Ragin (1999) argues that a more fundamental concept is the distinction between
case-oriented and variable-oriented research strategies. The case-oriented strategy is
primarily concerned with making sense of a relatively small number of cases, usually
between one and 50, selected because they are substantively or theoretically significant in
some way. The variable-oriented strategy is mainly concerned with the problem of
assessing the relationship between aspects of cases across a large sample o f “observations,”
usually with the goal of specifying general patterns that hold for a population. In the end,
what is important is what the researcher is trying to achieve. Is the researcher trying to
understand specific cases or to document general patterns characterizing a population?
Ragin (1999) cites the argument from the philosopher von Wright, who contends that there
are two main traditions in the history of ideas regarding the conditions an explanation must
satisfy to be scientifically respectable. One tradition is called “causal-mechanistic,” which
is focused on the problem of prediction. The other is called “ finalistic,” which is based on
making facts understandable. The contrast between the case-oriented approach and the
variable-oriented approach parallels this fundamental difference. For example, the case-
oriented approach may be adopted to make certain facts understandable. The variable-
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oriented approach may be utilized to elicit answers from a sample of respondents and to
draw inferences that can apply to an entire population.
In this dissertation, there were obvious limitations in obtaining a large number of
survey responses and interviews. Thus, the problem of small sample sizes provided
problems with validation and predictive value to a larger population. Larger samples from
the MGMA surveys were also utilized. However, the comparisons of MGMA data with
the single case-study data must still be noted with the understanding that inferences to
larger populations cannot be made in this study. On the other hand, with the combination
of interviews, time-series data comparisons, and case-study data, some informative and
meaningful research findings were possible, particularly using the primary research
premise that a case-oriented approach may be adopted to make certain facts
understandable. In this case, the meaningful research findings imply an understanding of
how cardiology groups may be impacted by federal regulatory mechanisms.
4.2.5 A nsw ering the R esearch Q uestions
In Chapter 1, ten hypotheses were generated as vehicles for answering the three
research questions. Additionally, in Chapter 4, three propositions were presented to predict
possible organizational characteristics that promote or inhibit change. This section
summarizes links of specific interview questions and questionnaire responses with the
relevant hypotheses. Due to the low number o f respondents, particularly with the
physician case-study questionnaire, a validated quantitative statistical analysis could not be
accomplished. Qualitative interpretations of responses were attempted and incorporated as
tabular results with some quantitative assessment in terms of how interviewees responded.
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Responses from the case-study questionnaire were assessed and tabulated separately.
Assessments of interview responses were accomplished in the following manner: First,
consultant and physician interview questions along with the responses from the case-study
questionnaire were correlated with applicable hypotheses. Next, answers were interpreted
and assigned as percentages in terms of agreement or disagreement with a particular
hypothesis. Percentages were based on the total possible respondents for a particular
hypothesis. For example, Hypothesis 4 was only addressed with the case-study questions,
not with the consultant interview or physician interview questions. Questions/hypotheses’
correlations are summarized in Table 9 below:
Table 9: Correlation of Interview Questions with Hypotheses
Hypothesis # Cons. Interview Question # Phy. Interview Question # Case-Study Question #
1 1,2 ** 1,2 2,3
2 3,4,7** 3,4,5 4, 5, 6,7
3 6 None 10
4 none None 14
5 8,9 6, 7 ,8 16, 17, 18, 19
6 8,9 6 ,7 15
7 4 5 8, 11
8 8 6 13
9 10 9 20
10 10 9 21,23
Note. Cons. = consultant. Phys. = physician. ** = Face-to-face interview responses with IT
consultant.
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Chapter 5
R e s e a r c h F in d in g s
5.1 H y p o t h e s e s a n d I n t e r v i e w / Q u e s t i o n n a i r e R e s p o n s e s
5.1.1 H ypothesis 1
5.1.1.1 Overview
Hypothesis 1 focuses on the impacts of HIPAA on the costs and development of
data access control mechanisms and the information technology requirements presented by
the transaction standards, privacy rules, and security regulations. It was decided to divide
Hypothesis 1 into three parts (la, lb, and lc) to better assess the specific questions related
to information system upgrade time frames, development of virtual private networks
(VPN), and implementation of electronic medical records (EMR). The applicable open-
ended questionnaire responses were based on Questions 1 and 2 in both the consultant and
physician interviews. The face-to-face consultant interview responses were applicable as a
supplement to the consultant and physician responses for assessment of Hypotheses la and
lb, primarily. The applicable responses from the case-study close-ended questionnaire are
Questions 2 and 3 (see Appendixes A, B, and C) and will be addressed under case-study
results.
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The applicable interview questions for Hypothesis 1 address whether cardiology
groups will upgrade their information systems in the near future or down the road to
accommodate the HIPAA requirements. The questions specifically address three areas of
interest: (1) Will groups upgrade their systems, and if so, in what time frame? (2) Will
security measures such as virtual private networks be implemented to accommodate
security concerns? (3) Will groups move toward purchases of electronic medical record
(EMR) systems.
5.1.1.2 Consultant and Physician Responses
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Alex Hunter, Managing Partner for Cejka Consulting in Norcross, Georgia, is
not convinced that groups will jump on the bandwagon and implement new information
systems (IS). Mr. Hunter contends that, unless the government threatens to close down
practices with required regulations, groups are not going to rush to upgrade their systems.
Part of the problem, as he sees it, is that significant capital investment is required without a
clear return on investment (ROI) associated in the case of HIPAA. Most specialty
practices of less than 1 0 physicians, including cardiology, do not have the capital to invest
in upgrading billing and scheduling systems. Also, to add EMR is a very costly project.
Larger practices, in general, have a larger revenue base and would be more likely to
upgrade than smaller practices. But according to Mr. Hunter, overall this has generally not
been the case.
Telephone interview with Mr. Alex Hunter, Managing Partner, Cejka Consulting, Norcross, Georgia,
March 27, 2002.
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Mr. Sean Weiss, a consultant with the Medical Management Institute in
Alpharetta, Georgia, 1 7 4 views the prevalence of IS upgrades as being determined by what
type o f systems physician practices are currently running. HIPAA requires a certain type
of software for a practice to be able to encrypt, or encode, data to afford the insurance
payers the opportunity to re-identify information. Groups will need to perform an
assessment of their current software to make sure that it can process the ASCX12N837
Version 47 software, for example. If systems are not compatible, then upgrades to the
system will need to be made either by purchasing a HIPAA “patch” or by moving into a
new system. In terms of the security requirements, Mr. Weiss states that, at least in the
beginning, organizations are going to attempt to circumvent the security requirements,
particularly since groups will have 24 months to become compliant from the time that the
security rules are finalized. This time frame will allow practices to see how they can
utilize their current internal networks, if they have any, or move toward more secure
computer servers over time to meet the HIPAA requirements.
Mr. Weiss is in agreement with Mr. Hunter in that he does not think that practices
are going to move to implement EMRs within the next 12 to 24 months. A primary reason,
of course, is the cost of purchasing and maintaining such a system. According to Mr.
Weiss, the pricing of EMR can run anywhere from a maintenance fee o f $2,000 annually to
a purchase price of $50,000 to $75,000 to upwards of six figures. Mr. Weiss also points
out that, with physician practices’ expenditures increasing by 6 . 2 percent in 2 0 0 1 and
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Telephone interview with Mr. Sean Weiss, Consultant, Medical Management Institute, Alpharetta, Georgia,
April 1, 2002.
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Medicare reimbursement conversion factors declining by 5.4 percent this year (2002), he
does not see physician groups hurrying to purchase EMR systems right away.
Mr. Robert Tennant, Government Affairs Manager for the Medical Group
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Management Association (MGMA) Department of Government Affairs, provides a
slightly different perspective, although somewhat in agreement with Mr. Weiss. Mr.
Tennant argues that cardiology groups will need to upgrade their information systems to
meet HIPAA compliance. He sees cardiology practices taking an incremental compliance
upgrade approach. Depending on their level of sophistication, he envisions cardiology
groups first moving to accomplish upgrades to the computer management/billing systems
to comply with the 837 professional claims standards. Next, upgrades will encompass
electronic eligibility, then claims status, and finally, electronic referrals. Mr. Tennant
indicates that changes will take some time, and most likely will not occur in 1 2 months.
However, the majority of cardiology practices of some size will move toward all of these
standards within, “hopefully,” 36 months.
Mr. Tennant also feels that in terms of implementation of virtual private networks
(VPNs) for security measures, some larger cardiology groups may be able to accomplish
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this in the short term, but he does not see this happening with smaller groups. The
security rule is still not finalized (as of September 2002), which gives cardiology groups
(and other physician practices) until at least 2004 to be fully compliant with the new rules.
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Telephone interview with Mr. Robert Tennant, Government Affairs Manager, MGMA Department of
Government Affairs, April 4, 2002.
176 Mr. Tennant provided a point o f clarification during the interview regarding his definition o f small-size
groups, medium-size group practices, and large-size group practices. For small-size, 10 or less physicians;
medium-size, 11 to 49 physicians; and large-size, 50 or more physicians.
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He implies that cardiology groups will, therefore, delay implementation until the deadline
for compliance.
Mr. Tennant also indicates that most groups of smaller size have not moved toward
EMR. He does not see anything happening in 2003 to encourage groups to move in that
direction. In fact, especially with cardiology group practices, he argues that the opposite
might be more the reality. With the reduction in Medicare fees in 2002, cardiology
practices will most likely have less interest in the large cash outlays that are required for
implementing EMR. However, having said that, he still anticipates that HIPAA will still
be a catalyst to move cardiology practices toward EMR systems. This probably will not
occur in 12 months (from April 2002), but may happen within 36 months of that date,
particularly due to the fact that one area of HIPAA actually mandates standards for patient
medical record information (PMRI). HHS is not expected to release a rule on PMRI until
mid-2003 at the earliest. However, what such a rule will accomplish is to standardize the
data infrastructure to allow EMR companies to have a standard data format. One of the
key drawbacks to cardiology groups moving to EMR is the tremendous cost. With
standardization for the way that EMR systems handle data, the cost o f the systems is
potentially driven down. This allows for more affordability for cardiology groups to
purchase these systems. In conclusion on this question, Mr. Tennant predicted that the
industry is moving toward EMR systems. However, in a meeting that he attended in New
York this year (2002), he queried the audience regarding how many were using EMR
systems. The response was approximately three out of 200 currently using EMR. His
perspective is that EMR is still in its infancy for small and medium-sized groups. Mr.
Tennant forecasts that in four or five years after 2002, approximately 40 to 50 percent of
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cardiology group practices will be moving to EMR; and in 10 years, the majority of
cardiology group practices will be using EMR.
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Mr. John Steiner, Corporate Compliance Officer for the Cleveland Clinic,
provided a perspective from the viewpoint of a large provider, particularly of cardiology
services. The Cleveland Clinic Foundation, according to Mr. Steiner, has made its mark
principally, domestically, and internationally in cardiology and cardio-thoracic surgery,
along with all the related advances in that field of medicine. In reference to the questions
of whether cardiology practices will upgrade their information systems within the next 1 2
months and implement VPNs, his answers are “yes.” The Cleveland Clinic’s information
technology division has already been in the process o f addressing these issues. His
viewpoint is that VPNs provide a valuable vehicle for sharing information, particularly for
clinical research trials. In the case of the Cleveland Clinic, significant information sharing
is conducted with information being de-identified in order to assure compliance with Food
and Drug Administration (FDA) data integrity regulations. Additionally, to the extent that
clinical research trials are sponsored by the National Institute for Health (NIH), the
Cleveland Clinic must comply with a disclosure analysis protocol. Mr. Steiner thinks that
the concept of maintaining integrity (security) of data and information is a necessary
element that applies to any provider-based site engaged in clinical research trials or
ongoing patient care. Otherwise, that provider will fall behind the market.
In reference to EMR, Mr. Steiner notes that the Cleveland Clinic has piloted an
EMR since September 2001. The project has been implemented incrementally across the
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Telephone interview with Mr. John Steiner, Corporate Compliance Officer, Cleveland Clinic, Cleveland,
Ohio, April 4, 2002.
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entire Cleveland Clinic Health System, but with a current emphasis on the inpatient side of
the business.
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Mr. Dave Gans, Director of Practice Management Resources for MGMA, has
valuable insights regarding how health care entities, particularly group practices, are
responding to various issues— including information technology questions— presented by
regulations such as HIPAA and BBA. First of all, Mr. Gans thinks that there will be a
change in information systems. Whether this change will occur in the next 12 months
(2002 to 2003) or later will depend on different factors. One factor may be the impact of
an extension on HIPAA. According to Mr. Gans, many of the upgrades and changes are
going to be vendor-driven as opposed to practice-driven. The vendors have an obligation
under HIPAA to be in compliance with the law. As a result, the vendors will make
changes in information systems that are universal and, subsequently, mandate that the
practices do an upgrade. Mr. Gans reasons that in one sense, this may actually be a
financial benefit to the vendor and a financial detriment to the practice because it will
necessitate certain systems to be upgraded that may be truly functional in their existing
mode. This is particularly relevant with a legacy system where the vendor no longer fully
supports the system. When the system is no longer HIPAA compliant, the practice is
forced to upgrade that system to the next generation, resulting in an increase in cost.
With respect to the development of VPNs and network-based systems, Mr. Gans
foresees this occurring in certain environments, but not many. One good example where
this would occur is in integrated delivery systems where a hospital has a very sophisticated
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Telephone interview with Mr. Dave Gans, Director o f Practice Management Resources, Medical Group
Management Association (MGMA), April 11, 2002.
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information technology branch and has employed physicians as part of the hospital. His
assessment is that these organizations will be among the first to implement virtual private
networks. Another example where this initially will be seen is in large multi-specialty
group practices, and basically for the same reasons—these organizations are more likely to
have the information technology capabilities plus the capital resources at their disposal.
Also, larger group practices that have multiple branches may potentially have the
technology and capital to establish networks and VPNs. On the other hand, Mr. Gans does
not foresee independent physician groups joining together in networks.
In terms o f the question addressing the purchase of integrated computer systems
with EMR, Mr. Gans does see an increased movement toward EMRs, although there will
be a large number of organizations that will resist the move to EMR for a long period of
time. He has noticed that generally all medical groups, not only cardiology groups, are
looking at EMRs as they are making their system decisions. Mr. Gans indicates that, for a
number of economic and clinical reasons, a practice may find an electronic medical record
to be very beneficial. The necessity to upgrade portions of the computer system because of
HIPAA may cause practices to consider their electronic medical records issues as well. If
the practice will incur substantial increases in its costs to manage in a paper environment
utilizing its current paper record technologies, this may tip the scales on economic costs of
EMR— it may be more cost-effective to invest in EMR as opposed to spending those
dollars on an antiquated system. Also, from an EMR perspective, Mr. Gans notes that it
has been identified in several studies that practices with EMR have a higher amount of
revenue due to increased charge capture. This reflects the integration o f EMR with billing
information, which is particularly relevant for cardiologists because there is a substantial
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amount of activity that occurs in the hospital, in an ambulatory surgery center, in the
catheterization lab, or in another facility that may be outside of the practice. The ability for
increased charge capture may actually enhance the revenue sufficiently to, again, tip the
scales towards an EMR because there is this considerable investment. And many practices,
including cardiology groups, do not have the capital resources to make that investment.
With respect to the time frame for implementation of EMRs, Mr. Gans predicts
that, in some cases, practices will implement these systems in the next 1 2 months ( 2 0 0 2 to
2003) because of otherwise investments for HIPAA. Again, he foresees an increased use
of EMR among all doctors. He thinks that the price of EMR will decrease further due to
economies of scale as more systems are put in place. Also, EMR vendors are noticing
certain patterns of increased implementation efficiencies which are also bringing costs
down. In terms of practices resisting movement toward EMR, Mr. Gans commented that
similar patterns occurred 15 to 25 years ago as practices moved into electronic systems for
general ledger. Many practices continued to use basically manual systems for long periods
of time, even though there were comparable, easily managed, low-end, relatively low-cost
computerized billing systems available. He foresees the same thing happening with EMR.
There will be a period of time where organizations will continue to use paper records
where many others have moved into an electronic environment.
Mrs. Margie Parilo, a certified public accountant (CPA) and consultant for several
medical practices in the Sacramento, California, region, 1 7 9 does not anticipate that many
cardiology groups will upgrade their information systems within the next 1 2 months ( 2 0 0 2
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Telephone interview with Mrs. Margie Parilo, CPA, certified public accountant and consultant for several
medical practices in the Sacramento, California, region, May 31,2002.
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to 2003). She suggests that cardiology groups will begin considering system upgrades in
12 months to 24 months (2003 to 2004), but she does not anticipate that they will spend
significant amounts of money in actually upgrading their systems. Mrs. Parilo does agree
that cardiology groups will attempt to provide required security, but she does not think that
many groups will make it as far as providing the actual required security of transmission of
medical records, particularly most group practices of small size.
Mrs. Parilo does anticipate that cardiology groups will increasingly move towards
the purchase of EMR, but not within the next 12 months (2002 or 2003). Her impression is
that EMR is a subject of awareness and discussion within the medical community from
single practitioners to groups with multiple physicians, but she does not anticipate in the
next 12 to 24 months (2003 to 2004) that many cardiologists will be inclined to spend the
money to buy EMR. Mrs. Parilo thinks that it is more realistic to predict that significantly
more groups will have EMR within five years, but certainly not within the next two years
(2002 to 2004).
Arjun Sharma, M.D., a practicing cardiologist and electrophysiologist in the
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Sacramento, California, region, provides insights from a physician’s viewpoint
regarding the impacts of HIPAA requirements on group practices and information system
upgrade needs. In Dr. Sharma’s opinion, information system upgrades will be a necessary
consequence of the new software for coding not being able to run on outdated operating
systems. He states that it is very likely most cardiology groups will be forced to upgrade
their computer systems in at least the Billing Department for submission of data to
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Interview with Arjun Sharma, M.D., practicing cardiologist and electrophysiologist in the Sacramento,
California, region, May 27, 2002.
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Medicare as a result of the requirement to have new coding and security. He notes that,
“unfortunately,” the technology costs are such that only the largest medical groups are
going to be able to afford and make use of the technology. He further comments that
inherently built into the technology is rapid development and change resulting in the
obsolescence of the equipment every three to five years. This puts this beyond the ability
of most physicians— who are either in solo practice or in small group practices— to be able
to afford to implement the technology. With current Medicare cutbacks (in
reimbursement), most practices are functioning at a borderline level that would make it
simply not feasible to implement the new technology. The cost o f having to repurchase
every three to five years and learn to run new software would simply not make this viable.
Dr. Sharma also comments that it is most likely that the HIPAA regulations will result in
most small groups separating their patient information systems from other systems. That
is, the systems that are involved with processing patient data will need to be completely
isolated from any other outside potential sources of access. This may either take the form
of various types of software or hardware firewalls, or simply a dedicated phone line that is
hung up to prevent inappropriate access of data after hours. He also suspects that as a
result of the HIPAA regulations, phone transmissions and FAX transmissions may increase
in utilization since these appear to be not covered in these regulations. The drawbacks of
FAX transmissions include the ease with which they are lost and the slowness of
transmission.
Regarding the question of whether cardiology groups will move toward the
purchase of EMR systems, Dr. Sharma indicates that there may be a small trend for
movement to EMR, particularly in very large, integrated health care networks. However,
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he suspects that in the small group practice and solo practice areas, this will not be
happening in the foreseeable future because of the difficulty with data input from multiple
sources, such as laboratories, X-rays, hospitals, and outside sources of data transfer as
patients move from site to site. He points out that, currently, there is no standard for
storage of data as patients move from physician to physician; in addition, as they change
insurance, there is no simple method for transferring this data. The astronomic cost of data
input for large charts would simply preclude the ability to implement this system until
there is a standardized method for data transfer. Interestingly, as Dr. Sharma notes, the
evaluation and management coding (E&M) regulations provide a greater stimulus to the
implementation o f electronic medical records as they provide an easy method for verifying
reimbursement. This is a supplemental point that reinforces the point Mr. Gans made in
describing the benefits o f EMR in enhancing the system ’ s ability to increase charge
capture.
Gearoid O ’Neill, M.D., also a practicing cardiologist and electrophysiologist in the
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Sacramento, California, region, does not anticipate that cardiology groups will
uniformly upgrade their information systems within the next 12 months (2002 to 2003).
He foresees a time frame that is significantly longer, for both information system upgrades
and development of VPNs. Dr. O’Neill states that the reason for this is, first of all, there
always has been a resistance on the part of the medical community to accept unfounded
mandates such as HIPAA. Secondly, there is minimal awareness in the community of
these regulations. Thirdly, the regular pattern that occurs with these mandates is for the
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Interview with Gearoid O’Neill, M.D., practicing cardiologist and electrophysiologist in the Sacramento,
California, region, June 4, 2002.
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deadline to arrive, for physician resistance to build, and, ultimately, for the mandate to be
abolished or significantly attenuated. As an example, Dr. O ’Neill refers to the recent
elimination of evaluation and management requirements by Medicare.
Dr. O ’Neill believes that cardiology groups will move toward purchase and
implementation of integrated computer systems and EMR, but, again, he envisions a longer
period than 12 months (2002 to 2003). He states that the motivating reason for
implementing integrated systems with EMR will be an improvement in the quality of
hardware and software. Also, the replacement of “graybeards” will be a factor. According
to Dr. O’Neill, younger practitioners are clearly more used to computers and electronic
data handling. On the other hand, physicians within five to ten years of retirement, with
established patterns of activity, will simply not be interested in incurring the expense nor
will they see the value.
A face-to-face interview was conducted with Mr. Binda Mangat, President of Med-
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X Connect/Integrated Technologies Management in Sacramento, California. Mr.
Mangat provided unique insights from a more technology-oriented perspective, and he
relayed his experiences from working with both hospitals and group practices in upgrading
their information technology (IT) systems. He provided one example of a hospital with
1,500 users that were required to “revamp” their systems to meet HIPAA requirements. To
migrate the system from the current environment to Microsoft 2000 Professional, for
example, will cost close to $600,000. Mr. Mangat explained that it is important to
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Face-to-face interview with Mr. Binda Mangat, President of Med-X Connect/Information Technologies
Management, Sacramento, California, August 5, 2002.
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purchase systems that are compliant with the enterprise model and also compliant with
the new security elements (promulgated by HIPAA). Mr. Mangat was asked regarding the
need for firewalls and Internet security protection in accordance with HIPAA requirements
and the applicability of wide-area networks (WAN) and creation of an infrastructure that
will support a WAN. He indicates that implementing wide-area networks is a part of the
solution, and vendors will need to comply with systems or upgrades meet the privacy and
security requirements. He already sees vendors developing new modules that are in line
with movement to an enterprise model. As an example, he is currently working with a
local group practice in developing a WAN and virtual private network (VPN) to meet
HIPAA security requirements and to develop the infrastructure to move to the enterprise
model.
5.1.1.3 Tabulation o f Responses
In summary, the overall question in Hypothesis 1 relates to the HIPAA impacts on
upgrading information systems in group practices. Table 10 (below) summarizes the
consultant interview responses relative to a 1 2 -month implementation time frame.
Responses were tabulated in terms of number (#) of “Yes” versus “No” responses (or
undetermined for a 1 2 -month period) and as a percentage of total responses for that
particular question. Overall, the majority o f consultant responses indicate that group
practices in general, and cardiology groups in particular, will not rush to upgrade their
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According to Mr. Mangat, the enterprise model refers to an organization that has multiple offices at
different geographic locations, but on common ground in terms o f technological infrastructure. Once the
enterprise model is established, systems can be purchased that are compliant with the model and also meet the
security requirements.
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information systems (63 percent), develop virtual private networks (63 percent), or
implement electronic medical records (75 percent), at least within the next 12 months.
However, the interview responses do indicate that the movement toward information
system upgrades in response to HIPAA requirements is relevant. Also, the responses
suggest that information system upgrades and the development and implementation of
VPNs and EMRs are more likely to occur in the next three to five years, but may occur
sooner in those organizations—particularly the larger groups and integrated health
systems—that have access to necessary capital and information technology resources. The
interview with Mr. Mangat was particularly persuasive that some larger hospital systems
and perhaps some medical groups are beginning to move in this direction.
Table 10: Hypothesis 1— Consultant Interview Responses
Yes No 12-Month Period Not Stated
# % # % # %
la-upgrade within 12 months 1* 13 5 63 2 25
lb - VPN within 12 months 1* 13 5 63 2 25
lc - EMR within 12 months 1 13 6 75 1* 13
* Mr. Mangat’s responses were not tallied but were inferred to be associated in these columns.
5.1.2 Hypotheses 2 and 7
5.1.2.1 Overview
Hypothesis 2 addresses the potential impact of HIPAA on consolidating internal
operations within the organization to increase efficiency. Hypothesis 7 addresses the
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consolidation question based on the potential impact of the BBA. Both hypotheses are
paired together in the analysis due to the overlapping themes presented in the interview
questions. For example, Question 4 of the consultant interviews asks if there is an
anticipation of position consolidation to save on operational costs. This has implications
for both potential cost increases due to HIPAA and potential reimbursement decreases due
to BBA. Therefore, responses for Hypothesis 2 and Hypothesis 7 are analyzed in the same
table (Table 11, below). Applicable responses for Hypothesis 2 were based on Questions
3, 4, and 7 for the consultant interviews and Questions 3, 4, and 5 for the physician
interviews. The responses from the face-to-face interview with the IT consultant were also
relevant to the assessment for Hypothesis 2. Case-study Questions 4, 5, 6 , and 7 are
applicable and addressed under case-study results. Applicable responses for Hypothesis 7
included consultant interview Question 4, physician interview Question 5, and case-study
Questions 8 and 11 (addressed separately under case-study results).
5.1.2.2 Consultant and Physician Responses
First, Question 3 for both consultant and physician interviews focuses on the
alternatives for contracting out transcription services. Mr. Alex Hunter sees two issues
pertaining to the question. One is cost, and two is the availability of appropriate
resources—that is, who is available to do the work inside the medical group. There are
issues of cost and overhead, and there are issues of service. Mr. Hunter suggests that the
issue is market-specific. For those physician groups that have a relatively broad pool of
skilled transcriptionists to draw upon, the work will most likely continue to be done
internally. In those areas of intense competition for these services— rural areas, for
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example—there may be a need to contract out, even doing so with Internet-based services,
based on reducing costs. However, Mr. Hunter contends that if it is only marginally more
expensive to maintain the service in-house, most groups will opt to keep the service in
house because they will have more (quality) control over the work.
Mr. Sean Weiss proposes that many practices are now moving towards external
utilization of transcription services. One of the reasons is that it reduces needed space in
the organization. It also reduces overhead, particularly in terms of cost savings on benefits
and bonuses. Mr. Weiss mentions that under the HIPAA regulations, physicians and
physician groups that outsource their transcription services will be required to sign
Business Associates Agreements with the services to assure appropriate maintenance of
privacy requirements for protected health information.
Mr. Robert Tennant also notes the privacy issue. Given this concern, he thinks that
groups will lean more toward keeping the service in-house. His view is that when data
leave the practice, especially in the first 6 to 1 2 months after the privacy rule goes into
effect, practices are going to be more cautious and aware of legal impacts. Also, when
more practices move to an EMR system, they will be able to bypass the transcription
service. He indicates that in some groups, it costs $2,000 a month for transcription, and
that amount can be saved with the integrated EMR systems. Therefore, as more groups
move to EMR, more will be able to do away with transcription services. Mr. Tennant also
emphasizes the issue of data security when utilizing Internet-based transcription services.
When the security rule is finalized, it is certain that data will need to be encrypted and a
Business Associates contract signed with any outside service. All of these issues need to
be weighed by the practice in making the decision regarding transcription services.
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Mr. John Steiner amplifies on the issue of utilizing an outside service for
movement of medical information. Mr. Steiner thinks that outsourcing transcription
services, whether Internet-based or otherwise, will increase. He emphasizes a specific
point related to HIPAA—that it is a domestic law enforced in the U.S. With Internet-based
transcription services, some medical information may be transmitted offshore. Some
services send the work to India, for example. Mr. Steiner raises the point that absent some
international treaty, the activity of having medical information sent offshore for further
processing, use, and possible disclosure raises interesting questions. For instance, can a
medical practice have the confidence that the service in a foreign country has represented
in its contract that it will attempt to protect health information? And even with that
representation, is it truly enforceable? Mr. Steiner thinks that most providers will not
automatically shift their transcription services back on shore (or domestically) just because
of HIPAA, but he questions whether that will be an important enough issue to drive a
change in a contract relationship. It most likely will be tested by the “weakest link” — the
possibility of an entity or an individual deciding to sell or pirate protected health
information for profit at the expense of an American provider. That will be the litmus test
when it comes to the HIPAA implications for transcription services. That issue aside, Mr.
Steiner elaborates that with the current technology, it is almost inevitable that these
services will be outsourced in this manner, particularly since there are numerous
companies that provide data-crunching services at a very low cost per hour. India is an
example.
Mr. Dave Gans confirms that contracting of transcription services is a heated
discussion at this time. He states that transcription, especially utilizing the Internet, is
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being studied by organizations ranging from very large multi-specialty practices to very
small solo practitioners in all specialties. The process of a physician dictating and sending
that dictation to a third-world country where the wage rate is a fraction of the rate in the
United States indicates that costs will be significantly reduced for externalized
transcription. However, Mr. Gans notes that at the same, an EMR that has voice
recognition technology—which continues to be refined— may eliminate 90 percent of the
transcription. This is possible due to the EMR system itself being integrated with voice
recognition capabilities, allowing for easy on-line editing of the dictation by the physician.
Mr. Gans notes that this is happening now and will become more frequent over the next
year. He sees more prevalent use of contracted-out transcription within the next 36 months
and also more than experimental use of voice recognition.
Mrs. Margie Parilo, CPA, maintains the viewpoint that physicians and physician
groups will look toward the most inexpensive way of doing medical transcription, meaning
that they will contract out. Also, the availability of transcriptionists will determine whether
to hire in-house or outsource. Mrs. Parilo does not envision cardiologists using Internet-
based transcription services, even within the next 24 months. Her reasoning is that
cardiologists, as a whole, are not ready to make the leap into EMR or these kinds of
computer-based systems.
Dr. Arjun Sharma indicates that large medical transcription services will be
capable of encrypting data, protecting them, and complying with HIPAA regulations. The
HIPAA regulations will have the inadvertent effect of driving some of the small medical
transcription services out o f business. It is likely that the encoding and encryption
regulations will keep changing every few years as technology advances, and he suspects
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this will produce an ongoing expense which will not be reimbursed by the government.
Dr. Sharma states that the additional benefit of moving toward an Internet-based
transcription service is that it would provide the physicians with ready access to a great
deal more of their recent dictations.
Dr. Gearoid O ’Neill also believes that more and more groups are evaluating the
possibility of contracting-out for transcription services. Whether this approach is adopted
ultimately depends on whether or not there is a significant impact on operational costs
without compromise of quality or timeliness of service.
Question 4 o f the physician interviews expands on the issue of contracting-out to
clinical office-based services. Dr. Sharma’s perspective on this question is that the
outsourcing of office-based services is totally economically driven. As these services
move from being revenue sources to expenses, then the services may actually be phased
out. Due to “quirks” in Medicare reimbursement, Medicare reimbursement is better in
certain states and also better when 24-hour service is available. Also, according to Dr.
Sharma, there is better reimbursement when the reader and the technical provider are a
separate source, although this is not the case for most procedures, at least from this
author’s experience. Dr. Sharma further elaborates that the above examples regarding
reimbursement quirks are purely a result of the “fickle” method of reimbursement and
really have no economically sound basis for persisting. That is, a change in the regulations
could easily wipe out outsourcing since, if it were profitable to perform the services in-
house, there would be no reason to outsource.
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Dr. O ’Neill views this question in a similar manner to his thoughts regarding
outsourcing of transcription services. Outsourcing of office-based services will be
evaluated and determined based on revenue effects and quality.
Question 4 o f the consultant interviews and Question 5 o f the physician interviews
address the question of consolidation of other positions within the organization to achieve
savings on operational costs. Mr. Hunter’s viewpoint on this question is that most
cardiology groups are not, in general, focusing on cost reduction from an operational
standpoint. He has not seen a wholesale trend toward removal of excess positions,
although he states that it probably does occur. Mr. Hunter contends that most groups are
focusing on assuring that the business office is functioning appropriately from a billing and
collections standpoint. Those positions responsible for contracting are not areas targeted
for cuts, as well as those positions that provide functional support for the ongoing daily
functions of the business.
Mr. Weiss maintains a different perspective on this question. He states that
physicians are going to be consolidating positions. Mr. Weiss refers to the fact that
physicians’ expenditures and overhead rose 6 . 2 percent in 2 0 0 1 — and that does not address
the increases in operating expenses that occurred over the last decade. At the same time,
reimbursement rates have not increased. In fact, in 2002, reimbursement from Medicare
dropped 5.4 percent. In addition to consolidating positions, physicians are going to move
toward development or hiring of staff who are cross-trained to perform more duties in both
the front and back office. Also, he envisions physicians hiring more skilled positions such
as nurses and m edical assistants who can better carry out clinical functions rather than
hiring those on the administrative side.
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Mr. Tennant anticipates that once the HIPAA standards are implemented in the
industry, there will be consolidations, with tremendous savings in the area of staffing
within cardiology groups. He actually sees these savings occurring particularly in the
billing department, which is the opposite of Mr. Hunter’s predictions. Mr. Tennant’s
reasoning is that there will be the opportunity to cut back on the number of person hours
spent tracking claims, tracking patient eligibility, and merging the various claims with the
different claims systems. Mr. Tennant suggests that consolidation can be accomplished
through the process of attrition rather than necessarily firing employees.
Mr. Steiner answered the consolidation question more from an organizational
structure perspective, particularly in terms of consolidation of physicians into single
economic units. One point that he makes is that if more physicians are brought into a
practice— through practice acquisition, for example— incremental cost savings can be
realized due to the spreading of direct and indirect costs over a greater number of
productive units. The more productive units supported by the same fixed costs, the more
profit per unit is attained, at least in theory. Mr. Steiner counters that, historically, medical
practice acquisitions have actually brought that line of thinking into question as companies
like PhyCor and other practice management companies involved in acquisitions attempted
to improve bottom line results through better management efficiency, but were eventually
unsuccessful. He further proposes that bringing physicians into a larger legal setting and
spreading fixed costs over a broader base to attain management efficiency is highly
dependent upon the marketplace. It is also risky, particularly for specialty and sub
specialty practices, to attempt to consolidate themselves into one legal economic unit for
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bargaining purposes or for production efficiencies. Mr. Steiner addresses consolidation in
terms of mergers more in Question 6.
In answering Question 4, Mr. Gans indicates that the economic forces impacting
medical groups must be considered. HCFA (CMS) reduced Medicare reimbursement
across the board an average of 5.4 % in 2002. For cardiology, the decrease was 9 percent.
This is a result of the Medicare economic formulas that necessitated this reduction, even
though the costs o f running practices are increasing. Mr. Gans states that Medicare
accounts for approximately 50 percent of the reimbursement for cardiology. Although
Medicare is only one major payer, the other payers are following Medicare reimbursement
patterns. Consequently, in Mr. Gan’s estimate, cardiology practices are seeing a 7 to 10
percent reduction in revenue for services provided. At the same time, the costs in
cardiology practices are continuing to increase due to wage increases for employees. There
are also increased costs for medical supplies, increased costs resulting from
implementation of new technology, and accelerating increases in malpractice insurance
costs. Practices are in a “squeeze.” Mr. Gans concludes that if reimbursement is down and
costs are up, the choices are to become more productive, more efficient, or have better
business operations. Therefore, the trend for cardiology practices to consolidate positions
is being scrutinized closely, because if the same service or same product can be provided
with less cost, that efficiency gain “goes right to the bottom line.” Thus, he sees a
necessity of change (for reduction) in operational costs.
Mrs. Parilo’s view is that physicians have always wanted to consolidate positions
and look for ways to save m oney. However, she does not anticipate that groups w ill be
able to consolidate positions. Mrs. Parilo notes that the medical field continues to become
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more complicated, and she does not think that consolidating positions is a realistic
possibility.
In reference to the question of consolidation, Dr. Sharma focused on additional
areas of potential outsourcing, particularly the billing office. Dr. Sharma suspects that the
HIPAA regulations will result in solo practices and a large number of small groups
outsourcing their billing since this would be the sole reason for complying with HIPAA
regulations. If billing can be provided at an economical cost on an outsourced basis, then
small groups will be able to save on the overhead in retooling their computing system
every few years. Thus, at this point, he foresees that outsourcing of billing will be a
growing trend.
Dr. O ’Neill, speaking from his own organization’s experience on the issue of
consolidation, finds it difficult to see how FTEs (full-time equivalent employees) can be
eliminated unless there is significant outsourcing of the work currently done in house.
There is a minimum overhead that is necessary for an office-based practice. In any event,
his practice prefers the notion of having full service in house. This requires sufficient
FTEs to perform the services. Dr. O ’Neill goes on to say that there will always be a
variety of opinions within a group practice as to how much operational consolidation
should be undertaken versus delivery point of service. He expects this issue to arise in
debate frequently but to be the slowest change that will occur.
Mr. Mangat answered the question of consolidation in terms of whether to
outsource for management of computer systems and information systems (IS). He states
that in the past, he has seen groups, even with 20 to 25 providers, who had an IT person
who could perform some functions. However, his view is that no one person can perform
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all of the functions and understand all of the technologies. Also, just because the
organization has an IT person on site does not mean that outside help will not be needed.
He sees the trend for creating an outsourcing environment, particularly an outsourcing
trend that he describes as "hosting.” His view is that two or three good IT people may be
needed (depending on organizational needs)—to manage the telecommunication system
and computer network. He further elaborates that, in today’s market, annual salaries
typically range between $60,000 to $65,000. To find someone who is Cisco certified— for
example, a person who can manage networks, routers, and switches (someone very
technically qualified)—will cost $75,000 or more. Hosting involves a contractual
partnering with an outside entity or applications service provider (ASP) to maintain (host)
the system off-site or on-site, depending on organizational preference. Mr. Mangat
indicated that he is currently working with two groups in Northern California that decided
to have an outside company co-host and manage the systems on a fixed-fee basis rather
than hire three or four IT people to maintain the systems in house. His view is that it
makes good business sense in terms of cost, particularly with smaller group practices. Mr.
Mangat also provided another example of a 45-physician group in Northern California that
recently split-off from one of the area hospitals. Suddenly, the group found that they
would need to spend $2 million on systems that were previously subsidized by the hospital.
The group elected to use an ASP. However, because of the type of computerized
information and billing system they had, the only ASP that could maintain their current
system was from the eastern United States. Furthermore, in order to utilize the ASP, the
system ’s IT infrastructure needed to be developed so that the ASP services could be
accessed and also to meet HIPAA requirements. This group did hire two IT people (in the
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$65,000 or more range), but they were unable to perform all of the functions needed by the
system. The IT people were eventually laid-off, and the group moved to the ASP model.
The point Mr. Mangat makes is that the two people could not accommodate all of the
organization’s application support needs which included computer desk-top support, wide-
area network support, system integration, and even telephony support. IT costs are
continuing to rise, and the need for different areas of expertise is an important
consideration. One last example Mr. Mangat provides is a medical group from the
Northern California region. The group decided to bring all of its IS management in house.
A Chief Information Officer (CIO) was hired from back east. He developed his own
department staffing with about 11 employees. The CIO has now communicated with Mr.
Mangat that his IT costs are continually rising, and part of the reason is due to the point
Mr. Mangat makes regarding the different set of talent available and the result of having to
hire more people with different skills and experience.
Question 7 addresses the questions regarding potential long-term cost increases or
savings under HIPAA, and whether the HIPAA regulations will result in increased
efficiencies for medical entities. Mr. Hunter believes that it will be some time before any
real savings will be realized as a result of HIPAA. He sees only cost increases. The reason
for this is, in his opinion, that most groups are going to invest just enough money to be
HIPAA-compliant. Medical groups are not going to invest in a system where they can see
savings down the road because that is not how groups operate.
Mr. Weiss views the issue somewhat differently. His perspective is that savings
w ill accrue in the long term as a result of HIPAA because it is going to greatly reduce the
number of people needed to handle all functions—many more things will be handled via
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computers and electronic methods. In the short term, Mr. Weiss states that there is going
to be a fairly significant cost to the physician practices and organizations based on the need
for compliance assessments. Practices will need to pay consultants or legal people if they
do not have the means internally to create their own compliance programs. Practices will
need to contract with IT or management information systems (MIS) organizations to
ensure that they have security measures appropriate to the systems. Mr. Weiss notes that
some organizations are working on antiquated systems— some still use DOS applications.
Those organizations will need to invest in new software and hardware to be able to utilize
some of the T1 and digital lines now used in the industry for communications. In terms of
efficiency, Mr. Weiss contends that there will be much more efficiency in physician
practices just based on the concept of HIPAA. It will afford physicians the capability to
perform more functions via computer in their offices and, subsequently, enhance the
potential for a seamless integration between billing, authorizations, and electronic medical
records.
Mr. Tennant expresses the opinion that there is no question that HIPAA will
increase the effectiveness and efficiency of the health care system. He predicts that the
standard transactions will benefit the industry, with tremendous cost savings eventually
realized. At the same time, there will some significant costs on the privacy and security
sides. However, the balance will be in favor of savings. In his discussions with other
industry experts, Mr. Tennant reports that other business areas will reap the benefits of
standardization. Examples include some clinical functions, standardized explanation of
benefits, standardized credentialing, and standardized claim s software that w ill allow one
claims software system to send claims to all of a medical practice’s payers.
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Mr. Steiner alludes to studies that have attempted to establish a return on
investment factor for effective HIPAA compliance. His description is more informational
in terms of the rationale behind the intent of the studies rather than a report on
scientifically substantiated results. Certain defined algorithms (not public at this time) for
a return on investment factor imply that if a covered entity (healthcare provider) can pull
together all of the privacy standards, transaction and code sets standards, and security
standards effectively, that entity will be “ahead of the curve” in the provider market and
payer community, resulting in measurable increases in efficiencies and bottom-line
revenue. In other words, an aggressive and effective approach to compliance with the
HIPAA standards should result in better efficiencies, particularly in areas such as claims
submission and resulting payments. With respect to the privacy requirements, Mr. Steiner
is not sure that he foresees long-term savings here. His view is that these requirements
result in an additional, somewhat unmeasurable, cost of doing business. To develop and
make available required privacy notices; to have a method of tracking disclosures; to have
a system for responding to patient requests for accounting of disclosures based on a
designated record set— all of this “minutia” in the HIPAA regulations on the privacy side
is important primarily as a patient protection measure, but less so as a provider efficiency
measure.
Mr. Gans’ perspective is that there are some short-term inefficiencies and
substantial costs that will be incurred. But in the long run, his view is that much of what
HIPAA is proposing is good business. He predicts that many practices will be forced to
m ove out o f legacy information system s and into more m odem system s, resulting in some
efficiencies. Practices have been reluctant to engage in this type of investment in the past.
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Mr. Gans provides an analogy that what will happen with HIPAA occurred with the Y2K
situation. Y2K cost a substantial amount of money on the front end, as both information
system vendors and practices were forced to update existing computer systems to
accommodate the Y2K requirements. Now that Y2K is in the past, those practices are
realizing the efficiencies of the more modem system. He predicts that the same thing will
happen as a result of HIPAA.
Mrs. Parilo forecasts that HIPAA is going to cost money and is not going to
increase efficiency. Her view is that HIPAA will only contribute what regulators wanted
to accomplish from the legislation, and that is the privacy mles primarily for the benefit of
patients. She does not think that medical groups will benefit from it.
5.1.2.3 Tabulation o f Responses
The responses pertaining to Hypothesis 2 are summarized in Table 11 (below).
Questions 3, 4, and 7 from the consultant interview and Questions 3, 4, and 5 from the
physicians interviews were tabulated into “yes” and “no” categories for each question, and
then aggregated into “yes” and “no” categories overall, except for Question 7. In
determining “yes” versus “no” responses, if the response primarily leaned toward
outsourcing, cutting positions, or reducing staff by attrition rather than maintaining the
service in house, then the response was tabulated in the yes column for each question. For
Question 7, responses indicating an increased efficiency with HIPAA regulations were
tabulated in the “yes” column. Responses that indicated both yes and no components
within a question were tabulated under the “Equivocal” column.
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The responses pertaining to Hypothesis 7 are also tabulated in Table 11 (below).
The applicable responses for Hypothesis 7 included Question 4 (consultant interviews) and
Question 5 (physician interviews). These were broken out separately in the table only to
clarify the responses applicable to Hypothesis 7.
The results in Table 11 are tabulated according to consultant and physician
responses and aligned according to question similarity. For example, consultant Question
3 (C3) and physician Question 3 (P3) are tabulated together. Questions C4, P4, P5, and the
face-to-face interview are, likewise, tabulated together. Responses for Question 7 are
tabulated separately.
Table 11: Hypotheses 2 and 7— Consultant and Physician Interview Responses
H ypoth esis 2
Yes No Equivocal
C3 - outsource transcription 3 3
P3 - outsource transcription 1 1
Cf - consolidations/outsource 1
C4 - internal consolidations 3 2 1
P4 - internal consolidations 2
P5 - internal consolidations 1 1
C7 - HIPAA efficiencies 3 2 1
TOTALS 12 8 5
Hypothesis 7
C4 - internal consolidations 3 2 1
P5 - internal consolidations 1 1
TOTALS 4 3 1
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5.1.2.4 Summary
The results in Table 11 reflect differences of opinion between the respondents on
certain points regarding operational cost-saving approaches and projected efficiencies
attributed to the HIPAA legislation. Overall, the “yes” answer was assessed as the most
frequent response, indicating, on one point, that HIPAA will impact cardiology groups in
terms of increased efficiencies, with implications for outsourcing of services and
consolidation of operations. The overall implication is that both increased costs (HIPAA)
and decreased revenue (BBA) are issues that necessitate consideration for operational
changes. However, compelling arguments were presented for the viewpoints on both sides
of the issues of outsourcing and consolidations. For instance, outsourcing of transcription
services makes sense from an economics’ perspective if cost savings can be realized,
dictation turn-around time is increased, and there is no drop-off in the quality of the work.
Also, the availability of qualified transcriptionists in the job market is a consideration. On
the other hand, new transcription modalities such as voice recognition technology presents
an alternative with potential capabilities for integration of dictation into computerized
electronic medical-record systems, resulting in more effective storage and retrieval of
patient-record information. There may still be the need for qualified transcriptionists in-
house to type “stat” requests and to oversee editing and processing of outsourced
transcription, particularly if Internet-based companies are utilized. The privacy issue, as
Mr. Tennant points out, also presents an argument for maintaining control of the service in-
house.
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The arguments for consolidation of positions in the organization, again, focus on
cost savings and reduced staff. One work area mentioned for potential savings in costs and
staffing was the billing department (in addition to transcription services as discussed
above). As Mr. Gans stated, there will be a necessity for reduction in operational costs,
and cardiology groups are looking at the options for consolidating positions. However,
unless staff reductions can be accomplished without disrupting the ability to provide the
service at the level of expectations and requirements of the practice, even reductions due to
attrition may be difficult to implement, at least in the short term. In the long term, if the
stmcture of the delivery model has changed and new technology is utilized effectively,
particularly for more efficient processing and access of patient medical records and billing
information, then there may be a more realistic opportunity to consolidate operations and
still deliver the service at desired quality levels.
Therefore, in summary, although the majority o f “yes” responses would indicate
that Hypothesis 2 and Hypothesis 7 are supported from the interviews, the caveats noted
above provide a caution that real-world situations may mitigate major or immediate moves
to consolidation of operations or reductions of staff in cardiology group practices.
5.1.3 H ypothesis 3
5.1.3.1 Overview
Hypothesis 3 proposes that the decreased reimbursement implications of the BBA
will not result in increased merger activity between cardiology group practices. The
applicable consultant interview question addressing this is Question 6. On the case study
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questionnaire, Question 10 pertained to the impact of BBA on merger activity (addressed
in the case-study portion).
5.1.3.2 Consultant and Physician Responses
Mr. Hunter’s view is that merger activity is one of the biggest trends across the
United States for several reasons. First, financial gain is a primary consideration. Mr.
Hunter points out that there is tremendous opportunity from a contracting perspective with
third parties in terms of increased leverage. Second, there is opportunity for joint
venturing with hospitals (if the cardiology practice is a large group) where groups can
move catheterizations or other procedures out of the hospital into a free-standing heart
center. He is seeing a fair number of mergers between cardiology practices and surgical
practices. His view is that this trend is not motivated so much by the regulatory
environment as it is by the opportunity to increase revenues through improved contracting,
improved leverage with hospitals, and improved leverage with referring physicians.
Mr. Weiss also sees a move toward mergers, but not with cardiology practices.
Mr. W eiss’s view is that mergers are occurring more with internal medicine and family
practice groups. Again, the reasoning to merge or acquire practices is to have leverage
over insurance carriers in order to negotiate better paying contracts. Internal medicine
practices are acquiring specialties such as cardiology, pulmonary medicine and other
specialties, particularly infectious diseases, due to limitations in the services that can be
provided by internal medicine groups, alone. However, Mr. Weiss thinks that cardiology is
one o f those specialties that is not at the mercy of insurance carriers. Due to trends in
obesity and aging, the population will be seeking out cardiologists for specialty and sub-
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specialty care more and more in the future. Therefore, cardiologists will not need to join
massive groups.
Mr. Tennant has seen the trend for mergers move in different directions. On the
one hand, there has been a reduction in the number of hospital-based practices in the past
year or so due to divestitures. On the other hand, he has seen practice mergers still taking
place, although not to the extent of a few years ago. Mr. Tennant points out that the
reasons why group mergers take place are to consolidate locations, to cut down on
competition, to decrease overhead, to bring in larger patient bases, and to increase clout in
terms of contracting with a larger group. However, mergers are not easy, and success
requires a very good management team to oversee these organizations, which does not
always happen. He predicts that the trend in the future will be more toward the formation
of medium-sized groups.
Mr. Steiner did not present a definite opinion regarding whether mergers are
increasing or decreasing. However, he did elaborate on some of the factors for
consideration in implementing mergers. One factor involves the match between the type of
care provided by the practitioner and the type of practice that might be amenable to a
merger or consolidation. Also, the economic situation, of course, is a primary
consideration. With Medicare fee reductions nationwide and the “drying-up” of
malpractice coverage in many regions, negotiating for coverage is better suited for a larger
group than a solo practitioner. Attaining efficiencies of scale is another consideration. Mr.
Steiner cautions that there are “these very hard dynamics” about forming a large group
practice and having market presence with the view toward negotiating a favorable contract
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with a managed care organization. The decision to merge or not to merge, particularly in
an unpredictable payer environment, must be thought out carefully.
Mr. Gans’s observation is that there has been no increase in mergers in the most
recent past. He states that there was a period of time— about 1999 to 2000— when
numerous mergers occurred. Oftentimes these mergers were in response to geographic
factors— for example, a hospital system acquiring primary-care practices. The hospital
system, therefore, would use its own primary-care physicians to direct referrals to selected
cardiologists or to other selected specialists. Also, by merging, cardiology practices could
gain economic clout regionally and counter some of these types of economic issues. Mr.
Gans does not see that happening now. He states that most cardiology groups have found
that their most optimal economic size is at the five-, six-, or seven-physician range. He
points out that merging to become very large groups— the 15 to 20 physician cardiology
group practice with multiple branch sites—actually results in diseconomy of scale. He
notes that, because of the tightening reimbursement market and increased costs, cost
efficiencies are going to predominate over market forces. Therefore, he foresees that there
will not be as many mergers in the current environment compared to the merger frequency
seen in the immediate past.
Mrs. Parilo has also noticed that mergers are not occurring with the same
frequency as in the past. She argues that the reasons medical groups were merging in the
past have not panned-out as expected. Those reasons— cost savings, better contract
negotiating clout—have not been realized in those groups that have undergone mergers.
Mrs. Parilo notes that cardiologists, as a w hole, want to run their own practices and are not
going to give in to being in a group where someone else is telling them how to run their
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practices. She does not see much reason economically for groups to merge, with the
possible exception that a merger may allow for greater access to capital for very large
purchases such as electronic medical record systems. She believes that the smaller groups
(two, three, or four physicians) are probably more efficient than the bigger groups because
of the layers of bureaucracy for which the bigger groups have to pay.
In assessing the research, the rationale for healthcare entities to merge, particularly
in the mid-1990s, was— with larger size, geographic expansion, greater organizational
capital resource accumulation, and integration or consolidation of administrative
expertise— economies of scale and enhanced market power could be achieved, with
economies of scale realized through cost savings in production and transaction costs
(Dranove and Shanley, 1995; Robinson and Casalino, 1996). Savings on production inputs
include elimination of duplicative equipment, sharing of facilities, joint purchasing of
supplies, reductions in administrative costs, and more efficient labor management.
Lowering of transaction costs includes the savings realized in the organization’s ability to
negotiate and monitor contractual agreements with payer organizations through the use of
the larger organization’s access to information systems and internal management
mechanisms. Market power suggests that larger size increases purchasing influence. Thus,
larger (merged) organizations are presumably more attractive (in terms o f purchasing
clout) to large companies seeking health care contracts (Conrad and Dowling, 1990).
However, many health-care entity mergers, particularly between hospital systems and
physician groups, confronted problems with the status quo, resulting in less than expected
econom ies o f scale. Problems arose due to hospitals not understanding the financial
situation, culture, support needs, and dynamics of physicians’ clinic operations (Bohlman,
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1997). Some mergers, although lowering the costs for technology and overhead, increased
the potential for eliminating price competition in their respective markets (Brown, 1996).
Questions also surfaced regarding the effectiveness of horizontal mergers in lowering
production costs (Dranove and Shanley, 1995).
From 1995 to 1997, health-care merger and acquisition activity steadily increased
with 633 transactions in 1995, 997 transactions in 1996, and 1,183 transactions in 1997.
The volume of physician group-practice merger activity during this period was,
surprisingly, greater than the activity for hospital-merger transactions. Physician group
practice transactions during this period increased from 126 in 1995 to 218 in 1996 to 278
in 1997 (Bellandi, 1998). Many larger cardiology group practices were included in this
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trend. Since the late 1990s, the trend for health care merger activity, particularly in the
hospital sector, has shown signs of declining (Bellandi, 2001). This corresponds to the
trend that Mr. Gans and Mrs. Parilo have noted in the group practice sector in recent years.
However, some interview responses indicated that merger activity will continue or even
increase. It is difficult to assess whether Hypothesis 3 is supported or not supported based
on the different opinions expressed in the consultant interviews. Also, the limited
responses in the case study (to be addressed later in the chapter) show across the board
differences of opinion on the question.
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Cardiology/Thoracic Surgery and Cardiology Assembly Conference (Medical Group Management
Association), Newport Beach, California, April 28, 1997. During the Break-Out Session for large cardiology
groups (defined as 12 or more physicians, representing numerous geographic regions), nearly half o f those
participating in the session indicated they had merged with other cardiology practices within the last three to
five years or were in the process o f merger discussions.
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It is the author’s opinion that, in this case, more weight should be given to the
responses that indicate merger activity will not increase or continue at the frequency noted
in the mid-1990s, at least with cardiology group practices. The reasoning, from the
author’s perspective, is that it appears that mergers are not occurring in the geographic
market relevant to the case study. Also, the trends in the health-care industry per se do not
show the same movement toward merger activity, particularly at the levels seen in the mid-
1990s. In addition, the author agrees with Mrs. Parilo that the reasons for merging
practices have not been realized. In fact, cost savings and efficiencies may not be the most
important reasons for merging because larger size may increase the bureaucratic structure
of the organization, with the potential consequences of increased costs and greater
organizational complexity. On the other hand, a horizontal merger between cardiology
groups could be beneficial if the new structure allowed for more efficient call coverage and
improved provision of clinical services. This can only be accomplished through interactive
support, hard work, and compromise on the part of both the physicians and management
team, with both actively participating in the planning and implementation of the merger
process.
5.1.3.3 Assessment o f Responses
To conclude the assessment of Hypothesis 3— first, a quantitative analysis is not
provided in tabular form to determine percentage responses in this instance. Although
different slants were provided by the interviewees, it is the author’s opinion that the
information and data available indicate that Hypothesis 3 is supported— that the decreased
reimbursement implications of the BBA will not result in increased merger activity
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between cardiology group practices. Mergers do not necessarily lead to decreased costs or
solve revenue issues. Also, the merger process itself can be costly and complex, with no
guarantees that the endeavor will be successful. Some estimates actually indicate a low
success rate for mergers outside the health care industry.1 8 5 There is no reason to believe
that this ominous scenario would be any different within the health-care industry,
particularly in physician-run group practices where the concept of physician autonomy is
such an important variable. O f course, there are exceptions, with the case-study entity in
this research providing a prime example. Also, the Hypothesis is supported with
qualifications. There is no statistical validity or reliability due to the small number of
interviews, lack of random survey techniques, and lack of overall formalized research
design in obtaining the information. Thus, inference or generalization to a larger
population is not appropriate. However, as previously indicated and referenced to Ragin
(1999), the approach in this research is based on the case-oriented strategy, which focuses
on the substantive or theoretical significance of a small number of data or cases, and the
“finalistic” tradition which is based on making certain facts understandable.
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Arthur Southam, M.D., speaker presentation at the Cardiovascular Surgery and Cardiology Assembly
Conference, Medical Group Management Association, San Francisco, California, April 28, 1997.
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5.1.4 Hypotheses 5, 6, and 8
5.1.4.1 Overview
Hypothesis 4 is addressed in the case-study analysis.
Hypothesis 5 states that the decreased reimbursement implications in the BBA will
accelerate the implementation of new procedural testing to compensate for declining
revenues. Questions 8 and 9 of the consultant interviews; Questions, 6, 7, and 8 of the
physician interviews; and, Questions 16 through 19 of the case-study analysis address this
hypothesis. Hypotheses 6 and 8 are closely associated with Hypothesis 5 due to the
overlapping of consultant and physician interview questions. Hypothesis 6 addresses the
impact of the BBA on volume of services performed in response to declining revenues and
is linked to consultant interview Questions 8 and 9 and physician interview Questions 6,
and 7. Hypothesis 8 focuses on the implications of BBA in rearranging physician hours in
the office versus the hospital and is linked to consultant interview Questions 8 and 9 and
physician interview Question 6. The case-study questions associated with the analyses for
Hypotheses 5, 6, and 8 are Question 15 and Questions 8 and 11, respectively, and are
addressed in the case-study section. Hypothesis 5 is the initial focus in this section, but the
section summary will address the three hypotheses together since interviewee responses
incorporated answers to these hypotheses within the same questions, for the most part.
5.1.4.2 Consultant and Physician Responses
Question 8 o f the consultant interviews asks if the regulations (HIPAA, BBA) have
impacted the practice of medicine in terms of the time physicians spend in the office versus
the hospital and the impacts on levels of clinical services provided. Mr. Hunter responds
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that physicians offer increased services to make up for lost revenue. He states that
physicians, like people in general, are financially motivated. He emphasizes, however, that
physicians are not bad people, but they do what they are incentivized to do. Mr. Hunter
makes the point that this will not impact the level of services provided. Most physicians
will not let a patient walk out of their office without ordering a medically necessary
procedure or follow-up visit.
Mr. Weiss answers the question from a somewhat different approach. He sees
physicians as now being required to spend more time on the administrative end than they
ever have in the past. The business of medicine has changed, and physicians are spending
more time learning about legislation, learning about administrative requirements, and
spending less time on the continuity and quality of care that they are able to provide to
their patients. Mr. Weiss thinks that this is either going to drastically reduce some of the
numbers of patients that the physicians are able to see, or force physicians to sign more
capitated HMO contracts for lower reimbursement with a higher volume of patients. This
scenario will increase the potential for more malpractice lawsuits and negligence fees. Mr.
Weiss comments that there are a lot of drawbacks to the way that the government is
approaching the health-care system at this time.
Mr. Tennant answers Question 8, which focuses on the impacts of HIPAA and the
decreases in the Medicare fee schedule. First, he states that there may be a potential
decrease in the willingness of cardiologists to see Medicare patients. Also, some practices
may not be able to continue financially, and they may be forced to close or merge with
other practices. Some physicians may become disenchanted with the practice of medicine
and leave medicine altogether. He is seeing more pressure on physicians to spend less time
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with patients, and subsequently see more patients, which must have an impact on patient
care. There is also more pressure on practice managers to improve the bottom line, to
make practices more efficient, and to look for cost-cutting measures to help pay for some
of the costs of HIPAA implementation and decreased reimbursement.
Mr. Steiner states that, if the amount of federal reimbursement is fixed and cannot
be changed overnight, then the only response is to increase volume. That is probably a
practical reality that he thinks most people have seen, whether physicians are seeing
patients in the hospital or the office. He has not noticed impacts on level of services
provided and clinical management of patients. He emphasizes that he has observed very
good quality medicine provided, especially in the cardiology area because that is the
expectation.
Mr. Gans thinks that increased compliance costs and decreased reimbursement
have affected medicine. He makes the point that compliance costs are not only associated
with HIPAA but are also due to other types of regulations. As examples, the requirements
for physicians to be in close proximity when there is “incident to”1 8 6 activity in their
practice and the requirements for physicians to properly document their work and activity
in medical records to support coding for certain procedures. These are compliance issues
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“Incident to” is a term that typically refers to the services that are directly linked to a physician’s care. The
term is most frequently used in defining clinical and supervisory oversight requirements by physicians who use
Nurse Practitioners (NP) and Physician Assistants (PA). Medicare reimbursement for NPs and PAs is lower
than that for physicians for services that are not “incident to.” For example, if the NP/PA performs a service on
a patient that does not meet the “incident to” requirements for physician involvement or presence, then the
service must be billed under the NP/PA identifier instead o f under the physician identifier, resulting in a
payment rate of 85 percent of the total allowable reimbursement (for Medicare patients).
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that may or may not be necessitated by clinical purposes, but they are resulting in increased
costs. Also, increased costs are associated with new technology and staff salaries, and
these issues are affecting how physicians practice. Mr. Gans notes that increased costs and
decreased reimbursement are affecting how long physicians practice and where they
practice. In terms of the amount of time that patients are seen in the office versus the
hospital is driven by other reasons. He identifies one reason as clinical capabilities. With
new technologies, new procedures, and new equipment, physicians can see more patients
in their office. In the past, these procedures would need to be done in the hospital on an
inpatient basis. Also, the incentives from health maintenance organizations to reduce
inpatient costs and the inherent $1,500 per bed day admission rates are moving physicians
more towards care for patients in the office. In terms of level of services provided and
clinical management of patients, Mr. Gans comments that the federal regulations for
compliance have mandated that certain documentation is required for the medical record.
This potentially provides benefits to the patient-care process.
Mrs. Parilo thinks that the decreased reimbursement has definitely affected the
practice of medicine. From her perspective, physicians who, in the past, were concerned
only with the quality of care for patients are now considering the costs of doing business.
She states that, with some physicians (but not all), there have definitely been practice
changes based on cost. She also thinks that the federal regulations have impacted the
amount of time patients are seen in the hospital versus the office. Her opinion is that there
is a trend for physicians to spend more time in the office and to do more procedures in the
office. This is due to the fact that more and newer revenue-generating equipment is now
being utilized in the office. Mrs. Parilo contends that the decreased revenue to physicians
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has impacted the level of service and the clinical management o f patients—not for all
physicians, but for a lot more than she would have seen 10 years ago. She observes that
physicians are not as willing to do things for free any more because physicians are feeling
that due to the payment cuts they are already working for not enough reimbursement.
Question 6 o f the physician interviews correlates with Question 8 of the consultant
interviews. In answering Question 6, Dr. Sharma states that the Balanced Budget Act of
1997 has had the greatest negative impact on the practice of medicine. He explains that
each year, as the cost of practicing goes up and the reimbursement goes down, physicians
are being forced to see patients in less time in order to maintain a viable practice. The
impact is felt at every level, with fewer trained personnel being hired by hospitals and
more semi-trained or untrained individuals, such as technicians being used as assistants in
the operating room (for example). Fewer registered nurses are employed on the wards and
more nursing assistants are being used. Contracting is being utilized to purchase the
cheapest product rather the best product in the way of pharmaceuticals or other devices and
products in hospitals. HIPAA is another source of expense that has not provided
reimbursement back to the physician. The ongoing cost of upgrading computing
equipment every few years is not at all accounted into in the Balanced Budget Act.
Dr. O ’Neill, on the other hand, does not think that these issues have affected the
practice of medicine as yet. He believes, however, that it will soon. He comments that if
the net result of these regulations is a significant reduction in income or a significant
increase in workload to maintain income, more and more physicians will retire. With the
relatively low output of new cardiologists (in the workforce), “work” per physician will
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increase. The net effect of this ultimately will be a more selective acceptance of patients
by groups in such a position. Dr. O’Neill notes that he anticipates careful analysis of payer
mix and elimination of contractual arrangements with the least value return.
Question 9 o f the consultant interviews. similar to Question 8, focuses on the
impact o f the BBA on physician income, impact on volume of services, and impact on new
procedural testing to compensate for declining revenues. Mr. Hunter emphatically answers
that volume of services has increased. He cites an article written by Dave Gans two to
three years previously which provided a 10-year data analysis describing the number of
specialists’ services (charges) that had increased compared with the relative cost of living.
The results of this article showed an 18 to 20 percent increase in charges over the past 10
years, but with only a 10 percent increase in the cost of living over the same period of time.
Mr. Hunter adds the caveat that this is not a one-dimensional answer. He notes that the
results were impacted not only by declines in Medicare reimbursement, but also by
considerations for an increased labor expense, increased pharmacy expense, and general
supplies expense. He reiterates that more testing is being performed, particularly with
increased use of nuclear cameras.
Mr. Weiss agrees that there has been a decrease in revenues for physicians since
the enactment of the Balanced Budget Act of 1997. He forecasts that what ultimately is
going to happen is that physicians are going to stop looking at health care as a science and
an art, and are going to start looking at it more “as accountants do— as a bean-counting
situation.” In other words, physicians will determine at their particular reimbursement rate
how many patients will need to be seen to keep their practice operating and maintain their
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current standard of living. Physicians will need to determine how they will negotiate
contracts or determine which contracts to accept or not accept. Mr. Weiss sees more
cardiology practices going into partnership with other cardiology practices for the creation
of cardiac cath labs, stent labs, and pacemaker surgical suites in order to increase their
revenues by decreasing the amount of referrals going to the hospitals. He notes that this
hurts hospitals as well and creates a vicious cycle. On this point, the author contends that it
would appear that these types of ventures would need to pass regulatory hurdles such as
anti-trust issues, Stark II prohibitions, and anti-kickback referral prohibitions. Cardiac
cath, for example, is not a Stark II service, but the prohibition regarding payments for
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referrals under the broad federal Anti-Kickback Statute could apply.
Mr. Tennant has also observed reimbursement decreases, particularly in cardiac
surgery and cardiology. He has seen recent 10-percent decreases, with five-percent
decreases over the past few years. Net incomes definitely decreased over the past three
years (1999 to 2002). He emphasizes the point that the reimbursement declines are not just
a Medicare phenomenon. Private payers tend to follow Medicare’s lead. When Medicare
reimbursement drops, private payers typically do the same. Therefore, groups are forced to
search for solutions to maintain their financial viability. Mr. Tennant answers
affirmatively to the question addressing the acceleration of new procedural testing in the
office. He adds that practices are also looking for other ancillary services that could
potentially augment their bottom line. He notes that this trend for additional ancillary
services is not occurring in cardiology as much as it is in other medical specialties.
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Information reproduced from Medical Management E-Advisor, “Effect on FMV o f Alternative Billing
Procedures,” Volume 1, Issue 1, December 2001 (Copyright 2001, Windsor Professional Information, LLC).
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However, according to Mr. Tennant, there is still much financial pressure on cardiology
practices that will not decrease anytime soon unless Congress makes significant changes to
the Medicare reimbursement formula.
Mr. Steiner’s view is that the change in the fee schedule places the practice of
cardiology under greater pressure to increase the volume of services. It also leads to
methods of studying how new technologies or new procedures can best be implemented to
achieve the same result—the same result being better diagnosis and treatment of heart
disorders and disease, which is a welcome outcome. However, Mr. Steiner also points out
that this situation can lead to a tension between capital expenditure needs and labor costs.
There is a very hard balancing act between maintaining a way o f performing services that
might be labor intensive to changing to a new piece of diagnostic equipment or other types
of machinery that might lead to reductions in employees involved in the service. Mr.
Steiner still agrees that new procedural testing capability in the office of a group practice is
of paramount importance. He also discusses the importance of the Stark Law. The Stark
Law— listed under 42 U.S.C., section 1395nn—places certain limitations on physician self
referrals. The law is designed to limit the capacity of a referring physician to profit from
his or her referrals for certain diagnostic or treatment modalities in an office setting in
which that physician has an ownership or financial interest. This creates a legal hurdle for
implementing more tests in the office to increase profits. On the other hand, there are
specific Stark Law exceptions that allow for procedural testing in the office or group
practice setting provided that the testing arrangement is properly structured within Stark
Law guidelines.
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Mr. Gans has a somewhat different perspective on the Medicare reimbursement
issue. He states that the decrease in Medicare reimbursement occurred only in 2002, but
not previous to that. He does see practices responding to the current decreased
reimbursement by trying to reduce costs and increase production. Mr. Gans indicates that
his research in association with the Medical Group Management Association (MGMA) has
shown that cardiology practices have increased their operating costs each year. However,
compensation for cardiologists has also increased on a yearly basis. For example, the
MGMA Physician Compensation/Production Survey shows that in the year 1999 to 2000,
compensation for invasive cardiology went up 7.61 percent, and noninvasive cardiology
went up 7.66 percent. But in the five-year period from 1996 to 2000, invasive cardiology
shows a total increase of only 3 percent while noninvasive cardiology shows an increase of
21 percent. Interestingly, while invasive cardiologists show a 3.4 percent change in
compensation over a five-year period, their increase in production increased by 23 percent
for the same period. For noninvasive cardiologists, there was a 21 percent increase in
compensation for the period with a corresponding 30.67 percent increase in production.
This is indicative of the fact that cardiologists, in order to see a compensation increase,
must work harder because of their decreased reimbursement and increased costs. Mr. Gans
points to this data as evidence that decreased reimbursement for specialists has promoted a
tendency to increase the volume of services provided.
Mr. Gans further elaborates on the question of whether this environment of
reduced reimbursement to specialists has accelerated the implementation of new procedural
testing in the office or in the hospital to compensate for declining revenues. He does not
think that the environment itself has accelerated the implementation of procedural testing.
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His view is that the technology has been more responsible for that. The reasoning is that
technology and the ability to provide good patient care— to treat the patient in a less
invasive manner, or in an invasive manner as opposed to a surgical intervention— is more
of a factor in moving procedural testing in the office or the hospital. These changes are
thus driven more from a clinical than a reimbursement perspective. However, the
reimbursement perspective is important if cardiologists are considering a joint venture for
certain diagnostic and treatment modalities such as nuclear imaging and cardiac
catheterization. Mr. Gans notes that this determination is not based on whether to utilize a
nuclear camera or cardiac catheterization lab; it is based more on whether to be a full or
part owner in the facility and to assume the operational costs as well as the potential
financial benefits from the venture. The economic environment has accelerated those
decisions. Physicians who may in the past have only utilized the technologies in a hospital
or the facility are now looking at being a financial partner or owner in those facilities. The
author again notes that Stark Law prohibitions must be considered in physician-owned
diagnostic imaging ventures that potentially impact the value or volume of patient referrals.
Mrs. Parilo senses that physicians are bitter about the reduced reimbursement. In
addressing the question that asks if she has seen a decrease in physician reimbursement and
net income over the past three years, she categorizes her response. She has seen decreases
for those physicians who have not attempted to create new services or provide additional
services. For instance, those physicians who are continuing with regular office visits,
performing treadmills, going to the hospital, and doing the same things that they have
always done have seen declines in their net incomes. Those physicians who have
expanded their practices, implemented new services, and taken more risks in buying
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equipment, have not seen declines and probably have increased their incomes in some
cases. Mrs. Parilo implies that she has seen an increase in volume of services that is
related to decreased incomes.
In answering Question 7 o f the physician interview, Dr. Sharma indicates that the
consequences of the Balanced Budget Act will be a steady decrease in reimbursement and
net income. His view is that the decrease in income has resulted immediately in a trend to
increase the volume of services to try to compensate for this decrease. He also points out
that several physicians have taken early retirement. In addition, this trend has resulted in a
larger percentage of physicians in his area preferring to electively join managed-care
organizations. The decline in reimbursement leads to the assessment of the practice in
economic terms rather than medical terms. Thus, certain procedures that normally were
carried out by other sources, such as radiology, are now performed in-house in order to
enhance revenue. There is also the potential effect of improving care of the patient
providing all the various cardiac-related investigations at one site. However, Dr. Sharma
notes that initiating these were clearly economically driven.
Dr. O’Neill observes that there has been a decrease in reimbursement for services
and a small decline in net income. He notes that the reason for the small decline in net
income has been due to a dramatically increased workload or production. He, personally,
has not appreciated a tendency to increase the volume of services provided, per se.
However, he thinks that large numbers of patients are being seen which, in turn, generates
a larger volume of services. Dr. O’Neill states that the environment has not really
accelerated the implementation o f new procedural testing in the office. N ew procedures
are evaluated on their own merits. In his practice, the group has tried some new procedures
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and found them to be wanting in terms of their clinical effectiveness and have not adopted
them, even though these procedures might have produced improved revenue. He provides
two specific examples— Bio-Z bioimpedance measurement and T-wave altemans, which
are noninvasive tests performed concurrently with in-office electrocardiograms and
treadmill testing, respectively, to provide additional information pertaining to electrical
activity in the heart. Dr. O’Neill emphasizes that the real decision has been related to the
actual value of the services rather than their associated compensation. He adds that this
situation will continue to be assessed.
In referring to physician interview Question 8 regarding new procedures, patient
benefits, and cost-effective patient management, Dr. Sharma notes changes that have
occurred with stents, such as radiation stents and coded stents. These procedures/devices
are utilized with invasive angioplasty procedures to maintain open vessels and improve
blood flow in coronary arteries and peripheral arteries that have been blocked due to
disease processes. Dr. Sharma explains that these newer stents are clearly much more
costly than standard stents but yet are being utilized. The cost effectiveness has been
assessed in clinical trials to demonstrate that these devices produce a long-term cost benefit
to the patient. Thus, when any new procedure or device is introduced, the manufacturer
has to carry out cost-effectiveness analysis. This, unfortunately, then subsequently raises
the price of the device, and the expense is passed onto the users.
Dr. O ’Neill, speaking as an electrophysiologist, states that the new cutting-edge
procedures are biventricular pacemakers and defibrillators, and more complex cardiac
ablation procedures. W ith respect to interventionalist procedures, the drug-eluting stents
are the hot topic at the present. Dr. O’Neill mentions that cost-effectiveness management
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is not physician-driven. His view is that it is payer-driven, and that the physician interest is
to achieve maximum benefit for the patient.
5.1.1.3 Tabulation o f Responses
Hypotheses 5, 6, and 8 are assessed individually but grouped together in the same
table due to the overlapping themes (increased cost implications o f HIPAA and decreased
reimbursement implications of the BBA) in the respective questions asked to the consultant
and physician interviewees (see Table 12 below).
Table 12: Hypotheses 5, 6, and 8— Consultant and Physician Interview Responses
Hypothesis 5 Yes No Not Determined
C8H5 0 0 6
P6H5 0 0 2
C9H5 3 1 2
P7H5 0 1 1
P8H5 0 0 2
TOTALS 3 2 13
Hypothesis 6
C8H6 0 3 3
P6H6 0 1 1
C9H6 1 4 1
P7H6 0 2 0
P8H6 0 0 2
TOTALS 1 10 7
Hypothesis 8
C8H8 2 1 3
P6H8 2 0 0
C9H8 0 0 6
P7H8 0 0 2
P8H8 0 0 2
TOTALS 4 1 13
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Consultant and physician interview question responses are tabulated in unison with
corresponding hypotheses. For example, consultant interview Question 8 and Hypothesis 5
are listed in the table as C8H5. Physician interview Question 6 and Hypothesis 5 are listed
in the table as P6H5, and so on. Responses were subjectively evaluated by the author and
tabulated as a “Yes” if the answer tended to support the respective hypothesis or a “No” if
the hypothesis was not supported from the response. If responses did not clearly support or
refute the respective hypothesis from the particular Question response, then that response
was tabulated as “Not Determined” in the table.
Due to the open-ended and multiple-answer format presented in the interview
questions, the construction of Table 12 particularly requires careful explanations of the
response tabulations. As previously stated, responses were subjectively assessed and
tabulated as “Yes,” “No,” or “Not Determined” in terms of respondent support (and the
author’s subjective assessment of the response) for the particular hypothesis. The high
number of “Not Determined” responses could possibly have been corrected with more
questions specifically focused on one answer rather than the multiple-answer per question
format. For example, Question 8 of the consultant interviews asked opinions regarding
overall impacts on the practice of medicine and levels of service that could imply new
procedural requirements, but was more specifically designed to address specific issues
regarding office versus hospital efficiency, for example. However, to an extent, the
questionnaire deficiency was accounted for by the grouping format devised specifically for
Table 12.
Hypothesis 5 totaled 3 “Yes” answers, 2 “No” answers, and 13 “Not Determined.”
There was an indication that the premise that decreased reimbursement will accelerate new
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procedural testing in the office has some merit. Mr. Tennant, for instance, makes the point
that, when Medicare payments drop, private payers typically follow suit. Therefore,
medical groups are forced to search for solutions to maintain their financial viability.
Although this premise is also an argument for the increased volume of work argument, Mr.
Tennant specifically agrees that there is an acceleration o f new procedural testing in the
office, and that practices are searching for other ancillary services that could potentially
augment their bottom line. However, he notes that this trend is not occurring in cardiology
groups to the same extent as in other specialties. Mr. Hunter, on the other hand, notes an
increase in the use of nuclear cameras in the office. Mr. Gans also made this observation
regarding the increased use of nuclear cameras. This is particularly applicable in
cardiology practices (in this author’s opinion). Overall, Hypothesis 5 is not supported by
statistical validation, but, again, was somewhat supported by specific responses.
Hypothesis 6 appeared to elicit the most predominant response pattern in Table 12.
The hypothetical contention that the decreased reimbursement implications of the BBA
will not lead to increase volume of services performed to compensate for declining
revenues was not supported by the majority of interviewee responses. Mr. Gans, for
instance, provided the most quantitative analytical response. His research with the MGMA
implied that physicians are working harder to account for reimbursement declines. He
points to the data as evidence that decreased reimbursement has increased the volume of
services performed. Mrs. Parilo’s response implies that she has seen an increased volume
of services performed with decreased reimbursement. Dr. Sharma’s view is that the
decrease in physicians’ net income has led to an increase in the volume of services. Dr.
O’Neill has not personally experienced a tendency for increased procedure volume, but he
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notes that a large number of patients are being seen, which increases service volume. A
part of this question has been addressed previously in the literature. Past researchers have
pointed to the relative magnitude of income and substitution effects as a strong determinant
of physicians’ response to a changed fee schedule (McGuire and Pauly, 1991). A
tightening of the Medicare fee schedule typically reduces physician incomes and leads
them to provide more of the total of services offered {income effect). The substitution
effect results from physicians providing more of the reduced fee service to higher paying
private insurance and less to lower paying Medicare patients. The income effect is
predicted to be stronger for physicians with a larger market share of the service whose fee
has fallen and for the physicians with a comparatively larger share of the Medicare
populations. The substitution effect dominates if the profit margin is higher in the non-
Medicare segment and for physicians whose market share of the Medicare market is fairly
small (Okunade and Miles, 1999). Other research has also shown indications that, when
price is constrained, physicians can maintain their incomes by increasing demand and,
hence, by increasing their billable services. However, the evidence is ambiguous as to
whether supplier-induced demand actually occurred. Thus, one objection to government
price setting (e.g., by a physician fee schedule) is not necessarily that physicians will get
around the controls by inducing demand, but that price controls result in a quantity and
quality of physicians’ services that are not ideal (Feldman and Sloan, 1988).
Similar to Hypothesis 5, Hypothesis 8 had more “Yes” responses than “No”
responses but with a high number of “Not Determined” responses. The argument that
appeared to most support Hypothesis 8 and was stated m ost frequently was that physicians
are seeing more patients in the office and thus spending less time with patients. Mr.
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Tennant brought up the implications for patient care with this scenario. Mr. Gans and Mrs.
Parilo noted that more services are being performed in the office due to several reasons
including new technology and clinical capabilities as well as increased hospital bed day
costs resulting in lower length of stays, with increased patient visits going to the offices.
More physician time related to administrative duties in keeping up with legislation and
compliance regulations that impact medical records documentation requirements were also
cited as factors potentially reducing the amount of time that physicians spend with patients.
5.1.5 H ypotheses 9 and 10
5.1.5.1 Overview
Hypothesis 9 and Hypothesis 10 address the question of whether physicians will
accept or reject contracts paying at Medicare rates or below Medicare rates, respectively.
Question 10 of the consultant interviews and Question 9 of the physician interviews are
applicable to these hypotheses. Questions 20, 21, and 23 of the case-study questionnaire
are also applicable to these hypotheses and are addressed in the case-study section.
5.1.5.2 Consultant and Physician Responses
In answering Question 10, Mr. Hunter anticipates that cardiologists will tend to
reject contracts paying at Medicare rates unless they cannot improve their leverage in the
commercial market. Therefore, the decision may be market-specific. Mr. Hunter notes
that when a broad range of payers is in a market, groups will cancel low paying contracts
and go after the higher paying contracts. If reimbursement is lower than Medicare, most
practices are not economically in a position to accept that level of reimbursement.
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Mr. Weiss states that he has not seen cardiologists, or other specialists for that
matter, that have formally done a financial-needs assessment to opt out of Medicare. His
observation is that, even with the reductions in Medicare reimbursement, it is still
traditionally higher than reimbursements from HMOs and some managed care
organizations. He does not see physicians opting out of Medicare, especially cardiologists.
His opinion is that a cardiology practice opting out of Medicare would be financial suicide
since 90 percent of the patients typically seen by cardiologists are Medicare-age eligible
and above, and Medicare provides the most consistent reimbursement. Another reason that
he does not see this happening is that traditional Medicare is basically a PPO. With
traditional Medicare— not Medicare HMOs or Medicare + Choice plans—there is no need
for referrals and authorizations. For instance, if a patient needs a cardiac catheterization,
the patient is scheduled for the procedure, the procedure is performed, and the service is
billed to Medicare. As long as the correct procedure code (CPT code), the correct
diagnosis code (ICD-9 code), and the correct modifier (technical or professional
component code, if needed) are billed to the Medicare carrier, the provider will be paid for
the service.
Mr. Tennant argues that groups will try to reject private contracts that mirror
Medicare rates. Unfortunately, he states that there is not much that smaller groups can do
to fight against the private payers. Depending on the region, cardiology groups may not
have much choice to deny a contract unless they decide to opt out of a particular health
plan, which is not practical in many instances.
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Mr. Steiner indicates that the answer is market-driven, meaning that it depends on
the current position of the group in the marketplace and the saturation of competitors for
cardiology services in the marketplace.
Mr. Gans’s response is similar to Mr. Steiner’s response. His observation is that
accepting or rejecting contracts is geographically determined. For example, in Miami,
Florida—Miami is one of the geographic areas in which Medicare is a comparatively high
payer—if a group rejects a contract that pays less than Medicare, the result could be a loss
of half of the group’s business because most payers in that area pay less than Medicare. In
other areas o f the country— for example, a more rural environment with less managed-care
penetration— most payers reimburse higher than Medicare, and, therefore, the group can be
more selective in accepting or rejecting a contract, particularly based on Medicare rates.
Thus, the decision process is more of a geographic issue determined by regional and local
competitors, comparative reimbursement rates, and available alternatives. Mr. Gans
comments that he is aware that cardiology practices are closely examining contracts for the
first time. He notes that there was a time that cardiologists would sign any contract. Now,
there is far more scrutiny regarding contract specifics, with a particular focus on payment
terms and methodology.
Mrs. Parilo states that, although cardiologists say that they want to reject contracts
based on Medicare rates, in reality, they do not, even with straight Medi-Cal patients. One
implication is the number of cardiologists in a region. In the area that she works, there are
too many cardiologists that have practices that are referral-based. Therefore, based on the
fact that they are referral-based and there will always be a cardiologist who will see the
patient, Mrs. Parilo does not see cardiologists discontinuing their current contracts.
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Question 9 of the physician interviews correlates with Question 10 of the
consultant interviews. Dr. Sharma explains that the current Medicare fee schedule does not
take into account the progressive increases in the cost of living index. Thus, there will be a
steady and progressive erosion of the services provided. However, he further explains that
the determinations for accepting or rejecting these contracts are purely based on supply-
and-demand issues. That is, if the number of cardiologists becomes scarce in any region,
the cardiologists are likely to opt out of Medicare and other contracts that pay less than
Medicare rates. He notes that the California environment is one of the rare environments
where physicians actually accept less than Medicare rates. For most of the country and
even in many parts of California, physicians will not accept rates less than 120 percent of
Medicare. Based on this premise, Dr. Sharma suspects that the supply-and-demand issue
will largely dictate which contracts the physicians accept or reject.
Dr. O ’Neill provides very direct answers to the question. His opinion is that, first,
the Medicare fee schedule does not provide adequate reimbursement to physicians.
Second, he anticipates a trend for cardiologists to reject contracts paying at lower than
Medicare rates. Third, he anticipates the same trend for cardiologists to discontinue their
current contracts paying at less than Medicare rates.
5.1.5.3 Tabulation o f Responses
Table 13 (below) summarizes the responses corresponding to Hypothesis 9 and
Hypothesis 10. Similar to the methodology for Table 12, consultant interview Question 10
and Hypothesis 9 are labeled C10H9, physician interview Question 10 and Hypothesis 9
are labeled P10H9, and so on.
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Table 13: Hypotheses 9 and 10— Consultant and Physician Interview Responses
Hypothesis 9 Yes No Not Determined
C10H9 1 3 2
P9H9 2 0 0
TOTALS 3 3 2
Hypothesis 10
C10H10 1 1 4
P9H10 2 0 0
TOTALS 3 1 4
OVERALL TOTALS 6 4 6
Hypothesis 9 is evenly distributed between “Yes” and “No” support. Interestingly,
more consultant respondents tended to think that physicians would not reject contracts,
whereas both physician respondents indicated that contracts paying at Medicare rates
would be rejected. Both physicians also agreed with Hypothesis 10. This gives some
evidence of the frustrations physicians are feeling regarding the impacts of declining
Medicare reimbursement, which, as previously indicated, is also reflected in the contractual
reimbursement provided by other payers, particularly those that are tied to the RBRVS
methodology. Again, it is difficult to declare absolutely that Hypothesis 9 and Hypothesis
10 are supported, even with the combined total of “Yes” responses being more than the
“No” responses. The argument that the decision process regarding acceptance or rejection
of contracts paying at or below Medicare rates is geographically and/or market-driven
deserves consideration. On the other hand, the physician interview responses may reflect a
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more widespread trend in how physicians are now addressing contracts that mimic
Medicare fee schedules or that pay less than Medicare rates.
5.1.6 Summary of Consultant and Physician Interviews Responses
A final summary of support or rejection of hypotheses from the consultant and
physician interviews is presented in Table 14.
Table 14: Hypotheses 1 Through 10— Supported/Not Supported/Not Determined
Hypothesis Supported Not Supported Not Determined
Hypothesis 1 +
Hypothesis 2 +
Hypothesis 3 +
Hypothesis 4 (Case Study only)
Hypothesis 5 + ++
Hypothesis 6 +
Hypothesis 7 +
Hypothesis 8 + ++
Hypothesis 9 + +
Hypothesis 10 + +
The summary reflects the preponderance o f responses that tended to support or
refute the particular hypothesis and the author’s assessment of responses (particularly for
Hypothesis 3). The results are not statistically validated and include limitations due to the
author’s subjective evaluations in determining if an answer truly supported the respective
hypothesis, rejected the respective hypothesis, or was equivocal or indeterminate. Plus
signs (+) indicate the column that reflects the preponderance of responses in all hypotheses
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for support or rejection. If the number of responses is the same for support or rejection,
then plus signs (+) appear in both columns. Hypotheses 5 and 8 had the most responses in
the “Not Determined” column and therefore are marked (++). However, a plus sign (+)
was also given for these hypotheses for the responses that were most frequent between
support versus rejection. The number of responses was the same for support and not
determined with Hypothesis 10 and therefore, the responses were tabulated with single plus
signs (+) in each respective column.
The data from Table 14 reflect what most interview responses indicated for each
hypothesis, but it is not a formal statistical determination of acceptance or rejection of a
stated hypothesis. Therefore, the results should be assessed with this understanding and
awareness of the research design and statistical limitations previously described. Given
this umbrella caveat, Table 14 indicates that the interviewees were in agreement with the
premises of Hypothesis 2, Hypothesis 3 and Hypothesis 7; were not in agreement with the
premises of Hypothesis 1 and Hypothesis 6 ; and, were either equally divided or equivocal
in their agreement with the premises of Hypothesis 5, Hypothesis 8 , and Hypothesis 10.
5.1.7 Hypothesis 4— Case Study
5.1.7.1 Overview
The cardiology practice studied in this research agreed to participate in the survey
and to allow certain data to be used if the identity of the organization remained
anonymous. That request, of course, was honored. Consequently, certain research design
limitations are inherent in this case study. A more complete overview of the cardiology
group practice studied is provided in the Case-Study Analysis (to follow this section). This
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section addresses the case-study survey questionnaire results. As previously noted, only
four physicians responded to the survey questionnaire sent to all physicians in the case-
study group. This percentage response rate (24 percent) approximates the larger AMA
SDS survey response rate noted earlier. Thus, statistical validity and reliability cannot be
tested or confirmed in terms of inference to larger populations (other cardiology group
practices). Also, the limited number of responses cannot be used as indicative of the
majority of feelings within the group practice. However, due to the author’s time spent in
meetings with group practice members, certain information can be elaborated on and
communicated as a general feeling or tendency of the group practice as a whole. This is
noted by the author when applicable.
5.1.7 .2 Questionnaire Responses
Table 15 summarizes the responses from the closed-ended survey sent to the
cardiologists in the case study. The questionnaire format is presented as Appendix C.
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Table 15: Case-Study Questions 1 Through 23 Tabulations
Question # Strongly Disagree Mildly Disagree No Impact Mildly Agree Strongly Agree
1 1 0 2 1 0
2 0 0 1 0 3
3 1 0 0 2 1
4 1 0 1 1 1
5 1 1 0 2 0
6 2 0 1 1 0
7 1 0 0 2 1
8 1 1 0 2 0
9 0 0 0 1 3
1 0 1 0 2 0 1
11 1 0 0 1 2
1 2 0 1 2 1 0
13 0 0 1 1 2
14 0 0 1 1 2
15 0 0 0 0 4
16 0 0 0 0 4
17 0 0 0 0 4
18 0 0 4 0 0
19 0 0 1 2 1
2 0 1 0 1 1 1
2 1 0 0 0 1 3
2 2 0 0 2 1 1
23 0 1 0 0 3
TOTALS 11 4 19 2 1 37
5.2 A s s e s s m e n t o f R e s p o n s e s f r o m I n t e r v ie w s a n d C a s e -S t u d y
Q u e s t io n n a ir e s
There were 23 questions presented in a Likert format on the cardiologist case-study
survey. Table 15 quantifies the responses. For purposes of this analysis, five levels of
assessment are presented, with aggregation of data performed in the following manner:
First, answers were summarized as totals of agreement with all questions’ statements
(totals of mildly agree + strongly agree), totals of disagreement with all questions’
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statements (totals of mildly disagree + strongly disagree), and totals for no impact.
Second, questions were grouped in categories of agreement, disagreement, no impact, or
not determined (if there were combinations of equal number o f agreement, disagreement,
and no impact responses per question). Third, questions that appeared to elicit relatively
overwhelming physician responses in one or two columns (e.g., all respondents strongly
agree; or, all respondents strongly agree or mildly agree) were highlighted with comments.
Fourth, responses were aggregated by question groupings to assess if hypotheses were
supported, rejected, or not determined. As previously displayed in Table 9, responses to
case-study Questions 2 and 3 correlated with Hypothesis 1; case-study Questions 4, 5, 6 ,
and 7 correlated with Hypothesis 2; and so on. Finally, comparisons of levels of support or
non-support for the ten hypotheses from consultant and physician interviewees versus the
case-study respondents were summarized.
5.2.1 Analysis Level 1
On the first analysis level, overall, there were 58 responses in the agreement
category, 15 responses in the disagreement category, and 19 responses in the no impact
category.
5.2.2 Analysis Level 2
On the second analysis level, Table 16 displays the questions assigned to the
categories of agreement, disagreement, no impact, or not determined based on the
respective number of responses (as explained above). Note that no questions were
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tabulated in the disagreement category and only one question was tabulated in the no
impact column.
Table 16: Case-Study Question Numbers 1 Through 23 Arranged by Responses
to the Categories of Agree / Disagree / No Impact / Not Determ ined
Question Numbers
Agree Disagree No Impact Not Determined
2 (None) 18 1
3 4
7 5
9 6
13 8
14 2 0
2 1 2 2
23
5.2.3 Analysis Level 3
The third analysis level for this data highlights responses that tended to show some
agreement by most or all respondents. For Question 2, three o f the four respondents
strongly agreed that the practice plans to upgrade its information systems within the next
12 months in response to HIPAA requirements. On Question 9, all four respondents were
in the agreement category—three in the strongly agree column— that their net income had
decreased over the past three years as a result of legislation decreasing Medicare
reimbursement. All four physicians were unanimous in their strong agreement on Question
15 indicating that decreased Medicare reimbursement has resulted in a tendency for them
to work harder to increase the volume of services to compensate for declining revenues.
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The four physician respondents were unanimous in their strong agreement with Question
16 indicating that decreased Medicare reimbursement has accelerated the implementation
of new procedural testing in the office to compensate for declining revenues. The four
physicians were also unanimous on Question 17’s statement that implementation of new
procedural testing in the office provides enhanced diagnostic information and improves
patient care. All four respondents were in agreement with Question 21 that decreased
Medicare reimbursement has resulted in the group practice declining to accept new
contracts paying at less than Medicare rates. It should be noted that there were varied
responses between the physicians on the previous question’s statement (Question 20) that
decreased Medicare reimbursement has resulted in the group practice declining to accept
new contracts paying at Medicare rates. Finally, three of four physician respondents
strongly agreed with Question 23 that decreased Medicare reimbursement has resulted in
the group practice discontinuing participation in current contracts paying at less than
Medicare rates. Interestingly, one physician mildly disagreed with the statement of
Question 23.
5.2.4 Analysis Level 4
The fourth assessment level correlates specific question response support or non
support for each hypothesis. Table 9 lists the question numbers that correlate to each
hypothesis. For example, case-study Questions 2 and 3 correlate with Hypothesis 1. Case-
study Questions 4, 5, 6 , and 7 correlate with Hypothesis 2, and so on. Table 17 (below)
lists the results for agree, disagree, no impact, or not determined for each hypothesis.
Results were determined by a majority count of responses from all questions correlated for
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a particular hypothesis (see Table 15). If the majority of possible responses for Questions
2 and 3 were in the mildly agree plus strongly agree tabulations, then a plus sign (+) was
marked in the Agree column for Hypothesis 1. For example, the total o f mildly agree plus
strongly agree responses for Questions 2 and 3 equaled 6 out of a possible 8 . Therefore,
the (+) was marked in the Agree column for Hypothesis 1. If the majority count was in the
mildly disagree plus strongly disagree tabulations, then a (+) was marked in the Disagree
column. If no majority count was obtained, then the (+) was marked in the Not
Determined column.
Table 17: Case-Study Questionnaire Results— Agreem ent with Hypotheses
Hypothesis Agree Disagree No Impact Not Determined
1
(+)
2
(+)
3
(+)
4
(+)
5
(+)
6
(+)
7
(+)
8
(+)
9
(+)
1 0
(+)
Table 17 indicates that the four physician respondents agreed with all but four of
the hypotheses based on the method utilized. The respondents disagreed with one
hypothesis. The other three hypotheses were categorized as Not Determined.
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5.2.5 Analysis Level 5
The fifth assessment level for this section provides a comparison of support, non
support, or not-determined categories between the consultant and physician interview
responses versus the case-study survey responses. Results from Table 14 and Table 17 are
aggregated in Table 18 to provide this comparison. Column headings include Supported,
Not Supported, and Not Determined. Row headings list each hypothesis and sub-row
under each hypothesis list Consultant/Physician Interviews and Case-Study Survey.
Again, a plus sign (+) is tabulated under the respective column to indicate support, non
support, on non-determination of each hypothesis. Finally, Table 18 also combines results
for both sets of questionnaires to give overall totals of support, non-support, or non
determination of each hypothesis. Table 18 is presented below.
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Table 18: Questionnaire and Survey Results— Level of Support
for Hypotheses 1 Through 10
Hypothesis Supported Not Supported Not Determined
Hypothesis 1
Consult./Phys. Interviews
Case-Study Survey
(+)
(+)
Hypothesis 2
Consult./Phys. Interviews
Case-Study Survey
(+)
(+)
Hypothesis 3
Consult./Phys. Interviews
Case-Study Survey
(+)
(+)
Hypothesis 4
Consult./Phys. Interviews
Case-Study Survey
(not applicable)
(+)
Hypothesis 5
Consult./Phys. Interviews
Case-Study Survey
(+)
(+)
Hypothesis 6
Consult./Phys. Interviews
Case-Study Survey
(+)
(+)
Hypothesis 7
Consult./Phys. Interviews
Case-Study Survey
(+)
(+)
Hypothesis 8
Consult./Phys. Interviews
Case-Study Survey
(+)
(+)
Hypothesis 9
Consult./Phys. Interviews
Case-Study Survey
(+)
(+)
Hypothesis 10
Consult./Phys. Interviews
Case-Study Survey
(+)
(+)
COMPARISON TOTALS
Consult./Phys. Interviews
Case-Study Survey
3
6
2
1
4
3
OVERALL TOTALS 9 3 7
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The results from Table 18 show some differences, except in a few instances,
between the Consultant/Physician Interview results (C/PI) and Case-Study Survey results
(CSS). In the Comparison Totals, the C/PI tallied 3 for support, 2 for non-support, and 4
for non-determination in reference to the ten hypotheses. The CSS tallied 6 for support, 1
for non-support, and 3 for non-determination. Combined overall, there were 9 hypotheses
supported, 3 hypotheses not supported, and 7 hypotheses not determined for support or
non-support. Between the C/PI and CSS, there was agreement on three of the hypotheses.
Hypothesis 6 — the decreased reimbursement implications in the BBA will not lead to an
increased tendency to increase the volume o f services performed to compensate for
declining revenues— was not supported by both the C/PI and CSS. Both sets of results
indicated that physicians are working harder and increasing production in response
declining to revenues. Hypothesis 7— the decreased reimbursement implications in the
BBA will result in an increased tendency fo r consolidation o f internal operations to
increase efficiency in cardiology group practice—was supported by both C/PI and CSS.
However, it was unclear from the other responses in terms of agreement on exactly how
that consolidation could be accomplished. The only other response agreement between the
C/PI and CSS was Hypothesis 9— the decreased reimbursement implications in the BBA
will increase the probability that cardiologists will reject proposals fo r managed-care
contracts paying at current (2002) Medicare rates. Unfortunately, in regard to Hypothesis
9, both sets of responses were in the Not-Determined category, indicating that the majority
of responses for both the interviews and the survey for that question were either equivocal
for or equally split between support and non-support for Hypothesis 9.
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5.3 S u m m a r y o f R e s e a r c h F i n d i n g s
In summary, Hypotheses 1, 2, 3, 4, 5, 7, 8 , and 10 were categorized as supported
by either the C/PI or the CSS according to the methodology utilized. However, only
Hypothesis 7 was categorized as supported by both the C/PI and CSS. Hypotheses 1 and 6
were the only hypotheses not supported by either the C/PI or the CSS. Hypothesis 6 was
categorized as Not Supported by both the C/PI and CSS. Hypotheses 2, 3, 5, 8 , 9, and 10
were categorized as Not Determined by either the C/PI or CSS. In this grouping,
Hypothesis 9 was the only hypothesis categorized as Not Determined by both the C/PI and
the CSS. The following observations are made with respect to the findings: (1) Due to the
low number of interviewees and survey respondents, results must be analyzed with caution.
(2) It is evident that the questions elicited differences of opinion in many instances. (3)
Certain issues did show opinions that appeared to be shared by the majority of those
interviewed and surveyed. For instance, the contention that physicians are working harder
or increasing volume in response to decreased income appears to be an important issue.
Also, the need to increase operational efficiencies through consolidation or cost-cutting
measures elicited valid arguments from the different perspectives presented. Another issue
that warrants discussion is the impact of contract reimbursement rates and the relationship
to patient access to care. It is implied from the interviews and case-study survey that
physicians are reluctant (or refusing) to accept contracts that are paying at less than
Medicare rates. In fact, it is evident that physicians are not happy with Medicare rates, per
se. Issues that add complexity to this physician discontent are first, depending on national
location, Medicare rates may represent the best reimbursement in the geographic area; and
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second, Medicare patients typically represent a high percentage of patient volume in
cardiology practices and thus represent a significant financial impact. Therefore, although
cardiologists may continue to see regular Medicare patients, the practice may decide to not
accept other payers that reimburse at similar rates or less. The consequence is that patients
covered by non-contracted entities are forced to look elsewhere for another cardiologist,
who also may not be contracted to see the patient(s) if the plan does not reimburse
adequately. The implication is that patient access to specialty care is potentially becoming
more difficult.
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Chapter 6
C a s e -S t u d y A n a l y sis
6.1 I n t r o d u c t i o n
6.1.1 Integrated Concepts
The case study incorporated some of the basic concepts presented by Fox-
Wolfgramm et al. (1998) and Leavitt (1965) in developing a framework for analyzing
organizational change. These concepts were not duplicated methodologically from those
studies. Rather, the concepts were modified and integrated into a section-heading’s format
to accommodate the research approach taken in this study. The institutional,
organizational, and strategic levels of analysis presented by Fox-Wolfgramm were utilized
as headings to assess organizational change responses to a strategic issue. The strategic
issues in this study are HIPAA and BBA. Three of the Leavitt Diamond variables—
Technological, Structural, and Human Approaches— were modified to Technological
Innovation, Organizational Structure, and Human Resource Management subheadings
under the Organizational Level of Analysis heading. An assessment of the organization’s
response was discussed in terms of defender versus prospector categorizations. Responses
from the case-study survey were also integrated into the overall case analysis.
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6.1.2 The Case-Study Subject
In order to provide information fo r the case study, the medical group practice
organization requested that its name and location not be identified except fo r the general
geographic location. The case study focused on a 17-physician cardiology group practice
located in the western region of the United States. The group is a respected, well-
established provider of cardiology services in the geographic region. The group was
actually formed as the result of a merger nearly seven years previously between two
separate cardiology practices. The two separate practices had a combined 35-year presence
in the geographic region prior to the effective date of the merger.
6.2 INSTITUTIONAL LEVEL OF ANALYSIS
According to Fox-Wolfgramm et al. (1998), the organization’s institutional setting
is that level where the strategic issue originated. The institutional context of strategic issue
processing describes the larger environment in which support and interest in strategic
issues are acted upon. In this study, the institutional setting selected included medical
group practices in the United States— more specifically, cardiology group practices. The
institutional setting is assessed in terms of the passage of HIPAA and BBA and the effects
of those pieces of legislation on the organizations in that institutional environment.
Similar—but not duplicative— to the methodology used by Fox-Wolfgramm et al.,
information collected for analysis at the institutional level included the following:
interviews with individuals within the industry, discussions with individuals within the
organization, gathering of documentation required for compliance with HIPAA,
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assessment of reimbursement calculation methodology established by BBA, and
observations of regulatory implementation efforts and industry responses.
The information acquired from the institutional level analysis has been provided, to
a large extent, from the chapters on HIPAA and BBA and the consultant and physician
interviews. In this section, additional analyses include comparative data between the case-
study group practice and data from outside sources. The costs associated with HIPAA are
just beginning to impact medical group practices in general and cardiology group practices
in particular. A discussion of the cost impact of HIPAA is provided in the Organizational
Level of Analysis level section. The reimbursement implications of BBA and associated
legislation, on the other hand, have potentially impacted medical practices since 1999, or
earlier. First, Table 19 displays the changes in Medicare reimbursement from 1997
through 2 0 0 2 for ten procedures commonly provided by cardiologists in the office and
hospital. Reimbursement is reflective of Medicare Fee Schedule Area 99, corresponding to
reimbursement in the geographic region of the case-study group practice.
Table 19 illustrates three points. First, from 1997 to 1998, Medicare
reimbursement showed increases for both evaluation and management services (i.e., patient
visits; consultations) and procedural work (i.e., treadmills; echocardiograms; caths; stents;
ablations). Second, beginning in 1999, increases continued for evaluation and
management services but began to decline for procedural work. Third, both evaluation and
management services and procedural work showed sharp declines in 2 0 0 2 compared to
2001. All the points noted above are accounted for by the legislative requirements for
calculation of the Resource-Based Relative Value Scale (RBRVS) and provisions in the
BBA (see Chapter 3). The increases in 1998 resulted directly from an increase in the
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RBRVS conversion factor component. In 1999, the practice-expense component phase-in
began, with practice expense relative values generally increasing in evaluation and
management services but decreasing in procedural work. The conversion factor also
decreased in 1999 compared to 1998. Finally, the across-the-board decrease seen in 2002
resulted from the 5.4 percent drop in the conversion factor (discussed earlier).
Table 19: M edicare Reim bursement (1997-2002)— Area 99
Procedure (CPT Code) 1997 1998 1999 2000 2001 2002
Treadmill (93015) - O ffice $111.37 $118.87 $116.26 $116.80 $116.21 $101.43
Echocardiogram (93307) - O ffice $202.45 $219.58 $216.68 $218.55 $218.02 $190.71
Level 3 V isit (99213) - O ffice $ 37.09 $ 39.97 $ 42.42 $ 48.15 $ 51.29 $ 51.06
Level 4 V isit (99214) - O ffice $ 56.04 $ 60.19 $ 64.69 $ 74.08 $ 80.06 $ 80.11
Level 4 Consult (99244) - O ffice $126.76 $137.45 $146.03 $164.10 $169.38 $166.06
Level 3 V isit (99233) - Hospital $ 69.63 $ 75.50 $ 76.84 $ 79.54 $ 82.21 $ 76.98
Level 4 Consult (99254) - Hospital $127.57 $138.34 $141.34 $144.92 $149.67 $137.77
Heart Cath (5 Codes) - Hospital $554.18 $569.04 $548.77 $540.73 $513.77 $444.10
Intra-Coronary Stent (92980) - Hospital $1,072.67 $1,159.70 $1,115.38 $1,057.83 $962.18 $794.89
Cath Ablation SV T (93651) - Hospital $1,169.74 $1,268.43 $1,215.80 $1,112.39 $1,052.23 $869.15
Note. Data obtained from M edicare Participating Provider Program Enrollment and Fee D isclosure, Fee Schedule Area 99
(1996-2001). National Heritage Insurance Company (NHIC): NHIC M edicare Part B, 620 J Street, M arysville, CA 95901;
and M edicare Profile Department, P.O. Box 2812, Chico, CA 95927. A ll CPT codes and descriptors are copyrighted by the
American M edical Association.
Table 20 illustrates changes in Medicare relative value units (RVUs) from 1997 to
2002 for two evaluation and management services (Level 4 Office Visit and Level 4 Office
Consult) and two procedures typically performed in the catheterization lab setting
(Left/Right Heart Cath and Intra-coronary Stent). In Table 20, each service and procedure
is listed with the three components utilized to calculate the Medicare payment (excluding
the geographic practice cost indices [GPCI]). Listed under each year is the dollar
conversion factor component for that year.
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Table 20: M edicare RVUs for Specific Services (1997-2002)
Year 1997 1998 1999 2000 2001 2002
Conversion Factor 35.7671 36.6873 34.7315 36.6137 38.2581 36.1992
Procedure/RBRVS Component
Level 4 Office Visit
Work RVU 1.10 1.10 1.10 1.10 1.10 1.10
Practice Expense RVU 0.50 0.57 0.70 0.85 0.92 1.04
Malpractice RVU 0.04 0.04 0.04 0.04 0.04 0.04
Total RVU 1.64 1.71 1.83 1.99 2.06 2.18
Level 4 Office Consult
Work RVU 2.58 2.58 2.58 2.58 2.58 2.58
Practice Expense RVU 1.23 1.23 1.48 1.73 1.67 1.83
Malpractice RVU 0.11 0.11 0.09 0.11 0.13 0.13
Total RVU 3.92 3.92 4.15 4.42 4.38 4.54
Left/Right Heart Cath
Work RVU 5.99 5.99 5.99 5.99 5.99 5.99
Practice Expense RVU 5.45 5.45 5.05 4.22 3.42 2.50
Malpractice RVU 0.39 0.39 0.31 0.80 0.31 0.31
Total RVU 11.83 11.83 11.35 11.01 9.72 8.80
Intra-Coronary Stent
Work RVU 14.84 14.84 14.84 14.84 14.84 14.84
Practice Expense RVU 16.41 16.32 15.81 12.02 9.28 6.22
Malpractice RVU 1.22 1.22 0.95 2.00 0.78 0.78
Total RVU 32.47 32.38 31.60 28.86 24.90 26.84
Note. Data obtained from the “National Physician Fee Schedule Relative Value Files” (Web site access:
http://cms.hhs.gov.physicians/mptsapp/display.asp) and Federal Register yearly payment updates. CPT Codes
and descriptions are copyrighted by the American Medical Association.
Table 20 demonstrates the annual changes in the conversion factor and RVU
components. O f particular importance is the practice expense RVU transition beginning in
1999 and, to a lessor extent, changes in malpractice RVUs. Note that practice expense
RVUs and total RVUs have generally increased for the selected evaluation and
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1 8 8
management services but have generally decreased for the selected procedures. Note
that total RVUs are highest for intra-coronary stent procedures and lowest for the level 4
office visit. These findings reflect the regulatory purpose of the RBRVS and BBA related
to physician reimbursement. The higher total RVUs and, hence, reimbursement for intra
coronary stent procedures reflect the required skill, risk, time, and resources required to
perform this procedure relative to an office visit. On the other hand, the increased payment
trend for evaluation and management services compared to procedural work reflects the
medical regulatory environment’s movement to emphasize— or incentivize— the primary
level of care given to the patient while providing disincentives for over-utilization of
procedural work.
Time-Series Graph 1 (Figure 2) displays the change in Medicare payments for the
two evaluation and management services and two procedural services in an interrupted
time-series format, assuming 1999 as the year in which a regulation was initiated—the
beginning of the practice expense transition from a cost-based to a resource-based
methodology. Note that all four services show upward reimbursement trends from 1997 to
1998. However beginning in 1999, procedural work shows a downward trend, which is
most dramatically displayed by the highest paying procedure (intra-coronary stent).
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Two inconsistencies in the data are noted. First, for the level 4 office consult, practice expense RVUs and
total RVUs take an unexpected dip in 2001 and then increase again in 2002. Second, the malpractice
component for the intra-coronary stent procedure jumps to 2.00 in 2000, but then reverts back in 2002. These
aberrations may be explained either as calculation errors or possibly have some relevance as specific services
subject to budget neutrality corrections.
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$1,400.00
$1,200.00
$1,000.00
c
«
| $800.00
a.
g >
(0
0
1 $600.00
$400.00
$200.00
$-
1997 1998 1999 2000 2001 2002
— Level 4 Visit - Office $56.04 $60.19 $64.69 $74.08 $80.06 $80.11
Level 4 Consult - Office $126.76 $137.45 $146.03 $164.10 $169.38 $166.06
■ —6 — Heart Cath - Hospital $554.18 $569.04 $548.77 $540.73 $513.77 $444.10
— © — Stent Proc. - Hospital $1,072.67 $1,159.70 $1,115.38 $1,057.83 $962.18 $794.89
Year
Figure 2. Tim e-Series Graph 1. M edicare paym ents fo r 1997 through 2002.
The office visit and office consult services, on the other hand, begin to show a greater
upward trend beginning in 1999 until leveling off in 2002. Again, reimbursement was cut
5.4 percent across the board in 2002. However, 2002 was also the year the practice
expense transition was fully implemented. This implies that the practice expense
component would be at either its highest level or lowest level in the transition period,
depending on the type of service provided.
The next comparison at the institutional level assesses financial data between the
case-study group practice with data tabulated from MGMA surveys. First, in Table 21, net
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income is shown for the case-study group practice versus the MGMA survey results. Net
income for the group practice was obtained primarily from month-end reports with some
information obtained from K1 partnership tax return filings. MGMA survey results were
reproduced from the most recent MGMA Production and Compensation Survey (2002
reports based on 2001 data and previous years’ reports). MGMA survey results for
cardiology practices are reported under non-invasive and invasive categories for all
geographic areas. For clarification purposes, invasive/interventional cardiologists perform
percutaneous transluminal angioplasty (PTA) procedures while non-invasive cardiologists
do not perform PTA procedures. Other classification wording is also used to categorize
cardiologists. For instance, cardiologists are also classified as invasive/non-interventional
versus interventionalists. In this categorization, invasive/non-interventional cardiologists
do not perform PTA procedures but do perform catheterizations, which technically is an
invasive procedure. Yet, another classification under cardiology is electrophysiologist, a
cardiologist who performs primarily electrophysiology procedures including implantable
cardioverter devices (ICDs), pacemakers, and cardiac ablations. The MGMA numbers for
all geographic areas aggregated are listed as combined (all categories) under the invasive
category. The noninvasive and invasive category data are listed for aggregated MGMA
results. Individual physicians for the case study are identified as interventional (I) if they
participated as part o f the interventionalist revenue center income-sharing or non
interventional (NI) if they did not participate in the interventional revenue center income
sharing. This classification is not absolute because some physicians classified as non
interventional also perform some interventional studies. For purposes o f this analysis, the
classification difference reflects the status of physician participation in the interventional
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revenue center income sharing. Electrophysiologists are identified as non-interventional
with an asterisk (NI)*. MGMA results are reported per full-time equivalent (FTE)
physician using the statistical median. MGMA results are also grouped non-invasive (NI)
or invasive (I) cardiologists. Comparative results are reported by group practice totals and
by individual (FTE) physician.
Table 21 shows a comparison of net income (labeled as compensation for the
MGMA survey) and production for the case-study cardiology group practice versus the
MGMA surveys. For case-study data, totals for net income and production per FTE are
presented in two formats. First, rows without an asterisk (*) reflect net income totals that
include contributions from physician-partners, employee physicians, on-call physicians,
and non-physician providers (physician assistants [PA] and nurse practitioners [NP]).
Rows with an asterisk (*) include all physician providers but factor-out contributions to
income and production from PAs and NPs.
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Table 21: Income and Production Comparisons for the Years 1997 Through 2001—
Case-Study Versus MGMA
Year 1997 1998 1999 2000 2001
Income
($)
Prod.($) Income
($)
Prod.($) Income
($)
Prod.($) Income
($)
Prod.($) Income
($)
Prod.($)
Case
Study
Phy. 1 (NI) 251,077 879,478 208,860 797,503 205,443 851,005 248,147 992,969 299,135 1,138,873
Phy. 2 (I) 544,328 1,794,540 444,685 1,543,765 367,387 1,477,954 411,340 1,360,560 54,533 163,173
Phy. 3 (NI) 453,855 1,746,517 365,236 1,423,012 312,675 1,356,699 349,960 1,498,067 297,929 1,334,970
Phy. 4 (I) 561,212 1,989,298 501,536 1,944,308 459,036 2,084,313 564,507 2,564,196 660,911 2,953,807
Phy. 5 (1) 604,907 2,104,104 515,960 2,016,861 481,063 2,051,656 574,881 2,361,352 582,113 2,397,387
Phy. 6 (NI)* 514,059 2,179,137 495,428 2,207,330 472,483 2,242,198 519,968 2,708,581 504,128 2,928,677
Phy. 7 (NI)* 509,303 1,915,954 495,432 2,456,088 462,867 2,291,425 526,507 2,572,828 502,026 2,526,431
Phy. 8 (1) 677,691 2,412,428 657,920 2,519,722 653,481 2,533,566 738,380 3,119,882 728,500 3,054,265
Phy. 9 (NI) 378,781 1,193,944 328,085 1,448,573 348,660 1,458,891 345,525 1,461,135 348,751 1,600,678
Phy. 10 (NI) 378,205 1,110,675 332,414 1,068,763 269,098 1,164,775 264,221 1,114,347 247,835 1,051,909
Phy. 11 (NI) 412,659 1,340,785 82,998 781,306 36,859 9,899 — — — —
Phy. 12 (NI) 523,941 1,723,612 456,550 1,657,858 409,308 1,430,930 433,680 1,599,491 365,631 1,591,747
Phy. 13 (NI) 511,192 1,785,696 441,750 1,549,041 374,861 1,326,825 358,983 1,466,851 366,521 1,579,039
Phy. 14 (NI) 503,690 1,785,967 429,549 1,726,035 472,401 1,891,857 497,988 2,100,421 448,294 2,054,494
Phy. 15 (NI) — 336,065 106,049 336,065 258,155 1,122,340 287,195 1,263,598 249,229 911,349
Phy. 16 (NI) — — . ___ — 59,211 251,630 199,590 798,494 237,703 1,022,521
Phy. 17 (NI)
— —
10,578 182,835 353,989 1,467,420 364,625 1,476,933 375,454 1,533,657
TOTALS 1997 1998 1999 2000 2001
Case S tudy
Net Income 6,536,297 5,837,737 6,054,328 6,743,118 6,440,228
Production 24,536,297 24,989,990 25,750,207 28,637,495 29,017,880
* Net Income 6,536,297 5,837,737 6,054,328 6,669,121 6,190,224
* Production 24,298,200 24,989,990 25,750,207 28,459,705 28,539,678
per FTE Phy. (15) (15) (16) (16) (16)
Net Income 435,753 389,182 378,396 421,445 402,514
Production 1,619,880 1,665,999 1,609,388 1,813,618
•per FTE Phy. (15) (15) (16) (16)
Net Income 435,753 389,182 378,396 416,820 386,889
Production 1,619,880 1,665,999 1,609388 1,778,732 1,783,730
"M G M A Survey
Compensation (Combined Geographic Areas)
Non-invasive 259,961 278,900 278,712 300,073 320,111
Invasive 326,537 350,000 340,010 365,894 410,300
Production (Combined Geographic Areas)
Non-invasive 889,068 907,341 1,029,822 1,074,378 1,204,105
Invasive 1,158,910 1,237,551 1,355,882 1,447,063 1,648,167
Note. Phy. = physician, (N I) = non-interventional, (I)= interventional. The number o f case-study physician FTEs are
defined based on M GM A criteria, mid-year m ovem ent o f em ployed physicians to partnership status, reduction in physician
partners’ hours, and best estim ates o f part-time physician contributions. Individual physician data were calculated primarily
from month-end reports, K.1 reports, and annualized estimates previously reported. Colum n totals do not equal the sum o f
physician individual colum ns’ data.
R ow totals without an asterisk (*) include receipts and production for em ployee physicians, on-call physicians, and non
physician providers (PA and NP). Row totals with an asterisk (*) include receipts and production for em ployee physicians
and on-call physicians, but receipts and production for physician assistants (PA ) and nurse practitioners (N P ) are factored-out
as non-physician provider data. A lso, PA s and N Ps are not included as FTE providers. PA and N P contributions are
discussed further in Chapter 5 in the Strategic L evel o f A nalysis section. Case-study data per FTE physician are reported as
the mean (average).
** M GM A data are reported as the median per FTE physician. According to the M G M A Survey instructions, an FTE
physician is defined by whatever number o f hours the practice considers to be the minim um number for a normal workweek.
A 40 hours or m ore w orkweek is defined as 1.0 FTE. Physician providers cannot total greater than 1.0 FTE.
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The following analysis utilizes net income and production data excluding PA and
NP contributions. Overall, the case study showed an average 11 percent decline in net
income per FTE physician over the period from 1997 to 2001. Net income decreased from
1997 to 1999, increased in 2000, and then decreased again in 2001. Part of the increase in
2000 is explained by the implementation of nuclear imaging studies in the office beginning
that year. Production numbers showed an average increase of 10 percent per FTE
physician over the same time period. Income and production contributions from Physician
Assistants (PA) and a Nurse Practitioners (NP) in 2000 and 2001 were factored-out in the
case-study totals to better focus on longitudinal comparisons for physician providers (only)
over time, particularly since there were no case-study PA and NP contributions in 1997
through 1999. Also, the 2002 MGMA survey summarizing yearly compensation and
production comparisons separates non-physician provider data into separate categories.
However, PA and NP receipts are important to include in overall analyses since PA and NP
receipts, production, and expenses are assigned to physicians based on internal group
income formula calculations. PA and NP production totaled $189,775 in 2000 and
$478,202 in 2001. PA and NP receipts totaled $73,997 in 2000 and $250,000 in 2001.
From the case-study data, it appears that income decreased over the time period but
production increased. Thus, the case-study data suggest some merit to the argument that
physicians are working harder with little or no increase in income.
The aggregated MGMA numbers show a somewhat different trend for
compensation. First, the MGMA data reflect the median rather than the mean (average).
Also, the invasive numbers are used for comparison since those are combined numbers and
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are most similar to the combined results presented for the case-study data. Over the period
from 1997 to 2001, compensation increased 26 percent. Production increased 42 percent
over the same period. Again, these numbers suggest that physicians are working harder to
maintain their income.
The differences in numbers between the case study and MGMA warrant
comments. First, the case study reported means (averages) per FTE physician while the
MGMA survey results utilized the statistical median. Second, the aggregated MGMA
numbers are numbers from MGMA member medical groups (only) throughout the United
States. Thus, regional differences in reimbursement, managed care penetration, costs of
living, and possible differences in practice patterns make valid comparisons difficult. The
contributions from employed physicians, on-call physicians, and non-physician providers
may not be accounted for uniformly between comparison data. In addition, including
employed physician and on-call physician calculations in net income estimates may create
data inaccuracies due to internal group formulas that distribute income to partners based on
overall employed physician costs (receipts generated minus salaries paid, or vice-versa).
Also, aggregated MGMA data reflect results from cardiology groups o f all sizes. An
additional level o f comparison was performed utilizing MGMA data from the MGMA
Western Section—the part of the country that most closely approximates the case-study
geographic locality. Table 22 presents this additional comparison. Cardiologist categories
from this MGMA data set were divided into three categories instead o f the two categories
presented with the aggregated data. The categories are non-invasive, invasive, and
invasive/interventional. Data are presented for 1998 through 2001. Data for 1997 in this
format were not obtained.
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Table 22: Income and Production Comparisons— Case Study Versus M GM A—
Additional Data
Year 1997 1998 1999 2000 2001
Case Study
*per FTE Phy. (15) (15) (16) (16) (16)
N et Income 435,753 389,182 378,396 416,820 386,889
Production 1,619,880 1,665,999 1,609,388 1,778,732 1,783,730
MGMA Survey
Combined Geographic Areas
Compensation
N on-invasive 259,961 278,900 278,712 300,073 320,111
Invasive 326,537 350,000 340,010 365,894 410,300
Production
N on-invasive 889,068 907,341 1,029,822 1,074,378 1,204,105
Invasive 1,158,910 1,237,551 1,355,882 1,447,063 1,648,167
Western Section Only
Compensation
N on-invasive — 237,471 220,197 243,834 254,323
Invasive — 282,113 245,709 254,489 284,457
Inv/Interventional — 329,361 315,939 348,775 368,008
Production
Non-invasive — 728,373 610,655 521,950 751,628
Invasive — 996,293 799,428 772,355 1,400,177
Inv/Interventional
— —
929,704 1,055,202 1,291,945
This level of comparison provides an additional insight with respect to the
comparison of income and production numbers between the case study and the MGMA
surveys. The case study numbers for income more closely approximate the aggregated
MGMA survey results than the regional results. However, the regional data do
approximate some of the case-study physician income from Table 21 when income is
assessed on an individual physician basis. One possible scenario is that the case-study
cardiology group is performing above the median in the region. Another consideration is
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the validity o f survey data for purposes of bench-marking. The implication here is that the
data provide interesting comparisons but should be used with caution in determining if the
group practice or individual physicians are inordinately above or below national or
regional benchmarks, particularly if the benchmarks are derived from non-randomized user
surveys or non-validated statistical data. The data do provide useful information regarding
national and regional trends. The MGMA numbers from both the aggregated national data
and the regional data show year to year increases in compensation, but relatively greater
percentage increases in production over the time period. This correlates with Mr. Gans’
observations presented previously.
One final caveat is noted regarding the data. For production, data are based on
charges per procedure. Charges are not uniform between group practices or between
regions. This adds to the difficulty in comparing production data. In the case study, there
was a price (charge) increase for specific procedures during the survey period. Also, the
implementation o f nuclear imaging in the office had an impact on the calculation of
production numbers (as well as revenue). Therefore, production (charge) comparisons
were not uniform over the five-year period. Also, comparisons were based on nominal
189
dollar terms, not real (or constant dollar) terms.
To summarize, both the case-study data and MGMA data indicate that
cardiologists’ production has increased over the past five years, although the change in
case-study production was much less pronounced than the changes seen in the MGMA
The nominal dollar price o f an item is its absolute (or current) price over time without adjusting for
inflation. The real (or constant) dollar price takes into account the price relative to an aggregate measure such
as the Consumer Price Index (CPI) compared to some base year. See Pindyck and Rubinfeld (1995), p. 4.
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surveys. The average net income for the case study reflects combined averages for non-
invasive and interventional cardiologists. The national MGMA numbers depict non-
invasive cardiologists and invasive cardiologists, with the invasive category defined by
MGMA as combined (all categories). The average net income from the case analysis more
closely approximated the MGMA national invasive category data. In this comparison, the
case-study net income numbers were greater than the MGMA number in every year except
2001. Production numbers were also higher for the case study, but they showed the same
constant upward trend over the five-year period. The MGMA Western Section numbers
were lower across the board compared to the case-study data and the MGMA national data.
As indicated above, one possible explanation for this difference is regional variations in
compensation for specialists. The 2001 MGMA geographic sectional data demonstrate this
point. Table 23 lists MGMA data from four geographic sections and four categories of
cardiologists— electrophysiologists, invasive cardiologists, invasive/interventional
cardiologists, and non-invasive cardiologists. Note that in all geographic sections and
categories except for the Midwest Section compensation for electrophysiologists, median
compensation is higher in comparison to the Western Section. Factors that influence levels
of compensation include group type (multi-specialty versus single-specialty), capitation
revenue percentages in the practice, geographic payment variations, and individual practice
differences. 1 9 0 More in-depth investigation is needed to comment on specific explanations
for the differences between sections.
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MGMA “Physician Compensation and Production Survey: 2002 Report Based on 2001 Data.”
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Table 23: Physician M edian Compensation by Geographic Section—
M GM A 2001 Survey Data
Section Eastern M idwest Southern W estern
Electrophysiology $413,755 $293,719 $466,756 $310,454
Invasive $366,102 $350,618 $410,783 $284,457
Inv./Interventional $440,474 $431,467 $506,170 $368,008
N on-invasive $309,807 $332,204 $373,624 $254,323
Time-Series Graph 2A (Figure 3) displays the relationship between income and
production from the case-study data and MGMA surveys for the invasive cardiology
category. Production lines for both data sets generally trend upward, while income lines
are generally flat, ranging year-to-year from small decreases to small increases depending
on the data set. Time-Series Graph 2B (Figure 4) displays the same data in a trend line to
demonstrate these findings. Graph 3A (Figure 5) displays the income and production
relationships between the case study and MGMA surveys, with time on the horizontal axis.
Graph 3B (Figure 6 ) shows the same comparison, but with category groupings displayed
on the horizontal axis instead of time. Note the more consistent upward trends with the
MGMA data compared with the case-study data.
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$2,000,000
$1,800,000
$1,600,000
$1,400,000
$ 1,200,000
$1,000,000
$800,000
1,000
$400,000
$200,000
2000 2001 1997 1998 1999
$453,753 $389,182 $378,396 $416,820 $386,889 Case-Study Income
$1,778,732 $1,783,730 $1,619,880 $1,665,! Case-Study Production
$326,537 $350,000 $340,010 $410,300 $365,894 MGMA Income (Invasive)
$1,447,063 $1,648,167 $1,158,910 $1,237,551 $1,355,882 MGMA Production (Invasive)
Year
Figure 3. Time-Series Graph 2A. Relationship between income and production
from the case-study data and MGMA surveys for the invasive cardiology category
for the years 1997 to 2001.
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$1,800,000
$1,600,000
$1,400,000
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
- ♦ —Case-Study income
— Case-Study Production
— a—MGMA Income (Invasive)
MGMA Production (Invasive)
$200,000
$ - - I , - - - - - - - - - - ,- - - - - - - - - - ,- - - - - - - - - , - - - - - - - - - - ,- - - - - - - - - - ,- - - - - - - - - - ,- - - - - - - - - , - - - - - - - - - - ,- - - - - - - - -
1996.5 1997 1997.5 1998 1998.5 1999 1999.5 2000 2000.5 2001 2001.5
Year
Figure 4. Time-Series Graph 2B. Trend lines for 1997 through 2001 showing the
relationship between income and production from the case-study data and MGMA
surveys for the invasive cardiology category.
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$2,000,000
$1,800,000
$1,600,000
$1,400,000
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
$-
i
1997 1998
t!
1999
1
2000 2001
□Case-Study income $453,753 3,182 $378,396 $416,820 $386,889
□Case-Study Production $1,619,880 $1,665,999 $1,609,388 $1,778,732 $1,783,730
□MGMA Income (Invasive) $326,537 $350,000 $340,010 $365,894 $410,300
□ MGMA Production (Invasive) $1,158,910 $1,237,551 $1,355,882 $1,447,063 $1,648,167
Figure 5. Graph 3A. Case study vs. MGMA surveys for the years 1997 through
2001, showing dollars o f income and production for the invasive cardiology
category.
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$2,000,000
$1,800,000
$1,600,000
$1,400,000
| $ 1,200,000
0
3
■o
1 $1,000,000
* 5
E
8 $800,000
$600,000
$400,000
$200,000
m
Case-Study Income
M3
Case-Study Production MGMA Income (Invasive) MGMA Production (Invasive)
□ 1997 $453,753 $1,619,880 $326,537 $1,158,910
□ 1998 $389,182 $1,665,999 $350,000 $1,237,551
$378,396 $1,609,388 $340,010 $1,355,882
12000 $416,820 $1,778,732 $365,894 $1,447,063
$386,889 $1,783,730 $410,300 $1,648,167
Figure 6. Graph 3B. Income and production data for the case study and MGMA
surveys for the years 1997 through 2001 in the invasive cardiology category.
Further statistical analyses were performed on the case-study data and MGMA
data. First, simple linear regression was used to predict year 2002 income and production.
Time was designated as the independent variable and matched with income and production
as separately calculated dependent variables. Regression equations for case-study and
MGMA survey income and production data are presented in Table 24.
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Table 24: Linear Regression Analysis
MGMA Survey
Income
Y-Intercept
Slope
SEylx
303,522
18,342
16,425
0.90
0.81
Equation: Y = 303,522 + 18,342X
Year 2002 Estimate: $413,574
* Range: $378,556 to $448,592
Production
Y-Intercept
Slope
SEylx
r
r2
1,013,107
118,803
38,622
0.98
0.97
Equation: Y = 1,013,107 + 118,803X
Year 2002 Estimate: $1,725,925
* Range: $1,643,583 to $1,808,267
Case Study
Income
Y-Intercept
Slope
SEylx
436,835
-10,609
29,872
-0.54
0.30
Equation: Y = 436,835 - 10,609X
Year 2002 Estimate: $373,181
* Range: $309,494 to $436,868
Production
Y-Intercept
Slope
SEylx
r
r2
1,559,416
44,043
55,497
0.82
0.68
Equation: Y = 1,559,416 + 44,043X
Year 2002 Estimate: $1,823,674
* Range: $1,705,354 to $1,941,994
* Range is calculated for 95% confidence limits ± the 2002 estimate with 4 degrees o f freedom and t value of
2.132. For a summary o f the steps for this calculation, see Meier, Kenneth, and Brudney, Jeffrey (1993),
Applied Statistics fo r Public Administration (3r d ed.) (Belmont, CA: Wadsworth Publishing Co.), p. 331.
The regression estimates per FTE physician in 2002 (year 6 ) for the case study
include $373,181 for income and $1,823,674 for production. For the MGMA data, the
estimated income per FTE physician for 2002 is $413,574 and $1,725,925 for production.
Due to the very small sample size (n = 5), obvious limitations are present in the data
analysis. Also, the calculations do not account for the 5.4 percent decrease in Medicare
reimbursement in 2002. However, the estimates do appear to be in line with observed
income and production dollar ranges and movement trends, in general. The case-study
coefficient of determination (r2 ) for income indicates a moderately weak relationship,
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primarily due to the up and down movement of income over the five-year period. MGMA
coefficients of determination indicate a strong relationship over the same time period due
to constant increases in compensation from year to year. Production coefficients of
determination indicate a moderately strong relationship for the case study and stronger
relationship for the MGMA data due to the consistent increases in production over the five-
year period.
Actual year-end income and production data for 2002 for the case study were
tabulated as an additional comparison to check against the regression estimates. Case
study annualized figures for income and production compared to the MGMA numbers and
regression estimates are listed in Table 25. Interestingly, the data comparisons appear to
be within estimated ranges, and, thus may be potentially useful for projection purposes.
The 2002 case-study figures amplify the argument that income is decreasing and
production is increasing. However, analyses should be undertaken with the understanding
that the comparison data are not statistically validated for formal inferences to larger
populations.
Table 25: Year 2002 Comparisons— Actual Data Versus Regression Estimates
Income Production
Case Study Year-End Actual
Case Study Regression Estimate
MGMA Regression Estimate
$366,886
$373,181
$413,574
$1,859,382 PA/NP receipts/production not included
$1,823,674
$1,725,925
Additional comments are warranted regarding this data analysis. Figures for 2002
were taken from month-end reports. Employed physicians were incorporated into the
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estimates for number of FTE providers, but PAs and NPs were factored out as non
physician providers. Thus, best estimates for number of FTE physicians were utilized in
year-to-year calculations. Finally, the lower estimates for income in 2002 compared to the
regression estimate may partially reflect the 5.4% decrease in Medicare reimbursement for
2002.
This particular analysis was utilized on the institutional level because it was
deemed appropriate to assess the impacts of the legislation on the industry as a whole in
comparison to an individual organizational. In the next section, the analysis focuses on the
organizational level under the headings Technological Innovation, Organizational
Structure, and Human Resource Management.
6.3 O r g a n iz a t io n a l L e v e l o f A n a l y s is
Fox-Wolfgramm et al. (1998) describe the organizational level of response to a
strategic issue as that level where structures and roles change—where adaptations occurred
at the organizational level in response to the regulatory requirements of HIPAA and BBA.
In this section, the three variables from Leavitt’s Diamond (modified for this analysis) are
utilized as section subheadings to assess organizational change.
6.3.1 T echnological Innovation
With the potential cost impacts on medical groups generated by the HIPAA
legislation, technological innovation plays a particularly unique role. For instance, it was
suggested from the interview responses that the implementation of EMR provides the
opportunity for developing systems that improve access to patient information and increase
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clinical-services charge capture, resulting in more efficient operations, higher organization
revenue generation, and enhanced processes for delivery of patient care. The potential cost
impacts of the HIPAA legislation are addressed here. The overall cost implications of the
HIPAA regulations were discussed in Chapter 2.
The cost implications of HIPAA can be addressed in terms of implementation costs
and the on-going costs of compliance. As previously suggested, HIPAA compliance is as
much a policy and procedure issue as it is a technological issue. Thus, the implementation
of devices such as EMR need concurrent administrative oversight to develop and enforce
the associated privacy, transactions and code sets, and security regulatory requirements.
In the August 17, 2000, Federal Register, HHS provided detailed implementation
cost estimates per health care provider-type primarily for needed software upgrades to
accommodate compliance requirements for electronic transmission of claims forms.
Examples of projected costs are listed below:
HHS also pointed out that after the first year of implementation, claims processed
electronically instead of manually could result in savings of approximately $1.49 per claim
in the case of physician groups. Thus, for every 1000 claims sent electronically instead of
by manual processing, the savings could almost equal the cost of the software upgrade for
a solo or small group practice, if the estimate is correct.
In referring back to the interview with Binda Mangat, he addressed certain costs
that are potentially associated with HIPAA, particularly related to computer system
Large Hospital Upgrades:
Physician Solo or Small Group Practices:
Physician Groups (3+) with Computers:
$50,000 to $500,000
$1,500
$4,000
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upgrades and development of wide-area networks. For example, for installation of firewall
software to provide for Internet security, he estimated that the cost is between $600 to $800
per personal computer (PC). To recruit and hire an in-house network person who is
“Cisco” certified, the salary cost is between $60,000 to $75,000 per year.
The case-study group practice has been working with an information technology
(IT) vendor over the past 18 months in the development of an infrastructure with wide-area
network (WAN) capabilities. Technically, the infrastructure utilizes a frame-relay protocol
and T 1 digital service line, allowing for high-speed transmission of information between
the multiple locations of the organization. A “firewall” allows for secured information
transmitted via the Internet. Also, software is incorporated to provide for computer virus
protection. This project will potentially enhance the capabilities of innovative technologies
such as EMR, Internet utilization, and wireless communications, while ultimately meeting
the organizational goals of improving efficiencies in the delivery of patient care and
increasing revenue capture.
In developing this infrastructure, the case-study group practice needed to purchase
upgrades to in-house computer equipment, intra-office communication devices, and
additional telecommunication services. A sample of some hardware and IT services costs
are provided below:
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Time Frame: March 2001 to December 2002
Total Costs (YTD)
Computers/WAN
Service
Clinical Research Section (Hardware/Services)
$119,000 (51%)
$ 70,000 (31%)
$ 41,000 (18%)
$230,000
(Remaining Balance on Project Infrastructure) $ 34,000
In assessing the costs of developing this infrastructure, it is obvious that costs add
up over time. The initial quote for the infrastructure itself was $100,000 to $110,000.
However, after incrementally upgrading computer equipment throughout the organization
and addressing other service needs as they were presented, it is evident that the
implementation of innovative technology can be a very costly endeavor. Is there a return
on investment? One physician member of the case-study group recently attended a
medical conference and talked with a representative from a large group practice that
recently invested approximately $1 million dollars into a network and EMR system. He
reported that the group representative communicated to him that the organization realized a
payback on the investment in 13 months. The payback is realized in the improvement in
revenue charge capture due to the computer software capabilities of the EMR system.
Also, the access to patient information and other capabilities provided with EMR systems
enhance the patient care process.
What are the advantages of EMR? One advantage relates to access of patient
medical information. Current EMR systems facilitate organization of patient medical
record information into specific fields that are accessed through menus on the computer
screen. Information access is much more time-efficient compared to the process of
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researching and retrieving patient paper-based records. One hypothetical scenario
amplifies this efficiency. For example, if the organization has invested into an EMR
system with connections to PCs in patient exam rooms, the physician has immediate access
to the computerized patient record. During a patient encounter, the physician can access a
list of all patient medications as well as information on any previous adverse drug
reactions. The physician can update records by entering changes or notes into specific
screens. If the EMR includes a voice-recognition system, immediately following the
patient visit or a time more convenient time, the physician can dictate the patient visit
report directly into a file, that is subsequently processed and confirmed by the physician
through whatever approved electronic signature procedures are in place. This process
results in a potentially huge time savings for the physician and the organization. EMR
significantly cuts down the processing time of conventional procedures in terms of
accessing and transporting patient charts, dictating reports, delivering dictated tapes to
transcription for report typing, obtaining final physician signatures, returning of reports to
medical records for processing and filing, and additional report processing and mailing of
reports to outside referring physicians. Problems with lost dictation tapes, misfiled lab
information, illegible writing, and other manual processing steps are minimized with an
effectively implemented EMR.
There are additional advantages with a truly integrated EMR. With multiple office
sites, the same patient information can be accessed at any office, reducing the need for
constantly transporting charts back and forth. In a completely “paperless” office, the need
to transport charts between offices is essentially eliminated. This is particularly applicable
for the case-study group practice. Physicians sometimes see the same patient at different
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offices due to physician scheduling availability and the need of the patient to be seen
within a particular time frame. Also, physicians with computers at home can access patient
information at any time with current networked EMR systems. This may be particularly
helpful to a physician on call, for instance, for reviewing the records of an unfamiliar
patient. Thus, the EMR system contributes to enhanced patient care delivery.
The use of the Internet is also enhanced by computerized systems. One application
is the patient scheduling process. In a referral-based practice such as the case-study
organization, referring physician office requests to schedule patients are enhanced by
computer access screens that provide first-available appointment capabilities. In order to
request and confirm patient referrals and authorizations for treatment, many managed care
plans and other payer entities provide Internet access for this level of patient visit
processing. The time saved with this process versus the time spent with phone calls going
back and forth between offices is an obvious advantage for a physician practice with these
computerized capabilities.
There are also some concerns with EMRs. First, and foremost, of course, is the
cost of purchasing and implementing an EMR system, particularly if the goal is to move to
an essentially “paperless” office. For the case-study practice, for example, a software
upgrade by itself could cost anywhere from $25,000 to $75,000 or more, depending on the
level of upgrade. Ongoing maintenance costs are also a concern. The case-study practice
currently has a computerized system, but not a formal EMR. Maintenance costs for
software only in this 17-physician practice are $15,000 annually. The hardware
maintenance contract was discontinued last year, but that cost was an additional $8,500
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annually. Hardware maintenance is now provided on a time-and-materials basis by the IT
company contracted to install the WAN infrastructure.
Another issue of concern is the time and cost of transferring information from the
current paper-based system to the EMR. First, a decision is required whether to attempt to
transfer all information to the new system, particularly for current patients. An alternative
consideration is to institute an implementation date to transition all patient records or
pertinent parts of patient records into the new system. This could be accomplished with
patient procedures and visits beginning with the implementation date. As patients are
scheduled, staff are trained to enter the entire chart or pertinent information from the
patient chart for that visit or procedure via the use of a computer document scanning
system. Another consideration is to hire outside help or an outside service to perform the
initial document-scanning project. The process should include some type o f notation in the
computer record of the date that information was transferred to the new file. A computer
backup mechanism should also be instituted, with appropriate storage policies and
procedures for computer backup media. If appropriately implemented, over time, the
storage costs for paper records can be reduced or eliminated.
There are several medical software management systems utilized in physician
office practices throughout the United States. Many of these systems have now developed
upgrades or new programs that incorporate EMR capabilities with additional integrated
functions. The case-study practice currently utilizes a UNIX-based medical office
management system with integrated billing and scheduling capabilities, but without an
EMR package. With the development of the WAN, the case-study practice is assessing the
purchase of an EMR system as the next step. With network and EMR capabilities, the
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practice can combine clinical and operational functions in an integrated system of
communication and information access. Additional capabilities will potentially be
available to enhance clinical care and operational processes. One capability is the
prescription-writing system. The system automates the process of writing and tracking
prescriptions. The physician can access a screen in the computer that mimics a
prescription pad. The physician selects the drugs, pharmacy, and SIG code, and then can
print, phone or electronically send the prescription to the pharmacy. Another program
capability is the system’s wireless hand-held device utilization that provides access to
patient information via a real-time connection to the office EMR. The physician can view
his or her daily schedule, progress notes, and patient medications in addition to writing and
sending prescriptions, reviewing lab results, or dictating patient notes into the special
dictation file. Again, all of the capabilities provide efficiencies to the physician in terms of
information access and processing and time savings.
The upgrade that is being considered for purchase by the group has two alternative
platforms. One is UNIX-based and the other is Windows-based. Given the current UNIX-
based system, it would appear that conversion to the upgrade would entail less costs and
fewer project hurdles than a conversion to a Windows-based system. However, the
Windows-based program is the newer program for this company, with software program
development and Beta-testing completed. Although the medical software company has
indicated that the UNIX-based upgrade will not be discontinued any time soon, the long
term consideration for the practice may be to look to the future and convert to the newer
program.
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6.3.2 Organizational Structure
Organizational structure considerations typically focus on lines of authority,
mechanisms of communication and coordination, and levels of centralization versus
decentralization. The structure of the case-study group practice is discussed here.
The group is a 17-physician general partnership. All current physicians are
partners, meaning that they share in the revenue and expenses defined by a formula in the
partnership agreement. New physicians recruited to the practice are initially hired as
employees of the partnership and are not eligible for partnership status until after the first
or second year of employment and confirmed through a vote of the partners. The group
was formed in 1996 as the result of merger between an 11-physician cardiology group and
a 5-physician cardiology group. Technically, the medical partnership is an umbrella
partnership that includes the two initial medical partnerships. There is a separate leasing
partnership for medical equipment and assets that partners must buy into based on a
formula calculated based on the current total asset value in the leasing partnership. There
are three medical building partnerships that are optional buy-ins by partners. A fourth
building partnership is owned by an outside limited liability entity and is also an optional
physician investment for a new medical office to be opened within the next 1 2 months (to
be discussed in the next section).
The general partnership is the highest level decision-making body o f the
organization. An executive committee is the second level o f decision-making authority
and consists o f five physicians. The executive committee is authorized to make
operational decisions and organizational purchases that do not exceed $50,000. The
organization’s non-physician management team includes a practice administrator, an
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assistant administrator, an independently contracted financial advisor, a billing office
manager, four clinical office managers, and work-area supervisors at the largest clinical
office in medical records, the nursing department, and the echocardiogram lab. The
organization has four clinical offices that provide a presence for delivery of cardiology
services in three strategic geographic areas. The new medical office will establish an
additional geographic area presence. A fifth office is utilized for medical billing services,
transcription services, and administrative services.
The organization combines centralized and decentralized mechanisms for delivery
of clinical services and for coordination and control on the operational level. The presence
of clinical offices in four (soon to be five) geographic areas has been a response to
changing economic, regulatory, and competitive pressures over time. The presence in
multiple areas has provided additional referral sources and has established the group’s
reputation over a greater geographic reach. Each clinical office maintains a level of
autonomy for purchasing supplies and equipment, with oversight by the physicians who
practice at the respective locations. The local office managers oversee operations and staff
performance, and work closely with the Assistant Administrator regarding human resource
management concerns.
Each clinical office is connected to the main scheduling and billing computer
system, thus maintaining access to the centralized patient database. This is important
because several physicians rotate between clinical offices, and some patients are seen at
more than one o f the offices. For example, a patient seen by a physician at a smaller
satellite office m ay need a nuclear im aging procedure, which is only performed at the
largest clinical office. The patient can be scheduled in the computer at the time of the visit
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for the nuclear scan, and the scheduled test is automatically computer accessible by both
clinical offices and the billing department. The office staff scheduling the procedure must
assure that the necessary referrals and insurance authorizations are obtained for the patient
procedure. Inter-office (and inter-departmental) communication is important to assure that
patient scheduling is completed appropriately. Phone calls to appropriate staff (if required)
and appropriate entries into the system are integral parts of the process. Thus, both the
system of clinical service delivery and the system of communication on the level of office
operations involve both centralized and decentralized components.
Physician call schedules are more decentralized. The reason is due to the large
distances between geographic coverage and physician numbers. As a result, the north end
of the call area is rotated between the same three physicians and other physicians in that
area. The southern area call is covered by another three physicians who rotate between that
area and the largest clinical office area. The electrophysiologists and interventionalists
have separate call schedules primarily in the central area.
Organizational change at the structural level in response to the HIPAA and BBA
legislative mandates is difficult to assess in the case study in terms of a short time-frame
analysis. Over longer time periods, major changes such as the merger have taken place.
Some structural changes have been considered. One proposal was to consolidate all
imaging and procedural services— including nuclear imaging, echocardiography, and stress
testing— at a single, centralized location. This would require either purchasing more space
or changing an existing office into a central imaging lab. Actually, another cardiology
practice in the region did just that, and also included a full laboratory service at the central
location. The rationale was to make efficient use of office space, staff, and equipment.
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Also, the more expensive equipment such as echo machines would not need to be
purchased for every office, particularly since a new office will be opened within a year.
However, the argument that providing echocardiogram and treadmill services at the
geographic location convenient to the patients has, so far, prevailed. Also, required
physician availability during procedures at a centralized office would require readjusting
physicians’ schedules and, depending on the central office location, could increase their
distance from the hospital, making it inefficient to go back and forth to see patients
between the office and the hospital.
Another major structural change being seriously considered is the movement from
a partnership to a corporate structure. This change has actually been considered for years,
but never acted upon. However, there is now a significant push from the group practice’s
legal advisor to incorporate the practice. The primary reason for moving to a corporate
form is to provide better protection for individual physicians under the “corporate veil” for
unforeseen catastrophic events or excessively huge malpractice awards that the group
would be liable for. Under the partnership structure, all partners and the practice assets
could be equally at risk if a major lawsuit was brought against the practice. The corporate
form would provide some protections for physicians individually.
The group as a whole has discussed decreased revenue and increased cost issues
and how to address those issues at the organizational level. One particular that has been
discussed frequently over time is staff costs. The proposals to address this issue have
usually focused on cutting staff and/or consolidating positions. This question was
addressed both in the telephone interviews and in Questions number 8 and 11 on the case-
study cardiologist survey. Disagreement was noted in the responses from both surveys.
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For instance, on the case study survey, the respondents were split in their agreement and
disagreement on Question 8 regarding consolidations occurring, but were more in
agreement regarding consolidations occurring on Question 11. The reality in the case-
study situation is that immediate, large-scale staff cuts and position consolidations are
unlikely to occur at this time. If this were to occur, major operational disruptions would
most likely be the result. However, staffing is being monitored closely. Also, some
consolidation of positions through attrition has already been accomplished recently at the
administrative office. In addition, some contracting-out o f services such as transcription
has occurred. Thus, it is evident that any near-term consolidations are more likely to occur
in the billing, clerical, and transcription areas than in the clinical areas where staff are more
directly involved in direct day-to-day patient care activities. Dr. Sharma implied this point
during his telephone interview, particularly in reference to contracting out for billing
services.
6.3.3 Human Resource Management
The third area under the organizational level o f analysis focuses on human
resource management. The effective oversight and management of staff performance is an
important component contributing to organizational effectiveness. Hiring and maintaining
competent staff is crucial for continuity and quality of patient care services.
For the case-study cardiology practice, the Assistant Administrator functions as the
primary manager of human resource issues. The organization actually contracts with a
human resource leasing company, which processes employee payroll, negotiates health
benefits packages, and provides labor law guidance. The Assistant Administrator works
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closely with the company in implementing these functions within the organization. When
personnel disciplinary action issues arise, the Assistant Administrator interacts with
representatives from the employee leasing company to assure that appropriate processes
are followed in correcting performance or discipline problems and that processes are in
compliance with applicable state and federal labor laws. The Administrator assists the
Assistant Administrator when required in areas of performance appraisal and staffing
needs.
The staff performance appraisal system functions to assure that employees are
properly trained, developed, and monitored in their job performance. New staff are hired
with a 90-day probationary period. Successful completion o f the probationary period is
determined by input from physicians, area supervisors, the Assistant Administrator, and the
Administrator (if warranted). The appraisal system focuses on areas o f performance
including work quality, work quantity, job knowledge, job skills, professionalism,
resourcefulness, and workplace policy compliance. Performance reviews occur at the 90-
day period and then on an annual basis. Interim reviews may be given to employees for
circumstances such as job promotions or for disciplinary action. Salary adjustments are
tied to performance and given annually (unless a salary freeze is in place). Annual salary
or other salary adjustments are contingent on physician approvals and executive committee
recommendations to the general partnership. Since 1997, salary adjustment caps have
ranged from 3% to 5% annually based on performance. In 2002, an employee could
receive from 0% to a 5% salary adjustment based on his or her performance review rating.
As Leavitt (1965) noted in his research, the focus is on monitoring and changing human
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behavior in order to impact changes in task performance, and to also promote changes
toward human growth and fulfillment.
The organization’s benefits package includes full health and dental premium
coverage for the employee. Spousal and dependents coverage payment is the responsibility
o f the employee. A $25,000 life insurance coverage is also provided. Employees earn two
weeks of vacation and one week of sick leave per year after becoming regular status
employees. At five years of employment, the employee earns three weeks of vacation per
year. At ten years, the employee earns four weeks of vacation time. Employees must work
30 hours per week to be eligible for benefits.
The effective utilization of staff is the prime consideration on this assessment
level. The ideal situation is one in which staff are well-trained and competent to cover in
multiple work areas. The reasoning behind this approach is that employees call in sick, go
on vacation, and move to other jobs or other areas. Recruiting and hiring new staff to take
over the duties o f an experienced worker usually involve operational disruptions.
Therefore, if there are transition periods in which new employees are training in a new
position, the best case scenario is to have as many trainers and staff as possible that can
cross-cover in different work areas. This typically works more effectively in smaller
medical offices than in larger medical offices. The reason why is that larger offices usually
have more work areas and more specialized staff needs. In a smaller office, for example,
there may be only one or two medical assistants who perform all of the front office, back
office, and billing functions. In the largest office in the case study, the office has a medical
records department, front office receptionists, noninvasive cardiology technicians,
echocardiography technologists, and nurses. Cross-coverage between work areas is much
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more difficult. For one thing, nurses have specialized training and certifications that are
not available for other job classes. Echocardiographers also possess specialized job skills
that require extensive training. However, the concept of cross-training and cross-coverage
does exist within work areas and between the less specialized work areas such as medical
records, front office, and back office. For instance, noninvasive techs in the back office are
cross-trained to perform treadmills, EKGs, and to room patients. A more specialized
procedure, Holter monitor scanning, is cross-covered by three noninvasive technicians.
Echo techs can also perform back office duties and treadmills if needed. Some medical
assistants can cross-cover for protime processing in the nurses’ station and, in some
instances cover receptionist duties at the front desk. In addition, several employees
provide cross-coverage at different clinical offices. This level o f flexibility in employee
utilization serves two purposes. First, it assures coverage in work areas or offices during
periods o f short-staffing. Second, it provides employees with versatile job skills, and,
hopefully, enhances employee job satisfaction. The application of this concept has
increased particularly over the past two to three years in the case-study medical group
practice. One apparent reason for this was due to job market dynamics. During the years
of the booming economy (the mid-to-late-1990s through 2000), there was a tight job
market in the region. It was very difficult to recruit and hire good employees within the
salary structures that the organization was offering. The organization was forced, in many
instances, to adjust current wages upward in certain job categories in order to be
competitive and to recruit good people. In the interim, current staff, in some instances,
took on new responsibilities, and new staff were cross-trained to be able to cover more
tasks or more areas. Thus, the smaller-office concept of cross coverage was effectively
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applied, to an extent, to the larger clinical office and throughout the organization. The job
market is somewhat different now, given the recent downturn in the economy. But the
cross-coverage concept is still the approach that will continue in the organization, at least
at the task level within work areas and between work areas in certain situations.
Adaptive change also occurred over time in the organizational mindset pertaining
to flexible work schedules. A majority of case-study office employees are female, and
many o f them have children. There has been an increase in requests to work alternative
work schedules such as four 10-hour days per week, or other part-time hours. The
organization has granted many requests for alternative or reduced hours over the past three
years, particularly to accommodate working mothers, as long as schedules were devised to
assure needed staff coverage levels. Prime examples are in the nursing and
echocardiography technologist categories. These were two of the job classes that were
very difficult to recruit for during times of staff turnover. Thus, the organization was
forced to provide additional incentives and higher pay to retain current staff and hire new
people who possessed the needed skills and levels o f experience to perform the duties at
the levels of competency required by the organization.
The issue of increasing staff costs is illustrated in Table 26. Staff costs as a
percentage o f total expenses are presented per FTE physician from 1997 through 2001 and
compared with MGMA data.
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Table 26: Practice Costs Comparisons— Case Study Versus MGMA
Y ear 1997 1998 1999 2000 2001
(Costs per FTE Physician)
C ase Study
Staff Costs $154,914 $168,262 $171,914 $192,252 $209,825
Total Exp. $305,493 $335,804 $331,035 $348,060 $371,682
*Total Exp. $276,154 $302,101 $305,336 $330,738 $341,994
% o f Total 50.7% 50.1% 51.9% 55.2% 57.5%
*% o f Total 56.1% 55.7% 56.3% 58.1% 62.4%
# o f Staff 4.37 4.90 4.66 5.00 4.91
M G M A Surveys
Staff Costs $143,742 $157,923 $178,016 $195,591 $222,295
Total Exp. $272,879 $301,353 $336,098 $377,644 $423,255
% o f Total 52.7% 52.4% 52.9% 51.8% 52.5%
# o f Staff 4.31 4.21 4.60 5.03 (4.99) 5.25 (5.03)
* Total practices expenses after em ployee M D, PA, and NP costs are factored out.
( ) for 2000 and 2001 equal total em ployed staff versus the listed total support staff.
Table 26 presents practice costs per FTE physician. Case-study staff costs include
employee support staff. Total expenses are listed in two formats. One format includes
employee physician, PA and NP costs, and the second format factors out those costs. The
first format was presented to account for all staff and employee provider costs. The second
format was used to more accurately compare support staff and total operating costs with
MGMA survey formats. Using the second case-study format, Table 26 shows that staff
costs per FTE physician for the case study increased by approximately 35 percent from
1997 to 2001. Staff costs from the MGMA survey demonstrated an even greater
percentage increase over the same period (55 percent). Interestingly, the second case-study
format showed a closer comparison with MGMA in 1997 and 1998, but the first case-study
format numbers were more comparable to MGMA numbers in 1999 through 2001.
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Overall, the argument that staff costs and total practice expenses are increasing is
reinforced by both the case-study data and MGMA data. Time-Series Graph 4 (Figure 7)
illustrates the upward trend for both staff costs and total practice expenses.
$450,000
$400,000
$350,000
$300,000
8. $250,000
$200,000
$150,000
$ 100,000
$50,000
1997 1998 1999 2001 2000
Year
— ♦— Case Study Staff Costs —o— MGMA Staff Costs —&— Case Study Total Expenses
—o— Case Study Tot. Exp.(without) —* — MGMA Total Expenses
Figure 7. Tim e-Series Graph 4. S ta ff and total practice expenses.
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Another point that is reinforced (indirectly) is that in order to recruit and retain competent
people, the organization must invest in its employees. This dilemma was realized by the
case-study group practice. To fill job vacancies and retain competent staff, it became
necessary to increase salaries, particularly for specific job categories when a tight job
market made it extremely difficult to hire good people at the group’s current salary ranges.
According to the MGMA’s assessment of employee labor shortages as of the year
2000,1 9 1 the tight labor market was due to low unemployment and high demand for
employee resources. However, it was noted that this could change if the economy
weakened. The study indicated that employees, especially younger people, do not develop
“company loyalty” and are highly mobile. The MGMA Report cited a CNN survey finding
that current employees aged 18 to 34 will change positions approximately every two years
for a career average of six jobs. It was noted that the most critical factor impacting
recruitment was the shortage of trained or certified personnel. This was particularly true in
nursing, as well as for a number of ancillary, technical fields such as radiology or medical
technology. This evidence reinforces the same problems faced by the case-study group
practice during the same period.
Linear regression was utilized to forecast staff costs and total practice expenses in
year 6 (2002) for the case-study data and MGMA surveys. The results are presented in
Table 27. Case-study total expenses were assessed using the format with employee MDs,
PAs, and NPs factored out. The same statistical technique was utilized for calculating the
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MGMA (2001), “Performance and Practices of Successful Medical Groups.” MGMA 2001 Report Based
on 2000 Data, p. 52.
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results in Table 27 as was utilized for regression analysis for income and production data
(see Table 24). Table 27 also displays the regression estimates compared to actual 2002
case-study costs derived from 2002 year-end reports.
Table 27: Linear Regression Results
Staff Costs Total Expenses
Case Study
Regression Equation Y = 137,803 + 14,125X Y = 263,170+ 16,031X
Regression Estimate (2002) $222,553 $359,356
Regression Range $209,500 to $236,605 $350,830 to $367,882
Actual 2002 $213,544 $352,995
MGMA Surveys
Regression Equation Y = 121,081 + 19,477X Y = 229,133 + 37,704X
Regression Estimate (2002) $237,943 $455,357
Regression Range $229,867 to 246,019 $441,808 to $468,906
The regression estimate for the case study is higher than the actual 2002 numbers,
but the actual 2002 numbers are within the regression ranges at 95% confidence intervals.
The MGMA survey data is higher than the case study results, particularly for total
expenses. Again, the total expense comparisons are closer when case-study employee-
provider data are included. However, this may present a less accurate comparison. Also,
MGMA data are aggregated for small, medium, and large-size cardiology groups. This
limits the validity of direct comparison of cost ranges.
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6.4 S t r a t e g ic L e v e l o f A n a l y sis
The strategic level of analysis focuses on how issues are interpreted and responded
to by the organization (Fox-Wolfgramm, 1998). In this section, six selected strategic
issues are presented. First, the question of increasing referral and revenue sources by
geographic expansion is addressed. Second, the impact of new procedural testing as a
source of additional revenue is presented. Third, the use of physician assistants and nurse
practitioners to enhance patient scheduling access and allow physicians additional time
efficiencies is examined. Fourth, cost-containment strategies are discussed. Fifth, the
management of payer contracts is assessed. Finally, the organizational preparations needed
for HIPAA regulatory compliance are summarized.
6.4.1 Geographic Expansion
In response to declining revenues and increasing costs, the case-study group
practice investigated the idea of geographic expansion to increase referrals and provide
additional revenue sources. An opportunity presented itself in the form of a new medical
office building partnership investment in the targeted geographic region adjacent to the
hospital campus. Professional assessments of this investment opportunity were positive.
Ten of the seventeen physician partners decided to invest in the new medical office
building. Equity investment per unit is $82,800, with two units invested by the group. The
building is due for completion in late 2003.
In moving forward with the plan to open a practice in a new area, call coverage
considerations and a constant physician presence in the new area were the strategic
concerns. Without enough physicians to handle the call and maintain a constant presence
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at the hospital, it was not feasible to implement the move until the manpower issues were
resolved. Therefore, the group initiated the recruitment of new physicians. One new
physician was subsequently hired and begins work in April 2003. One additional
physician is also being recruited. In addition, two third-year cardiology Fellows from the
region’s academic medical center were recruited to assist with weekend call rotations.
6.4.2 New Procedural Testing
The group practice implemented nuclear imaging in the office beginning in March
2000. Many cardiology group practices perform nuclear studies in the office. The case-
study group practice had not implemented this procedure in the office for various reasons,
one being that no cardiologist in the group had a nuclear license. This barrier was initially
overcome by contracting with a respected nuclear cardiology academic center to assist with
licensing and providing professional interpretive services. One on-site physician
proceeded to obtain needed hours of didactic training. Eventually, another cardiologist
who had a nuclear license was recruited to the practice. The cardiologist joining the
practice in April 2003 is also nuclear certified.
The implementation of nuclear testing in the office has been a successful
investment for the group on two levels. Obviously, the additional revenue to the group is
one positive result of the investment. A formula was devised specifically for distributing
nuclear revenue within the practice. A portion is distributed to the referring cardiologist’s
revenue center, and the remaining portion goes to reducing overhead. For example, in
2001, the calculation of the nuclear receipts’ contribution for reducing overhead were
$322,758. For 2002, the nuclear receipt overhead reduction contribution was $373,259.
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A second, and more important, positive result from the implementation of nuclear
testing in the office has been the enhancement in patient care. During this project, the best
equipment was purchased and, arguably, the best technologist in the area was hired to
implement the nuclear testing in the office. The highly-regarded cardiology academic
group provided the interpretive services for the studies. Images were transported via high
speed, DSL interconnections between the nuclear imaging computer processing unit at the
office and the VPN system in the nuclear lab at the academic medical center. Physicians in
the practice began to compare findings from the nuclear imaging studies with cath results
on the same patients in the hospital. Good results were unofficially reported in terms of
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sensitivity and specificity. One of the reasons that the imaging provides such good
results is that additional views are taken with the patient in the prone position. This
reduces image artifact that occurs with the usual supine-imaging only due to the anatomical
position of the diaphragm muscle in the chest.
Another new procedure that was implemented in the office did not demonstrate the
same clinical efficacy. Transthoracic electrical bioimpedance (TEB) is a non-invasive test
used in supplement to the EKG to assess particular heart electrical problems. Over time,
the physicians determined that the test did not contribute enough additional clinical
information for the diagnostic assessment of the patient in a cost-effective manner, and was
essentially discontinued as a routine testing device. Other new procedures, particular those
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Sensitivity = true positives/(true positives + false negatives); specificity = true negatives/(false positives +
true negatives). Actual results were not officially tabulated with cath results but were communicated by
specific physicians. See Goldman, Lee, and Braunwald, Eugene (1998), Primary Cardiology (Philadelphia:
W. B. Saunders), p. 14, for definitions.
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performed in the hospital, have been discussed previously by Dr. O’Neill in the interview
section.
6.4.3 Use of PAs and NPs
The use of non-physician providers—physician assistants (PAs) and nurse
practitioners (NPs)—was frowned upon by the case-study cardiology practice until about
three years ago. The rationale for not using PAs or NPs was twofold. First, of course, was
the concern with the level of competency at the specialty level. The argument frequently
heard was that PAs or NPs were better suited to the primary care office environment. The
second concern was related to the first concern— that referring physicians wanted their
patients to be seen by the cardiologist because of their confidence in the expertise of that
particular specialist. It was perceived that it made no sense for a primary care physician
seeking specialty advice to have their patients seen by a PA or a NP. However, the
mindset changed due to workload increases and reimbursement decreases. A role for
physician extenders was seen by the group particularly to assist with patient follow-up
visits and Medi-Cal patients. Consults and initial referrals would still seen by the
physician. In fact, it is required for a physician to establish care with the patient according
to clinical guidelines for physician extenders.
The utilization of PAs (in particular) has seen mixed results. A full-time PA at one
of the smaller satellite offices has established a successful presence, and has contributed to
enhanced patient care and increased efficiencies for the physicians. Patient follow-ups
visits can be seen in a timely manner, thus freeing up physicians’ schedules for more
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consults. Physicians are presented with increased time-efficiencies and can spend more
time at the hospital as required.
At the largest clinical office, the hiring of a PA encountered difficulties. The
problem was that the physicians, particularly the interventionalists, did not create a
situation in which the PA could be effectively utilized. The physicians still wanted to
maintain direct care of their own patients, even for treadmill testing. The problem was a
combination of resistance and low confidence in the use of a PA, inexperience in creating a
system for effective utilization of the PA, and a concern regarding the income impact of
transferring work to a PA. Recently, a NP was hired and works one day per week at the
office for one specific physician. All the revenue and costs generated by the NP are
incurred by that particular physician. At this point, it appears that this system is working
satisfactorily. The NP can see follow-up patients in the office, the physician can see more
consults, and the physician can also run over to the hospital to see patients as needed.
In terms of revenue generation in 2002, the PA has generated gross receipts
totaling $172,780. The NP, working much fewer hours, has contributed $20,418 in
receipts. Thus, the revenue impacts are probably not the primary implication for using
physician extenders, at least in the case-study scenario. Also, the physician extenders do
not rotate in call coverage, which does not rectify a major physician concern. The primary
contribution appears to be in the enhanced capabilities for seeing more patient follow-up
visits and increasing the time-efficiency of the physician.
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6.4.4 C ost-C ontainm ent Strategies
Several cost-containment strategies have been implied in previous sections. Cost-
containment is an organizational response to real or perceived internal financial problems,
or to external economic or competitive threats. In this section, specific case-study adaptive
organizational change responses are discussed. These include lease negotiations, staff
salary adjustments, job position outsourcing and consolidations, and retirement plan
changes.
6.4.4.1 Lease Negotiations
Three office leases were nearing the end of their five-year term in 2001. The
group decided to sign an agreement with a third-party broker to assist in early negotiations
with lessee companies. The brokerage fees were not incurred by the group practice. The
broker was paid a percentage commission by the lessee (in most cases) for assisting with
closing a negotiated deal. New five-year leases were finalized, with most cost savings
occurring in the first year. The initial savings negotiated included no increase in rent from
current year levels, and establishment of a new base year for pass-through expenses. Thus,
no pass-through expenses would be paid until the second year of the lease. Also, one
office proposal included 3 percent increases per year in base rent. The rate increases were
negotiated down 0.5 percent per year. Also, tenant improvements (TI) including new rugs
and painting were provided at no cost in the first year at one office. At another office, a
$30,000 TI allowance was paid to the group.
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6.4.4.2 Staff Salaries
Annual performance salary adjustments given to employees were capped at 4
percent to five percent every year since 1996. The cap means that depending on the
performance rating, an employee at the annual review was eligible for a 0 percent to 4 or 5
percent salary adjustment, depending on the cap approved for that year. This adjustment
was separate from the individual and range adjustments discussed in the human resource
management section. For 2003, the partnership voted a cap of 2 percent, the lowest salary
adjustment cap since the organization was formed in 1996. The rationale for this decision
is that physicians incomes are continuing to decrease, and the group needs to be fiscally
responsible, but still provide some salary increase incentive to the employees.
6.4.4.3 Job Position Outsourcing and Consolidations
Some outsourcing of transcription services has already occurred, primarily with
outside individual independent contractors. However, the group recently contracted for a
short-term trial period with an Internet-based transcription company. The rationale for
utilizing this type of service is based on cost-savings and report turn-around time.
Physicians dictate reports into digital hand-held recorders. The recorders are then
connected to a PC via USB interface, and the dictation is downloaded into a secured file,
which is then sent to a location overseas. Reports are then transcribed and downloaded
back to an encrypted file in the computer system at the office location. An on-site
transcriptionist then retrieves the dictation, performs required editing, and processes the
report for physician signatures. The cost for the trial-period service was 8 cents per line.
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A longer-term contract—which has not been signed yet— will cost 11 to 12 cents per line.
Currently, the outside independent contractors charge 13 to 15 cents per line.
Very few position consolidations have occurred, primarily in the billing office.
The position consolidations have resulted from staff attrition rather than direct elimination
of positions. Otherwise, staff cutbacks have not occurred on an across-the-board scale.
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One point to note is that according to MGMA data, better performing medical practices,
in general, have a higher ratio of support staff per FTE physician, which in turn allows
higher rates of productivity per physician. For example, the MGMA 2001 Report Based
on 2000 Data showed that Better Performers in single-specialty cardiology groups had a
median 5.32 support staff per FTE physician compared to a median 5.03 for All Performers
in single-specialty cardiology groups. The implication here is that the corporate down
sizing philosophy for cutting costs should not necessarily be accepted as the answer for
making organizations more efficient.
6.4.4.4 Retirement Plan Changes
The retirement plan change that occurred with the case-study group practice could
be classified under a cost-containment as well as an investment strategy. From March
1996, until October 2002, the organization administered a combination profit-sharing plan
and money purchase pension plan. In 2001, the total employer contribution to both plans
was approximately 9.5 percent of eligible compensation for non-highly compensated
employees (staff) and approximately 20 percent of eligible compensation for highly
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Performance and Practices o f Successful Medical Groups, op. cit., p. 82.
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compensated employees (physicians). The Economic Growth and Tax Relief
Reconciliation Act of 2001 (EGTRRA) instituted an increase in the deduction limits under
Internal Revenue Code section 404(a) for a profit-sharing plan from 15 percent of eligible
compensation to 25 percent of eligible compensation.1 9 4 The group practice decided to
investigate alternative retirement plan arrangements given the changes in the law. One
alternative presented to the physicians included a 401(k) profit-sharing arrangement in
which the physicians could maximize their defined contribution amounts
($40,000/physician/year) and save approximately $125,000 in non-physician allocations.
After professional analysis and partnership review, a decision was made to merge the
pension plan into a 401(k) profits sharing plan.
There is an upside and a downside to this change. The upside is that the physician
owners can increase their yearly investments to a total of $40,000 or more beginning in
2003 (depending on age). Also, employee contribution costs are decreased by
approximately 4.5 percent. For 2003, employees (and physicians) can contribute from $0
to $12,000 (plus an additional $2,000 if the participant is 50 years of age or older) to the
401(k) component, which serves as tax-deferred compensation. In addition, the actuarial
costs are reduced because there is now one plan instead of two plans to administer.
The downside is that employees realize that the employer is contributing less to
their retirement accounts. Even though the new plan has many positive attributes, the
decreased employer contribution could still elicit the perception that a salary reduction has
been given to the employees.
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Information obtained from Chang, Ruthenberg, & Long, PC, September 25, 2002 Notice.
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6.4.5 M anagem ent o f Payer Contracts
Until approximately three years ago, the case-study group practice typically signed
most managed care contracts that were presented to them. The rationale was that, since the
group was essentially a referral-based practice, most, if not all, contracts should be signed
to accommodate the referring physicians who participated on the same contracts. Now,
new contracts are not even considered unless reimbursement levels are at threshold levels
of at least 10 to 20 percent above Medicare rates, unless the contract is specifically for
coverage at the main hospital(s) for uninsured or indigent patients coming through the
emergency room. New Medicaid contracts are typically not accepted.
In addition, current contracts are now being terminated if the contracts pay poorly,
if they do not generate sufficient charges and receipts, or if the patients on particular
contracts are typically non-compliant with medical regimens or demonstrate a high
frequency of no-shows for office visits. Examples of these types of contracts include some
of the Medicaid geographic managed care plans.
Why has this change in contracting philosophy occurred? One reason is that
physicians feel that they cannot afford to continue taking on contracts that potentially
reimburse lower than the actual cost of care. For example, the case-study practice
Administrator calculated that Medicaid payments for office nuclear imaging study
technical components, pharmaceuticals, and radioisotopes were lower than the actual cost
to provide the service. Another reason is that physicians feel that they work hard and
provide quality care to their patients, and should be reimbursed fairly for their services.
Thus, the group has become very selective in terms of the type of contract arrangements
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that they participate in. The group still sees Medicare patients, which represent a high
percentage of the practice. In 2002, Medicare patients (excluding Medicare managed care
patients) contributed approximately 35 percent of total practice charges ($10,782,641) and
27 percent of total practice receipts ($3,327,676). Medicaid patients (excluding Medicaid
managed care patients) represented 3.2 percent of practice charges ($976,199) and 3.1
percent of practice receipts ($383,949). Overall, in 2002, total practice charges equaled
$30,744,556 and total practice receipts equaled $12,302,238, meaning that for every $100
in billed charges, the group practice received $40. The question addressing patient access
to care is related to providers’ participation in certain contract relationships and is
discussed in the final section.
6.4.6 HIPAA Compliance
As stated previously, HIPAA compliance is as much a policy and procedure issue
as it is a technological issue. Upgrading computer systems with appropriate software to
accommodate the transaction standards and electronic transmission security requirements,
and putting systems in place to protect Internet access to group practice medical
information are obviously technological concerns. However, the privacy and security
requirements imply that policies and procedures will need to be re-written, evaluated,
implemented, and closely monitored to guarantee that the issues of patient privacy and
security of data and other medical information are assured.
Estimated costs for implementation of the HIPAA requirements on a national scale
have been outlined in Chapter 2, and the costs of upgrading computer systems and
applicable technology have been discussed in the section on technological innovation.
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Further estimates of required preparedness and costs incurred at the medical practice level
are presented here.
In the case study, legal advice has already been solicited for the development of a
FIIPPA compliance policy manual. An initial retainer fee of $2,500 was paid, and
additional fees estimated at $250 an hour or more are anticipated. Accountant/consultant
fees, which ordinarily are about $1,100 for month-end report generation and group
accounting services, will also show temporary increases with additional compliance
manual development. Administrative time (approximately 10 hours at a $35/hour rate) has
already been incurred in processing required extensions for compliance with the
Transaction and Code Sets regulations that were effective October 16, 2002.
The development of the HIPAA compliance manual will require time specifically
dedicated to the project by the practice Administrator and Assistant Administrator (an
average of $34/hour time requirement). The manual development will not need to be
totally created and written by administrative staff, as several HIPAA regulatory manual
models are available for purchase. However, the manuals do need to be configured and
written with policies and procedures applicable to the specific group practice situation.
The manual will require legal review prior to being finalized and policies and procedures
implemented.
Some policies and procedures are already in place in terms of patient record
confidentiality requirements. For example, patient requests for copies of records have a
process in place for obtaining required signatures for release of records. Also,
confidentiality statements are already written in the organization’s employee manual.
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HIPAA regulations require covered entities (e.g., medical practices) to train their
employees on the policies and procedures with respect to protected health information as
appropriate for the employees to carry out their functions. Covered entities must
implement training by April 14, 2003, the date that the privacy rules are formally
implemented. Training schedules will be developed and organized by administrative staff,
and actual training will performed by administrative staff with assistance from office
managers and work area supervisors. Job descriptions will also need to be amended to
account for HIPAA privacy and security issues.
The organizational oversight for development and compliance of the HIPAA
privacy and security requirements will include the Chief Compliance Officer (described
below), Administrator, Assistant Administrator, and legal and consulting assistance from
the group practice Accountant and contracted Attorney. A sample of some of the oversight
requirements for privacy and security concerns are listed below:1 9 5
• Assure all required privacy notices are available for public access as required
by federal and state laws.
• Develop mechanisms to track access to protected health information as
required by law.
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Adapted from Keene, Robert (2001), HIPAA Regulatory Manual: New Rules, New Challenges
(Alpharetta, Georgia: The Medical Management Institute), pp. 3-19 to 3-20; 4-64 to 4-65.
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• Establish a process for receiving, documenting, tracking, investigating and
taking action on all complaints concerning the organization’s privacy policies
and procedures.
• Conduct initial privacy training to all staff and physicians associated with the
practice.
• Interact with all offices and work areas to ensure that the practice maintains
appropriate privacy and confidentiality consent, authorization forms, and
information notices and materials reflecting current organization and legal
practices and requirements.
• Develop, implement and monitor compliance of all business associates’
agreements.
• Prepare the organization’s disaster recovery and business continuity plans for
information systems breakdowns or failures.
• Provide information security training to all staff and physicians associated with
the practice.
A physician has been selected by the group to serve as the Chief Compliance
Officer. There has been no decision by the general partnership whether the Chief
Compliance Officer will become a paid position. If the position is approved by the
partnership as a paid position, an estimate of the salary is $10,000, but that amount is
unconfirmed at this time.
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6.5 C a s e -S t u d y O r g a n iz a t i o n : P r o s p e c t o r o r D e f e n d e r
R e s p o n s e ?
Fox-Wolfgramm et al. (1998) elaborated on Miles and Snow’s (1978) description
of prospector and defender strategic orientations. Prospectors are dynamic organizations
that focus on innovation and market opportunities. They tend to emphasize creativity over
efficiency. Prospectors adapt to their environment by continuously monitoring the
opportunities for developing new products or entering new markets that are critical to their
success. In terms of organizational structure, prospectors are organic, with low levels of
formalization and specialization, but high levels of decentralization. Defenders, on the
other hand, are less dynamic and focus on efficiency in their existing operation.
Structurally, they are more mechanized, with higher levels o f formalization, more
centralization, and more specialization in comparison with prospectors.
Prospectors and defenders also tend to differ in the way they act on information,
how they adapt to environmental change, and how they respond to strategic issues
involving new technologies. These differences suggest that prospectors are generally more
responsive to changes in their environment and more open to change compared with
defenders (Fox-Wolfgramm, 1998).
Using the case-study observations as the basis for analysis, three propositions are
presented to describe the case study’s organizational change response to HIPAA and BBA.
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6.5.1 Proposition 1
Organizational change is supported by a combination o f both prospector and
defender strategic perspectives.
This statement suggests that the organizational response to the regulatory impacts
of HIPAA and BBA included components of both types of strategic orientation.
Supporting arguments for this statement are given.
The group practice’s prospector level of response would indicate that the
organizational adaptive change process included strategic assessment of environmental
stresses, movement on perceived opportunities, and development of new products or
additional sources of income. These factors were apparent as part of the change dynamics
occurring within the group practice. The group had monitored the regulatory environment
and other area cardiology group movements closely, given the forecasted reimbursement
declines in specialty procedural work, and the complexity and magnitude of the regulatory
compliance requirements of HIPAA. The group was presented with an opportunity to
create a presence in a new geographic market and acted on that opportunity by assuring
space in a new office building that was yet to be completed. The group strategy included
the understanding that the timing of the opening of the office would need to correspond
with the group’s ability to effectively manage 24-hour call coverage in the area. The group
also realized that office-based nuclear imaging was a clinically efficacious and revenue-
generating opportunity that needed to be implemented. Although the project was a huge
endeavor, the investment was clearly a successful venture.
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The prospector response orientation also included a component of decentralization
of services, communication, and control. A centralization proposal was suggested in terms
of creating an imaging center for all procedures such as nuclear imaging, echocardiograms,
and stress echoes. However, the proposal was not acted on due to the perceived need to
maintain some level of local control for the satellite offices and to provide services such as
echo, stress echo, and treadmill at locations that were convenient for patients.
The defender level of response would indicate that the organization adaptive
change would include a focus on efficiency, centralization, and resistance to change.
These factors also applied to the change process. The group focus on efficiency included
increased frequency of cost assessments, increased action to monitor payment problems
from specific payers, and schedule changes by some physicians to concentrate on work at
the main office. Also, the employee performance review process involved increased input
and monitoring of employee performance to assure quality and efficient performance.
The centralization component was actually somewhat initiated at the time of the
merger, but was amplified with changes occurring in terms of human resource management
and the development of the information systems network. Oversight of human resource
management moved under more central control by the Assistant Administrator, with some
local office autonomy still in place. The development of the network is in place for
centralized messaging and to further provide integrated information access by all satellite
offices. Centralized control is still maintained by the general partnership, but physicians
maintain local autonomy on the office operational level and hospital call coverage.
The resistance to change component was reflected in the way that physicians
scheduled their day. A suggestion was presented continuously over time to adjust
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scheduling to allow for physicians to either be in the office or in the hospital. This type of
arrangement has worked well for the electrophysiologists, primarily because they perform
a greater amount of elective procedures in the hospital, and can more easily schedule
separate office days and hospital days. The other physicians, particularly the
interventionalists, have been unable to change to this scheduling concept. The problem
that exists is that when physicians are seeing patients in the office, and a procedure is set to
begin in the hospital, or an emergency arises, the physician must run over to the hospital to
do the procedure or see the hospital patient. Many times, office patients have been
required to wait for long periods of time for the physician to return from the hospital. One
reason why this change has been difficult to implement is due to available scheduling times
for procedures at the hospital and the amount of patients that need to be seen by the
physicians. Thus, the physicians are forced to juggle office schedules to accommodate
procedures or patients in the hospital.
One area where resistance to change initially prevailed, and then a change in
philosophy occurred, is with the use of mid-level providers (PAs, NPs). Until
approximately three years ago, the group showed some resistance to the use of mid-level
providers. Now, the group has one full-time PA and one part-time NP assisting primarily
with patient follow-up visits. The use of non-physician providers has shown some success
in increasing physician efficiency by allowing for more consults to be seen by the
physicians, and also by enhancing the physicians’ time-efficiency for seeing patients in the
hospital while the PA or NP sees patients in the office.
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6.5.2 Proposition 2
The magnitude o f adaptive change in the organization is directly related to the
regulatory impacts on revenue and expenses.
Given the results of the overall analysis, this proposition is almost a foregone
conclusion. The forecasted impacts of HIPAA and BBA do not necessarily move in the
same direction. HIPAA, for example, was forecast to incur initial short-term costs, but
create efficiencies in the system over the long term. The impact of BBA on cardiology
practices, however, suggests that reimbursement will continue downward. This is evident
for the year 2003, as the conversion factor has decreased 4.4 percent from year 2002 levels.
The decline in the conversion factor over the past two years is 9.8 percent.
The case-study adaptive change process occurred in response to the stresses of
increasing costs—particularly staff costs— and declining Medicare reimbursement. A
caveat is attached to that statement. The (pending) geographic expansion, for example, is
predicted to not only provide additional patient revenue sources, but also expand access to
high quality cardiology services in the area. The implementation of nuclear imaging in the
office not only created new revenue-generating procedural volume, but also provided high
quality diagnostic imaging services that contributes to enhanced patient care. Thus, the
adaptive change process focused on both improving income and enhancing patient care.
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6.5.3 Proposition 3
The prospector characteristic o f technological innovation and the defender
characteristic o f efficiency provide prominent contributions to the adaptive
change process.
The implication that the change process included components from both prospector
and defender strategic orientations is a reasonable assessment, suggesting that theoretical
concepts when applied to life situations are not necessarily all-or-none propositions. The
case-study organization showed adaptive change response patterns that could be classified
from both prospector and defender perspectives. Technological innovation is assumed in
this case study to lean more toward the prospector strategy side. The development of the
computer network, the implementation of nuclear testing, and the additional new
procedures utilized in the hospital all suggest an openness to forward movement by the
organization to implement technologies which are both cost-effective and enhance clinical
capabilities. A focus on operational efficiency is typically a defender strategic orientation.
The organization is becoming more and more concerned with escalating costs, particularly
due to increasing employee salaries. Discussions have accelerated in terms of assessing
outsourcing opportunities and cost-containment strategies. The implementation of the
HIPAA privacy rules, transactions and code sets regulations, and security requirements are
almost certain to incur initial, short-term implementation costs, but also may require
ongoing monitoring and process-updating costs. The forecasts suggest that, in the long
run, HIPAA will produce increased efficiencies in accessing and processing health care
information. The implications are improvements in the delivery of health care services and
the enhancement of quality patient care.
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Chapter 7
Su m m a r y , C o n c l u s io n s a n d R e c o m m e n d a t io n s
7.1 S u m m a r y
7.1.1 Purpose
The purpose of this research was to analyze the impacts of the 1996 Health
Insurance Portability and Accountability Act (HIPAA) and the 1997 Balanced Budget Act
(BBA) on organizational change and delivery of care in cardiology group practices. From
an overall standpoint, HIPAA was assessed in terms of the cost impacts on medical
practices in implementing the privacy rules, transactions and code sets standards, and
security regulations. From an additional perspective, HIPAA could also be viewed from
the revenue side, assuming that long-term efficiencies in the processing of information may
also enhance charge-capture, particularly with current sophisticated computerized billing
systems. The BBA was discussed in the context of the impacts of declining reimbursement
and organizational responses to financial pressures.
7.1.2 Research Instruments
To assess the impacts of HIPAA and the BBA within this research framework,
multiple research tools were utilized. First, telephone interviews were performed,
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incorporating an open-ended questionnaire format to allow for subjective responses from
selected professionals from across the United States. Although the quantity of the
interviews was low, the quality of the responses was high. The high quality was attributed
to the cross-section of experts participating in the interviews— including consultants, a
compliance officer from a world-renown medical clinic, a researcher with a medical group
organization, a medical group organization legislative liaison, a CPA, an information
systems expert, and two cardiologists. Second, closed-ended questionnaire surveys
incorporating a Likert format were submitted to cardiologists in the group practice that was
the focus of the case-study analysis. Unfortunately, the very low response rate presented a
problem with data validity in terms of inferences of results to larger populations,
specifically other cardiology group practices. The case-study analysis was the third
research approach presented. The case study incorporated the premise that real data and
organizational response patterns obtained from a group practice could be accessed and
longitudinally analyzed. Comparing case-study data with other sources such as surveys
from the MGMA provided cross-sectional analyses, with the understanding of data
limitations, including potentially dissimilar group practice populations and data-gathering
techniques. Thus, as previously mentioned, the subsequent findings cannot be
universalized to the population of all cardiology group practices, given the limitations in
research design.
7.1.3 Results
The results from the open-ended telephone and face-to-face surveys indicated that
the interviewees were in agreement with the premises of Hypotheses 2, 3, and 7; were not
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in agreement with the premises of Hypotheses 1 and 6; and, were either equally divided or
equivocal in their agreement with the premises of Hypotheses 5, 8, and 10. Therefore, the
majority of respondents, first, agreed that HIPAA requirements will influence group
practices to upgrade their technology, particularly in the development of virtual private
networks (VPNs). Second, there is agreement that merger activity between cardiology
groups will not increase due to the decreased reimbursement implications of the BBA.
Also, the reimbursement impacts of the BBA will result in group practices finding more
ways to increase efficiencies through consolidation of internal operations. On the other
hand, the impacts of HIPAA were not seen by the majority of interviewees as influencing
the consolidation of internal operations to increase efficiency. Also, respondents were
clearly in agreement in rejecting Hypothesis 6, indicating that there is merit to the
argument that the decreased reimbursement implications of the BBA will result in a
tendency to increase production or volume of services in response to declining revenues.
The determination of whether increases are the result of actual volume increases or the
result of more patients being seen per physician— or the result of both dynamics— requires
further inquiry. Also, the contribution of income and substitution effects warrants
consideration. A formal statistical analysis of the effects of income (independent variable)
on production (dependent variable) would add valuable insights to the data presented in
this research. However, due to respondent and data limitations, this level of analysis was
beyond the methodological research capabilities in this study, and, therefore, was not
performed.
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7.1.4 A nalysis
7.1.4.1 Questionnaire Responses
For the case-study questionnaire responses, five levels of assessment were
presented. The first three assessment levels summarized, categorized, and highlighted
responses, respectively. The fourth assessment level correlated specific responses with
support or non-support for the 10 hypotheses. The fifth level compared support, non
support, and not-determined categories for the 10 hypotheses between the case-study
responses and the consultant and physician interview results. Unfortunately, the small
number of respondents (four) resulted in the questionnaire findings representing very low
comparison validity and inference power to both group practice populations in general,
and the case-study group practice, in particular. The case-study findings indicated
agreement with Hypotheses 1, 4, 5, 7, 8, and 10. There was disagreement with Hypothesis
6, and no determination for Hypotheses 2, 3, and 9.
Overall, agreement on three of the Hypotheses was found between the consultant
and physicians responses and the case-study responses. First, Hypothesis 6 was strongly
rejected, meaning that the respondents from both groupings thought that the decreased
reimbursement implications of the BBA will lead to an increased tendency for increased
production or higher volume of services to compensate for declining revenues. Both
respondent camps agreed with the Hypothesis 7 premise that the decreased reimbursement
implications of the BBA will result in an increased tendency for consolidation of internal
operations to increase efficiency, although it was unclear from the various responses
whether agreement existed on exactly how the consolidation would be accomplished.
There was also agreement between the consultant and physician interviews and case-study
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responses on Hypothesis 9, but only in the sense that both groups fit into the not-
determined category. Hypothesis 9 did elicit important comments regarding the perceived
inadequacy of Medicare payment rates, as did Hypothesis 10, which proposed that
cardiologists are more likely to discontinue contracts paying at less than Medicare rates in
response to the decreased reimbursement implications of the BBA. The issue of patient
access to specialty care follows the implications of these two hypothetical statements.
7.1.4.2 Theoretical Frameworks and Levels o f Analysis
The case-study analysis incorporated theoretical frameworks for studying
organizational change presented by previous researchers (Fox-Wolfgramm et al., 1998;
Leavitt, 1965). Three levels of analysis (institutional, organizational, and strategic) were
utilized to assess organizational change responses to strategic issues. The strategic issues
in this study were HIPAA and the BBA. Within the organizational level, further analysis
was accomplished under the subject headings of technological innovation, organizational
structure, and human resource management. Also, the group practice response patterns
were assessed under prospector versus defender strategic orientations.
7.1.4.2.1 Institutional level.
Institutional level analysis presented the changes in Medicare reimbursement
trends. Comparisons between evaluation and management services and procedural work
reflected the regulatory purpose of the RBRVS and the BBA in regard to physician
reimbursement, emphasizing promotion of primary level patient care while providing
disincentives for over-utilization of higher-priced procedural work. The trends
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demonstrate generally decreasing reimbursement over time beginning in 1999 (the initial
year of the practice-expense phase-in) for higher-priced procedures and generally higher
payments for office visits and consults, with the exception of an across-the-board 5.4
percent decrease in 2002.
Analysis was also performed at the institutional level comparing income and
production between the case-study group practice and the MGMA surveys. Over the five-
year period (1997-2001), both the case-study data and MGMA survey results indicate that
cardiologists’ production has increased, although the percentage increase in the case-study
production was much lower than the MGMA percentage increase. The case-study income
showed an 11 percent decrease per FTE physician from 1997 to 2001. Production
increased 10 percent per FTE physician over the same period. MGMA numbers showed
some differences. Over the same time period (1997-2001), compensation increased 26
percent and production increased 42 percent. The suggestion from both sets of data is that
physicians are working harder to maintain their incomes. Potential differences in data
collection techniques and use of different statistical indicators (mean versus median)
contributed to limitations in comparing the two data sets. Differences and inconsistencies
in procedure charge structures between group practices and geographic regions presented
additional problems with comparison accuracy. Regional variances in reimbursement,
managed-care penetration, costs of living, group size, and possible differences in medical
group practice patterns also contributed to problems in making valid comparisons.
Statistical analyses were performed to predict year 2002 income and production from both
data sets. A nalyses were not statistically validated for formal inferences to larger
populations.
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7.1.4.2.2 Organizational level.
The organizational level of analysis was divided into three parts: technological
innovation, organizational structure, and human resource management. Under
technological innovation, the cost implications of HIPAA provided the underlying
consideration for innovations such as the development of wide-area networks and
implementation of electronic medical records (EMR). It was emphasized that HIPAA is as
much a policy and procedure issue as it is a technological issue. Thus, the implementation
of devices such as EMR need appropriate oversight and processes in place to develop and
enforce the HIPAA requirements for standardized transactions, privacy, and security of
patient information.
EMR systems have distinct advantages. Information access is more time-efficient
compared to the process of researching and retrieving paper-based patient records.
Problems associated with dictation can be eliminated with integrated voice-recognition
systems. Misfiled lab information, illegible hand-written chart notes and prescriptions, and
other manual processing steps are minimized with an effectively implemented EMR. Also,
networked EMRs can allow physicians to access patient information from exam rooms,
other offices, or even from a PC at home. This may be particularly helpful when a
physician is on call and needs to review records on an unfamiliar patient. Thus, the EMR
system enhances quality patient care. On the other hand, the costs of implementing and
maintaining an EMR system can be very high, particularly if the organizational goal is to
become “paperless.”
Organizational structure considerations focus on lines of authority, communication
systems, and levels of centralization and decentralization. The case-study cardiology
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group practice has combined centralized and decentralized mechanisms for delivery of
clinical services and coordination and control on the operational level. The presence of
clinical offices in four (soon to be five) geographic areas reflects the organizations’
responses to changing economic, regulatory, and competitive pressures over time. One
issue addressed at the organizational level is the question of consolidation of positions or
staff cuts in response to increasing staff costs. From the case-study survey questionnaire,
the respondents were split in their agreement and disagreement on Question 8 regarding
consolidations, but they were in more agreement on Question 11 regarding the movement
toward consolidations. Although draconian staff cuts are unlikely in the near future, some
consolidation of positions has occurred via attrition.
The human resource management level focuses on oversight and management of
staff performance in concert with the delivery of quality patient care. The performance
appraisal system functions to assure that the employees receive appropriate feedback and
guidance regarding their job performance. The effective utilization of staff—particularly
involving those employees that are cross-trained within or between work areas—provides
the ideal scenario for work-area coverage.
On the other hand, staff costs present the most significant overhead concern.
Practice costs comparisons between the case-study cardiology group and MGMA survey
were analyzed. From 1997 to 2001, staff costs per FTE physician increased 35 percent for
the case-study cardiology group, while the MGMA survey showed an increase of 55
percent over the same time period. The dilemma presented is that, in order to recruit and
retain competent staff, the organization must invest in its employees. A tight labor market
in the late 1990s into 2000 reflected a shortage of trained personnel in nursing and a
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number of technical fields according to an MGMA report. This issue also impacted the
case-study organization. To recruit in these areas, salary ranges were increased in selected
job classes such as nursing and cardiac ultrasound in order to remain competitive and to
facilitate the hiring of competent employees.
7.1.4.2.3 Strategic level.
The strategic level of analysis focused on six selected strategic issues. (1) The first
strategic issue focused on geographic expansion into new referral areas to tap new revenue
sources. (2) New procedural testing in the form of nuclear imaging in the office provided
the case-study group practice with an additional revenue source and enhanced patient care
by providing expanded access to quality imaging services. (3) The use of non-physician
providers (PAs and NPs) enhanced physician capabilities for seeing more hospital patients
and patient consults. (4) Cost-containment strategies were presented, including negotiation
of leases, staff salary caps, job position outsourcing and consolidations, and retirement plan
changes. (5) The management of payer contracts was addressed as a mechanism for more
selective determinations of acceptable versus unacceptable reimbursement rates. (6 )
HIPAA compliance was included as a strategy to assure that legislative requirements are
met and to assure that appropriate implementation and monitoring of required policies are
accomplished.
7.1.4.2.4 Prospector or defender orientation.
Finally, the case-study organizational change response was analyzed in terms of a
pro sp ecto r strategic orientation or a defender strategic orientation. Using the case-study
observations as the basis for analysis, three propositions were developed to describe the
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organizational change response to HIPAA and the BBA. Proposition 1 implies that both
prospector and defender types contributed to the case-study organization’s adaptive change
response to HIPAA and the BBA. Proposition 2 suggests that the impact of HIPAA on
costs (and on revenues) and the BBA’s impact on Medicare reimbursement were key
drivers in influencing the level of the adaptive change response in the organization.
Proposition 3 indicates that the prospector characteristic of technological innovation and
the defender characteristic of efficiency collaborated in effecting the change process.
7.2 C o n c l u s io n s
7.2.1 R esearch Q uestion 1
The first research question addressed the extent to which HIPAA and BBA
impacted organizational change in cardiology group practices. A range of answers was
obtained through the interviews and case-study findings. The strategic orientation
approach provided some general insights regarding the prospector versus defender
tendencies in organizations when faced with competitive or regulatory threats. The
indications are that both prospector and defender characteristics were instrumental during
the adaptive change period. In the case study example, there were indications that
geographic expansion and increased use of current and new technologies on the prospector
side, and an increased focus on operational efficiency on the defender side, contributed
significantly to change dynamics in the group practice.
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7.2.2 R esearch Q uestion 2
The impacts of HIPAA and BBA on delivery of care is a second research question
that was presented. It is proposed that, in the long term, HIPAA regulatory requirements
will promote certain efficiencies in terms of information access and processing in addition
to protecting the privacy of the individual patient and security of transmitted information.
The implications are that these efficiencies will result in improvements in the delivery of
health care services and, thus, contribute to enhancement of quality patient care.
Expansion of geographic markets and utilization of current and new technologies in the
office not only provide new revenue sources, but also enhances access to quality diagnostic
capabilities and high-level specialty care, which improves the patient care process. The
use of non-physician providers potentially contributes to the promotion of quality care by
providing faster patient scheduling access in many cases, thereby enhancing physician
efficiencies in seeing more patient consults and hospital patients.
7.2.3 R esearch Q uestion 3
The third research question focuses on whether HIPAA and BBA have contributed
to increased or diminished patient access to care in cardiology groups. On the surface, it
appears that HIPAA should improve patient access to care in the long term. If access to
patient information is improved and the process for delivery of care is enhanced, it stands
to reason that the regulatory impacts should, in the long term, promote quality patient care
on all levels. However, if the costs of HIPAA implementation are prohibitive, particularly
in the short term, the possibility exists that an increased cost dynamic combined with a
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decreased reimbursement dynamic may exacerbate a situation in which a provider or
providers may discontinue seeing patients who are associated with certain payers.
The decreased reimbursement from Medicare, particularly in 2002 and 2003, has
presented a legitimate concern regarding access to care. In 1999, patient access to care was
not a problem, according to data from the Medicare Current Beneficiary Survey. 1 9 6
However, a survey by Project Hope, on behalf of the Medicare Payment Advisory
Commission (MedPAC), indicated that the number of physicians accepting all new
Medicare patients declined from 76 percent in 1999 to 69 percent in 2002 (Hawryluk,
2003). The proportion of medical practices open to all new Medicaid patients decreased
from 48 percent to 37 percent during the same period (Hawryluk, 2002). A survey in
Olympia, Washington, found that 77 percent of primary care practices have closed their
doors to new Medicare patients, and 76 percent will no longer see Medicaid patients
(Hawryluk, 2002). This indicates an increasing trend for physicians to discontinue seeing
Medicare or Medicaid patients due to inadequate reimbursement. Although in the case-
study situation the group practice did not discontinue the Medicare and Medicaid contracts,
other contracts were discontinued due to low reimbursement or patient non-compliance
issues. Thus, patients other than those under Medicare and Medicaid were unable to be
seen, unless they changed insurance to a payer contracted with the group. The implication
is that any group of patients associated with certain payers may suddenly have an access to
care issue if their provider discontinues the contract with that insurance.
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S ta tem en t o f G le n n H ackbarth , J .D ., C hairm an , M ed ica re P a y m en t A d v is o r y C o m m iss io n (2 0 0 2 ).
T es tim o n y B e fo r e th e S u b c o m m itte e o n H ea lth o f th e H o u se C o m m itte e o n W a y s an d M ea n s. H ea rin g on
P h y sic ia n P a y m en ts, F ebruary 2 8 , 2 0 0 2 .
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The declining reimbursement issue does not appear to be resolved any time soon.
Another factor that exacerbates the situation is that many managed-care plans and other
insurance payment rates are tied to the current Medicare RBRVS reimbursement rate.
When the Medicare rate decreases, those insurance companies that reimburse providers
based on the RBRVS fee schedules typically follow suit. Thus, medical practices are faced
with decreasing reimbursement from other payers in addition to receiving lower payments
for their Medicare patients. If the payment issue is not addressed soon, it is likely that
more physicians will discontinue seeing Medicare and Medicaid patients and even
discontinue other low paying contracts, thus exacerbating the problem of patient access to
care. The 108th Congress appears to consider the physician payment issue important.
Members in both the Senate and the House are considering ways to prevent the scheduled
4.4 percent payment cuts, scheduled to go into effect March 1, 2003. A provision in a
Senate-approved appropriations package, drafted by Sen. Charles Grassley (R-Iowa),
would freeze Medicare payments at 2002 levels through the end of the fiscal year
(September 2003). Representative Bill Thomas (R-Califomia) has introduced a bill that
would maintain payments at 2002 levels. Tom Scully, administrator of the Centers for
Medicare and Medicaid Services (CMS), is concerned that that both bills are one-year
fixes. However, he notes that it is not a good situation for physicians be angry with the
Medicare program and that the underlying payment problem needs to be fixed (Finkelstein
and Hawryluk, 2003).
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7.2.4 Theoretical C onsiderations for O rganizational Change
The primary theoretical considerations for organizational change in this
dissertation were premised on the research presented by Fox-Wolfgramm and her co
authors (1998). Although the content and research processes did not duplicate Fox-
Wolfgramm et al., the basic research framework that entailed the investigation of
organizational change in response to a legislative mandate was evident. The use of case-
study analysis followed—but did not mimic—the research approach adopted by Fox-
Wolfgramm. The multi-level analysis perspective was also incorporated.
Fox-Wolfgramm et al. (1998) emphasized certain prerequisites for studying first-
order change. Although this dissertation did not focus on first-order change per se, some
of the prerequisites recommended by Fox-Wolfgramm et al. showed applications. One
prerequisite, an environmental change— or a strategic issue—requires an organizational
response that is significant. In this research, both HIPAA and the BBA elicited important
developments in the thinking and strategic approaches taken by medical practices. Another
prerequisite is the adoption of a multi-level perspective that simultaneously examines the
institutional, organizational, and strategic contexts in which change occurs. As Greenwood
and Hinings (1993) suggested, it is important to examine the patterns of change in the
institutional environment concurrently with the changes in the organization to better
understand the potential cause of different modes of organizational adaptation. The multi
level approach was utilized in this study to analyze the institutional setting of cardiology
group practices in the United States, the organizational setting represented by the case-
study cardiology group practice, and the strategic level describing the group’s
identification and response to the strategic issue context.
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Another theoretical consideration utilized by Fox-Wolfgramm et al. (1998) and
incorporated in this dissertation were the concepts of prospector and defender strategic
orientations. Three propositions for organizational change based on the case-study
observations were derived from these theoretical concepts.
Finally, Leavitt’s (1965) theoretical concepts of interaction between technological,
structural, and human (people) approaches were also evident. Leavitt pointed out that the
approaches work in concert, suggesting that all levels interact in the change process.
7.3 R e c o m m e n d a t io n s
It is important to utilize a multi-level approach when studying organizational
change, particularly change that occurs as a response to an environmental change such as a
regulatory requirement. As Fox-Wolfgramm et al. (1998) point out, without such multi
level consideration, an interplay between institutional and organizational forces will be
missed. In this study, the institutional setting included the passage of HIPPA and the BBA
and the effects on the organizations in that institutional environment. The organizational
level of response defined where structures and roles changed in response to the FIIPPA and
BBA legislation. Also, the interplay between technology, structure, and human resources
could be assessed at this level. The strategic level was important in determining how
issues were interpreted and responded to by the organization. For example, what strategies
ensued (e.g., geographic expansion; cost-containment approaches). The organizational
change response was an integrative response with implications at all levels of analysis.
The use of a multiple-methodology approach in studying organizational change
also has certain advantages. In this study, telephone interviews, survey questionnaires, and
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case-study analysis were utilized to assess organizational change responses to HIPAA and
the BBA. If only one methodology was used in this study, the paucity of respondents
would greatly compromise the integrity of the findings. Even in this study, although three
methodologies were incorporated, the findings required caveats regarding the validity of
the data due to the low number of respondents. However, particularly with the telephone
interviews, the quality of the interviews was high due to the expert opinions received from
professionals across the country. Thus, a multiple methodology approach can serve to
enhance the quality of the data if another area of data retrieval falls short of expectations.
For future studies of medical practices, if a case-study format is utilized, it is
recommended that more than one group be analyzed and compared to other studies in a
cross-sectional manner. If longitudinal data are available, changes over time would
provide more insights if longer time periods could be assessed utilizing interrupted time-
series formats.
As previously noted, survey responses from physicians or physician groups have
shown response rates in the 20 to 25 percent range. This rate was similar to the response
rate for the case-study closed-ended questionnaire. The use of surveys, unless
professionally done with well-organized research techniques, can provide only limited
information due to low response rates. This study incurred that problem.
Finally, the calculation methodology utilized in determining Medicare provider
payments must be addressed. From the perspective of the medical-provider community, of
course, the methodology is flawed, particularly the calculation of the SGR. Given the
current economic environment and concerns regarding the solvency of the Medicare
program, physician Medicare reimbursement is not likely to see significant increases
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anytime soon, unless more consideration is given to changing the formula to better account
for the increased overhead costs that physicians are incurring. Recent proposals in the
Senate and House of Representatives indicate that the 108th Congress and MedPAC have
recognized the importance of addressing the physician payment issue and are working to
improve the physician payment methodology.
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A p p e n d i x e s
A p p e n d ix A : C o n s u l t a n t I n t e r v ie w Q u e s t io n s (O pen-E n d e d)
A p p e n d i x B : P h y s ic ia n In t e r v ie w Q u e s t io n s (O pen-E n d e d)
A p p e n d ix C: C a r d io l o g is t S u r v e y (C a se St u d y)
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.
A p p e n d ix A
Consultant Interview Questions
(Open-Ended)
The following questions are open-ended with individual assessments and qualifying
comments encouraged. Also, fo r questions referring to time frames, please assume the
time fram e beginning April 2002. Thank you fo r participating in this phone interview.
1. As a result of the HIPAA regulations, do you anticipate that cardiology groups will
upgrade their information systems within the next 12 months?
If not the next 12 months, will this occur within the next 24 months? Do you
anticipate that groups will implement technology such as virtual private networks to
establish networked-based information systems and provide required security of data
transmission and patient medical records?
2. Do you anticipate that cardiology groups will increasingly move toward the purchase
and implementation of integrated computer systems with electronic medical records
(EMR) within the next 12 months? If not the next 12 months, will this occur within
the next 24 months? If not, will groups move toward EMR in the foreseeable future,
and in what time frame?
3. In your opinion, will medical group transcription services continue to be utilized in-
house, or will transcription services be contracted out more frequently? Do you
foresee that the medical field is moving more toward internet-based transcription
services to reduce operational costs? If so, in what time frame will this occur
(immediately; 12 months; 24 months etc.)?
4. Do you see or anticipate a trend in cardiology groups moving toward consolidation o f
other positions within the practice to save on operational costs?
356
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5. Do you see or anticipate a trend for increased use of mid-level providers (Physician
Assistants [PA], Nurse Practitioners [NP]) in cardiology groups?
6. Have you seen an increased frequency of mergers in cardiology practices? What are
the primary reasons for groups to merge or not merge in the current economic and
regulatory environment?
7. Do you foresee long-term cost increases or savings as a result of HIPAA? Do you
foresee increased efficiencies as a result of HIPAA?
8. How has the potential increased compliance costs related to HIPAA and decreased
reimbursement related to the Balanced Budget Act of 1997 (BBA) affected the practice
of medicine? Do you think that these federal regulations have impacted the amount of
time that physicians see patients in the office versus the hospital? Do they impact the
level of services provided or clinical management of patients?
9. Given the potential decreases in Medicare reimbursement as a result of the 1997 BBA,
how do you foresee this impacting the practice of cardiology? Have you seen a
decrease in reimbursement and net income over the past three years in cardiology
practices? Do you think that the current health care environment of decreased
reimbursement to specialists has promoted a tendency to increase the volume of
services provided? Has this environment accelerated the implementation of new
procedural testing in the office or the hospital to compensate for declining revenues?
10. Do you anticipate a trend for cardiologists to reject contracts paying at current
Medicare rates? If not, do you anticipate this trend at lower than current Medicare
rates? Do you anticipate this same trend for cardiologists to discontinue their current
contracts paying at current Medicare rates? If not, do you anticipate this trend at lower
than current Medicare rates?
357
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A p p e n d ix B
Physician Interview Questions
(Open-Ended)
The following questions are open-ended with individual assessments and qualifying
comments encouraged.
1. As a result of the HIPAA regulations, do you anticipate that cardiology groups will
upgrade their information systems within the next 12 months, or longer? Do you
anticipate that groups will implement technology such as virtual private networks to
establish networked-based information systems and provide required security of data
transmission and patient medical records?
2. Do you anticipate that cardiology groups will increasingly move toward purchases and
implementation of integrated computer systems with electronic medical records (EMR)
within the next 12 months? If not in 12 months, will groups move toward EMR in the
foreseeable future and in what time frame?
3. Do you foresee that medical group transcription services will continue to be utilized in-
house, or more frequently contracted out? Do you anticipate that the medical field is
moving more toward internet-based transcription services to reduce operational costs?
If so, in what time frame will this occur (immediately; 12 months; 24 months etc.)?
4. Do you anticipate a movement toward contracting-out of office-based services (e.g.,
event recorder testing, tele-monitored pacemaker surveillance, Holter monitoring) to
enhance clinical results, tumaround-time, to save on costs, and to improve revenues?
358
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5. Do you foresee that cardiology groups are moving toward consolidation of other
positions in the company to save on operational costs? If so, in what time frame will
this occur?
6. How has the potential increased compliance costs related to HIPAA and decreased
revenue related to the Balanced Budget Act of 1997 (BBA) affected the practice of
medicine? Do you feel that these federal regulations have impacted the amount of time
that physicians see patients in the office versus the hospital? Do they impact the level
of services provided or clinical management of patients?
7. Given the potential decreases over time in Medicare reimbursement as a result of the
1997 BBA, how do you foresee this impacting the practice of cardiology? Have you
seen a decrease in reimbursement and net income over the past three years. Do you
think that the current health care environment of decreased reimbursement to
specialists has promoted a tendency to increase the volume of services provided? Has
this environment accelerated the implementation of new procedural testing in the office
or the hospital to compensate for declining revenues?
8. What new cutting edge procedures are being utilized by cardiologists? What are the
benefits to patients? Is there a movement toward more cost-effective management of
patients, or is that a secondary consideration if a more expensive procedure provides
more clinical efficacy?
9. Do you think that the current Medicare fee schedule provides adequate reimbursement
to cardiologists? Do you anticipate a trend for cardiologists to reject contracts paying
at lower than Medicare rates? Do you anticipate this same trend for cardiologists to
discontinue their current contracts paying at less than Medicare rates?
359
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A p p e n d ix C
Cardiologist Survey
(Case Study)
In the space before each question, please write the number which best describes your
opinion, using the ranking below:
No Opinion Strongly Disagree Mildly Disagree No Impact Mildly Agree Strongly Agree
0 1 2 3 4 5
1 .__ Although compliance plans are not mandatory for small group practices, most
cardiology groups will implement formalized plans within the next 12 months.
2 .___ As a result of the new HIPAA regulations, our practice plans to upgrade its
information systems within the next 12 months to provide for the necessary privacy and
security for patient medical records and transmission of data.
3 .__ Our practice plans to upgrade its computer system to incorporate electronic medical
records within the next 12 months.
4 ._ _ Our practice is considering a change from in-house transcription to outside contracted
transcription within the next 12 months.
5 ._ _ Our practice is considering a change from in-house transcription to Internet-based
transcription services within the next 12 months.
6 ._ _ Our practice is moving toward contracting-out for services such as event recorder
monitoring, tele-pacemaker analysis, and Holter monitoring within the next 12 months.
7 . Contracting-out for some services may enhance clinical results turnaround time,
provide cost savings, and improve revenues for that procedure.
8 ._ _ Our practice plans to consolidate office positions within the next 12 months to save
on operational costs.
9 ._ _ My net income has decreased over the past 3 years as a result of legislation
decreasing Medicare payments.
360
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10 ._ _ Decreased Medicare reimbursement has contributed to our practice merging with
other practices.
11 ._ _ Decreased Medicare reimbursement has contributed to actions in our practice to
consolidate operations.
12 ._ _ Decreased Medicare reimbursement has contributed to a movement to centralize
procedural testing to one office location (if the practice has one or more satellite offices).
13 ._ _ Decreased Medicare reimbursement has contributed to my rearranging my office
hours to better accommodate efficiencies for seeing patients in the hospital and the office.
14 ._ _ Decreased Medicare reimbursement has contributed to our practice undergoing or
considering geographic expansion within the next 12 months by the addition of satellite
offices in areas previously not covered by our practice.
15 ._ _ Decreasing Medicare reimbursement has resulted in a tendency for me to work
harder to increase my volume of services to compensate for declining revenues.
16 ._ _ Decreased Medicare reimbursement has accelerated the implementation of new
procedural testing in our office (e.g., nuclear imaging, peripheral vascular procedures) to
provide additional revenue sources.
17 ._ _ The implementation of new procedural testing in our office (e.g., nuclear imaging,
peripheral vascular procedures) provides enhanced diagnostic information and improves
patient care.
18 ._ _ Decreased Medicare reimbursement has accelerated the utilization of new, cutting-
edge procedures in the hospital to provide additional revenue sources.
19 ._ _ The increased utilization of new, cutting-edge procedures in the hospital provides
for enhanced diagnostic and interventional capabilities, leading to improved patient care.
20 .___Decreased Medicare reimbursement has resulted in our practice declining to accept
new contract proposals paying at Medicare rates.
21 .___Decreased Medicare reimbursement has resulted in our practice declining to accept
new contracts paying at less than Medicare rates.
22 .___Decreased Medicare reimbursement has resulted in our practice discontinuing
participation in current contracts paying at Medicare rates.
23 .___Decreased Medicare reimbursement has resulted in our practice discontinuing
participation in current contracts paying at less than Medicare rates.
361
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

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Asset Metadata

Creator Hollister, James Kleiser (author)

Core Title The 1996 Health Insurance Portability and Accountability Act (HIPAA) and the 1997 Balanced Budget Act (BBA): Implications for organizational change and delivery of care in cardiology group practices

Degree Doctor of Public Administration

Degree Program Public Administration

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag health sciences, health care management,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c16-373167

Unique identifier UC11339286

Identifier 3103901.pdf (filename),usctheses-c16-373167 (legacy record id)

Legacy Identifier 3103901.pdf

Dmrecord 373167

Document Type Dissertation

Rights Hollister, James Kleiser

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

Repository Name University of Southern California Digital Library

Repository Location USC Digital Library, University of Southern California, University Park Campus, Los Angeles, California 90089, USA