It’s Complicated: The Exceptional New Challenges Facing Physician Compensation Managers - Part 1

U.S. healthcare organizations have experienced many shocks over the last year and a half, beginning with the onset of COVID in early 2020 followed by major changes to the Medicare Physician Fee Schedule (MPFS) for 2021. The resulting market dynamics present some complex issues for managers of physician compensation plans. This series will explore some of the key topics.

Medicare’s 2021 Revaluation of Office Visit E&M Services is

Suddenly –— and Considerably — Increasing the Work RVUs for Certain Specialties

After a year of grappling with the impact of COVID, healthcare organizations were given little time to adequately evaluate and adjust for a significant increase in work relative value units (wRVUs) assigned to office visit evaluation & management (E&M) services under the MPFS. However, on December 1, 2020, the Centers for Medicare & Medicaid Services (CMS) finalized the 2021 MPFS with updates that included some of the most substantial revisions that have been made to the physician payment model in its history. The finalized re-weightings are shown below.

Initially, these wRVU increases were accompanied by a mandated 10.2% cut to the dollar conversion factor rate. To help avoid the extreme fluctuations in reimbursement this would cause, Congress intervened, and the Consolidated Appropriations Act was signed on December 22, 2020. The act included easing of the financial impact of some of the final fee schedule adjustments and resulted in a much smaller reduction to the Medicare conversion factor of 3.3%.

While Congress’ actions were helpful, changes to the MPFS still have far-reaching implications. In addition to being how Medicare and many other payers determine the amount of reimbursement providers are owed, wRVUs are commonly used by physician employers for setting compensation. Under a wRVU-based compensation plan, a higher wRVU value assigned to a procedure means that physicians performing the procedure will earn more compensation even though there is no corresponding change in the underlying service being provided. This has created a particular need among physician employers to assess the financial impact of these changes on their organizations.

To gauge the wRVU impact of the 2021 MPFS in different specialties, BFMV analyzed physician production data from the Medical Group Management Association’s (MGMA) DataDive Procedural Profile. This dataset reports the total aggregated volume by Current Procedural Technology (CPT) code for all survey respondents in a specialty, allowing for an overview of the typical mix of services. Using 2019 CPT volume information, BFMV calculated the effective specialty wRVU totals under both the 2020 and 2021 fee schedules.

While a small minority of specialties show little change – hospitalists and pathologists, for example, are not affected by the changes to office visit codes – many others have quite substantial wRVU gains. The top five projected wRVU increases are in urgent care (25%), neurology (21%), rheumatology (21%), family medicine (20%), and endocrinology (20%). More than half (58%) of the reviewed specialties have wRVU gains of greater than 5%, and nearly one-third (29%) show increases of more than 10%. Also, these calculations do not include the addition of the new CPT G2212 for extended visits, which will further increase the total wRVUs generated by some providers.

At the same time, the 3.3% reduction to the Medicare conversion factor means the 2021 reimbursement rates for services other than office visit E&Ms are generally lower than 2020 rates. The American Medical Association (AMA) analyzed the total Medicare revenue impact of the enacted 2021 MPFS changes by specialty. In most cases, the total annual Medicare payments for a specialty, including all E&M and other services, are expected to increase at a lower rate than the increase in wRVUs.

The effective wRVU changes and AMA’s Medicare revenue impact estimates based on the 2021 MPFS are shown in the table below (access a pdf here).

Since wRVUs are one of the most common metrics used in provider compensation plans with production-based components, employers with these structures need to evaluate what the MPFS changes mean for their physicians’ wRVU levels, compensation, and collections. Outcomes for individual physicians or groups may be different — even within the same specialty — since the blend of clinical services and payer mix varies among providers. Employers need to be aware that, in some cases, the total net increase in reimbursement stemming from higher wRVUs may be less than the additional compensation that is payable to a physician under a wRVU-based model.

The substantial update of the MPFS is just one aspect of the key market factors that managers will need to account for when evaluating and setting physician compensation over the next several years. Future installments of this series will examine other current and expected market dynamics.