June 2003 Bulletin

An inside look at Medicare’s Physician Fee Schedule

A review of the resource-based relative value unit process

By Daniel H. Sung, JD

Prior to 1992, Medicare paid physicians based on a system of "customary, prevailing, and reasonable (CPR)" charges. Under this system, physicians were reimbursed for the services they provided to Medicare beneficiaries using existing physician charge data.

However, in 1992, Medicare changed the way it paid for physician services by establishing a standardized physician payment schedule based on a resource-based relative value scale (RBRVS). Under the RBRVS system, medical services are ranked according to the relative costs of the resources required to provide the service. This article provides an overview of how the RBRVS process works.

RBRVS components

Medicare uses three components to calculate resource costs for the RBRVS: physician work, practice expense and professional liability insurance. The physician work component accounts for 55 percent of the total relative value for each service. This component measures the time, technical skill, physical effort, mental judgment and potential risk of performing a medical service.

The practice expense component accounts for 42 percent of the total relative value for each service. This component measures the clinical time, medical supplies and equipment needed to perform a particular procedure. The third component, professional liability insurance, accounts for 3 percent of the total relative value and measures the professional liability costs associated with each medical procedure.

Medicare uses Current Procedure Terminology (CPT) to develop the list of services payable under Medicare. There are thousands of procedure codes defined in CPT. Each procedure is assigned a total relative value unit (RVU), which is calculated by adding the physician work, practice expense and professional liability RVU components for that procedure. The total RVU is multiplied by a conversion factor, which translates the RVU into a specific dollar amount reimbursement rate. Medicare then makes an adjustment to the reimbursement rate based on the geographic location of the provider.

RVS Update Committee

The AMA/Specialty Society RVS Update Committee (RUC) was formed in 1991 by the American Medical Association (AMA) and the national medical specialty societies to ensure that organized medicine had input in developing RVU recommendations for Medicare. There are 29 members of the RUC, and to guarantee appropriate representation, 23 members are appointed by major national medical specialty societies.

In addition to the RUC, each of the 102 specialty societies seated in the AMA House of Delegates has the opportunity to appoint a representative to serve on the RUC Advisory Committee. The RUC advisors represent their specialty society at RUC meetings and make RVU recommendations for new and revised CPT codes that affect members of their specialty.

RUC process

Each year, the RUC goes through a specific process for developing RVU recommendations for new and revised procedures. First, the RUC advisors review upcoming changes in CPT to determine if any new or revised codes might affect members of their specialty. If the RUC advisor identifies any relevant changes in CPT, the RUC advisor contacts the specialty society to coordinate a survey to obtain data to develop an RVU recommendation for the new or revised code. After the survey process is complete, the RUC advisor and the specialty society review the survey data and prepare an RVU recommendation based on the data. Next, the RUC advisor presents the RVU recommendations to the RUC. The RUC then deliberates on whether to approve, reject or modify a specialty society’s recommendation. The RUC then forwards its RVU recommendations to Medicare. Medicare reviews the RUC recommendations and then publishes its annual update to the Physicians’ Fee Schedule.

Through this process, the AMA and the specialty societies have submitted over 3,000 RVU recommendations for the Physicians’ Fee Schedule. Medicare has accepted more than 90 percent of the RUC’s recommendations.

RUC five-year review process

In addition to the annual updates, the RUC also participates in the five-year review process. Congress requires Medicare to comprehensively review all RVUs at least every five years to make any needed adjustments. The five-year review process is used to identify existing CPT codes that are either undervalued or overvalued. As with the annual updates, RVU recommendations for the five-year review rely heavily on survey data obtained by the specialty society.

AAOS involvement

The AAOS maintains a permanent seat on the RUC and has a RUC advisor. The AAOS also maintains a seat on an important subcommittee of the RUC, the Practice Expense Advisory Committee. Through the RUC process, the AAOS has successfully submitted hundreds of RVU recommendations for musculoskeletal codes. The AAOS will continue to work diligently to represent orthopaedic interests in this complex reimbursement process.

The RUC survey process is an extremely important part of both the annual update and the five-year review process because it is the primary method of developing RVU recommendations. Because these recommendations directly impact your Medicare reimbursement, the AAOS strongly encourages members to sign-up for the annual update and five-year review survey process by contacting the author of this article.

Daniel H. Sung, JD, is a policy analyst in the AAOS department of socioeconomic and state society affairs.

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