How Medicare, Other Payers Determine Physician Reimbursement Rates

December 11, 2013

This short summary of the history and elements of physician reimbursement rates will make you better informed than most other doctors.

Do you know how Medicare and other payers determine reimbursement rates? Most physicians don't. Reading this summary of the history and elements will take less than three minutes, and will make you better informed than most.

History. The resource-based relative value scale (RBRVS) was introduced in the Omnibus Budget Reconciliation Act of 1989. The intent was to create a uniform and objective payment system to address the large payment disparities produced under the traditional usual, customary, and reasonable (UCR) standard. The new scheme was adopted over a five-year transition period. 

NOTE: The sustainable growth rate (SGR) was part of the Balanced Budget Act of 1997 and is separate.

Relative Value Units (RVUs) and CPT codes. Three RVUs are assigned to each CPT code:

Physician work RVU: A relative measure of the time, skill, training, and intensity required to provide a specific service The goal is for each CPT code to be reviewed at least every five years in order to make adjustments to reflect changes in the components of the service.

Practice expense RVU: Addresses expenses associated with providing the service. The direct costs (staff allocation, supplies, and equipment) of the service are calculated; indirect costs (any costs of operations not directly involved in providing the service) are allocated. A new method of calculating practice expense was fully implemented in 2010, after a transition period.

Malpractice RVU: Costs associated with professional liability expenses.

Who sets RVUs? CMS sets RVUs based upon the recommendations of the Specialty Society Relative Value Scale Update Committee (RUC). The RUC is made up of 29 physicians, 23 of whom are nominated by professional societies. Almost all are specialists. CMS is not bound to accept either the professional society nominees or the RUC's recommendations, but it has historically approved more than 90 percent of RUC recommendations.

The process has been criticized for a lack of transparency. There are also those who argue for more representation by primary-care providers, private insurers, and employee health plan purchasers.

Geographic Practice Cost Indices (GPCI). A GPCI is calculated, by CMS, for each of the RVU components. The GPCIs are reviewed every three years and attempt to take into account the different costs associated with different areas of the country.

Conversion Factor (CF). The CF translates RVUs and GPCIs into actual dollars. It is updated annually according to a formula specified by statute.

CMS may not, by statute, increase its total annual budget by more than $20 million. If shifts in the RVUs would increase CMS' budget by more than $20 million, the CF is used to achieve, essentially, budget neutrality.

Congress may override the CF formula and regularly does.

Non-Facility Payment Amount. A non-facility is a freestanding physician's office, as well as other freestanding settings. Inpatient facilities, hospital outpatient clinic settings, and off-site hospital-owned locations are considered "facilities."

The payment for each CPT code in a non-facility is calculated as follows:

Payment = [(Physician Work RVU X Work GPCI) + (Non-Facility Practice Expense RVU X Practice Expense GPCI) +     (Malpractice RVU X Malpractice GPCI)] X (Conversion Factor, adjusted for budget neutrality)

2014 Payment Changes. CMS released the finalized payment rates and policies for 2014 on Nov. 27, 2013. The total payments under the fee schedule are projected to be $87 billion.

The largest increases go to psychiatry, clinical psychologists, and clinical social workers, as well as other providers of mental health services. There was also an aggregate increase in physician work RVUs and a corresponding decline in practice expense RVUs.

Beginning in 2015, CMS will establish separate payments for managing a patient's care outside of face-to-face contact.

Private Payer Reimbursement. Most, if not all, private payers tie their reimbursement rates to Medicare's. Contrary to widespread perception, private payers often reimburse at rates lower than Medicare.

As intricate as this may seen, these are just the basics. Bonuses and penalties for quality, patient satisfaction, eRX, and meaningful use are topics for another day.