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How to calculate Medicare Fee Schedule?

Payment rates for an individual service are based on the following three components:

1) Relative Value Units (RVU);

2) Conversion Factor (CF); and

3) Geographic Practice Cost Indices (GPCI).

Each component is discussed in more detail below.

1) Relative Value Units (RVU)

Three separate RVUs are associated with the calculation of a payment under the Medicare PFS:

™Work RVUs reflect the relative levels of time and intensity associated with furnishing a Medicare PFS service and account for approximately 50 percent of the total payment associated with a service. By statute, all work RVUs must be examined no less often than every five years. As noted in the calendar year (CY) 2010 Medicare PFS final rule, the fourth five-year review of work was initiated in 2009. Changes to work RVUs resulting from this review are effective beginning in CY 2012. In addition, beginning in CY 2013, the five-year review of physician work process has been consolidated with the misvalued codes initiative to allow for ongoing annual public input from interested stakeholders who can nominate codes to review; 

Practice expense (PE) RVUs reflect the costs of maintaining a practice (e.g., renting office space, buying supplies and equipment, and staff costs). For CY 2012, indirect cost data that are used in the calculation of PE RVUs for most specialties were updated using the American Medical Association’s Physician Practice Information Survey (PPIS) data. The PPIS is a multispecialty, nationally representative indirect PE survey of both physicians and non-physician practitioners. Its use is being transitioned over a four-year period beginning in CY 2010; and

Malpractice (MP) RVUs represent the remaining portion of the total payment associated with a service. The second five-year review of MP RVUs was completed in CY 2009.

2) Conversion Factor (CF)

To determine the payment rate for a particular service, each of the three separate RVUs, identified in

1) Relative Value Units (RVU) above, is adjusted by the corresponding GPCI as explained in 3) Geographic Practice Cost Indices (GPCI) below.

The sum of the geographically adjusted RVUs is multiplied by a dollar CF. The CF is updated on an annual basis according to a formula specified by statute. The formula specifies that the update for a year is equal to the Medicare Economic Index (MEI) adjusted up or down depending on how actual expenditures compare to a target rate called the Sustainable Growth Rate (SGR). The MEI is a measure of inflation faced by physicians with respect to their practice costs and general wage levels. The SGR is calculated based on medical inflation, the projected growth in the domestic economy, projected growth in the number of beneficiaries in Fee-For-Service Medicare, and changes in law or regulation.

3) Geographic Practice Cost Indices (GPCI) 

GPCIs are adjustments that are applied to each of the three relative values used in calculating a physician payment, as described in 1) Relative Value Units (RVU) above. The purpose of these adjustments is to account for geographic variations in the costs of practicing medicine in different areas within the country. The Centers for Medicare & Medicaid Services (CMS) is required to update the GPCIs every three years and to phase in any changes over two years.

The Medicare PFS payment rates formula is shown below:

[(Work RVU x Work GPCI) + (PE RVU x PE GPCI) + (MP RVU x MP GPCI)] x CF


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