Since 1992, Medicare has reimbursed physicians services pursuant to a resource based relative value schedule. The American Medical Association explains that

In the RBRVS system, payments for services are determined by the resource costs needed to provide them. The cost of providing each service is divided into three components: physician work, practice expense and professional liability insurance. Payments are calculated by multiplying the combined costs of a service by a conversion factor (a monetary amount that is determined by the Centers for Medicare and Medicaid Services). Payments are also adjusted for geographical differences in resource costs.

Many health plans utilize the RBRVS to establish the basis for compensating network providers.

At least every five years, CMS must reevaluate the RBRVS. The most recent re-evaluation was published in the Federal Register on June 29. CMS’s press release explains that

The proposed notice includes substantial increases for “evaluation and management” services, that is, time and effort that physicians spend with patients in evaluating their condition, and advising and assisting them in managing their health. The changes reflect the recommendations of the Relative Value Update Committee (RUC) of the American Medical Association. “It’s time to increase Medicare’s payment rates for physicians to spend time with their patients,” said CMS Administrator Mark McClellan, M.D., Ph.D. “We expect that improved payments for evaluation and management services will result in better outcomes, because physicians will get financial support for giving patients the help they need to manage illnesses more effectively.” These are the largest revisions ever proposed for services related to patient evaluation and management. For example, the work component for RVUs associated with an intermediate office visit, the most commonly billed physician’s service, will increase by 37 percent. The work component for RVUs for an office visit requiring moderately complex decision-making and for a hospital visit also requiring moderately complex decision-making will increase by 29 percent and 31 percent respectively. Both of these services rank in the top 10 most frequently billed physicians’ services out of more than 7,000 types of services paid under the physician fee schedule. Medicare law requires that CMS impose a budget neutrality adjustment if changes in RVUs will cause an increase or decrease in overall fee schedule outlays of more than $20 million, compared with what they would have been in the absence of the changes. CMS estimates that the proposed work RVU changes would increase expenditures by approximately $4.0 billion. CMS is proposing to create a separate budget neutrality adjuster that can be applied just to the work RVUs for Medicare purposes, without changing the number of work RVUs assigned to a particular service. This would preserve the integrity of the existing work RVU structure, which is often adopted by other payers.

CMS will be accepting comments until August 21 and it plans to announce the final policy changes in November and implement the revised RBRVS on January 1, 2007, subject to a phase in period.