Background of the Malpractice RVU

Until 1992, under Medicare Part B, the reasonable charge for a physician’s service was the lowest of (1) the physician’s actual charge, (2) the physician’s customary charge, or (3) the prevailing charge in the locality for similar services. The customary charge is defined as the median physician charge for the service during the preceding July through June data collection period. These charges are arrayed in ascending order and the median, or midpoint, of the charge data is selected as the customary charge. The prevailing charge for a particular service in a locality is traditionally defined as the 75th percentile of physician charges in the locality for that service. Since 1975, however, changes in prevailing charge limits from year to year have been constrained by statute to the amount of inflation in medical costs as measured by the Medical Economic Index ("MEI").

A major change in the Medicare physician payment rules was enacted as part of the Omnibus Budget Reconciliation Act (OBRA) of 1989 (Public Law 101-239) on December 19, 1989. Section 6102 of Public Law 101-239 amended title XVII of OBRA by adding a new section 1848, "Payment for Physicians’ Services". The new section contained three major elements: (1) establishment of volume performance standard rates of increase for physician services expenditures; (2) replacement of the reasonable charge payment mechanism with a fee schedule for physician services; and (3) replacement of the maximum actual allowable charge ("MAAC"), which constrains the total amounts that nonparticipating physicians can charge Medicare beneficiaries for covered services, with a new limiting charge.

Section 1848 requires that the fee schedule include national uniform relative values for all physicians’ practice expenses net of malpractice expenses and the cost of professional liability insurance (malpractice insurance). Nationally uniform relative values must be adjusted for each locality by a geographic adjustment factor ("GAF"). The new fee schedule was phased in over 4 years, beginning in 1992, with the new rules fully effective in 1996. From 1992 through 1995, transition provisions generally blended the old payment amounts with the new.

The relative value unit is primarily based on the resources needed to furnish the service. It is for this reason that the fee schedule is often called a resource based relative value scale, or RBRVS. Each physician fee schedule comprises three components: (1) work RVUs, (2) practice expense RVUs, and (3) malpractice RVUs. The work component reflects the relative value of the doctor’s work for a particular procedure, in terms of time and intensity of effort, and compares it to the value of work required for other procedures. The practice expense component reflects the doctor’s overhead. The malpractice insurance component attributes a portion of a doctor’s malpractice insurance premium to each procedure.

Work RVUs have been resource-based since the inception of the fee schedule in 1992. Resource based practice expense RVUs are currently being phased in over a four-year period. The malpractice RVU is the last of the three components to be converted to a resource based relative value unit.

In most cases, the current malpractice expense RVUs are calculated based on a statutory formula. They are derived from the product of "base allowed charges" and service specific malpractice expense percentages. The base allowed charge is the national allowed charge for the service furnished during 1991. The service specific malpractice expense is a weighted average of the malpractice expense percentages of the specialties performing the service.

A common criticism of the current malpractice RVU system is that for many services the RVUs, which are based on charges under the reasonable charge system, are not based directly on the resources involved in furnishing the service. Rather the charge-based nature of the current fee schedule malpractice expense retains historical charge patterns that existed before the implementation of the physician fee schedule on January 1, 1992. For example, those charge patterns favor procedures and tests performed in hospitals rather than evaluation and management services and other office based services, whereas the current trend in reimbursement philosophy appears to encourage performing services outside of a hospital setting.

HCFA has asked KPMG to address this criticism by allocating malpractice premium RVUs by existing total RVUs by CPT code. These malpractice premiums will be weighted by provider specialty within CPT code. This methodology will result in a malpractice RVU, which is more resource based than the current malpractice RVU formula.