The Medicare Fee Schedule unveiled: an account of physician payment reform

On January 1, 1992, the Medicare program unveiled a new method for paying physicians known as the Medicare Fee Schedule (MFS). The new fee schedule is a complex system of administrative pricing based on the resource inputs used in producing physician services. The MFS consists of three parts: (1) a Relative Value Scale (RVS) which assigns to each medical service a value relative to all other services; (2) a Conversion Factor (CF) which converts the relative values into dollars; and (3) a Geographic Adjustment Factor (GAF) which adjusts payments based on geographic differences in the cost of producing physician services. In the paper we explain: how the relative values were determined; how the GAF was constructed; and how the CF was calculated. In addition, we explain balancing billing limits and the Medicare Volume Performance Standards (MVPS). We then present computer simulations of the impact of the MFS on payments to physicians. We find that the MFS will: (1) redistribute payments away from surgeons, radiologists, and other procedure-based specialties toward the primary care specialties, (2) redistribute payment away from urban areas toward rural areas, (3) redistribute payments away from invasive procedures and diagnostic tests toward evaluation and management services. We conclude with a discussion of the future refinements of the MFS, its applicability to other payors, and whether it will accomplish its intended purposes.