The Medicare Physician fee schedule was implemented in 1992 using a relative Value scale methodology called RVUs to base payment rates on the resources used to perform the service. This is currently how the Medicare Physician Fee Schedule (MPFS) is set. But beware, the industry is moving to a Value-Based Payment which is quickly accelerating across the country. We will save that for another time; this article will focus on how the RVUs are calculated and Medicare Fee schedules.   

What are RVUs?
CMS and other payers use Relative Value Units (RVUs) to determine the physician’s compensation by taking each component of a given service and applying a dollar-to-RVU conversions factor, geographic adjustment, and other adjustments. The geographic adjustment is the location where the service was performed. Using this information, the federal government and the American Medical Association (AMA) created a standard physician fee schedule based on relative value units (RVUs).    

The parts of the RVU are based on three criteria involved in performing a certain procedure, Practice Work (W), Practice Expense (PE), and Malpractice Insurance (MI). Once these are taken into consideration, the service is then adjusted according to the cost of practicing medicine across the country using the Geographic Practice Cost Indices (GPCIs). So far, it sounds simple. The components are listed below, as they are the key to understanding how to calculate RVUs.  Let's dive a little deeper to get a better understanding.

Components used for calculating RUVs

#1 Physician work (W)
The level of time, skill training, and intensity to provide a given service. When a code with a higher RVU is assigned, it means the service takes more time, intensity, or a combination of both.

#2 Practice Expense (PE)
The practice expense is broken into direct and indirect components. The direct expense is the cost to maintain a practice, including rent, equipment, supplies, costs, and nonphysician staff expenses. For example, if the provider owns the X-Ray machine, the provider is reimbursed for the expense of owning the machine. If the hospital owns it, the hospital is reimbursed. The practice expense RVUs will generate a different RVU depending on who owns the equipment.  An indirect cost is a cost that cannot be attributed directly to the provided service, such as the cost of a billing service or waiting room. 

#3 Malpractice (MP)
This cost of malpractice insurance - Liability Insurance.

#4 Geographic Practice Cost Indices (GPCIs)
The Geographic Practice Cost Indices (GPCIs) reflect the differences in the cost of practice across the country. Each Medicare Administrative Contractor (MAC) is assigned a Locality Number.  The locality number identifies the location of the provider and the carrier.  For example, Utah's locality number is 09, and the Medicare Administrative Contractor is 03502 identifying the MAC, a Multistate Regional Medicare Contractor.

So how does this translate into a dollar amount?
Every year the Federal Register announces changes to the Medicare Physician Fee Schedule (MPFS) using a conversion factor. The conversion factor is the cost of each RVU. On January 5, 2023, the Centers for Medicare & Medicaid Services (CMS) announced an updated CY 2023 physician conversion factor (CF) of $33.8872. You can visit the AMA for a list of historical conversion factors, starting in 1992-2023.  

Annual Conversion Factor (CF)
The conversion factor (CF) is the cost of each RVU. For example, the conversion factor for 2023 is $33.8872. Therefore, each RVU is worth $33.8872.   

Calculation
A calculation is involved in the process of coming up with Medicare pricing.

Take a look at RVUs in action!
We are using the national unadjusted rates and will show you how to get the regional rates for Utah. In the first section of the table, we have the National Un-Adjusted Rates for Hospital/Facility and non-facility/office RVU Components and fees. 

See (Fig. 1)

National Unadjusted Hospital/Facility [(W) RVU 1.03 +(PE) RVU 0.426 +(MP) RVU 0.140 = 1.577 X (CF) $33.8872 = $55.23

(Fig. 1)

Find the GPCI or the location and the RVUs assigned to that specific location; (Fig. 2) shows the GPCI-adjusted Utah rates (Fig. 2), then X them by the National Unadjusted rates (Fig. 1).

Note: If you are looking for your state-specific GPCI, find your Mac/State and use CMS' Geographic Practice Cost Index. 

(Fig. 2)

See services provided in a Utah Hospital/Facility in (Fig. 3)

(W) RVU 1.03 X GPCI 1.00 + (PE) RVU 0.426 X GPCI 0.926 + (MP) RVU 0.121 X GPCI 0.865

= 1.596 X (CF) $33.8872 = $53.44 

(Fig. 3)

Complete Table showing calculations (Fig. 4)

(Fig. 4)

Notice how the RVUs are higher in the office setting; this is because the office costs the provider more resources, whereas the Hospital/Facility is owned by someone else, and they are responsible for the cost of the facility and all resources used in the Hospital/Facility. The provider is only reimbursed for his portion of the service he provided in the Hospital/Facility setting; the fees in this article are the provider's service only for Hospital/Facility.  

Non-Contracted Providers - Limiting Charge
The above applies to contracted providers; if you are a non-contracted provider, you can charge up to 15% over the Medicare-approved amount. This is called the limiting charge; however, you cannot charge over the limiting charge.  If a provider wants to see a Medicare Beneficiary, the provider still needs to accept the approved limiting charge amount as payment in FULL. 

Non-contracted provider reporting CPT 10021:

• Non-Facility Limiting Charge is $111.92
• Facility Limiting charge is $60.35

Examples of Direct and Indirect Expenses
Here is an example of what is included in the CPT code 10021

Clinical Labor (Non-Facility)- Direct Expense

The information in this article is informational only, intended for general information, and may change due to time or other circumstances. For questions about a specific matter with RVUs, you should contact a Medicare or AMA representative.