The Centers for Medicare and Medicaid (CMS, formerly the Health Care Financing Administration) issued the scheduled updates to the Resource Based Relative Value Scale (RBRVS) on November 1, 2001. The update reflects changes mandated by the Balanced Budget Act of 1997 and subsequent legislation, and contains a predicted but nonetheless stunning cutback in the conversion factor, as explained below.

The 2001 physician fee schedule conversion factor is $36.1992, a 5.4% decrease from the 2000 factor of $38.2581 per RVU (relative value unit). This conversion factor is applied to the number of RVUs for each CPT code under the RBRVS to determine the base fee that Medicare pays. Local geographic adjusters are then applied to determine the payment rate in a given area.

The workings of the annual physician fee schedule update are complex, and difficult to predict with any certainty until the annual measurement date (September 1) is extant. CMS first determines the Medicare Economic Index, which measures the weighted average price change for various inputs involved with producing physicians’ services.

"The MEI is a fixed-weight input price index, with an adjustment for the change in economy-wide labor productivity. This index, which has 1996 base weights, is comprised of two broad categories--physician's own time and physician's practice expense." A review of these factors for 2002 illuminates in part the underlying mathematical rationale. For example, the increase in nonphysician salaries and benefits was computed at 2.5% and given a weight in the overall computation of 16.8%. In effect, the MEI is an inflation adjustment factor for the cost of delivering physician services, including the estimated effect of productivity growth based on broad factors in the economy - not on physician offices.

The MEI, computed at 2.6% (or 1.026) for 2002, is then multiplied by the Update Adjustment Factor (computed at –7.0 or .93), which is designed "to reflect success or failure in meeting the expenditure target that the law refers to as "allowed expenditures." Allowed expenditures are equal to actual expenditures in a base period updated each year by the Sustainable Growth Rate (SGR)"

The SGR is based upon the following

The base period allowed expenditures roll forward from an initial fiscal year ending March 31, 1997. The formula reduces or increases for the current and future years by any excess or deficient expenditure in prior years. This is the critical point that a valuator or consultant must understand: Physician expenses under the Medicare Program cannot exceed a limit established by a pre-determined, statutory formula, built off of historical expenditures. The computation produced a limit on Physician Expenditures for 2002 of $365.3 billion.

A series of additional adjustments are then made to the MEI and Update Adjustment Factor, comprising the Statutory Adjustment Factor, which was 0.998 for 2002.

The result of these three components is 1.026 * .93 * .998 = .952 or a reduction of 4.8%.

There are two Budget Neutrality Factors that are then applied to the above calculation. One provides that the ultimate increase (or decrease) in the conversion factor is statutorily limited by a requirement that the changes in the RVUs under the RBRVS not exceed $20 million (.9954). The second one anticipates physician responses in terms of coding and intensity of services to changes in the RBRVS (.9982).

.952* 9954* .9982 = 0.946 or a reduction of 5.4%.

Recap
To recap, the MEI is basically an inflation factor based upon physician compensation and physician office expenses; the annual allowed expenditures are based upon FY March, 1997 expenditures increased by the Sustainable Growth Rate (SGR); and the Update Adjustment Factor, which forces the projected expenditures for the upcoming year to be no more than a pre-determined limit. Prior year mistakes in estimating the increase are therefore compensated for in subsequent years. As the CMS announcement noted in the announcement "However, in making updates to the list of codes that are included in the SGR, we discovered that a number of new procedure codes were inadvertently not included in the measurement of actual expenditures beginning in 1998. Therefore, the measurement of actual expenditures for 1998, 1999, and 2000 was lower than it should have been. As a result, the physician fee schedule update was higher in 2000 and 2001 than if we had included these codes."

Changes in the RVUs

The changes in the number of RVUs for each CPT code are a result of the changes in the Practice Expense Component. This component looks at the cost of delivering services by physician type, for example family medicine versus cardiac surgery. These changes have major implications for evaluating the forecasted cashflow for practices such as Internal Medicine and Family Medicine that make the greatest use of these codes. The following Table summarizes the changes in the established patient visit codes, the most commonly used of all the CPT codes. The "old" column shows what the fee in 2002 would have been based upon the in place for 2001 (as published in the November 2, 2000 Federal Register) using the 2002 conversion factor and the "new" reflects the actual 2002 fee using the revised RVUs and the 2002 conversion factor:

The next Table compares the actual 2001 fees to the newly released actual 2002 fees

The next table summarizes the changes in reimbursement for the office consultation codes, customarily used by sub-specialists such as cardiologists.

The following table summarized the percentage impact of these RVU changes in the practice expense and physician work components of the RBRVS on the income of various specialties. It does NOT reflect the change from the decreased Conversion Factor, but rather the reallocation of available income among the specialties:

There are 92 geographic cost areas for the Geographic Practice Cost Index (GPCI) adjustment.

You can download the fee schedule for your particular area at http://www.hcfa.gov/medicare/pfsmain.htm.

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