Fee schedule development and maintenance is the first important step that doctors must take to make sure they are paid appropriately for the services they provide. This simple step-by-step guide allows you to effectively adjust your fee schedule.
A Simple Step-by-Step Guide to Adjust Your Fee Schedule
One of the primary challenges for health care providers is deciding what to charge for the services they deliver. As someone who is closely involved with reimbursement issues, I constantly hear questions from doctors about the appropriateness of their charges and I frequently experience the confusion providers face when attempting to establish a charge for new procedures introduced into the practice. Fee schedule development and maintenance is the first important step that doctors must take to make sure they are paid appropriately for the services they provide.
One of the initial items to examine in any review of a medical practice is the appropriateness and consistency of the fee charged. Fee schedule inconsistencies lead to several potential problems for health care providers. Inappropriate fees may lead to lower reimbursement for the practice. Fee schedule inconsistencies may increase the potential for an audit of the practice and increased liability in case of an audit. Fees that are too high lead to services that are overpriced for the market. This causes higher patient out-of-pocket costs. These higher patient costs result in increased patient dissatisfaction that can strain the doctor-patient relationship and can lead to patient accounts that are difficult to collect.
Fees that are too low not only lower the potential income, but also tend to lower the provider’s usual, customary and reasonable profiles with the various insurance payers. This tends to depress the payment insurers are willing to support for all providers of the same service. Fee schedule inconsistencies can bring about losses in the practice if the costs for delivering the service exceed the income from the service. This seems incontrovertible, but I have seen many examples of medical practices delivering services whose costs are not covered by the charges generated by the practice.
Ideally, charges should be based on the costs incurred by the doctor for delivering the services, but in reality very few providers have any idea what it costs them to provide services to patients. A systematic fee schedule maintenance program provides the doctor with a foundation for establishing costs associated with delivering each service provided by the practice.
Developing costs for procedures and services delivered by doctors can be an extremely intimidating process which involves allocating practice expenses such as staff time, computers, rent, telephone, medical supplies and equipment, etc. to each service provided. It also calls for allocating the doctor’s time resource to each procedure or service. Simply considering such a process can be a daunting task for any provider. Fortunately, systems have been developed that incorporate all the detail and mundane work associated with allocating such medical practice costs. Various relative value systems have been devised that successfully attempt to allocate practice expenses, the amount of physician work and malpractice insurance expenses for virtually every CPT-4 coded service provided by a medical practice. The best known of these systems is the Resource Based Relative Value Scale (RBRVS) promulgated by the government’s Health Care Financing Administration (HCFA).
Relative value systems can be used to develop consistent and defensible fee schedules. A systematically maintained fee schedule based on a relative value system can provide many benefits to the medical practice. For example, they can be used to establish fees for new procedures and services or they can be used to rationally and systematically adjust current fees. Such systems can also help identify pricing problems in the practice. Relative value systems are invaluable in developing a fee schedule for a new practice. These systems can help the doctor determine whether his fees cover the costs of providing a procedure or service to patients. And, in today’s managed care environment, fee schedules developed using relative value systems can be important assets when negotiating contractual payments with insurance companies.
I will examine several instances of the use of relative value systems in a typical medical practice. These examples utilize simple concepts and arithmetic to achieve the specific goal. A completed fee schedule is based on the coding structure of the American Medical Association’s Current Procedural Terminology (CPT-4) and the assigned relative values from the selected relative value system. Relative value systems provide a weighted value for the selected code. They do not provide a dollar value for the service. The relative weight must be multiplied by a conversion factor to complete the process of assigning a dollar value for the fee schedule. The codes and values given in the following examples are for illustration purposes only and are not intended to be construed as accurate codes or values.
Using Relative Values to Establish Fees:
Method One
Let’s assume you need to establish a fee for a medical service code your practice is going to begin performing. The service CPT-4 code in your selected relative value system is 54321. Follow these steps to determine an appropriate charge for the new service.
1. Locate the relative value for the procedure for which you need to establish a fee. For this example, the relative value is 12.0.
2. List 10 to 20 of your most frequently performed medical (not surgical or evaluation and management) procedures.
3. List your charge for each procedure.
4. List the relative value for each procedure.
| Procedure | Current Charge | Relative Value |
| 54322 | $500 | 21.6 |
| 54323 | $750 | 25.2 |
| 54324 | $250 | 12.0 |
| 54325 | $1,500 | 46.5 |
| 54326 | $950 | 28.6 |
| Total | $3,950 | 133.9 |
5. Calculate the sum of the current charges ($3,950).
6. Calculate the sum of the relative values (133.9).
7. Divide the total charges by the number of procedures ($3,950 ÷ 5 = $790) to get your average charge.
8. Divide the total relative values by the number of procedures (133.9 ÷ 5 = 26.78) to calculate your average relative value for medical procedures.
9. Divide the average charge by the average relative value ($790 ÷ 26.78 = $29.50). This is the conversion factor you will use for medical codes.
10. Multiply your conversion factor by the new code’s relative value to establish your new fee for the procedure 54321 ($29.50 x 12.0 = $354).
Using Relative Values to Establish Fees:
Method Two
You also can arrive at a conversion factor and a fee for a new service using the following method. This second method is preferred when using the HCFA Resource Based Relative Value Scale (RBRVS).
1. Locate the relative value for the procedure for which you need to establish a fee (same as in Method One).
2. Divide each fee by its associated relative value.
3. Calculate the sum of the individual relative values.
| Procedure | Current Charge | Relative Value | Fee ÷ Relative Value |
| 54322 | $500 | 21.6 | $23.15 |
| 54323 | $750 | 25.2 | $29.76 |
| 54324 | $250 | 12.0 | $20.83 |
| 54325 | $1,500 | 46.5 | $32.26 |
| 54326 | $950 | 28.6 | $33.22 |
| Total | $139.22 |
5. Divide the sum of the relative values found in step three by the number of procedures in the analysis ($139.22 ÷ 5 = $27.84). This is the conversion factor you will use for medical codes.
6. Multiply your conversion factor by the new code’s relative value to establish your new fee for the procedure 54321 ($27.84 x 12.0 = $334).
Using Relative Values to Adjust Fees and Make Fee Schedules Consistent
This process is useful in evaluating an existing fee schedule for consistency. It is the process I use in reviewing fee schedules for medical practices and when making suggestions for revision. Follow each of these steps to review your own existing fees.
1. Determine a conversion factor by performing the calculations in steps one through five of the previous example.
2. Multiply the relative value for each procedure by the conversion factor.
| Procedure | Current Charge | Relative Value (RV) | Conversion Factor (CF) | CFxRV |
| 54322 | $500 | 21.6 | $27.84 | $601 |
| 54323 | $750 | 25.2 | $27.84 | $702 |
| 54324 | $250 | 12.0 | $27.84 | $334 |
| 54325 | $1,500 | 46.5 | $27.84 | $1,295 |
| 54326 | $950 | 28.6 | $27.84 | $796 |
3. Subtract the conversion factor times the relative value from your current fee for each procedure.
| Procedure | Current Charge | CF x RV | Difference |
| 54322 | $500 | $601 | ($101) |
| 54323 | $750 | $702 | $48 |
| 54324 | $250 | $334 | ($84) |
| 54325 | $1,500 | $1,295 | $205 |
| 54326 | $950 | $796 | $154 |
4. Identify differences that are negative. These may represent opportunities to increase fees.
5. Identify fees that are positive which may indicate instances where your fees are too high.
6. Establish your new fees.
| Procedure | Old Charge | New Charge |
| 54322 | $500 | $600 |
| 54323 | $750 | $725 |
| 54324 | $250 | $335 |
| 54325 | $1,500 | $1,400 |
| 54326 | $950 | $850 |
7. Examine your completed fee structure including volume or procedure quantity to determine the financial impact of these changes to your practice.
| Procedure | Yearly Vol. | Old Charge | Total Income | New Charge | Total Income |
| 54322 | 58 | $500 | $29,000 | $600 | $34,800 |
| 54323 | 23 | $750 | $17,250 | $725 | $16,675 |
| 54324 | 47 | $250 | $11,750 | $335 | $15,745 |
| 54325 | 12 | $1,500 | $18,000 | $1,400 | $16,800 |
| 54326 | 6 | $950 | $5,700 | $800 | $4,800 |
| Total | $81,700 | $88,820 |
8. Multiply the old charge by the annual volume for each procedure.
9. Multiply the new charge by the annual volume for each procedure.
10. Sum the total income columns for both the old and new charges.
11.Compare the totals to ensure the practice will not lose money under the new fee structure. In this case, even though some fees were reduced significantly, the new fee structure is:
1. More consistent.
2. Results in an overall fee increase of 8.7%.
Using Relative Values to Negotiate Fee Schedules
Consistent and defensible fee schedules make managed care contract negotiations much easier. This is because most managed care plans already use these systems to analyze and develop their usual, customary and reasonable profiles and to establish their fee schedules. If both the provider and the payer are using the same systems to discuss payments, the negotiations should simply revolve around agreement on a payment conversion factor.
1. List those procedures the practice performs or anticipates performing under a negotiated contract arrangement.
2. List your current fees for each procedure.
3. Estimate the volume of procedures based on your experience or your beliefs about the services you will perform under the negotiated arrangement.
4. Multiply your current fee by the anticipated volume to determine your income for each service.
5. Calculate the total income amounts to obtain the total gross income you expect from the contractual agreement.
| Procedure | Annual Volume | New Charge | Total Income |
| 54322 | 58 | $600 | $34,800 |
| 54323 | 23 | $725 | $16,675 |
| 54324 | 47 | $335 | $15,745 |
| 54325 | 12 | $1,400 | $16,800 |
| 54326 | 6 | $800 | $4,800 |
| Total | $88,820 |
6. List each procedure.
7. List the volume for each procedure.
8. List the relative value for each procedure.
9. Multiply the volume by the relative value for each procedure.
10. Calculate the total of all relative values for the procedures covered under the contractual arrangement.
| Procedure | Annual Volume | Realtive Value (RV) | Total Relative Value |
| 54322 | 58 | 21.6 | 1,252.8 |
| 54323 | 23 | 25.2 | 579.6 |
| 54324 | 47 | 12.0 | 564.0 |
| 54325 | 12 | 46.5 | 558.0 |
| 54326 | 6 | 28.6 | 171.6 |
| Total | 3,126.0 |
11. Divide the gross income calculated in Step 5 by the total relative values established in Step 10 ($88,820 ÷ 3,126.0 = $28.41). This is the minimum conversion factor you should be willing to accept in order to maintain a constant practice income under the contractual arrangement.
As we have demonstrated, fee schedules developed using relative value systems can prove useful to any medical practice in several ways. It is important to review the practice fee structure periodically and minimally on an annual basis. Also, HCFA periodically adjusts the RBRVS relative values for certain CPT-4 codes as it develops more understanding about specific services or procedures.
HCFA has announced plans to dramatically alter the manner in which providers are paid for services delivered to Medicare patients. The changes are slated to occur in January, 1999. This will be done by altering the RBRVS relative values. Since many payers already use this system to calculate their payments to doctors and other providers, these changes eventually will affect more of your practice than just the Medicare portion. Use this time to review your fees, make your entire fee schedule more consistent and evaluate the impact of these changes on the future of your practice.
You can secure a list of the assigned relative values in the RBRVS from various sources such as the Government Printing Office, by visiting the HCFA web site or by contacting a company that specializes in these services.
