Issues & Projects

Medicare Physician Fee-for-Service Payments: Adjusting for Variation in Geographic Practice Costs and Challenges for Hawaiʻi

Background: Medicare, the national health insurance program for those 65 and older, as well as people with disabilities or End-Stage Renal Disease (ESRD), reimburses physicians on an outpatient basis based on a Physician Fee Schedule (PFS) established in statute in 1992. The core payments (service values) in the PFS are adjusted nationally using the “Geographic Practice Cost Index” (GPCI), which was established by Congress and intends to adjust for geographical differences in physician work, practice expenses, and malpractice costs. This formula’s methodology is largely determined by the Centers for Medicare and Medicaid Services (CMS) and is meant to encourage fair payment in higher-cost areas.

Issue: Under the current GPCI formula methodology, Hawaiʻi’s PW GPCI is 1.000—effectively the national average—even though the cost of living in Hawaiʻi is the highest in the nation and is over 20% higher than the national average. Hawaiʻi’s physician community has long raised concerns that the state’s Medicare payments do not reflect Hawaiʻi’s exceptionally high cost of living and geographic isolation. Alaska—another non-contiguous state with similar challenges—has had a Congressionally-established 1.5 floor on its Physician Work (PW) GPCI since 2008, ensuring higher reimbursement levels. Despite shared geographic and economic constraints, Hawaiʻi lacks this adjustment, resulting in comparatively lower payments for the same services. There have been concerns that this lack of adjustment in Medicare payments has been linked to challenges in recruiting and retaining physicians across the state of Hawaiʻi, particularly in rural and neighbor island communities, where access to care is already limited.

Project: The University of Hawaiʻi Rural Health Research & Policy Center (RHRPC) conducted an analysis of the GPCI methodology and its effects on Hawaiʻi. The project included:

• Reviewing the statutory and regulatory history of the GPCI and PW GPCI formula, including the existing PW GPCI floor for Alaska, the other non-contiguous state;
• Examining the construction and limitations of the PW GPCI formula, including the 25% adjustment cap and use of proxy professional wage data from the Bureau of Labor Statistics;
• Analyzing national and state-level wage and cost-of-living data to determine correlations between PW GPCI adjustments and true geographical cost differences;
• Comparing Hawaiʻi’s wage–cost gap to other high-cost states; and
• Proposing policy options to promote equitable physician reimbursement.

Final Report and Findings: UH RHRPC’s final publication, Medicare Physician Fee-for-Service Payments: Adjusting for Variation in Geographic Practice Costs and Challenges for Hawaiʻi, presents the findings of this analysis and outlines four key policy solutions to ensure fair compensation for Hawaiʻi’s physicians.

Findings of the report included:

• Compared with other high-cost states, Hawaiʻi exhibits the largest gap between cost of living and geographic adjustment of Medicare reimbursement rates for wages.
• The GPCI’s reliance on proxy professional wages fails to capture Hawaiʻi’s true economic conditions, as wages are compressed in the state due to its isolated economy.

Given the challenges with Medicare reimbursement in a non-contiguous state of Hawaiʻi, as described, as well as the statutory and regulatory precedents for treating Hawaiʻi and Alaska similarly, RHRPC’s policy proposals include:

1. Congress could implement a 1.5 PW GPCI floor for Hawaiʻi, consistent with Alaska’s current statutory floor;
2. CMS could provide a regulatory adjustment to create a 1.5 PW GPCI floor for Hawaiʻi or merge Hawaiʻi into Alaska’s fee schedule locality;
3. CMS could incorporate Regional Price Parities (RPP) into the PW GPCI formula; and/or
4. Congress could create a bonus payment for non-contiguous states, similar to the existing Health Professional Shortage Area (HPSA) bonus payment in Medicare, to offset geographic cost disparities.

The full report and two-page overview are available below:

Full Report (PDF)

Two-Page Overview (PDF)