Deep Dive 3: What is a Relative Value Unit and why do they matter?

Discussing where RVUs come from, how are they used, and how could they be improved

Nov 14, 2021

We hope you enjoyed our previous deep dives into drug plan design and Medicare Advantage vs. traditional Medicare. For this post, we want to review a rather esoteric aspect of our healthcare system: Relative Value Units (RVUs). RVUs form the basis for provider reimbursement in the U.S. healthcare system, but they have several major flaws. Below, we’ll summarize what a RVU is, where they come from, and how they perpetuate our fee-for-service (FFS) paradigm. We’ll also walk through a few commonsense reforms that could improve the system and better reward high quality preventative healthcare.

What is a RVU?

A RVU is a measure of value that the Centers for Medicare & Medicaid Services (CMS) uses to determine reimbursement for physician services under Medicare Part B. RVUs have three components:

Physician work: accounts for the time, technical skill, mental effort, and judgement required by the physician to perform a service.
Practice expense: accounts for the non-physician clinical and non-clinical labor (i.e. nurses and admin staff), building space, medical equipment, and office supplies.
Malpractice expense: accounts for the cost of malpractice premiums associated with the particular service.

For reference, the average proportion of costs between the three categories for Medicare is 52%, 44% and 4%, respectively.

Before RVUs, CMS reimbursed physicians based on “usual, customary, and reasonable” rates that were largely considered to undervalue evaluation and management services and overvalue procedures. As Atul Gawande details in Better: A Surgeon's Notes on Performance, for example, "doctors who spent an hour making a complex and lifesaving diagnosis were paid forty dollars; for spending an hour doing a colonoscopy and excising a polyp, they received more than six hundred dollars." Costs for cataract surgery, which could be as high as $6,000 in 1985, "grew to consume 4% of Medicare's budget." RVUs were implemented in 1992 via the resource-based relative value scale (RBRVS) to fix this problem and standardize reimbursement for specific Current Procedural Terminology (CPT®) codes. Today, there are about 7,000 unique physician services in the RVU system.

RVUs are determined by CMS based on the recommendations of the American Medical Association's Specialty Society Relative Value Scale Update Committee (RUC), a multispecialty committee of 32 physicians. In the past, CMS accepted the RUC’s recommendations over 90% of the time, but more recently that number has dropped to 76%.

How RVUs work?

So how do RVUs and reimbursement work in practice? Well, the process starts with a CPT code. Then, the corresponding RVU components are adjusted based on a geographic practice cost index (GPCI), which reflects that some areas have higher associated costs than others (i.e. New York City vs. rural Kansas). Then, the final total RVU is multiplied by the conversion factor to translate the RVU to a dollar amount. In 2021, the conversion factor is 34.8931, meaning CMS reimburses at ~$35/RVU.

Let’s take a look at an example RVU and reimbursement calculation for an office visit. We can use the CPT code 99213, which is a visit for the evaluation and management of an established patient with moderate medical needs. The visit should take 20–29 minutes of total provider time on a single date. To make this example more real, let’s say an established patient on Medicare with known osteoarthritis shows up complaining that Tylenol no longer alleviates their knee pain and aching. You, as the physician, ask additional questions and physically examine the knee. You diagnose worsening osteoarthritis, recommend ibuprofen three times a day, and instruct the patient to return in two weeks if there’s no improvement. Let’s also say you practice in downtown Chicago. So how much should Medicare reimburse you for the visit? The graphic below walks through the calculation for the $97.92 total reimbursement.

If you’re interested, you can use CMS’ physician fee schedule tool yourself to see the RVUs and reimbursement for any CPT code.

Importantly, RVUs also serve as the basis for private insurance reimbursement. Typically, private health plans will reimburse providers at some multiple of Medicare rates. Specific multiples depend on numerous local market factors, including the number of plans and the number of other providers / provider groups in the area, studies have found that private plans pay on average 143% of Medicare rates (i.e. 43% higher reimbursement) for outpatient physician services and 199% of Medicare rates or all hospital and physician services.

Physician earnings per work RVU can vary widely across specialties and even within specialties due to payor mix (i.e. more Commercially insured patients vs. more Medicaid patients), geography, and other factors. On average, physicians are typically paid $42 per RVU performed. But this is far from a rule. There are many types of physician compensation models, some of which may not be tied to RVUs at all (e.g. a physician early in their career may receive a guaranteed salary until they’ve had the opportunity to build their patient roster). You can find data on the average number of work RVUs by specialty here and a summary graphic of compensation vs. work RVUs by specialty group below.

What is the RUC?

As noted above, the RUC makes RVU changes and updates recommendations to CMS. The RUC is comprised of a volunteer group of 32 physicians (27 of whom are represent specific specialties) and over 300 medical advisors, other health care professionals, and experts that represent each sector of medicine, including primary care physicians and specialists. You can find the list of current RUC members here.

The RUC touts a rigorous methodology for data collection built on surveys. For example, for healthcare services performed more than 1M times per year in the Medicare population, the RUC requires that at least 75 physicians complete a survey detailing the time and expense required to provide the service. The RUC also highlights its transparency, with meeting dates, meeting minutes, and vote totals for each service evaluated on the AMA’s website.

What are the problems with RVUs and the RUC?

RVUs were a well-intentioned step towards standardizing reimbursement for the same services and providing a better balance across office visits, diagnostic services, and procedures, but there are several problems with the RVU / RUC system.

RVUs are not aligned to value-based care

By definition, RVUs are tied to a fee-for-service world. If a physician wants to earn more, they simply need to increase the number of services they perform. RVUs do not reward physicians based on care quality or value. To be fair, other payment models have emerged, particularly within Medicare, that are better aligned to value-based care. These include direct contracting, bundled payments, and MIPS-driven quality bonuses. For most physicians and most patients, though, the FFS paradigm persists and a vast majority of physician compensation plans do not include quality incentives.

RUC favors specialists over primary care and procedures over office visits

As noted above, the RUC includes 27 physicians who each represent a specialty. Only five of these doctors practice in some form of primary care. The rest are specialists. As a result, primary care physicians believe they are under-represented at the RUC, contributing to undervaluation of codes they frequently perform. At the same time, many physicians across specialties complain that there is still a reimbursement bias for procedures over office visits (although not quite at the same level as the “usual, customary, and reasonable” days), leading to suboptimal patient care.

Let’s look at an example of this bias towards procedures in gastroenterology (further detailed in this article). Let’s say you are a GI and a new patient calls your practice to schedule an office visit to discuss her inflammatory bowel disease (IBD). You know that IBD is a complex condition, so you could probably code the highest level office visit (CPT code 99205). But that would require extensive records review, imaging analysis, a detailed patient history, physical examination, and conferences with the patient and potentially other physicians. Even if you could get all of that done in an hour, you’d only earn a maximum of 3.5 work RVUs.

Now, what if you instead scheduled colonoscopies during that hour? A standard screening colonoscopy without complication or polypectomy (CPT code 45378) provides 3.26 RVUs, and a GI can probably perform three colonoscopies in an hour with a good staff. So instead of a one hour, labor intensive office visit that only provides 3.5 RVUs, a GI could earn 9.78 RVUs by prioritizing procedures. So, ask yourselves, if you are a GI with your compensation tied to annual RVU targets, why on earth would you schedule the office visit over the procedures?

RVU-based compensation models can disadvantage hospital-employed physicians

We’ve covered the growth of hospital- and large group-employed physicians in numerous issues. Recent data show that just 30% of physicians in the U.S. are part of independent private practices. As part of large corporate entities, the other 70% of physicians may be subject to complicated compensation models. One thing physicians need to be wary of as they negotiate their contracts are attempts to push them into flat RVU frameworks where they are paid a fixed dollar amount per work RVU. These models result in physicians with higher work RVUs contributing a much higher practice expense to their employers than less productive colleagues even though all providers presumably share the same resources. This phenomenon is explained in depth here, but it’s just basic math. If a practice always keeps 44% of total RVU payments, for example, and the overhead (nurses, building costs, receptionist, etc.) doesn’t meaningfully increase as the number of work RVUs increase, the practice benefits significantly from more productive physicians (more practice revenue, same costs, higher profit). Where appropriate, physicians should protect themselves by negotiating tiered compensation systems that pay more at higher RVU thresholds.

How can the RVU system be improved?

So what can be done to improve the RVU system? We believe a few reasonably straightforward reforms could improve the system and benefit both physicians and patients. Given the political nature of the RUC and the continued dominance of fee-for-service payment models, we doubt these will come to pass, but hey, we can dream!

Raise RVUs for office visits and lower RVUs for procedures

As noted in our GI example, the RVUs for office visits, particularly complex office visits, remain insufficient to incentivize physicians to devote the required time to these services. Similarly, there is little financial incentive for providers to coordinate care with a patient’s other providers or spend time discussing the treatment plan in detail with a patient and their family. The RUC can help remedy this by increasing the RVUs for outpatient visits for patients with multiple comorbidities and complicated treatment plans. If CMS is worried about overall costs, the RUC could decrease RVUs for lower value procedures to have this change be budget-neutral.

Add healthcare policy and health economics representation to the RUV

Given that the AMA controls the RUC, we doubt this will happen, but adding healthcare policy and economics expertise to the RUC could help re-assign value away from procedures and towards preventative, office-based (or even home-based) services. Adding non-physicians would also help address another criticism of the RUC - that essentially doctors themselves suggest the reimbursement that doctors receive. A bit of a conflict of interest, no?

Tie a higher percentage of physician income to quality measures

Entities that employ physicians should work to incorporate value-based metrics into physician compensation models. Deprioritizing work RVUs and rewarding providers for care quality and patient satisfaction would help alleviate some of the inherent flaws in the RVU system. For certain specialties, entities could also add non-clinical measures, such as the number of new patients seen, to compensation models to further reduce a physician’s incentive to prioritize work RVU volumes.

Conclusion

So long as the American healthcare system remains largely fee-for-service, RVUs will strongly influence physician behavior. We should explore common sense reforms that better align incentives towards preventative services and primary care and away from lower value specialist procedures. This change will not be easy, though. The status quo works well for many specialties that will fight any changes with all available resources.

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