In the mid-1980s, how much did Medicare pay for each cataract surgery? The answer depended, in large part, on where in the United States the surgery was performed. The company that I worked for had surgery centers in North Carolina, where the surgeon’s fee was about $1,000, and San Diego, where it was $2,200. Medicare based those payments on the average fees that surgeons in the two localities were charging, and since the surgeons in California charged more for cataract surgery than their colleagues in North Carolina did, the Medicare payments got out of whack.

Because of a perceived unfairness in the geographic differences for Medicare reimbursements, along with a feeling on the part of the government that surgeries were over-reimbursed and exams under-reimbursed, legislation was passed in 1989 that revamped Medicare payment for physicians. The new system, implemented in 1992, is known as the Resource-Based Relative Value Scale (RBRVS), and it attempts to set a reimbursement rate for each CPT code that is based on the value of the resources that are needed to provide that service. It does that by assigning relative values, measured in Relative Value Units (RVUs), to each CPT code. This article explains how Medicare uses the RBRVS to set its allowable payments. The next issue of *EyeNet* will examine how practices are using that scale to set fee schedules, perform cost accounting, analyze payers’ fee schedules and calculate physician compensation.

**A Formula With 8 Components**

Medicare’s allowable for a given CPT code is derived from a formula (see box) that contains eight components: three RVU values, three Geographic Practice Cost Index (GPCI) values, the Budget Neutrality Adjustor and the Conversion Factor.

**How to Calculate a CPT Code’s Allowable** |

Using the formula below, first plug in the three Relative Value Unit (RVU) values that have been assigned to the CPT code and the three Geographic Practice Cost Index (GPCI) values that have been assigned to the locality where you are practicing; next plug in the Budget Neutrality Adjustor (which is 0.8994) and Conversion Factor (37.8975); and then it’s a simple matter of multiplication and addition. [ ((Work RVU x Budget Neutrality Adjustor)* x Work GPCI) + (Practice Expense RVU x Practice Expense GPCI) + (Malpractice RVU x Malpractice GPCI) ] = Geographically Adjusted RVU Total x __Conversion Factor__ = Allowable Amount Example: **If a Manhattan practice performs an eye exam on a new patient (CPT code 92004), what would the allowable be?** ((1.67 Work RVU x 0.8994 Adjustor)* x 1.065 Work GPCI) | | 1.595 | + (1.67 PE RVU x 1.300 PE GPCI) | | + 2.1710 | + (0.04 MP RVU x 1.480 MP GPCI) | | + 0.0592 | = Geographically Adjusted RVU Total | | 3.8277 | x Conversion Factor | | x __37.8975__ | = Allowable Amount | | $ 145.06 | **After multiplying the Work RVU by the Adjustor, you must round off the product to two decimal places before multiplying by the Work GPCI.* |

**Each CPT code has three RVU values.** The work RVU value is designed to reflect the work effort and intensity required of the physician in providing the service, the practice expense RVU value represents the expenses the practice incurs in providing the service, and the malpractice expense RVU value varies depending on the relative malpractice exposure of the CPT code. For example, an eye exam (CPT code 92004) has a work RVU value of 1.67, a practice expense RVU value of 1.67 and a malpractice expense RVU value of 0.04, for a total of 3.38 RVUs. For cataract surgery with an IOL (CPT code 66984), the three corresponding values would be 10.36, 7.24 and 0.39, for a total of 17.99 RVUs. Thus, Medicare pays more than five times more for a cataract surgery than it does for an eye exam.

When you download the spreadsheet of RVU values from Medicare’s Web site (see “How to find RVU and GPCI values,” below), you will find several columns for the practice expense RVU values. The “Transitioned” practice expense values are used for the current year, and “Fully Implemented” values will be applied once the new methodology CMS is using to calculate these RVU values is fully in place. “Facility” practice expense values are used in hospitals or ambulatory surgery centers, and the “Non-Facility” practice expense values are used for services provided in your office.

**Each practice has three GPCI values.** Medicare recognizes that it costs more to practice in Manhattan than in Muncie, and it adjusts payments accordingly. If, for instance, you are practicing in Manhattan, Medicare’s Geographic Practice Cost Index assigns you a work GPCI value of 1.065, a practice expense GPCI value of 1.300 and a malpractice expense GPCI value of 1.480. Since the RVUs for each category are multiplied by their respective GPCI value (as shown in the box on the previous page), the fact that these three GPCI values are greater than 1.00 increases both the RVU values and the resulting reimbursement.

But if you were practicing in Muncie, Ind., you would have a work GPCI value of 1.00, a practice expense GPCI value of 0.908 and a malpractice expense GPCI value of 0.429. Those last two GPCI values are less than 1.00 and will therefore reduce their corresponding RVU values, and hence your reimbursement.

**Pay for Reporting** |

CMS is offering a 1.5 percent bonus if you participate in the six-month pay-for-reporting program that starts on July 1. The Academy and AAOE have developed a comprehensive module that is designed to simplify implementation of the CMS **Physician Quality Reporting Initiative (PQRI)** for ophthalmic practices. The module has been mailed to all Academy and AAOE members, and is also available on the Academy’s Web site at www.aao.org/pqri. |

**New in 2007: the Budget Neutrality Adjustor.** After a five-year study of work RVUs, Medicare increased the work RVU values for most CPT codes beginning in 2007. However, the legislation that covers Medicare payments puts a $20 million cap on the amount that physician fee expenditures can increase when work RVUs are adjusted. To keep its payments under that cap, Medicare introduced the Budget Neutrality Adjustor—when calculating a CPT code’s allowable, the work RVU value is now multiplied by 0.8994. Once this work RVU value is multiplied by the adjustor, the product is rounded off to two decimal paces before you multiply it by the work GPCI value. With the adjustor, CPT codes 92004 and 66984, which were discussed in the examples above, would have a total of 3.21 RVUs and 16.95 RVUs, respectively.

**The Conversion Factor.** This figure converts RVUs to dollar amounts. Each CPT code’s geographically adjusted RVU total is multiplied by the Conversion Factor—which is $37.8975 for 2007—and the result is the Medicare allowable amount that appears on your Explanation of Medicare Benefits. During each of the last several years, we have heard projections of a 4 to 5 percent decline in the overall payments for each CPT code because CMS was planning to reduce this Conversion Factor. This threat has arisen year after year because existing legislation includes a Sustainable Growth Rate (SGR) formula that limits the growth in overall physician payments. CMS cannot change this SGR formula, and so each year Congress has had to pass overriding legislation to prevent declines in the Conversion Factor. (For more on the SGR formula, see “Washington Report” on page 81.)

**How to find RVU and GPCI values.** Go to www.cms.hhs.gov/PhysicianFeeSched and select “PFS Relative Value Files.” Then find the latest zip file that is listed for 2007 (keep clicking “Next” until you get to the last item on the list). This is currently RVU07B, which was released in April, but it will be superseded by RVU07C in July and RVU07D in October. When you download and unzip RVU07B, you will find several documents. The three that you need are PPRRVU07.xls, which lists the RVU values for each CPT code; Gpci07.xls, which provides GPCI values for each geographic area; and RVUPUF07.doc, a Word file that provides instructions on calculating Medicare allowables and explains the codes used in the RVU spreadsheet file.

Now you know how Medicare calculates the allowable payment for each CPT code that you bill. The RBRVS method of setting Medicare fees has been very controversial since its inception and will continue to be so for the foreseeable future. However, there have been some positives in the work that CMS has done in assigning RVUs to each CPT code, and the next issue of EyeNet will explore how to use those RVU values in setting your fee schedule, and in your practice’s cost accounting, physician compensation and payer contracting.

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*Mr. Preece is president of Enhancement Dynamics Inc., a practice management consultancy. Contact him via the AAOE Consultant Directory at www.aao.org/aaoe.*

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**MEET THE EXPERT** |

Mr. Preece will present five Instruction Courses in New Orleans, including The ABCs of RVUs (#244; Sunday, Nov. 11, 3:15 to 4:15 p.m.). **For more information,** visit www.aao.org/annual_meeting. |