RBRVS: how new physician fee schedule will work - resource-based relative value scale payment system

Healthcare Financial Management, Sept, 1991 by Paul L. Grimaldi

The PPRC has recommended that relative values for malpractice insurance be based on risk of service. This method would allocate insurance premiums based directly on service risk: the higher the risk, the higher the allocation. In contrast, OBRA '89 requires that the same ratio (premium-to-gross-revenue) be used in the calculations, with no differentiation among risks associated with different services.

Preliminary values. Exhibit 1 lists 18 physician services for which relative

[TABULAR DATA OMITTED] values have been proposed for physician work, practice expenses, and malpractice insurance. The higher the relative value, the higher the fee, which is determined by multiplying the relative value by the conversion factor.

A conversion factor essentially equals the dollar value of one relative value unit. For example, if the conversion factor equals $27.50, the fee to repair a hernia would be $298 (10.85 x $27.50) before any geographic adjustment.

Conversion factor. The conversion factor will be a single national value that will apply to all physician services paid under the RBRVS fee schedule. OBRA '89 requires the conversion factor to be budget neutral for 1992, the first year of the fee schedule. The conversion factor is to be based on predicted payment levels for 1991 updated through 1992. The predicated levels are to reflect current laws, including changes mandated by OBRA '90. HCFA has proposed a conversion factor of $26.873 before any update for 1992.

Geographic adjustment. The relative values for physician work will be adjusted for geographic variations in the cost of living. OBRA '89 requires an adjustment for 25 percent of the cost difference, which would work to the disadvantage of physicians practicing in urban areas.

The adjusted relative work values will apply to all physicians, with no differences among specialties. Every physician who assigns a particular CPT-4 code to a service or procedure will be credited with the same relative value units regardless of specialty.

Relative values for practice expenses and malpractice insurance will be adjusted for geographic price differences. The adjustment will recognize 100 percent of the difference. A key factor in the adjustment will be the definition of localities. OBRA '89 seems to require use of the current 240 payment areas.

The Physician Payment Review Commission, however, has recommended statewide areas, except for 15 states where wages and other prices vary significantly within state boundaries. These states would be divided into as many as five areas based on population size: more than 3 million, 1 million to 3 million, 250,000 to 1 million, fewer than 250,000, and non-metropolitan. Adopting this recommendation would decrease the number of payment areas to 94.

Exhibit 2 shows considerable variation among proposed geographic practice cost indexes (GPCIs) for 20 Medicare carrier localities. GPCIs for malpractice insurance especially vary, ranging from .504 for Dallas, Texas, to 1.773, for Chicago, Ill. Less variation among GPCIs for physician work stems from the fact that, as mandated by OBRA '89, the work index reflects only 25 percent of the difference between the value of a physician's work effort in a locality and the national average, not 100 percent as for the other two components.