The Medicare Physician Payment Schedule

The Medicare payment schedule's impact on a physician's Medicare payments is primarily a function of three key factors:

The resource-based relative value scale (RBRVS)
The geographic practice cost indexes (GPCIs)
The monetary conversion factor

The enabling legislation and regulations, as well as Medicare carrier correspondence and forms, refer to the Medicare physician payment schedule as a “fee schedule.” From the AMA’s perspective, the distinction between a payment schedule and a fee schedule is extremely important: a fee is what physicians establish as the fair price for the services they provide; a payment is what Medicare approves as the reimbursement level for the service. All references to the “full Medicare payment schedule” include the 80 percent that Medicare pays and the 20 percent patient coinsurance. Likewise, transition “approved amounts” also include the patient coinsurance.

The Formula for Calculating the Payment Schedule
The Omnibus Budget Reconciliation Act of 1989 (OBRA 89) geographic adjustment provision requires all three components of the relative value for a service—physician work relative value units (RVUs), practice expense RVUs, and professional liability insurance (PLI) RVUs—to be adjusted by the corresponding GPCI for the locality. In effect, this provision increases the number of components in the payment schedule from three to the following six:

Physician work RVUs
Physician work GPCI
Practice expense RVUs
Practice expense GPCI
PLI RVUs
PLI GPCI

The formula for calculating payment schedule amounts entails adjusting RVUs, which correspond to services, by the budget neutrality work adjustor and by the GPCIs, which correspond to payment localities.

The general formula for calculating Medicare payment amounts for 2008 is expressed as:

¹The 2008 physician work, practice expenses, and malpractice RVUs may be found in Medicare RBRVS: The Physicians’ Guide.

²The Budget Neutrality Adjustment = -11.94% or 0.8806, when calculating for budget neutrality, use the resulting figure rounded to the second decimal place (eg, 12.34) and then continue with the calculation

³The Geographic Practice Cost Index (GPCIs) for calendar year (CY) 2008 may also be found in Medicare RBRVS: The Physicians’ Guide.

The Medicare Conversion Factor
The Medicare conversion factor is a scaling factor that converts the geographically adjusted number of relative value units (RVUs) for each service in the Medicare physician payment schedule into a dollar payment amount. The initial Medicare conversion factor was set at $31.001 in 1992. Subsequent conversion factor updates have been based on three factors:

The Medicare economic index
An expenditure target “performance adjustment”
Miscellaneous adjustments including those for “budget neutrality”

The history of Medicare conversion factors (PDF, 14KB)

More information on the Medicare Physician Payment Schedule may be found in Medicare RBRVS: The Physicians' Guide.