Podcast Episode 11: Relative Value Units and RBRVS

Episode Summary

RVU’s (Relative Value Units) are the currency of healthcare. Hosts Neal Sheth and Dr. Piyush Sheth explore the concept of RVU’s and Geographic Practice Cost Indices and how CMS makes payments.

Episode Transcript

NEAL SHETH: How do physicians get paid for services delivered? Prior models of payment included fee-for-service, Customary, Prevailing, and Reasonable (aka, CPR) charge system by CMS, and the Usual, Customary, and Reasonable (UCR) system by private carriers. The current payment model utilizes Relative Value Units, RVUs, as part of the Resource-Based Relative Value Scale (RBRVS). Dad, can you tell us the difference between the Customary, Prevailing, and Reasonable model and the RVU model? 

PIYUSH SHETH: Of course, Neal. For the most part, in this podcast we will be talking about CMS. The Customary, Prevailing, and Reasonable model set the customary charge for a service at the median for all same-specialty physician charges submitted for that service. This led to significant differences in payments to physicians. Physicians in different regions charged different amounts so the customary charge, prevailing charge, or reasonable charge varied from region to region. Also, this model of payment was vulnerable to overpricing by physicians among other drawbacks. In 1992, the RBRVS model with Relative Value Units was instituted. RVUs are attached to services and procedures.  

NEAL: So, what is the importance of RVUs? 

PIYUSH: Relative Value Units give us a way to value services and procedures in a more consistent manner. The RVU is subdivided into work RVU, Practice expense RVU, and Malpractice RVU. The physical effort, mental effort and judgement, technical skills, and stress related to patient risk are all factored into the work RVU. Cost of clinical and administrative staff, office supplies, cost of building space and utilities, medical and office equipment, and medical supplies are factored into the Practice expense RVU. The cost of malpractice liability insurance is factored into the Malpractice RVU. In my opinion, the RVU scale is at best okay. After writing my book Coding Solutions General Surgery, I began to see patterns where procedures seemed to me not to truly reflect common sense valuation. For example, a laparoscopic gallbladder removal has 19.76 total RVUs and an excision of a 5.5 cm, roughly 2-and-a-half-inch diameter subfascial lipoma of the chest has 21.75 total RVUs. As a general surgeon who performs both these types of procedures, I can assure you that a laparoscopic gallbladder removal is far more complex and carries a higher complication profile than a chest lipoma excision. My take on this is that either laparoscopic gallbladder removal is undervalued or that lipoma excisions are overvalued. Now that’s a can of worms I don’t want to open!  

NEAL: I see what you mean about how it doesn’t make sense. So, how are physicians compensated by CMS and how do the RVUs get translated into dollars and cents?  

PIYUSH: To answer that, we need to understand that there are differences between geographic regions in cost to deliver services. This is taken into account by applying a Geographic Practice Cost Index value to each of the RVU subcomponents. This then is translated into dollars using the Medicare Physician Fee Schedule Conversion Factor. Have I confused you yet? 

NEAL: Yeah. 

PIYUSH: Let me try to simplify this by using an analogy. Let’s say you go to a grocery store in New York City to buy an apple. Think about how that apple got there. The farmer has to spend time and effort to cultivate the apples. This is the work RVU. The farmer also has to pay real estate taxes on his farm, buy seed, plant it, water and fertilize it, harvest the apples and transport them. This is the practice expense RVU. Along the way, we know some of the apples will turn rotten or the entire crop can fail due to unforeseen circumstances and the farmer has to have crop insurance. This is malpractice RVU. We know that apples cost more in big cities vs. at a local grocer. This is the Geographic Practice Cost Index. Finally, depending on supply and demand issues, the seller determines a Conversion Factor that translates all these costs into dollars. 

NEAL: Hey that’s much easier to understand. 

PIYUSH: Let me go one step further. Think of RVUs as healthcare currency tokens. When you provide a service, you get a certain number of tokens. The number of tokens you get for a service may vary between different geographic regions. In New York you may get 30 tokens to remove a gallbladder whereas in Arizona you might only get 25 tokens. This variation is the Geographic Practice Cost Index. Finally, a currency exchange rate converts those tokens into dollars. This exchange rate is the Conversion Factor. If the currency exchange rate is $50 per token, then in New York you will get $1500 whereas in Arizona you will get $1250. 

To make things even a little more complex, there is a Geographic Practice Cost Index for each of the RVU components: work, practice expense, and malpractice. CMS determines the GPCI for work using regional variation of physician wage data from the Bureau of Labor Statistics. The practice expense GPCI is based on data from the Bureau of Labor Statistics regarding employee wages and cost of contracted services typically purchased by physicians, Census Bureau regarding office rent, and a base amount relating to practice expenses associated with capital goods ranging from chemicals and rubber to telephone and postage. Finally, the malpractice GPCI is based on regional variation in medical malpractice premiums.  

Let’s put this all together. I made a spreadsheet with RVU values and GPCI values. I then cross-referenced these and here are real life examples of what I found: 

A laparoscopic gallbladder removal, CPT code 47562, has 19.76 RVUs assigned to it. The work RVU portion is 10.47, practice expense portion is 6.68, and the malpractice portion is 2.61. The 2022 Conversion Factor is $34.6062 so you would expect 19.76 RVUs to convert to $683.82. However, when you factor in the GPCIs, a significant variation becomes apparent. The highest payment is in Queens, NY, at $906.84 and the lowest payment is in Nebraska at $593.45. Imagine if new physicians had this information on hand when deciding on where to set up a practice. 

Here's another example: 

A colonoscopy, CPT code 45378, has 5.40 RVUs when performed in a facility. This would translate to $186.87 using the 2022 Conversion Factor. But, when you factor in the GPCIs, the highest payment is in Alaska at $245.04 and the lowest payment is in Arkansas at $170.25. As you see, the highest and lowest paying localities are not always the same. 

In these examples, when I drilled down in my spreadsheet to see why the huge variation in payments, I saw that mostly it was related to practice expense and malpractice. Unfortunately, you can’t do much with regional variations in practice expense. But malpractice premiums is an area where there can be cost savings. New York has malpractice GPCI between 200 and 270% of the base amount whereas Nebraska has only 24% of the base amount. In contrast, the regional practice expense variation is between 138% and 84%. Theoretically, if all localities had tort reform and are able to reign in malpractice premiums, CMS could see millions of dollars in cost savings per year. Our healthcare system costs are skyrocketing but wouldn’t this be a great first step in cost containment? 

Now I know that’s a lot of numbers and if you are listening to this podcast in your car, it may be difficult to follow. You can find a transcript to this podcast at unravelingmedicalcoding.com that will make it easier to follow the number trail. For now, all I’m trying to get across to you is that the payment model is complex and there is substantial variation in payments between localities. 

NEAL: So, who determines the RVUs, Geographic Practice Cost Index, and the Conversion Factor? 

PIYUSH: You want to take a guess? 

NEAL: CMS? 

PIYUSH: Yes, mostly. RVUs are determined by CMS with assistance from the AMA’s Specialty Society Relative Value Scale Update Committee and are reviewed annually. Geographic Practice Cost Indices are set by CMS and are updated every 3 years. A Conversion Factor is proposed by CMS annually and must comply with budget neutrality and in recent years CMS has proposed drastic cuts that would have had a significant negative impact on physician practices. Congress has had to postpone or minimize these cuts at the 11th hour for the past few years. 

NEAL: I’m beginning to understand the process now, but you’re right. It is complex. So, why should physicians and coders take the time and effort to understand all this?  

PIYUSH: There are three very important reasons to care. First, it behooves everyone who is paid this way to understand the process. Many physician employment contracts compensate physicians based on work RVU’s generated. If your employer is not calculating your work RVU’s accurately, your compensation would be lower. As an example, we talked about shared / split services on previous podcast episodes. As a reminder, this is when an APP and a physician both see a patient. If the work RVU’s are assigned incorrectly to the APP, who is usually a salaried employee, then the physician will get paid less and the APP will not see any change in her salary. Essentially the employer pockets this revenue when in reality, a portion of it should be paid out to the physician for services delivered. Second, RVUs are determined by CMS with input from the AMA and revised annually. When I discussed laparoscopic gallbladder removal in comparison to a chest wall lipoma excision, the RVU scale does not seem to be balanced and some procedures are either valued less or more than what common sense would dictate. And third, coders have the knowledge and expertise to sift through documentation to identify missed sources of additional revenue and can help add to the tally of RVUs you generate making your bottom line healthier.

Remember what Thomas Hobbes said in 1668, “Scientia Potentia Est”…Knowledge is Power.

NEAL: That’s a great quote that fits in nicely here. But Dad, doesn’t CMS and the AMA recognize these issues?

PIYUSH: Maybe and maybe not. When I said that CMS and the AMA revise RVUs annually, I really meant to say that they target certain specialty procedures one year and another specialty’s procedures on another year. With this piecemeal annual revision process, the RVU valuations have become lopsided. It would take a major overhaul to re-level all procedures at once. Remember, a lot goes into re-leveling the valuation of a procedure. First you need lots of data. Then you have to factor in things like newer technologies that make surgery easier and more efficient.

 NEAL: That would indeed be a momentous undertaking. Well, we’ve covered a lot of ground and it was a great discussion.