Resource-Based Relative Value Scale

The Resource-Based Relative Value Scale (RBRVS) is the method used to construct Medicare’s physician payment schedule for ambulatory services. The RBRVS transformed the way physicians were reimbursed by establishing a method of standardization of payment. Other nations have also used the method to reimburse their physicians.

Background
The method and rate of physician payment constitute powerful incentives under which physicians make clinical decisions, such as how much time to spend with patients and hours of work supplied. Fee-for-service is the dominant payment method for physician services in most countries, including the United StatesU.S. Government Accountability Office. Read more ... », GermanyNewhouse, Joseph P.. Read more ... », Canada, JapanUncompensated Healthcare. Read more ... », Australia, and Singapore. Their fees are largely based on what physicians have charged in the market place. In a market economy, prices are determined by supply and demand and by competition. However, nations have learned from experience that the market for physician services does not satisfy the conditions that define a reasonably competitive market. These imperfections in the market often distort the payment rates for different services.

First, widespread health insuranceMoral Hazard. Read more ... » coverage reduces patients’ sensitivity to fees. Physicians can overcharge patients, particularly for the diagnosis and treatment of urgent and life-threatening medical conditionsIntensive-Care Units. Read more ... ». Moreover, there is an asymmetry of information between physicians and patients. While in a few specialties, such as family medicineProvider-Based Research Networks. Read more ... » and pediatrics, patients may be able to make reasonably informed choices, in others, such as oncology and neurosurgery, patients have to rely primarily on physicians’ decisions. Consequently, physicians can induce demand and raise their fees. Finally, legal restrictions specify who can provide medical services, admit patients to hospitals, and prescribe drugs. Although such restrictions protect patients from unqualified providers, they also tend to grant monopoly power to the medical profession. Physicians can use this monopolistic power to raise their fees.

These market distortions result in the fees for some specialties being higher than those for other specialties. A distorted fee schedule can cause an under- or oversupply of physicians by specialty and therefore also a lack of medical services in areas where there is an undersupply, excess service provision (which can be harmful to patients) in areas where there is an oversupply, and higher health expenditures when unnecessary services are rendered. To avoid distorted fees, policymakers in the United States and several other advanced economies have sought a systematic and rational foundation for determining physician fees.

Once a nation decides to move away from paying physicians according to their charges, the question becomes, “What rational foundation and methodology can be used to develop a relative value scale and set the conversion factor?” Equally important is the question of whether the medical profession will accept a new approach to administering their fees. The RBRVS was developed when the United States was grappling with these questions.

Theoretical Foundation
In 1979, William C. Hsiao and William B. Stason published an article that outlined a rational foundation for setting a physician fee schedule. It was to be based on the theory of competitive markets, whereby the price of a service would be equal to the cost of the input resources required to produce it efficiently. A fee schedule based on the price that a perfectly competitive market would yield has the advantage that the fees will allocate resources efficiently and services will be produced efficiently.

In 1986, the U.S. Congress requested and appropriated funds for developing a new method to set physician fees for the nation’s Medicare program on a more rational basis. A Harvard UniversityO’Leary, Dennis S.. Read more ... » research group, headed by Hsiao, was selected from several competing organizations to conduct the study. Hsiao proposed to develop the new fees based on the principles of his earlier work. A year later, the U.S. Physician Payment Review Commission (PPRC), an advisory body to the U.S. Congress, also endorsed the method based on input resource costs. The commission reasoned that a resource-cost basis would reflect estimates of what relative values would be in a hypothetical market that functions perfectly and that in such a market, competition drives relative prices to reflect the relative costs of efficient producers.

Method and Data
The Harvard research group identified three main resource inputs required to produce physician services: (1) the total work input by the physician (TW); (2) the relative practice costs, including professional liability insurance premium (RPC); and (3) the amortized value of the opportunity costs of postgraduate specialty training (AST). These three components are combined to produce the RBRVS. Specifically, RBRVS = (TW)(1 + RPC)(1 + AST). The TW, RPC, and AST are each expressed as an index. The total work is divided into pre-, intra-, and postservice work. The intraservice period is the time when a physician sees the patient or performs a procedure, while the preservice and postservice periods represent the time spent on the patient before and after the intraservice period.

To investigate the work and other costs, the RBRVS study relied on the Physician’s Current Procedural Terminology (CPT-4), a coding system designed by physicians, to identify more than 7,000 distinct services, visits, and procedures.

In their study, the Harvard research group found that physician work consists of two key components: time and intensity of time. The intensity has four dimensions: mental effort and clinical judgment, technical skill, physical effort, and stress due to risk. The study employed the magnitude estimation method to measure work inputs for a given service. Magnitude estimation method is a way of measuring subjective perceptions and judgments; its usefulness in obtaining reliable, reproducible, and valid results for work input has been repeatedly demonstrated.

The Harvard research group randomly selected 6,841 physicians from the American Medical Association’s Physician Masterfile and surveyed them by telephone. They were asked to estimate the time and intensity of the work of selected services performed by that specialty. The survey covered 33 specialties. The overall response rate was 69%, ranging from a high of 84% for nuclear medicine to a low of 56% for obstetrics and gynecology. The responses were tested for reliability, consistency, and validity with different statistical methods such as the intraclass correlation method and regression analysis. The study found the results from the surveys to be reliable, consistent, and reproducible. A panel of more than 200 practicing physicians who served as consultants to the study, representing the 33 specialties, then reviewed the results. The research group found that the results had face validity.

In the national survey, physicians in each specialty used a different service as a standard against which to rate the work of other services. To create a common scale for all specialties, the research group had to link the separate scales. They developed a method whereby their physician consultant panels identified pairs of services from different specialties that required approximately equal amounts of intraservice work. They connected each specialty to others by at least four of the pairs, creating a set of linkages. They then used a weighted-least-squares method to find the best-fit location for each link. A jackknife analysis of the residual sum of squares suggested that the choice of links was appropriate.

Practice costs can vary widely between different specialties and different services. Such costs would include compensation for supporting staff, office space, equipment, and supplies. The RBRVS study divided practice costs into direct and indirect costs. The identification of direct costs is straightforward—these are the resources used to render a service. In contrast, indirect costs consist of all the remaining costs; they are allocated based on commonly accepted allocation methods used in cost accounting, such as time or space occupied.

Physicians master their clinical judgment and skills through post–medical school residency training, which can range from 3 to 7 years depending on specialty. To undertake residency training, the physicians forgo the compensation they could have earned as medical school graduates. This loss in earnings constitutes the opportunity cost of residency training. The RBRVS study developed an index of the opportunity costs for different specialties by calculating the opportunity costs for each specialty and amortizing these costs over their working lifetime.

Last, the three components of the RBRVS are combined into one index.

Epilogue
The RBRVS study was completed for all specialties in late 1991. On its completion, the U.S. Congress immediately passed a law to adopt its use for the nation’s Medicare program by January 1, 1992. Many private insurance plans in the nation adopted it as well. Responsibility for updating the RBRVS was given to the American Medical Association (AMA). Subsequently, several other nations, including Australia and FranceNational Health Insurance. Read more ... », and private insurance plans in EnglandStevens , Rosemary A.. Read more ... » also adopted the RBRVS method to set their physician fees.

William C. Hsiao

See also American Medical Association (AMA); Centers for Medicare and Medicaid ServicesCenters for Medicare and Medicaid Services. Read more ... » (CMSCenters for Medicare and Medicaid Services. Read more ... »); Healthcare Financial Management; Health EconomicsHospital Closures. Read more ... »; Medicare; Pay-for-Performance; Payment Mechanisms; Supplier-Induced Demand

Further Readings
American Medical Association. Medicare RBRVS 2008: The Physician’s Guide. Chicago: American Medical Association, 2008.
Hsiao, William C., and William B. Stason. “Toward Developing a Relative Value Scale for Medical and Surgical Services,” Health CareOutcomes-Based Accreditation. Read more ... » Financing Review 1(2): 23–38, Fall 1979.
Jan Bergman, Martin. “Resource-Based Relative Value Scale (RBRVS): A Useful Tool for Practice Analysis,” Journal of Clinical Rheumatology 9(5): 325–27, October 2003.
Johnson, Sarah E., and Warren P. Newton. “Resource-Based Relative Value Units: A Primer for Academic Family Physicians,” Family Medicine 34(3): 172–76, March 2002.
Rotarius, Timothy, and Arron Liberman. “An RBRVS Approach to Financial Analysis in Health Care Organizations,” The Health Care Manager 19(3):
17–23, March 2001.
Williams, Tim R. “A Geologic Survey of the Medicare RBRVS System,” Journal of the American College of Radiology 1(3): 192–98, March 2004.

Web Sites
American Medical Association (AMA): http://www.ama-assn.org
Centers for Medicare and Medicaid Services (CMS): http://www.cms.hhsCenters for Medicare and Medicaid Services. Read more ... ».gov
Healthcare Financial Management Association (HFMA): http://www.hfma.org