UNDERSTANDING YOUR REIMBURSEMENT AND FEE SCHEDULE

How did we get to RBRVS and the maze of mathematical formulas we now include in the practice’s everyday business? Understanding the background of this 40-year-old system helps put today’s fee schedule rationales in perspective.

Beginning in the 1950s, systems were developed to establish relative values of medical services. The first edition of this tool used a 3-digit coding system to describe services and assigned a unit value (UV) to each service. The term “relative value” was coined because each service unit value could be measured in relationship to the values of other services. Practices derived their fees by multiplying the unit values times a dollar conversion factor (CF) to arrive at a fee/allowable payment.

These values functioned as a guide for both the medical practice and the third party payor to help quantify medical and surgical services, including:

• pricing services
• evaluating payments for services
• evaluating offers from managed care entities
• calculating the value of services rendered under capitated contracts

RVSs were divided into five sections: Medicine, Surgery, Anesthesia, Radiology, and Pathology. Each section had its own set of unit values that did not relate to the values in the other sections; consequently, each section had its own conversion factor.

When HCFA developed the RBRVS, they wanted a system of unit values that allowed relationship between sections and the ability to use one conversion factor for the entire scale.

The rationale for establishing these RBRVS scales remains the most valid, despite ongoing debates over appropriate distribution of its three-parts: overhead, physician work, and malpractice.

An important distinction about the way HCFA uses RBRVS to develop the Medicare Fee Schedule is that they employ one conversion factor for the entire U.S. HCFA allows for local variability of the fee schedule by using a set of geographic adjustment factors to adjust each unit value by locality, based on factors such as rent costs, staff salaries, etc. When Medicare publishes the national conversion factor each year, it is applied to locally adjusted units.

The Calculations
The basic and most-often-used calculation in a Relative Value Scale is the determination of a fee or allowable payment by multiplying the unit value times a conversion factor. In this calculation, the number of units assigned to a medical or surgical service (represented by CPT code) is multiplied times a dollar amount (the conversion factor) to derive a fee (when used by a provider, e.g., a physician) or an allowable payment level (when used by an insurer). The formula is simple: UV w CF = Fee/Allowable Payment.

Advanced Features
As in any algebraic relationship, having any two of the components allows calculation of the third: that is, if you have the conversion factor and the fee for a CPT code, you can derive the unit value. Similarly, if you have the unit value and the fee, you can derive the conversion factor.

How Payers Use RBRVSs
While it may seem that managed care plans choose their payment levels based on the lowest level they can get away with, it is still valuable to understand how they develop their allowable payment levels. The managed care plans generally develop their fee schedule using one of two methods: choosing a relative value scale and conversion factor(s), or paying at some multiple of the Medicare Fee Schedule (e.g., 110% of Medicare, 90% of Medicare, etc.).

It is important to remember the difference between the Medicare Fee Schedule and RBRVS. We often hear that “a PPO is paying RBRVS plus 10%” (or “110% of RBRVS”); however, this is a meaningless statement. There are two ways to state a payment level when RBRVS or the Medicare Fee Schedule is used as the basis:

1. “Medicare Fee Schedule plus 10%” (or “110% of the Medicare Fee Schedule”)
2. “RBRVS at a conversion factor of $40 per unit”

Examples
For the purpose of this discussion, we will use the Resource-Based Relative Value Scale, which is maintained by HCFA and is the basis for the Medicare Fee Schedule. The unit values used are those that were in effect as of January 1, 1998. (The RVUs published at the beginning of each year can be downloaded from www.hcfa.gov/stats/cpt/rvudown.htm.)

Example 1. No fees established ­ Choose a Conversion Factor (CF) and calculate a fee (UV x CF = Fee). A range of services (for example, the 5 levels of new patient office visits) have a unit value (measured in relative value units or RVUs) assigned to each CPT code. We’ve used $50.00 to demonstrate how to arrive at a set of fees.

Fee @ $50 per RBRVS Unit

* RBRVS units as of January 1, 1998 The example above shows a practice using the relative value scale to determine its fees; however, a managed care payor can use the same methodology to establish its allowable payment schedule.

In example 1, you start with the unit values for the range of services to be provided. Those unit values are multiplied times a conversion factor (in this example, $50 per unit under RBRVS) to derive the fee. Fees will generally be rounded to the nearest dollar.

Example 2. Fees established ­ Calculate CF (Fee ÷ UV = CF).

There are many circumstances where a fee (or reimbursement amount) is known, and there is a need to determine the conversion factor that the fee or allowable payment represents. (Said another way, this calculation gives you the CF that would have been used to derive the fee or allowable payment.) These circumstances include:

• A practice evaluating its own fees can identify overpriced and underpriced services and can calculate its average conversion factor.
• A practice may want to compare its own fees to the payment schedule offered by a managed care entity. Comparing the calculated conversion factors is a valuable methodology.
• A practice can calculate the conversion factor for its collections: that is, given the total units charged (the total of the unit value of each CPT code times frequency of charges for that code), the practice can divide those total units into the total revenue collected to determine the overall conversion factor of collections. This can also be done by payor class.
• For the capitated component of a practice, the total units for the services provided to that population can be divided into the total capitated revenue. This can also be done for each capitated plan.

The calculations would look like this:

It can be seen that in the set of fees analyzed here, the calculated conversion factors range from a low of $24.19 (CPT 99205) to a high of $32.66 (CPT 99203). These are the conversion factors that would have been used to derive each of those fees if each one were calculated from a relative value scale. Another way of describing the range of conversion factors is to say that when measured from a reference point (for example, a fee schedule based on $35 per unit), the calculated conversion factor for each CPT code shows how the fee for that code varies from the reference fee schedule at $35/unit.

Thus, in the example above, the fee for 99201 is $25. The calculated conversion factor is $27.47 (fee of $25 ½ the unit value of 0.91 = 27.47). This compares to an allowable payment derived from a conversion factor of $35 per unit at $31.85 (unit value of 0.91 times a conversion factor of $35 = $31.85). Comparing the two conversion factors (the $35/unit of the reference fee schedule vs. the calculated $27.47), you can see that the fee is 78.48% of the allowable payment ($27.47 ½ $35). By going down the list of the five codes above, you can see how each calculated conversion factor compares to the $35 reference. This calculation can be done for a variety of reference fee schedules much more quickly than comparing each fee to the reference fee.

Another value of this calculation is in comparing those conversion factors to the conversion factors of the larger insurance plans of the practice’s patients. For instance, Medicare pays at about $34 per unit. If the practice charges Medicare a fee that is at $27.47 per unit (CPT 99201), that would probably be below the Medicare Allowable Payment, and the payment would be reduced (Medicare pays the LOWER of their allowable payment or the submitted charge).

Similarly, if the fee-for-service managed care plans in the practice’s community pay at $40 per unit, money will be left on the table for each charge submitted for these codes.

Example 1. Calculating the Weighted Average CF (CF = Mean of [calculated CFs x Frequency]).

This calculation is done when a practice has not developed its fee schedule from a relative value scale and wants to evaluate its charges and collections. The calculation is an extension of example 2, where the fee is known and the conversion factor is calculated. This extension of that example is a method for calculating the overall weighted conversion factor for the entire fee schedule. The average weighted conversion factor is the figure that represents the value of the practice's services in the marketplace and is the place from which all opportunities are evaluated and performance is measured.

Average Weighted CF = 478,204 ÷ 12,051 = 39.68

There are two benefits from this calculation:

First, it shows the wide variation in the individual calculated conversion factors. The range is $23.67 for CPT 99245 to $56.96 for 99212. This assessment shows that 16 of the 39 codes evaluated are probably below the Medicare allowable, let alone the allowable payment for most fee-for-service managed care plans.

Second, it shows the overall weighted average conversion factor, which allows the practice to calculate several things, including discounts to fee-for-service contracts, collection performance from the practice's billing operations, and performance of capitated contracts.

The $39.68 would be compared to the expected payments (expressed as a conversion factor) from each payor class. These expected payments would be used, along with the payor mix, to calculate an overall collection target. This methodology will be covered in an upcoming newsletter issue.

Selecting Your Conversion Factor for a Recalculated Fee Schedule
There are several factors that should guide you in the selection of the conversion factor you use to recalculate your fee schedule.

First, you should examine your payer mix. In some parts of the country there is virtually no indemnity insurance (that is, plans where the patient is responsible for the balance of the charge after the insurance pays). Where there is no indemnity insurance, the fee schedule becomes simply a level from which to measure discounts to the various fee-for-service contracted plans (Medicare, Medicaid, PPOs, HMOs, etc.)

Next, using the RVS tools described above, calculate the average conversion factors used by the various payors in your practice. This calculation is one of the benchmarks practices use to arrive at their specific fee schedule.

In today’s environment, it is rare for the managed care plans to pay above the $40­$50 per RBRVS unit level. We know that Medicare pays at roughly the $32­$36 level (depending on the region of the country).

Let us assume that the allowable payments from the managed care plans in your community all fall within the $40­$50 per unit range, and you have very little indemnity insurance. You want a fee schedule that will assure that you’re not leaving any money on the table by charging less than the payors are willing to pay. If you calculate your fee schedule with a conversion factor that is above the managed care level, you will not leave money on the table, and you will not be punishing your indemnity-insured patients by leaving them with large balances.

Another method is simply to apply a multiple to the Medicare Fee Schedule. Most practices using this method will multiply the Medicare Fee Schedule by a specific factor to derive their fee schedule.

One caution in using either method is that HCFA has determined that the overall cost for some high-volume services requires control. They have designated these as overpriced (e.g., 66984, cataract surgery) and have departed from their semi-scientific methods for assigning unit values. They have lowered the unit value and, consequently, have lowered the Medicare Fee Schedule amount for those services.

In reviewing a recalculated fee schedule, make sure that none of the fees are higher than you want them to be and that none are lower than you determine to be appropriate.

Example 1. A recalculation of the practice's fee schedule. An RBRVS conversion factor of $65 per RBRVS unit (as calculated in example 3) produces the following fees:

In the original analysis of the fee schedule, the variation in the calculated CFs showed internal inconsistencies. The revised fee schedule based on a reasonable conversion factor ($65 per RBRVS unit) has consistency in the relative value between procedures.

If a practice's fees are established using a relative value scale, and the managed care insurer contracts to pay based on the same relative value scale, the relationship between the practice's fees and the contracted payment amount can be easily seen by comparing the two conversion factors. That relationship can be viewed as the percentage of the charges that can be collected as revenues. This is the first step in calculating a practice’s collection target.

If we review the concept of the practice's fees as a proxy for the value that the physicians have placed on the services, the percentage of the fees that is represented by the managed care allowable payment level is the amount of discount that is being given to that insurer.

The RVS methodologies reviewed here are also important in assessing the performance of a capitated plan.

If a managed care contract provides for capitated payments, the calculation is somewhat different, although the principles are the same. All of the services provided to patients insured under the capitated contract for the time period examined (usually a minimum of three months) are evaluated. The practice establishes the value of the services provided by multiplying the frequency of services for each CPT code times the practice's fee schedule amount for that CPT code and compares the total fee value of the services to the revenue received for the care of those patients. A gross collection ratio is calculated and compared to the fee-for-service component of the practice.

Another use of an RVS in capitation plans is to measure the clinical content of the work required to care for the population. Measures such as “units per-member-per-month” are key to comparing management of the population as well as to giving an indication of changes in the capitated population or an alert to “adverse selection.”

Summary
Relative Value Scales are critical tools in all of the measurements that will determine how your practice is doing as a business. By having the ability to measure the volume of clinical services you provide and to translate those services into dollars, you can apply business methods used in other industries to monitor your practice’s performance.

Ron Rosenberg, PA, MPH, Author Practice Management Resource Group
Irene Chriss, Editor Director, AAO Practice Management Department