Understanding Physician Compensation - RVUs Explained

Acronyms make up the language of the healthcare ecosystem. CMS, HIPAA, CPT, and RVU…to name just a few!

Today, let’s talk about the ABCs of physician compensation - RVUs.

Physician compensation can be based on different methodologies, which will be provided in your employment offer or contract. Most compensation models for physicians are typically structured in one of three ways:

1. Guaranteed salary
2. Salary plus incentive bonuses (which can be based on quality metrics and/or productivity)
3. Productivity only

The last one, physician productivity, is the riskiest for a new physician and is measured in RVUs or Relative Value Units which are explained below.

What is an RVU?

An RVU (relative value unit) is a method that the Centers for Medicare and Medicaid Services (CMS) uses to determine reimbursement for physician services. Some physician employment contracts, after a ramp-up period of 1 or 2 years with a salary guarantee, may convert to 100% productivity compensation based on the number of RVUs produced. So, it’s imperative to understand RVUs before you sign a contract.

RVUs reflect the relative level of time, skill, training, and intensity required of a physician to provide a defined service. It is a method for calculating the volume of work or effort put forth by a physician in treating patients. A well-patient visit, for example, would be assigned a lower RVU than an invasive surgical procedure. Because of this relative scale, a physician seeing two or three complex or high acuity patients per day could accumulate more RVUs than a physician seeing ten or more low acuity patients per day. “Work,” rather than the number of patients or billings, is what is being measured and reimbursed.

The RVU fee schedule was created with the passing of the Omnibus Budget Reconciliation Act of 1989 (OBRA). The act eliminated Medicare’s “reasonable charge” method of physician reimbursement and transitioned to the relative value scale. The RVU fee schedule assigned value to each service provided by physicians as designated by CPT® or Current Procedural Terminology code. The schedule also accounted for geographic differences in costs incurred by practices using a geographic conversion factor. Before the implementation of the RVU system, physicians billed Medicare by what is referred to as the “usual, customary, and reasonable” (UCR) charge. In fact, this charge was usually whatever doctors decided to reasonably bill for their services. Medicare’s reimbursement rates for services billed under this system were determined based on a weighted average of what physicians in the same community billed for the same service. Physicians billing under the UCR system were reimbursed at much higher rates for performing procedures and surgeries than for other types of patient care.

How are RVUs calculated?

There are three components or separate calculations required to calculate RVUs – RVUs, GPCI, and a Conversion Factor.

Relative Value Units (RVUs)

• Physician work RVU (work RVU) – This is the combination of time and acuity for each service based upon individual CPT codes.
• Practice Expense RVU (PE) – These expenses go into running the practice aside from the physician’s time. They include things such as rent, equipment, supplies, and staff (other than physicians)
• Malpractice RVU (MP) – These are costs associated with professional liability expenses.

Geographic Practice Cost Indices (GPCI)

GPCI is used to differentiate reimbursement based on geography. For example, the GPCI could be higher for a densely populated city than for a rural area. The GPCI is calculated for each of the RVU calculations above (physician work, practice expense, and malpractice).

Conversion Factor

This component converts the RVU to a dollar unit or the amount of reimbursements. This amount changes annually and is announced as part of that year’s Medicare Physician Fee Schedule. For 2023, CMS announced a conversion factor of $33.06, which is a $1.55 decrease over last year’s $34.61.

Additionally, RVUs are calculated differently depending on whether the service provided is facility or non-facility based. Facilities can include settings such as inpatient, outpatient, and emergency rooms. Non-facilities are generally free-standing physician practices.

Advantages and Disadvantages

There are advantages and disadvantages to each compensation methodology. A production-based system can be a daunting contract for new physicians since there are few guarantees and many uncertainties with respect to compensation. Before signing an RVU-only contract, make sure you have a good understanding of the pros and cons. My advice to my physician clients, new or experienced, is to ask at the outset whether or not there is a business case for the opportunity they are being offered. Most employers and large practices will have a three-to-five-year physician development plan that takes into consideration demographic trends, community/regional supply, and demand for physicians and other providers. Ask to see it or at least something in writing that justifies and supports the opportunity for which you are being recruited. You may end up requesting an extended guarantee period and a slower ramp-up to productivity-based compensation.

Knowledge is Power

Before you sign your employment agreement, make sure to ask the following questions:

• What is the rate I will be reimbursed per RVU?
• Will the reimbursement rate be flat or variable depending on other metrics?
• Is the rate also different based on the insurance provider or other guidelines set forth by the group?
• Will I get paid for uninsured patients?
• How long until I get paid?
• Is there a monthly, quarterly, or biannual true-up?
• How soon after the true-up will I get paid?
• Can I take a draw against my payout?

Understanding the role RVUs can play in determining physician compensation isn’t always easy. However, it is essential to know, at the very least, the basics of how this type of compensation is calculated. The more you know and understand, the better you can protect yourself.

Thank You!

We are grateful to Anu Murthy for sharing her knowledge and expertise and partnering with Spaugh Dameron Tenny on blogs about healthcare contracts and negotiations, physician compensation, non-compete contracts, and RVUs.

Final Thoughts Around Physician Compensation

Are you in the process of looking for a new role or reviewing a new physician contract?

One way to protect yourself in an employment agreement is to have your trusted advisors - your healthcare attorney, accountant, and financial planner – review the contract for you. They can provide guidance specific to your situation to help you understand if your contract includes fair payment terms and to ensure you are financially prepared before starting a new role. Please reach out if Spaugh Dameron Tenny can be of assistance as you plan your financial future.

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