Establishing a Fair Payment for Rural Physicians

Research center:
Lead researcher:
Project completed:
November 2004
This project will analyze differences in physician payment as a function of practice location, and simulate policy choices that change the current payment formula. Section 1848 (e) of the Social Security Act creates geographic indices, including an index which reflects 1/4 of the difference between the relative value of physicians' work effort in each of the different fee schedule areas and the national average of such work effort. Two other Geographic Practice Cost Indices (GPCIs) are also used to calculate the Geographic Adjustment Factors (GAFs) -- practice cost including office rent and hourly wages of staff, and professional liability insurance (PLI) to reflect differences in premiums for malpractice insurance. Most physicians and those who employ them argue payment for physician work should not differ much by geography because the value of the work is not a function of area-specific costs, as distinguished from the costs of the practice and prices for liability insurance. The work index established by federal regulation uses the salaries for each of the 89 payment areas as reported in the 1990 census for six occupational categories. Of these six categories, one covers registered nurses and pharmacists. This project will research the following hypotheses:
  • Modest changes (e.g., a floor in the work index) in the calculation of GPCIs will yield significant increases in payment for rural physicians.
  • Physician practices affected favorably by increasing the work index used in the GAFs will locate in rural areas that include a disproportionate share of shortage areas and serve a disproportionate percentage of elderly persons.
This project will include three discrete activities:
  • an explanation of the physician payment formula with an easy-to-follow schematic;
  • development of a database of payments in the 89 payment areas; and
  • an analysis of the effects of payment change in specific physician practices.


  • Medicare Physician Payment: Practice Expense
    RUPRI Center for Rural Health Policy Analysis
    Date: 10/2003
    This rural policy brief examines the physician practice expense component of Medicare payment, which proportionately results in greater geographic physician payment variation than does the physician work payment. The practice expense adjustment warrants careful validation to demonstrate that the index measures actual geographic cost differences.