The Medicare Physician Fee Schedule (MPFS) is the structure the Centers for Medicare & Medicaid Services (CMS) uses to determine payment for medical services provided by physicians and other clinicians to Medicare beneficiaries. This system governs payments under Medicare Part B for services like office visits, surgical procedures, and diagnostic tests. Adopted in 1992, the MPFS replaced the previous charge system with a resource-based relative value scale (RBRVS). The RBRVS aims to pay for services based on the resources typically required to furnish them, ensuring a standardized approach to reimbursement. The final payment amount is calculated using a formula that combines relative values, location adjustments, and a single dollar-amount multiplier.
Relative Value Units
The foundation of the MPFS is the Relative Value Unit (RVU), a numerical measure of the resources needed to provide a specific medical service. The RVU expresses the value of one service relative to all others, rather than a direct dollar amount. Every Current Procedural Terminology (CPT) code is assigned a total RVU value composed of three distinct components.
The first component is the Work RVU, which accounts for the time, technical skill, physical effort, and mental effort required of the clinician. This component also factors in the level of judgment and the stress associated with patient risk during the procedure. The Work RVU often represents the largest portion of the total RVU, sometimes accounting for approximately 50% of the overall value.
The Practice Expense (PE) RVU covers the non-physician costs of operating a medical practice, including rent, utilities, supplies, equipment, and staff salaries. The PE RVU is particularly complex because it distinguishes between facility and non-facility settings. If a service is performed in a facility, like a hospital outpatient department, the overhead costs are borne by the facility, resulting in a lower PE RVU for the physician.
The third and smallest component is the Malpractice RVU, which represents the cost of professional liability insurance associated with providing that service. Services with a higher risk of complications, such as complex surgical procedures, are assigned a higher Malpractice RVU to reflect the increased cost of premiums. The total RVU for a given service is the sum of these three individual relative value units.
The RVUs are regularly reviewed and set by CMS, often based on recommendations from the American Medical Association (AMA) Relative Value Update Committee (RUC). This process ensures the assigned values accurately reflect the current resources required for physician services.
Adjusting for Location and Converting to Dollars
Once the total RVU is determined, a geographic adjustment is applied to account for regional differences in the cost of practicing medicine. The Geographic Practice Cost Indices (GPCIs) are multipliers that adjust each of the three RVU components—Work, Practice Expense, and Malpractice—to reflect local input prices. The GPCIs are calculated for every Medicare payment locality to ensure payments are neither excessive nor insufficient based on where the service is delivered.
The Work GPCI reflects the relative cost of physician labor in a specific area. Congress has established a floor of 1.00 for the Work GPCI, ensuring no locality’s physician work is valued below the national average. The Practice Expense GPCI measures geographic variation in the prices of inputs like employee wages, office rent, and purchased services.
The Malpractice GPCI accounts for regional differences in the cost of professional liability insurance premiums. This GPCI often exhibits the most variation across localities, reflecting the wide range of insurance costs nationwide.
After the RVUs are adjusted for location using the GPCIs, the resulting total is multiplied by the Conversion Factor (CF) to translate the relative value into a final dollar amount. The CF is a single dollar multiplier applied nationwide to the geographically adjusted RVU total. Set annually by Congress or CMS, the CF serves as the primary mechanism to control the overall level of Medicare spending on physician services.
The Final Formula and Annual Updates
The payment for any given service under the MPFS is determined by combining all factors into a single mathematical expression. The formula applies the local GPCI to its corresponding RVU component. Specifically, the Work RVU is multiplied by the Work GPCI, and similarly for the Practice Expense and Malpractice components.
The sum of these three geographically adjusted RVU amounts yields the Total Adjusted RVU for the specific service in that locality. This final RVU total is then multiplied by the Conversion Factor to calculate the Medicare Payment Amount. This calculation is performed for thousands of CPT codes to create the comprehensive fee schedule.
The entire fee schedule undergoes a review and update process every year, with CMS issuing a final rule effective January 1. The RVU values for specific services may be updated, and the GPCIs are reviewed on a triennial basis. Statutory changes often dictate the final Conversion Factor, which can fluctuate based on legislative action and economic indicators like the Medicare Economic Index (MEI).