December 2004 Bulletin

Expect higher Medicare payments in 2005

By Daniel H. Sung, JD

On Nov. 15, 2004, the Centers for Medicare and Medicaid Services (CMS) published the final rule for the 2005 physician fee schedule, available at Included are several provisions that will affect reimbursement for musculoskeletal procedures.

Under the final rule, the 2005 conversion factor will be $37.89, which is a 1.5 percent increase from 2004. As a result of this increase in the conversion factor, payment rates for many orthopaedic services will increase slightly from 2004. The final rule also includes adjustments to practice expense and professional liability relative value units for specific musculoskeletal procedures. Due to these adjustments, the exact change in payment rates will vary from procedure to procedure.

The effect of RBRVS

Medicare uses a resource-based relative value scale (RBRVS) to reimburse physicians. Under this system, medical services and procedures are ranked according to the relative costs of resources required to provide a service. Medicare implements RBRVS by assigning three different types of relative value units (RVUs) for every procedure listed on its fee schedule: an RVU for physician work, an RVU for practice expense, and an RVU for professional liability insurance. The sum of these three RVUs is multiplied by a dollar conversion factor, and the result is a payment rate for a particular procedure.

Medicare makes an additional adjustment in payment rates based on geographic location. As a result, reimbursement for a specific procedure depends on a number of factors. For 2005, changes in payment rates for musculoskeletal procedure are due to adjustments to the conversion factor, practice expense RVUs and professional liability insurance RVUs.


work RVU





insurance RVU






Conversion factor

The conversion factor is a multiplier used to convert RVUs into dollar amounts. A change in the conversion factor affects payment for all procedures and services under the Medicare fee schedule.

Medicare normally updates the conversion factor each year through a complex formula specifically defined by federal statute. Under this formula, the 2005 conversion factor would have decreased 3.3 percent. This cut was averted because the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 included a mandate that the 2005 update to the conversion factor could not be less than 1.5 percent. As a result, the conversion factor went from $37.34 in 2004 to $37.89 in 2005.

There are numerous problems with the conversion factor formula that have led to significantly lower Medicare payments for physicians over the last couple years. The AAOS continues to lobby and actively seek ways to improve the conversion factor formula.

Relative value units

The 2005 Medicare fee schedule incorporates more than 2,200 changes to practice expense RVUs based on recommendations made by the American Medical Association (AMA)/Specialty Society Practice Expense Advisory Committee (PEAC). The PEAC is charged with reviewing the data used by Medicare to develop practice expense RVUs.

Refinements of practice expense inputs for many musculoskeletal procedures are incorporated into the 2005 fee schedule. In several instances, this led to a decrease in practice expense RVUs. Changes in practice expense RVUs often create a noticeable change in payment rates for a given procedure because practice expense accounts for 43.6 percent of the reimbursement for a given procedure.

The trend of decreasing practice expense RVUs for musculoskeletal procedures results from Medicare’s decision to transition to resource-based practice expense RVUs. Medicare began the transition in 1998 and is close to completing this task. When the transition to resource-based practice expense RVUs is complete, there will be fewer fluctuations in practice expense RVUs.

Medicare also revised all professional liability insurance RVUs for 2005. Under the specialty-weighted approach adopted by Medicare, professional liability insurance RVUs are based upon the weighted average of the risk factors for all specialties performing a given service.

In addition, Medicare used updated data in calculating professional liability insurance RVUs. This included actual 2001 and 2002 malpractice premium data, projected 2003 premium data and actual 2003 Medicare payment data on allowed services and charges.

For orthopaedic surgery, the overall impact of these changes is that professional liability insurance RVUs for many musculoskeletal procedures will increase by approximately 0.4 percent. However, it is important to remember that changes in professional liability RVUs will not significantly affect payment rates for procedures because professional liability insurance accounts for only 3.9 percent of the reimbursement rate for a code.

Five-year review

For 2005, Medicare did not make adjustments to physician work RVUs for existing musculoskeletal procedures. However, it did announce the initiation of the five-year review, which is a process to identify misvalued physician work RVUs.

This will be the third time that Medicare has undertaken this Congressionally mandated five-year review process. For the upcoming five-year review, Medicare will revise undervalued work RVUs for services and procedures identified by the medical community. In addition, Medicare has indicated it will also examine high-volume codes across all specialties where the procedure: (1) was previously performed in the inpatient setting, but is now performed predominantly on an outpatient basis; and (2) has no data or old data (such as procedures that have not been reviewed by the AMA/Specialty Society RVS Update Committee).

The five-year review process is important because it affects physician work RVUs, which account for 52.5 percent of the reimbursement for a given code. A change in physician work has a significant impact on reimbursement. To illustrate this point, a 20 percent increase in the value of a physician work RVU will increase the overall reimbursement rate for a procedure by at least 10 percent. In contrast, a 20 percent increase in the value of a professional liability RVU will increase overall reimbursement for a given procedure by only 0.6 percent.

What you can do

The AAOS is a member of the AMA/Specialty Society RVS Update Committee (RUC). This advisory body to Medicare makes RVU recommendations for annual updates to the fee schedule, as well as for the five-year review. The AAOS participates in the RUC because it provides an opportunity to advocate on behalf of the orthopaedic community for appropriate payment rates for musculoskeletal procedures.

The AAOS has already begun preparing for the five-year review and has identified a number of undervalued musculoskeletal services within the fee schedule. However, the AAOS will need your help to collect specific data that will be used to defend reimbursement rates for musculoskeletal procedures.

For several months during 2005, the AAOS will be sending out surveys to collect data. If you receive a survey, it is vitally important for you to complete it because Medicare reimbursement rates for the surveyed procedures might decrease if the AAOS cannot collect sufficient data. The survey results will directly affect your Medicare reimbursement. You can volunteer to participate in the five-year review survey process by contacting the author of this article.

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

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