Fact sheet





CMS announces that in the final physician fee schedule rule we are responding to the concerns of many commenters regarding insufficient information on the proposed changes to the methodology used to calculate practice expense (PE) relative value units (RVUs), which make up on average 45 percent of physician payments.  In order to ensure that the medical community has adequate information to provide meaningful comment before we implement potentially significant changes to these RVUs, we are not implementing our proposal for 2006.  Instead, we intend to work to ensure that our proposals to change the PE methodology are understandable and informed by input from the medical community.  We expect to provide further information in January, 2006 to begin the process of ensuring that the data and methodology are better understood by the community prior to the 2007 proposed rule next summer. 



Since January 1, 1992, Medicare has paid for services of physicians and other practitioners under a physician fee schedule.  This schedule, which is updated annually, sets payment rates for some 7,000 services, based on the resources used to provide those services. 


To construct the fee schedule, Medicare assigns values called relative value units (RVUs) to each service.  The total RVUs for a service are the sum of the work RVUs (which include the physician’s time and effort); the practice expense RVUs (which cover overhead, staff, supplies, etc.); and the malpractice expense RVUs (which cover malpractice premiums).



In the proposed rule for 2006, CMS laid out its plans to revise the practice expense (PE) methodology. There were three major parts to the CMS proposal:


1.  Changing from a “top-down” methodology for calculating direct PE to a “bottom-up” approach. 

Currently, on a specialty-specific basis, CMS derives a PE per physician hour from aggregate survey data, then creates a cost pool using Medicare utilization data and then allocates the pool to all the services performed by the specialty.  This methodology is complex, often unintuitive and produces some PE values that can change significantly from year-to-year.


The proposed bottom-up approach would add up the costs of the direct inputs associated with a service, based primarily on recommendations from the American Medical Association’s Relative Value Update Committee (RUC) for the clinical staff, supplies and equipment required for the service, and convert these costs into direct cost PE RVUs to cover the clinical staff, equipment, and supplies associated with the service.  CMS believes this methodology is more understandable and intuitive and would improve stability. Moreover, CMS and the RUC have a long history of working together on fee schedule issues and RUC recommendations have been taken very seriously in developing inputs for relative values.


2. Accepting the supplementary PE surveys from seven specialties -- allergy, dermatology, urology, GI, cardiology, radiology and radiation oncology -- and using these in the calculation of indirect PE.

The surveys submitted by these specialties have met the precision requirements we had previously announced.  Because of the large increase in the PE per hour resulting from these surveys, there would be a significant redistribution of PE RVUs as a result of PE budget neutrality.


3.  Calculating, on a code specific basis, the higher of the current portion of the PE RVU for indirect costs (the indirect PE RVU) or the indirect PE RVU resulting from acceptance of the supplementary surveys.

This proposal was to have the effect of mitigating the redistributive effects of accepting the seven supplementary surveys by ensuring that, before PE budget neutrality, no service had indirect PE RVUs lower than the current RVUs.



Special societies and others indicated that they did not understand the mechanics of our proposal and that there was not enough information for specialties to analyze our proposals.  Many commenters requested a 1-year delay in implementation of our proposal to give time for CMS to provide the further information and to give other specialties an additional opportunity to submit their own supplementary survey.


After reviewing the comment, CMS determined that the proposal for revising the indirect PE did not have the intended result and that the published PE values and impacts were incorrect.  Therefore, in the final rule, CMS is withdrawing the proposed PE revision for 2006 and is using the 2005 PE RVUs for most services.  The only exception to this would be to price the codes that will be new in 2006 and, as required by the MMA, to use the new urology PE data in the calculation of the drug administration codes used by their specialty. 


During the coming year, CMS plans to work with the physician community on refining the practice expense methodology.