The Social Security Act (the Act) requires the Centers for Medicare & Medicaid Services (CMS) to establish payments under the Medicare Physician Payment Schedule based on national uniform relative value units (RVUs) that account for the relative resources used in furnishing a service. The Act requires that RVUs be established for 3 categories of resources:
- Physician work
- Practice expense (PE)
- Malpractice (MP) expense
CMS is also required to establish by regulation each year’s payment amounts for all physician services paid under the Medicare Physician Payment Schedule, incorporating geographic adjustments to reflect the variations in the costs of furnishing services in different geographic areas.
The Medicare Physician Payment Schedule’s impact on a physician’s Medicare payments is primarily a function of 3 key factors:
- The resource-based relative value scale (RBRVS)
- The geographic practice cost indexes (GPCI)
- The monetary conversion factor
Calculating the Payment Schedule
The Omnibus Budget Reconciliation Act of 1989 (OBRA 89) geographic adjustment provision requires all 3 components of the relative value for a service—physician work relative value units (RVUs), practice expense RVUs and professional liability insurance (PLI) RVUs—to be adjusted by the corresponding GPCI for the locality. In effect, this provision increases the number of components in the payment schedule from 3 to the following 6:
- Physician work RVUs
- Physician work GPCI
- Practice expense RVUs
- Practice expense GPCI
- PLI RVUs
- PLI GPCI
The formula for calculating payment schedule amounts entails adjusting RVUs, which correspond to services, by the GPCIs, which correspond to payment localities.
The general formula for calculating Medicare payment amounts for 2016 is expressed as:
Work RVU1 × Work (GPCI)2
+ Practice Expense (PE) RVU × PE GPCI
+ Malpractice (PLI) RVU × PLI GPCI
= Total RVU
× CY 2016 Conversion Factor of $35.8043 (Jan. 1–Dec. 31, 2016)
= Medicare Payment
1The 2016 physician work, practice expenses, and malpractice RVUs may be found in Medicare RBRVS: The Physicians’ Guide.
2The Geographic Practice Cost Index (GPCIs) for calendar year (CY) 2016 may also be found in Medicare RBRVS: The Physicians’ Guide.
The Medicare Conversion Factor
The Medicare conversion factor is a scaling factor that converts the geographically adjusted number of RVUs for each service in the Medicare physician payment schedule into a dollar payment amount. The initial Medicare conversion factor was set at $31.001 in 1992. Subsequent conversion factor updates have been based on 3 factors:
- The Medicare economic index
- An expenditure target “performance adjustment”
- Miscellaneous adjustments including those for “budget neutrality”