The Medicare Conversion Factor

What Is the CF?

The monetary CF is 1 of 3 key elements that determine physician payment under the Medicare Physician Fee Schedule, along with the Resource-Based Relative Value Scale and Geographic Practice Cost Indices (GPCIs) (GPCI_W = physician work, GPCI_PE = practice expense).

With the Resource-Based Relative Value Scale (RBRVS), an RVU is assigned for each Current Procedural Terminology (CPT) code on the basis of resource costs associated with 1) physician work, 2) practice expense, and 3) professional liability insurance. As determined by Congress at the inception of the RBRVS, all of the CPT codes on the Medicare Fee Schedule are subject to review on an annual basis.¹

Each Current Procedural Terminology code RVU is adjusted on the basis of the GPCI associated with each geographic area, adjusting for different medical costs and wage differentials. GPCIs are reviewed every 3 years.

The CF, a national dollar multiplier, is used to “convert” the geographically adjusted RVU to determine the Medicare-allowed payment amount for a particular physician service.

The CF is used separately to price facility and nonfacility payment amounts. Facility pricing typically covers services provided to inpatients or in a hospital outpatient clinic setting or other off-site hospital facilities. Nonfacility pricing covers services generally provided in a physician office or other freestanding setting such as an Independent Diagnostic Testing Facility.²

How Is the CF Calculated? Why Is the Calculation So Complex?

The CF is updated annually according to a complex formula set by statute. Every year, by use of the formula, the Centers for Medicare and Medicaid Services (CMS) must publish an estimated SGR and estimated CF applicable to Medicare payments for physician services for the following year, as well as the data underlying these estimates. CMS cannot change its overall budget by more than $20 million. The use of this SGR target is intended to control growth of aggregate Medicare spending. The targets are not expenditure limits, but an update to the Physician Fee Schedule to reflect a comparison of actual to target expenditures. If RVU adjustment causes a differential greater than that $20 million or exceeds the target, CMS uses the Budget Neutrality factor to bring overall payments down to an acceptable level.

Under statute, the update for each year is determined by comparing cumulative actual expenditures with cumulative target expenditures since April 1, 1996, through the end of the year before the year in question. As an example, the update for 2013 compares the cumulative actual with cumulative target expenditures from April 1, 1996, through December 31, 2012. The calculation is as follows for 2013:

2013 Non-Facility Pricing Amount = [(Work RVU * Work GPCI) + (Transitioned Non-Facility PE RVU * PE GPCI) + (malpractice expense [MP] RVU * MP GPCI)] * CF 2013 Facility Pricing Amount = [(Work RVU * Work GPCI) + (Transitioned Facility PE RVU * PE GPCI) + (MP RVU * MP GPCI)] * CF.

The CF for calendar year 2013 is $34.0230.

If the Formula Were Followed, What Would the CF Be for Next Year?

Under current law, the CF for 2014 would be similar to 2013, reduced by approximately 26.5% to $25.0069 (compared with the current $34.0230). This reduction would be effective January 1, 2014, unless Congress passes a legislative fix. The latest estimates of the cost of the so called “doc fix” are between $150 and $300 billion, depending on assumptions regarding economic performance, policy changes, and physician behavior.

What Happens Next?

Annually, the Sustainable Growth Rate–mandated cuts in the CF have been overridden by Congress, usually through last-minute negotiations that cover numerous contentious issues. Many interested in health policy recognize the need for a reform of this process to improve clarity and remove uncertainty from the annual determination of the CF. Because of the large and growing discrepancy between the statutory CF and the established CF, the budgetary need for a more permanent solution is also considered important, going forward. Recently, the magnitude of the adjustment required in the CF to maintain Budget Neutrality has been revised downward. It is likely that this is a temporary consequence of the disparate timing of effects on the various components of the Sustainable Growth Rate formula related to recent economic conditions. As the economy returns to more normal levels of growth, we can expect these short-term trends to revert to their prior patterns and continue to increase.

Some of the proposals on the table include cuts in the overall level of Medicare fees weighted heavily toward cuts in specialist services such as imaging and relatively sparing primary care. Others reduce costs by changing the calculation of Medicare premiums and/or means testing them. Another approach is to adjust the relationship between the CF and the rate of inflation and the rate of economic growth. Other proposals seek a more fundamental overhaul of the program, through premium support models similar to those already being used in Medicare Part D. Others seek to preserve the status quo. Regardless of the fate of the current CF formula and the precise relationships among the components, the ingredients of the CF are combined in recipes for global health care budgets under discussion in health care policy circles.³