RVUs: A valuable tool for aiding practice management

When it comes to managing practice finances, physicians have few better tools at their disposal than the Relative Value Unit (RVU). RVUs can be used for everything from helping to determine compensation in a multi-physician practice to deciding whether to take a buyout offer from a hospital system.

What are RVUs?

RVUs are part of the system Medicare uses to decide how much it will reimburse physicians for each of the 9,000-plus services and procedures covered under its Physician Fee Schedule, and which are assigned current procedural terminology (CPT) code numbers. The dollar amount for each service is determined by three components: physician’s work, practice expenses, and malpractice insurance.

(Physician’s work, in turn, is divided into four subcomponents: the time it takes to perform the service, the technical skill and/or physical effort required to perform the service, the amount of mental effort and judgment required, and the stress arising from any potential risk to the patient from performing the service.)

Each of these three components is assigned an RVU. Then, to account for variations in living and business costs across the country, each of the three components is multiplied by a factor known as the Geographic Practice Cost Index, or GPCI. The three components are added together, and the resulting sum is then multiplied by a dollar amount known as the conversion factor to arrive at the reimbursement dollar figure:

The dollar amount of the conversion factor is established each year by Congress. The RVUs themselves are determined as part of what’s known as the Resource-based Relative Value Scale (RBRVS), a system for describing, quantifying, and reimbursing physician services relative to one another. The values in the RBRVS scale are reviewed periodically by a panel of physicians, known as the Relative Value Scale Update Committee (RUC), representing every sector of medicine.

Why they were created

The RVU/RBRVS system was created as a way of bringing more uniformity to Medicare’s reimbursement systems while also trying to rein in spiraling medical spending, explains H. Christopher Zaenger, principal of Z Management Group in Barrington, Illinois, and a Medical Economics editorial consultant. Until then, Medicare based its reimbursements on what it determined were the “uniform, customary, and reasonable” fees for a service in a given market.

In 1988, the Centers for Medicare and Medicaid Services commissioned a study from the Harvard School of Public Health to look at the resources and costs associated with the services that doctors provide. That study led to the introduction of the RBRVS system in 1992. It has been in use ever since, although not without controversy.(See “Liked or loathed, RUC wields broad influence.”)

Using RVUs for practice management

From a practice management perspective, understanding RVUs is important because “they are the language the payers speak when contracting with practices, and for reimbursing doctors for the work they do,” explains Jeffrey Milburn MBA, CMPE, an independent national practice consultant with the Medical Group Management Association (MGMA.) “It’s kind of a national standard, and like it or not, doctors need to be familiar with the system.”

The reimbursement impact of the RVU system is not limited to Medicare. “If you look at most contracts today, you see that virtually every commercial carrier benchmarks its fee schedule to the Medicare fee schedule,” says Zaenger. “Historically it’s always been higher than what Medicare pays, but over the last three to five years that has changed, and now there are some plans that actually pay less than Medicare.”

The percentage of the Medicare fee schedule a commercial insurer will pay often is a function of the supply of, and demand for, the type of service a practice provides. “I always refer to what I call the geographic and specialist monopoly,” explains Milburn. “For example, if you’re the only orthopedic group in town, you have not only a geographic monopoly but a specialty monopoly. That would give you a lot of leverage with the insurance company, which means it will pay much more than Medicare.”

Conversely, if many practices are providing the same service in a community-or if only one commercial payer includes the community’s physicians in its panel, the doctors will have to accept whatever rate the payer sets, even if it’s less than Medicare, or risk losing patients.

Along the same lines, RVUs are a useful way of comparing how well payers reimburse for the same service or procedure, says Frank Cohen, principal of the Frank Cohen Group, a medical consulting firm in Clearwater, Florida and a Medical Economics editorial consultant. To do so, says Cohen, first divide the practice’s total expenses for the year by the practice’s RVUs, to produce a dollar cost per RVU.

Armed with that information, says Cohen, “you can go to a payer and say ‘I do so much better with these other payers that it’s not worth it for me to see your patients anymore.’ You’ll have a lighter patient load and you’ll make more money.” And while practices sometimes balk at the idea of giving up any patients, “sometimes the best thing you can do for your business is to send the bad payers to your competitors.”

Knowing the costs and revenues associated with specific procedures and payers can yield an additional benefit, Cohen notes. In most cases, costs and revenues tend to increase relative to each other. But occasionally a practice may encounter certain procedures where, for whatever reason, the cost-to-revenue ratio is much higher than in others. In those cases, he says, he advises practices to try to negotiate a “carve out,” whereby the payer reimburses at a higher rate for those procedures.

Cohen also advises clients to measure their providers’ productivity-per RVU relative to one another. That can be done by calculating each provider’s revenue and RVUs as a percentage of the practice’s total revenue and RVUs, and then dividing the results. (See table, “RVU-based productivity).

Cohen cautions, however, that there may be valid reasons for a provider’s low ratio, such as his or her willingness to see more Medicaid patients than others in the practice. “Rather than looking at the ones that are doing poorly and ask what they’re doing wrong, I prefer to look at why some are doing better, and see if there’s something that can be applied to the ones not doing as well,” he says.

RVUs and physician compensation

Another potential function for RVUs is as a tool to help multi-physician practices determine how much to pay their physicians. Practices typically use them for this purpose in one of two ways, says Milburn. The first is straight productivity, whereby the practice multiplies the number of work RVUs the doctor generates by its own conversion factor to arrive at a compensation figure.

The conversion factor typically is determined by dividing the national median compensation for a  specialty by the median number of work RVUs for that specialty, data for which can be obtained from the MGMA or American Medical Group Association. That conversion factor acts as a “market rate” for doctors in that specialty for each RVU they produce, says Milburn.

The second approach is to pay each physician a salary plus a bonus tied to the number of work RVUs generated over a base number, such as 2000 RVUs. “When a practice wants to put in a productivity incentive, that’s typically how they will do it,” says Milburn.

With hospital systems across the country looking to grow, RVUs can be among the tools a practice uses to decide whether to sell, says Zaenger. That’s because most large systems use RVUs to set physician compensation and productivity bonuses. “They really need to analyze their practice from an RVU standpoint, so if the hospital says they will be benchmarked at, say, 4600 RVUs per year for their evaluation and management services, they know if that’s a realistic number for them to attain.”