Medicare Physician Payment System

The Medicare physician payment system has the following components:

  1. "Resource-based" Relative Value Scale
  2. Geographic Practice Cost Indices
  3. Conversion Factor

Other issues that affect Medicare physician payment rates include the service's global period, the service's site-of-service, and budget neutrality.

Resource-based Relative Value Scale (RBRVS):
Each Category I CPT code has a total relative value. The total relative value unit is the sum of the following component relative values units:

  1. Relative value unit (RVU) for physician work (about 50% of the total relative value)
  2. RVU for physician practice expenses (about 46% of the total relative value)
  3. RVU for physician professional liability insurance costs (about 4% of the total relative value)

Both the physician work and physician practice expense values are further broken out into components as described below.

  • Work RVU inputs: Work RVU inputs include the physician effort in the "pre", "intra", and "post-service" periods.
    • Pre-service period consists of the 24 hours preceding a specific procedure or service and is assumed to include time for patient evaluation (ie, history and physical, and patient counseling), patient positioning, and scrub, dress and wait time.
    • Intra-service period consists of the time spent in direct service, either "skin-to-skin" time if it is a surgical procedure or "face-to-face" time if it is a cognitive service.
    • Post-service period consists of three phases. 1-The "immediate" post-service which includes the time spent in the operating room or patient room immediately after the procedure or service is performed. 2-The "hospital" post-service time for those procedures performed in the facility setting (defined below in site-of-service section) includes the patient visits performed by the operating physician while the patient is recovering in the hospital. Hospital visits have three levels based on CPT codes for inpatient hospital visits-99233, 99232, 99231 and hospital discharge visit CPT codes-99238, 99239. 3-The "office" post-service time for those procedures with 010 or 090 global periods (defined below in global period section) includes the patient visits performed by the operating physician in his/her office. Office visits have three levels based on CPT codes for established patient office visits-99215, 99214, 99213, 99212, 99211.
  • Practice Expense RVU inputs: practice expense RVUs are comprised of two separate, but related, inputs-1-direct practice expense inputs, and 2-indirect practice expense inputs. Direct practice expense inputs are those costs directly assumed by a physician in the course of providing the service. These include the costs of medical supplies, staff time, and equipment. Direct expense inputs are collated and then converted into relative value units. Indirect practice expense inputs measure the costs a practice incurs such as the cost of labor, rent, office supplies, insurance and so forth. There is a very complex formula for calculating indirect practice expense which is based primarily on surveys of practices across the United States and on a physician's designated medical specialty (eg, orthopaedic surgery).

Geographic Practice Cost Indices (GPCI):
Each component RVU (i.e., work, practice expense and professional liability insurance costs) has a geographic practice cost adjuster/index (GPCI) to reflect geographic differences in these relative values units. Each component RVU is multiplied by its GPCI before they are added together to get the total RVU for a given CPT code.

Conversion Factor:
The conversion factor is the dollar figure that translates the total relative value unit for each CPT code into the fee for the code. The conversion factor is determined through a highly controversial formula tied to the federal government's budget for physician services under Medicare.

Physician Payment Formula:
Taking all of these components together below is the general formula for determining a Medicare fee for each CPT code:
Physician Work RVU x Physician Work GPCI
Practice Expense (PE) RVU x Practice Expense GPCI
Professional Liability Insurance (PLI) RVU x Professional Liability Insurance GPCI

Budget Neutrality:
Across the entire Fee Schedule:
Under law, the Medicare system cannot spend more than $20 million in additional funds for changes in the total number of RVUs. If the total number of RVUs increases because one or more existing services are given higher RVUs and the cost of that increase is more than $20 million, CMS will decrease the RVUs of all physician services.

Within Families of Codes: CMS will also apply budget neutrality within the annual update process in certain circumstances. One such circumstance is when a new procedure includes work that was previously valued as part of the work for an established procedure code the value of the previously valued procedure code would be reduced by the amount of the new procedure code (an example would be if a Hip Resurfacing code were created and valued by the RUC, the RUC would reduce Hip Arthroplasty, 27230, by said amount if it was determined that Hip resurfacing was previously reported as 27230 and now has a "work value" that is theoretically removed from 27230). Another circumstance when budget neutrality applies is when a new CPT code is established to replace one or more deleted CPT codes. In this circumstance, the new CPT code's value cannot exceed the value of the deleted code(s). It is important to note that by statute, code values changed within the 5-Year Review process are exempt from this type of budget neutrality and CMS cannot apply this type of within family budget neutrality for codes with new valuations from the 5-Year review process.