Understanding the Medicare Fee Schedule and its impact on physicians under the final rule

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, which assigns to each medical service a value relative to all other services; 2) a conversion factor, which converts the relative values into dollars; and 3) a geographic adjustment factor, which adjusts payments based on geographic differences in the cost of producing physician services. In this article, the following are addressed: how the relative values were determined; how the geographic adjustment factor was constructed; and how the conversion factor was calculated. In addition, balance billing limits and the Medicare Volume Performance Standards (MVPS) are described. Computer simulations of the impact of the MFS on payments to physicians are presented. The authors found that the MFS will 1) redistribute payments away from surgeons, radiologists, and other procedure-based specialties toward the primary care specialties; 2) redistribute payments away from urban areas toward rural areas; and 3) redistribute payments away from invasive procedures and diagnostic tests toward evaluation and management services. The authors conclude with a discussion of the future refinements of the MFS, its applicability to other payers, and whether it will accomplish its intended purposes.