October 2004 Bulletin

RVUs and you

Using Relative Value Units to better manage your practice

By James J. Hamilton, MD

Most orthopaedic surgeons know that the Relative Value Unit (RVU) resulted from a comprehensive study conducted in 1992 at Harvard University. Traditionally, however, most orthopaedic surgeons have not paid much attention to RVUs except as they are used in connection with the Medicare payment schedule. This is unfortunate, because the RVU can also be a powerful practice management tool for your office.

The objective of the Harvard study was simple: determine the resources used in providing every medical procedure and establish a common unit of measurement that would permit an objective comparison of the work involved in each procedure relative to all other procedures. The existence of a common unit of measurement would permit the government to reimburse physicians for care provided to patients in a logical, internally consistent manner. No longer, for example, would two physicians practicing in the same community receive radically different amounts for providing exactly the same service, as was previously often the case.

While this concept may seem strange initially, it is virtually identical to the way we think about purchases in the non-medical marketplace. For example, we think of an item that costs $5 as being five times as valuable as an item that costs only $1. Ultimately, the RVU system was adopted by the Centers for Medicare and Medicaid Services (CMS) as the basis for all Medicare payments today.

Calculating RVUs

The total RVU value for a procedure has three components:

The RVUs are then multiplied by a conversion factor to determine the actual cash reimbursement value of the procedure. The conversion factor is updated annually and the entire scale must by statute be reviewed every five years by CMS. In 1997, the conversion factor was $40.96; by 2000, it had dropped to $36.61. The 2004 conversion factor is $37.34.

What is your cost per RVU?

Every office should regularly calculate its average cost per RVU. This is a very simple process. First, determine the annual cost of running your office. This includes salaries, rent, employee benefit costs, office supplies, medical supplies, depreciation, taxes, medical liability premiums and other costs.

Next, determine your annual RVU production. Your practice management system should be able to generate a simple report of all the CPT codes you have billed in a year and electronically convert them to RVUs. Finally, divide the cost of running the office by the annual RVU production to give you an RVU cost.

Your office RVU value can be used in several ways. For example, you can use it during contract evaluations to determine if you want to be involved or not. A managed health care plan with a payment schedule that lists a $1,000 payment for procedure XYZ might initially seem appealing, especially if you have only been charging $900 for the procedure. However, if you discover that this procedure has an RVU value of 25 and your cost per RVU is $60, for a total cost of service of $1,500, signing the contract will be a fiscal disaster. In addition, you will need to adjust your fee schedule to reflect the cost of providing this procedure.

A more sophisticated analysis you could undertake is based on the three RVU components: work, practice management and professional liability. The work portion is the same anywhere in the United States. The practice management portion must include a geographic factor that reflects the difference in the cost of running an office on 5th Avenue in New York City compared to one in Pella, Iowa. The professional liability portion would also reflect the average medical liability cost in a geographic area. You can generate some interesting figures based on these factors to see if your costs are in line with what you are being paid.

Other applications

A multi-physician office could do individual analyses to determine the cost of an RVU provided by different physicians in the practice. You should not expect, or attempt to achieve as a goal, that all physicians would have the same RVU cost. A physician who spends most of his or her time in the office will probably have a higher RVU cost than a physician who concentrates on surgery.

Similarly, use caution in basing compensation solely on RVU productivity. The office-based physician frees up the surgeon to do more procedures; without that support, the surgeon would have to spend more time in the office, with a significant decrease in RVU production.

You can also compare your data to several different benchmarks. Two major resources are the Medical Group Management Association and the University Health Consortium. Both groups collect data on practice expense and physician productivity. The data are presented in multiple tables and are analyzed by such factors as region, specialty, and practice type and other factors. Although you can compare your data to these sources, you should be careful in interpreting the data. Both resources rely on on a relatively small sample size.

In summary, understanding RVUs can be a powerful tool in your practice. RVUs should not be the sole measure you use, but a careful analysis of your costs can help keep your practice financially profitable.

James J. Hamilton, MD, is chair of the Academic Business and Practice Management Committee. He can be reached at James.Hamilton@tmcmed.org

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