Although the Resource-based Relative Value System (RBRVS) is the method applied by Medicare to determine payment for physician services, the same principles can be used in your practice to establish fee schedules as well as to determine your cost in providing a particular service. Given declining reimbursement, it is particularly important for physicians to know their costs before committing to third-party payer contracts that might provide insufficient reimbursement.
The concept of RBRVS actually originated half a century ago based on median charges reported by California Blue Shield. Although a charge-based RBRVS was supported by surgical subspecialty societies, a resource-based system supported by non-procedural specialty societies prevailed.
The American Medical Association (AMA) supported a system based on resource costs as long as the payment system allowed balanced billing and reflected geographical variations in cost. Antitrust concerns precluded direct physician involvement in the development of a physician payment system. Eventually, the AMA accepted the proposal by William Hsiao, PhD, and Peter Braun, MD, of the Harvard University School of Public Health.
The Omnibus Budget Reconciliation Act of 1989 mandated a Medicare fee schedule based on RBRVS derived from the Harvard study with inclusion of physician work, practice expense and malpractice costs with geographical adjustments for each of these three components. It was estimated that physician work comprised just over half of the total RVU, whereas practice expense comprised approximately 40 percent of the service value. A conversion factor from relative value units (RVU) to dollars was used to provide a mechanism for Medicare to achieve expenditure targets. The Medicare conversion factor for 2001 is $38.88.
RVU as a Surrogate
The RBRVS system attempts to measure physician work on an equitable scale, such that the “value” of different physician services can be similarly measured across physician specialties. There is also an estimate of the cost (practice expense and malpractice cost) built into the RVU of each procedural code. Although practice costs are not linearly related to physician work, the RVU can serve as a surrogate. Consequently, a fee schedule can be constructed based on a “conversion” factor determined by the practice and applied to the RVU assigned by Medicare to procedural codes.
However, the appropriate conversion factor for a given practice is influenced by many factors. Certainly, one of the most important components that should drive the conversion factor is the practice cost including personnel, equipment, insurance (disability, health, malpractice) and others. The practice manager should determine the average annual RVU performed for the entire practice as well as stratified by individual physician. The RVU can be separated into E&M and procedural services. One must be careful to account for “reduced” RVU when modifiers are appended (e.g., -51 multiple procedure modifier reduces RVU by 50 percent) to more accurately account for the physician services performed. As a result, simply dividing the total practice (or individual physician) costs by the RVU performed during the same period provides a cost/RVU figure that reflects the expense to provide physician services.
Determination of cost/RVU is essential in negotiating contracts with third-party payers. Since many third-party payers have adopted fee schedules based on RBRVS, it is to your advantage to determine your costs similarly. First of all, your analysis of the payment schedule is more meaningful once you have determined your practice cost to provide the service. For example, I evaluated a large physician practice in which fewer than one quarter of the physicians had a cost/RVU below the Medicare conversion factor. When discussing the proposed payment schedule with insurers, one can quickly determine whether the practice can afford the terms.
Secondly, the cost analysis allows the physiciian to see where costs can be reduced. Finally, one can assess the time required to perform particular services. Certain services may be more economical than others, thereby allowing the physicians to focus efforts on their most efficient services.
Conclusion
The RBRVS has been a tool used by Medicare and third-party payers to create a reimbursement system in which costs are much easier to manage. Physicians should take advantage of this same system to analyze their practice costs in terms of services provided. This will not only improve efficiency and identify areas for cost containment, but will also facilitate educated negotiations so that the practice does not agree to contracts whose terms are unsustainable in this difficult health market.
Gregory J. Przybylski, MD, is associate professor of neurological surgery at Northwestern Memorial Faculty Foundation of Northwestern University in Chicago and a faculty member for AANS-sponsored coding and reimbursement courses.