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How to Calculate Medicare Physician
Payment Amounts

While it's well known that Medicare makes annual changes to its payments for physician services, the calculation behind those payments is not always so clear.

National average Medicare physician fee schedule payment amounts can be quickly calculated by simply multiplying the relative value unit (RVU) for the service by the conversion factor for the year. For example:

The 2002 Medicare 88305-professional component(PC)national average payment is 1.12 (the 2002 PC RVU) multiplied by the 2002 conversion factor of $36.1992 or $40.54. The 2002 national average payment for the 88305 technical component surgical pathology service is the 2002 RVU for the TC (1.46) times the 2002 conversion factor of $36.1992 = $52.85

But no one receives the national average payment amount. Locality-specific payments are calculated by applying Geographic Practice Cost Indices (GPCIs) to the components of the national relative values. For those who want more accurate payment information for their local area, the following formula should be used:

((Physician Work RVU x Work GPCI for locality) + (Practice Expense RVU x PE GPCI) + (Malpractice RVU x Malpractice GPCI)) x Conversion Factor = Medicare Local Payment Amount

Example: To calculate the year 2002 Medicare payment amounts for the 88305 in Alabama, combine the Medicare national RVU components for the 88305 with the GPCIs for Alabama and multiply by the 2002 conversion factor:

88305-PC: ((0.75 x 0.978) + (0.35 x 0.870) + (0.02 x 0.807)) x $36.1992 = $38.16, $2.38 below the mythical national average.

88305-TC ( Technical component): ((0.00 x 0.978) + (1.43 x 0.870) + (0.03 x 0.807)) x $36.1992 = $45.91, $6.94 below the national average.

Add the PC and TC payment amounts to obtain the global payment amount: 88305: $38.16 + $45.91 = $84.07.

A listing of Medicare relative values for the most common pathology services and the GPCIs for the year 2002 are available on this site.

Combine the RVU component for each service with the GPCI for each component to calculate locality-specific payment amounts. A listing of the local physician fee schedule payment amounts is also available from each Medicare Part B carrier and on the Centers for Medicare and Medicaid Services Web site.