How Medicare fee schedule calculation happen


Medicare Part B pays for physician services based on the MPFS, which lists the more than 7,000 covered services and their payment rates. Physician services include the following: Office visits; Surgical procedures; and A range of other diagnostic and therapeutic services.

Physician services are furnished in all settings including
: Physicians’ offices;
Ambulatory Surgical Centers;
Skilled Nursing Facilities and other post-acute care settings;
 Outpatient dialysis facilities;
 Clinical laboratories; and
 Beneficiaries’ homes

Payment rates for an individual service are based on three components:

1) Relative Value Units (RVU)

The three separate RVUs that are associated with the calculation of a payment under the MPFS are:

Work RVUs reflect the relative levels of time and intensity associated with furnishing a physician fee schedule service and account for more than 50 percent of the total payment associated with a service. By statute, all work RVUs must be examined no less often than every five years.

Practice expense (PE) RVUs reflect the costs of maintaining a practice such as renting office space, buying supplies and equipment, and staff costs. PE RVUs account for approximately 45 percent of the total payment associated with a given service.

 Malpractice RVUs represent the remaining portion of the total payment associated with a service.

Conversion Factor (CF)

To determine the payment rate for a particular service, each of the three separate RVUs is adjusted by the corresponding geographic cost index. The sum of the geographically adjusted RVUs is multiplied by a dollar CF. The CF is updated on an annual basis according to a formula specified by statute. The formula specifies that the update for a year is equal to the Medicare Economic Index (MEI) adjusted up or down depending on how actual expenditures compare to a target rate called the Sustainable Growth Rate (SGR). The MEI is a measure of inflation faced by physicians with respect to their practice costs and general wage levels. The SGR is calculated based on medical inflation, the projected growth in the domestic economy, projected growth in the number of beneficiaries in fee-for-service Medicare, and changes in law or regulation.

3) Geographic Practice Cost Indices (GPCI)

GPCIs are adjustments that are applied to each of the three relative values used in calculating a physician payment. The purpose of these adjustments is to account for geographic variations in the costs of practicing medicine in different areas within the country. We are required to review and, if necessary, adjust GPCIs at least every three years.

Where to Find Additional Information About the Medicare Physician Fee Schedule
Additional information about the MPFS is available at on the CMS website.

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