December 2003 Bulletin

Conversion factor adjustment may not be enough to offset decreased payments

2004 Medicare payment cuts still expected

By Daniel H. Sung, JD

In November, the Centers for Medicare and Medicaid Services (CMS) published the Medicare physician fee schedule for 2004. In the fee schedule, CMS projected a 6 percent decrease in Medicare payments for orthopaedic surgery. Much of this decrease was due a reduction in the conversion factor. However, on Nov. 25, 2003, Congress passed a bill to reform Medicare that included a 1.5 percent increase in the conversion factor.

Although payment for many orthopaedic services will still decrease because of changes in practice expense relative value units, passage of this bill will lessen these decreases. Payments for other orthopaedic services will increase slightly. Following is a summary of how the 2004 fee schedule will affect payments to orthopaedic surgeons.

Relative value units
Every service paid by Medicare is given a total relative value unit (RVU) that is based on physician work, practice expense and the cost of professional liability insurance associated with the service. Each of these components is assigned an RVU. When added together, they comprise the total RVU for the service.

The physician work, practice expense and professional liability RVUs for all Medicare services will change in 2004. Medicare will increase professional liability insurance RVUs by 19.86 percent. However, federal law states that changes in RVUs may not affect overall Medicare spending by more than $20 million. If that happens, CMS must make adjustments to ensure spending on physician services remains “budget neutral.” In order to maintain budget neutrality, CMS will decrease all physician work RVUs by 0.57 percent and practice expense RVUs by 0.77 percent.

In addition to these across-the-board reductions, the practice expense RVUs for a number of orthopaedic services will be cut as a result of Medicare’s transition to resource-based practice expense RVUs, which began in 1998.
Because of these RVU changes, orthopaedic surgeons will see decreases in payment rates for some of their services.

Conversion factor
The conversion factor is a multiplier (expressed in dollars) used to convert RVUs into dollar amounts. A change in the conversion factor affects payment for all Medicare services.

In early November, CMS announced the conversion factor for 2004 would be $35.13, which is a 4.5 percent decrease from last year’s conversion facto. As previously noted, however, Congress approved a 1.5 percent increase for the 2004 conversion factor. The legislative update (see page 13) provides more details on the Medicare bill.

In the absence of Congressional action, CMS updates the conversion factor each year through a complex formula. There are numerous problems with the formula that have led to significantly lower Medicare payments for physicians over the last couple years.

One part of the formula, the Medicare Economic Index (MEI), accounts for the inflationary cost of operating a medical practice. A problem with the MEI is that it fails to fully capture all the inflationary changes from one year to the next. In recent years, the MEI has increased by an average of 2 percent. In 2004, the MEI will be 2.9 percent.

Another part of the formula, called the update adjustment factor, compares actual Medicare spending on physician services to the amount budgeted for these services. When CMS develops its budget for physician services, it takes into account estimates of: 1) fees for physician services, 2) the growth in the number of Medicare patients, 3) the U.S. Gross Domestic Product (GDP), and 4) costs due to changes in Medicare rules and regulations.

If actual spending over time is more than the amount budgeted, the conversion factor for the following year is reduced. If actual spending is less than the budgeted amount, the conversion factor is increased. Medicare calculated a lower conversion factor for 2004 partly because actual Medicare spending exceeded the Medicare budgeted amount.

The problem with Medicare’s budget calculation is that it often underestimates the number of patients in the Medicare program and practice cost changes because of new Medicare rules and regulations. This leads to an underestimation of the Medicare budget. The Medicare budget is also tied to the overall business cycle of the U.S. through the GDP. This is a problem because it makes the Medicare budget dependent on economic factors that have little bearing on the Medicare program.

How is the AAOS involved?
The AAOS regularly submits written comments to Medicare on rules and regulations that affect orthopaedic reimbursement. For instance, over the last several years, the AAOS has submitted written comments on the various problems with the conversion factor, musculoskeletal RVUs and coverage and coding policies that affect payment for orthopaedic surgeons. The AAOS leadership has also met face-to-face with CMS officials on many payment and coverage issues.

Additionally, the AAOS participates in the AMA/Specialty Society Relative Value Scale Update Committee (RUC) process. The RUC is an advisory body to Medicare that makes RVU recommendations for new and revised Medicare services. Every five years, the RUC also reviews the RVUs for existing services to ensure they are appropriately valued. The RUC process allows the AAOS to defend the RVU values for all services performed by orthopaedic surgeons.

The AAOS also actively lobbies in Washington, D.C., for improved Medicare payment policies that will help orthopaedic surgeons. The article on page 13 provides an update on the AAOS’ activities in Congress on Medicare payment issues.

Medicare payment rates for 2004, the previous three years, and 1992 (the first year that Medicare implemented the fee schedule) can be found on the Health Policy section of the web site. The 2004 payment rates have been calculated using the –4.5 percent conversion factor announced in the final rule. However, because Congress recently authorized a 1.5 percent increase in the conversion factor, payment amounts will be more than the amounts listed in the charts. Visit the AAOS Web site for the most current Medicare payment rates.

The charts reflect nationwide payment rates for commonly performed orthopaedic services in the facility and non-facility setting. Payments in your area will vary somewhat from the listed amounts because Medicare adjusts payments due to geographic differences in cost of practicing medicine.
To read the final rule in its entirety, go to:

For more information on Medicare payment issues, contact AAOS department of socioeconomic & state society affairs, at (847) 384-4320.

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