• The ABCs of RVUs, Part Two

    By Derek A. Preece, MBA

    This article is from July/August 2007 and may contain outdated material.

    In the last EyeNet, I explained how Medicare uses Relative Value Units (RVUs) to calculate the allowable payment for each CPT code in each geographic location throughout the United States. Although Medicare’s system of payment may seem arcane, the fact that CPT codes have been assigned RVU values does have potentially beneficial side effects. The three case studies below show how your practice can use RVUs to calculate how much it costs to provide various services, to allocate physician income and to analyze capitated contracts.

    Case Study #1—How to use RVUs in cost accounting. A small group practice has received a contract to be on a new insurance panel, and the billing manager, Laura, needs to figure out whether the allowable payments are high enough to make the contract worthwhile. She turns to the practice administrator for help: “Hey Jack, this plan has a lot of members in our area, and some of the payments seem OK but others are quite a bit lower than our fees.”

    “Well, we certainly don’t want to lose money on this contract,” said Jack. “Let’s calculate how much each of our services costs to provide, and then we can compare our costs against their fee schedule.” Jack downloaded a report from their practice management system into his computer and put it into an Excel spreadsheet (see box ). Column 1 lists all the CPT codes that the practice has billed during the previous year; column 2 lists how many times each code was billed during that year; and column 3 lists how many RVUs Medicare assigns to those codes. Jack set up the Excel spreadsheet so that column 4 would automatically be populated with the annual number of RVUs that had been billed for each code—it did this by multiplying the value in column 2 (number of claims) by the value in column 3 (RVUs assigned to a code).

    At the bottom of the spreadsheet, Jack added together all the values in column 4 and found that the practice had billed for 22,168 RVUs of services in one year. He then divided the practice’s total expenses for the year—$500,000—by the number of RVUs that the practice had produced. This yielded a “Cost per RVU” figure of $22.555. (Physician income was not included in the practice expense figure, which Jack got from the practice’s Profit and Loss Statement, because they considered that income to be part of the practice’s profit.)

    For each CPT code, Jack multiplied the number of RVUs that are assigned to that code by the Cost per RVU figure ($22.555) to calculate the approximate cost of providing each service.

    Laura took these figures back to her office and compared the insurer’s proposed fee schedule with the practice’s cost for each code so that she could make a recommendation as to whether or not the contract rates should be accepted.

    How to Set Your Fees

    RVUs also can be used in setting your practice’s fee schedule.

    Suppose you decide that you want your fees to be 150 percent of the Medicare fee schedule, you would simply multiply Medicare’s Conversion Factor by 150 percent to calculate your practice’s own conversion factor. Since the 2007 Medicare conversion factor is 37.8975, your conversion factor would be 56.8463. Multiplying the RVUs for each CPT code by your conversion factor then gives you a fee for each code. For example, CPT code 66984 (cataract surgery) has an RVU value of 17.99. Multiplying that figure times your practice’s conversion factor of 56.8463 would give a fee of $1,022.66.

    Once you have fees for each CPT code that you bill, you may want to adjust a few of the codes for your specific practice. Since insurers typically pay the lesser of their allowed amount or your billed charges, you will probably want to increase any fees that might be lower than a local insurer’s allowable. For example, if you have an insurer that pays $1,200 for a cataract surgery, you would increase your fee for that procedure so that it matches or exceeds $1,200.

    Case Study #2—How to use RVUs in physician compensation. In a practice 300 miles from Jack and Laura’s, a different situation was developing. Mike, a young partner who had been with the practice just two years was in his administrator’s office, complaining about how the practice owners split income among themselves. “I’ve been assigned to work three days a week in the South County satellite office. I don’t mind working there, but because the office is located in an area where there are a lot of Medicaid patients, my collections are low even though I’m doing a lot of work. Since we partners split income based on our individual collections, I’m at a disadvantage. I could work until midnight every day and still not produce as much in collections as my partners who work a normal schedule at the main office. It’s just not fair.”

    The next month, the administrator met with the practice’s partners and showed them how income could be split based on the RVUs that each physician produced, rather than based on their collections. In this way, each partner would be rewarded based on how much work he or she produced, without regard to which insurer was paying for the work, and Mike would not be penalized for seeing patients whose insurer had a low fee schedule. The practice decided to use only Work RVUs in their calculations, since those best approximated the physicians’ individual production, and the administrator used a spreadsheet to calculate a “Collections per Work RVU” value.

    Case Study #3—How to use RVUs to analyze a capitated contract. Some practices have capitation contracts, where they accept a set fee “per member, per month” to provide ophthalmic care for a specific population of patients. These contracts pay one monthly check, and the practice is required to provide care for any patient who needs services during the month. In a practice on the West Coast, this conversation was overheard: “Charlene, I think we should terminate our capitated contract,” said the senior physician. “It just seems like we are being overrun with patients from that plan, and we’re not getting paid enough to take care of them.”

    Charlene had wondered the same thing, but she dreaded the thought of no longer receiving the $50,000 capitation check on the 20th of each month. After all, she was responsible for the management of the practice, and that included its financial results.

    “Let me do an analysis of the contract, and I will let you know whether we make an adequate return on our efforts,” she promised him.

    Charlene ran a report that listed every CPT code and the number of times it had been provided to members of the capitated plan during the previous 12 months. Much as Jack had done in Case Study #1 (see box), she multiplied the number of times that each code had been billed by the RVUs assigned to that code. This gave her the annual number of RVUs that had been billed for each code. Adding the totals for each code, she arrived at a figure for the annual total of RVUs provided to members of the capitated plan.

    She then added the 12 months of capitation checks the practice had received from the insurer, plus the copayments that the plan’s members had paid directly to the practice and the result was the total revenue the practice received for the capitation contract. Dividing that revenue by the total RVUs provided resulted in a conversion factor for the contract, which then could be compared to Medicare’s conversion factor. In this case, the news was not good: “Our capitated contract’s conversion factor is 22.7, which is only 60 percent of Medicare’s conversion factor,” stated Charlene in a doctors’ meeting. “In other words, for the work we do on our capitated patients, we are only receiving 60 percent of what we would get if we were paid Medicare rates. Of course, we don’t have any collection expenses for that contract, but the rate is still very low. I am meeting with the insurer next week to see if they will increase our capitation payments. If not, we will have to decide whether to terminate the contract or not.”

    Although Medicare’s payment system has frustrated ophthalmologists for many years, these case studies show how its RVUs can prove extremely useful in practice management.


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