February 2002 Bulletin

2002 Medicare Payments reduced

Conversion factor down 5.4%

RVU phase in will be completed in 2002

By Bob Fine

On November 1, 2001, the Centers for Medicare and Medicaid Services (CMS, formerly HCFA) published the Medicare Fee Schedule for 2002. This fee schedule includes a 5.4% across-the-board decrease in payments for all physician services, including services performed by orthopaedists. The reason for the payment reduction is that the Medicare conversion factor for 2002 is 5.4% lower than the 2001 conversion factor.

The conversion factor is the dollar amount that is used to convert relative value units (RVUs) into payments under Medicare’s Resource-Based Relative Value Scale (RBRVS) Fee Schedule. Next year’s reduction comes after two years of significant increases in the conversion factor, 5.4% in 2000 and 4.5% in 2001. The following factors are causing the lower Medicare payments for 2002.

Annual Physician Payment Update

The amount of money that the federal government budgets for physician services under Medicare for the coming year is based, largely, on a very complicated and controversial formula. This formula uses an inflation measure, called the Medicare Economic Index (MEI), plus an adjustment that reflects the degree to which actual spending by Medicare on physician services in the previous year came in under or over a targeted amount. Under this target or sustainable growth rate (SGR), the use of services per Medicare beneficiary is allowed to increase by only as much as the gross domestic product (GDP) increases. When GDP growth is strong, payment changes in the following year are more likely to keep pace with inflation in practice costs, but declining GDP growth will generally lead to physician payment cuts. Even though the GDP has no direct link to health care needs, an economic downturn can lead to steep reductions in Medicare payments to physicians. This year, revised forecasts for the GDP, increases in physician spending and the economic slowdown have all added up to a 4.8% decrease in Medicare payments for physician services in 2002.

Five-Year Review of Physician Work Relative Value Units

The total RVU for each physician service in the Medicare RBRVS reflects three factors: physician work, practice expenses and medical malpractice insurance costs. There is an RVU for each of these factors. When added together, these RVUs make up the total RVU for each service. The total RVU is then multiplied by the conversion factor to calculate the payment amount for the service.

The physician work RVU is the biggest RVU for services provided by orthopaedists. It makes up about 50% of the total RVU.

Under law, CMS must review physician work RVUs for all services every five years. All interested parties, including the AAOS, are given the opportunity to provide "compelling evidence" to CMS that physician work RVUs for select services are wrong. In 2002, the physician work RVUs for several hundred services, including some in orthopaedics, will be higher as a result of the five-year review. However, federal law states that changes in RVUs may not affect overall Medicare spending by more than $20 million. If that happens, a "budget neutrality" adjustment must be applied. To maintain budget neutrality, CMS has reduced the 2002 conversion factor by another 0.46%. In other words, payments for all services are decreased slightly so that money is freed-up to pay for those services that are getting higher physician work RVUs. This is how CMS maintains budget neutrality.

Transition to Resource-Based Practice Expense Relative Value Units

In 1999, CMS began a four-year transition to new "resource-based" practice expense RVUs. Previously, practice expense RVUs were based on the old Medicare charge system. The overall impact of the new system is to increase practice expense RVUs for services performed in physicians’ offices, while lowering the practice expense RVUs for services provided in a facility. The phase-in to the new system will be completed in 2002. CMS anticipates that physicians will increase the volume and intensity of services they provide in response to the new practice expense RVUs, so it has reduced the 2002 conversion factor by an additional 0.18 percent.

Impact on Individual Services

Although the conversion factor has been reduced by 5.4%, the impact on individual services will vary based on changes in their RVUs.

However, the biggest factor causing payment changes across-the-board is the lower conversion factor.

For several years, the American Medical Association, the AAOS and other national specialty societies have expressed concerns about the formula used to set the conversion factor, including the fact that it is tied so closely to GDP growth. The AAOS is currently working with other groups in Washington to get legislation that would freeze Medicare payments at current levels until this formula is fixed.

Payments for Procedures Provided by Orthopaedists

The two tables on the following pages show national average Medicare physician payments for the top 20 facility and non-facility procedures performed by orthopaedists from 1992 to 2002. (Actual payments in your area may be slightly different because Medicare also uses a geographic adjustment factor in its fee schedule formula.) The procedures in these tables account for most Medicare payments to orthopaedists. The tables show the overall trends in payment since the Medicare RBRVS was introduced a decade ago. Please note that "non-facility" refers to procedures performed in an office setting. "Facility" refers to procedures performed in a hospital or ambulatory surgical center.

If you have questions please contact Robert C. Fine, JD, Director, AAOS Department of Health Policy, at 847-384-4322 or by e-mail at fine@aaos.org.

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