This Insight is part of our Medicare Payment Primers series.
Physician/Practitioner Services
Medicare Part B pays for clinician services on the physician fee schedule (PFS). The PFS is Medicare’s primary payment system for Part B professional services, covering many clinician-furnished services such as office visits, procedures, diagnostic services, outpatient therapy, mammography, and other covered services paid on a fee schedule basis.
Under current law, the PFS reimburses for a unit of service by way of a combination of relative value units (RVUs), weighted to reflect the cost of resource inputs required to deliver a particular service, along with geographic adjustments, all multiplied by a conversion factor (CF). The relative values are based on the amount of clinician time, skill, effort, and clinical judgment required to provide each service, along with estimates of expenses associated with maintaining a practice and professional liability insurance. These three factors are adjusted for variation in the input prices in different markets, and the sum of these factors is multiplied by the physician fee schedule CF to produce a total payment amount.
Relative Value Units (RVUs)
RVUs serve as the basis for determining payment rates for services billed under the PFS. Established and updated with significant input from the American Medical Association/Specialty Society Relative Value Scale Update Committee (RUC), RVUs aim to provide national uniform measures of the relative resources clinicians require to perform a given service. RVUs are developed using data collected through surveys of physicians sponsored by their specialty societies. In addition to recommendations from the RUC, the Centers for Medicare and Medicaid Services (CMS) also gathers cost data from other surveys and data sources.
For each PFS service, there are three RVUs:
- Work RVUs (wRVUs) reflect the physician time and intensity necessary to deliver a service;
- Practice Expense RVUs (PE RVUs) account for both direct and indirect physician practice expenses, such as the costs associated with the requisite supplies, equipment, and personnel needed to furnish a service; and
- Malpractice RVUs (MP RVUs) encompass the costs associated with purchasing professional liability insurance.
Under current law, CMS applies budget-neutrality adjustments if changes in RVUs (or in the components of an RVU) would otherwise lead to an increase in total annual PFS spending above $20 million per year. As a result, RVU updates inherently trigger upward payment adjustments for certain specialties and downward payment adjustments for others.
Geographic Practice Cost Index (GPCI)
As detailed by the Government Accountability Office (GAO) in a February 2022 report, “CMS separately adjusts each of the three RVUs to account for variations in physicians’ costs of providing care in different geographic areas.” The agency relies on geographic practice cost indices (GPCIs) or input prices to make these adjustments across 112 distinct physician payment localities, subject to a statutory floor for the work GPCI.
Conversion Factor (CF)
PFS payment rates are updated each year by updating the CF, which is a fixed dollar amount used when converting a service’s relative value units to a payment amount. CF updates typically reflect both a percentage specified in law and a percentage calculated by CMS to maintain budget neutrality. The budget neutrality adjustment ensures that any changes CMS has made to values for individual codes in the fee schedule do not, in and of themselves, increase or decrease total spending.
The general formula for calculating the Medicare fee schedule amount for a given service in a particular geographic area is
Payment = [(RVU work X GPCI work) + (RVU practice expense X GPCI practice expense) + (RVU malpractice + GPCI malpractice)] X CF
Certain non-physician practitioners (NPPs) are paid under the PFS but at a reduced rate. As an example, physician assistants are paid the lesser of the actual charge or 85% of the PFS, with certain exceptions. For services performed in a hospital, Medicare limits the payment to the lesser of 75% of the PFS or the actual charge for the service. Additional adjustments are made for surgical assistance provided by physician assistants. Nurse practitioners and clinical nurse specialists are paid at 85% of the PFS. Physicians who are non-participating in the Medicare program are paid 95% of the fee schedule rate.
Facility/Non-Facility Locations
There are different fee rates for non-facility and facility services. Facility rates apply to professional services performed in a facility—such as a hospital—other than the professional’s office. Non-facility rates apply when the service is performed in the provider’s office.
Non-facility rates are higher than facility rates to address the overhead and indirect expenses incurred for services provided in this setting. Practice expense RVUs are generally lower when a service is furnished in a facility. This is because the facility receives separate payment under another Medicare payment system to cover facility-related costs, so the clinician is assumed to incur fewer direct practice expenses for services provided in a facility. RVUs for work and malpractice are not adjusted based on whether the service is furnished in a clinician’s office or a facility.
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Resources
Physician/Practitioner Services https://www.cms.gov/regulations-and-guidance/guidance/manuals/downloads/clm104c12.pdf
Mammography Services https://www.cms.gov/regulations-and-guidance/guidance/manuals/downloads/clm104c18pdf.pdf
Outpatient Therapy Services https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/clm104c05.pdf
