Allocating practice expense under the Medicare fee schedule

Health Care Financing Review, Spring, 1993 by Gregory C. Pope, Russel T. Burge

PROPOSED SPECIALTY RESOURCE- BASED METHOD

The method proposed here starts from the observation that MFS physician fees are composed of two parts: a payment for physician work, and a payment for practice expense (including malpractice insurance). The method assumes that the payment for practice expense should be the same proportion of the total payment as actual physician practice expenses are of total practice revenues. This is a resource-based method because the practice expense percentage is derived from actual physician practice data on practice expenses as a proportion of total practice revenues. Practice expenses and revenues are calculated practice-wide by specialty, riot on a service-specific basis. Thus, the method assumes that the relationship between physician work and practice expense is uniform for all services provided by a specialty.

Specifically, the method sets practice expense RVUS so that they are the same proportion of total RVUS as practice expenses are of total practice revenues: (4) [RVU.sub.pe,i] [ITRVU.sub.i] = [PEP.sub.i], where [TRVU.sub.i] = total relative value units for

               service i = [RVU.sub.w,i]   [RVU.sub.pe,i]
               with [RVU.sub.w,i] denoting the physician
               work RVU, and [RVU.sub.pe,i]
               the practice expense RVU (including
               malpractice) for service
               i.

Equation (4) can be solved for [RVU.sub.pe,i]- (5) [RVU.sub.pe,i] = [[PEP.sub.i]I (1 - [PEP.sub.i]) [RVU.sub.w,i-

Equation (5) states that if, for example, practice expenses account for one-half of physician revenues on average for the specialties performing a service (that is [PEP.sub.i] = 0.5), then the practice expense RVUs for that service equal the work RVUs.

Substituting equation (5) into the expression for total RVUs, we have:

(6) [TRVU.sub.i] = [1/(1 - [PEP.sub.i])][RVU.sub.w,i-

[PEP.sub.i]      = service i's practice expense percentage,
                   that is, the percentage
                   of practice expenses in total revenues
                   for each specialty providing
                   service i, weighted by the
                   specialty's frequency of performing
                   service i.

Multiplied by an appropriate conversion factor and geographic adjustment factor, equation (6) gives the Medicare fee for service i under the proposed method. We call equation (6) a specialty resource-based relative value scale because it is calculated from only [RVU.sub.w,i] and [PEP.sub.i], which are both derived from actual physician resource costs by specialty. The percentage markup over physician work for service i implied by equation (6) is: ([TRVU.sub.i] - [RVU.sub.w,i])[IRVU.sub.w,i] = (7)

[PEP.sub.i]I](1 - [PEP.subi]).

If the practice expense percentage PEP were the same for all services, equation (6) shows that the method would allocate practice expenses in proportion to physician work. Also, the markup over work would be the same for all services (equation 7). However, [PEP.sub.i] does vary by service, though only according to the mix of specialties performing a service. For example, fees for services performed by psychiatrists are marked up less over physician work than fees for services performed by general practitioners, because psychiatrists have lower practice expenses relative to revenues than do general practitioners. Within a specialty, though, the method presumes that physician work and practice inputs are complementary; that is, services that require more physician work also require more practice inputs.