Diffusion of Medicare's RBRVS and related physician payment policies - resource-based relative value scale - Medicare Payment Systems: Moving Toward the Future

Health Care Financing Review, Winter, 1994 by Lauren A. McCormick, Russel T. Burge

BACKGROUND

The rapid increase in health care costs has been a primary motivation behind many proposals to reform the U.S. health care system. While overall national health expenditures have increased from $250 billion in 1980 to $751 billion in 1991, national expenditures for physician services increased at an even faster rate, from $42 billion to $142 billion (Letsch et al., 1992). Potential reform measures for physician reimbursement range from capitated payments to negotiated payments for a specialized bundle of services to newly developed fee schedules.

The Medicare program took a major step to reform physician payment by implementing the MFS on January 1, 1992.1 Medicare's reform provisions, enacted by Congress as part of the Omnibus Budget Reconciliation Act of 1989 (OBRA 1989), were motivated by several factors. First, Medicare program expenditures for physician services had been growing at rates that averaged over 13 percent since 1965. By 1991, Medicare expenditures for physician services--which constituted 70 percent of total Part B expenditures and more than 25 percent of Medicare total expenditures--had reached $26 billion (Physician Payment Review Commission [PPRC], 1992). A second factor was the wide variation in physician payments across types of procedures, physician specialties, and geographic locations that developed under Medicare's customary, prevailing, and reasonable (CPR) charge payment methodology. Finally, concern about the impact of increasing financial liability on Medicare beneficiaries for physician services was another important factor for the passage of OBRA 1989. Out-of-pocket expenditures for Medicare beneficiary households (of which physicians' charges billed above Medicare maximums, or balance billing amounts, were a major component) were about 17.1 percent of household income in 1991, up from about 10.6 percent in 1972 (Physician Payment Review Commission, 1992). To address these concerns, OBRA 1989 included the following provisions: (1) physician service fees derived using RBRVS;(2) (2) a cost-control mechanism-Medicare volume performance standards (MVPS); and (3) balance billing limits on non-participating providers.

The RBRVS serves as the foundation of the MFS and includes three resource components: (1) total physician work; (2) practice expenses; and (3) malpractice expenses. Each component is measured in terms of relative. value units (RVUs). In the MFS, fees are based on RVUS from the RBRVS, adjusted for geographic input price differences, and multiplied by a national conversion factor to derive dollar amounts. The MFS also consists of accompanying physician payment policies.

The physician work RVU component was developed by Harvard University researchers and refined by HCFA (Hsiao et al., 1988, 1992; Federal Register, 1991). The work RVU for each current procedural terminology (CPT) code represents the relative value of physician work (e.g, time, physical effort and skill, mental effort and judgment, and stress from iatrogenic risk) required for that service in comparison to all other services. HCFA developed the practice expense RVUs, using historical charges for each code and estimates of the average portion of total revenues that physician specialties attributed to their practice expenses (e.g., equipment, rent, and salaries for ancillary personnel). Similarly, malpractice expense RVUs were also developed by HCFA. The total RVU for each CPT code represents a value indexed to an intermediate office visit which has 1.0 total RVUs.

Physician service fees under the MFS are calculated from the following equation:

(1) [FFE.sub.i;L] = CF x [GAF.sub.i;L] x

([RVU.sub.w,i] [RVU.sub.pe,i] [RVU.sub.m,i]

where i is the ith service or procedure; GAF is a procedure- and location-specific geographic adjustment factor comprised of the weighted average of three indexes--physician work, practice expenses, and malpractice expenses--based on the Geographic Practice Cost Indexes (GPCI); and CF is the national conversion factor to convert the sum of the three RVUs, multiplied by the respective GAF, into dollars. Medicare's total RVU is the sum of the three RVU components. In the formulas, each RVU component is indicated with a subscript: subscript w indicates physician work involved in performing service i; subscript pe represents practice expenses associated with service i; and subscript m represents physician malpractice expense for service i. RVUs vary by procedure while each procedure-specific GAF varies by Medicare payment locality L of which there are over 200 pricing localities based mainly on administrative units created by HCFA to administer the Medicare program.

This method of calculating physician service fees using RBRVS is intended to make payments for physician services across service types, specialties, and locations more equitable by reflecting estimated resource costs into the payment. Under the CPR system, payments reflected charges, rather than resource costs that contributed to incentives to provide more costly diagnostic and surgical procedures versus cognitive and primary care services. The MVPS in the MFS are designed to control the rate of expenditure growth by setting physician annual payment updates (through changes in the CF) according to the difference between actual national physician expenditure growth in a given year and its established target. Targets are adjusted to account for changes out of the control of physicians such as beneficiary population and technology development. Thus, the MVPS are aimed at controlling costs by reducing the growth in the volume of physician services. Balance billing limitations are designed to protect Medicare beneficiaries from increased financial liability for physician services. That is, physicians are prohibited from billing patients directly for an amount in excess of an established percent of the Medicare-allowed charge.