Calculating Medicare Fee Schedule Rates

A fee schedule is a complete listing of fees used by Medicare to pay doctors or other providers/suppliers. This comprehensive listing of fee maximums is used to reimburse a physician and/or other providers on a fee-for-service basis. Medicare Part B pays for physician services based on the Medicare Physician Fee Schedule (PFS), which lists the more than 7,400 unique covered services and their payment rates.

Physicians’ services include Office visits; Surgical procedures; Anesthesia services; and a range of other diagnostic and therapeutic services. CMS develops fee schedules for physicians, ambulance services, clinical laboratory services, and durable medical equipment, prosthetics, orthotics, and supplies.

Medicare PFS Payment Rates

The Medicare PFS payment rates formula shows how a payment rate for an individual service is determined.


Each component of the Medicare PFS payment rates formula is discussed in more detail below.

Relative Value Units (RVU)

Three separate RVUs are associated with the calculation of payment under the Medicare PFS:

  • Work RVUs reflect the relative time and intensity associated with furnishing a Medicare PFS service and account for approximately 50 percent of the total payment associated with a service;
  • PE RVUs reflect the costs of maintaining a practice (such as renting office space, buying supplies and equipment, and staff costs); and
  • MP RVUs reflect the costs of malpractice insurance.

Conversion Factor (CF)

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 non-facility payment amounts. Facility pricing typically covers services provided to inpatients or in a hospital outpatient clinic setting or other off-site hospital facilities. Non-facility pricing covers services generally provided in a physician’s office or other freestanding settings such as an Independent Diagnostic Testing Facility.

The formula specifies that the update for a year is equal to the Medicare Economic Index (MEI) adjusted up or down depending on how actual expenditures compare to a target rate called the Sustainable Growth Rate (SGR). The MEI is a measure of inflation faced by physicians with respect to their practice costs and general wage levels.

The SGR is calculated based on:

  • Medical inflation;
  • Projected growth in the domestic economy;
  • Projected growth in the number of beneficiaries in Fee-For-Service Medicare; and
  • Changes in law or regulation.

Geographic Practice Cost Indices (GPCI)

GPCIs are adjustments that are applied to each of the three relative values used in calculating a physician payment, as described above. The purpose of these adjustments is to account for geographic variations in the costs of practicing medicine in different areas within the country.

  • Work GPCI: A GPCI for physician work
  • PE GPCI: A GPCI for practice expense, and
  • MP GPCI: A GPCI for malpractice.

The above variables capture the efforts and productivity of the physician, his/her individualized costs for staff, and for productivity-enhancing technology and materials. The information in this article applies only to the Medicare Fee-For-Service Program (also known as Original Medicare).

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