Reimbursement for medical practices was once based on what was known as "customary, prevailing, and reasonable charges." This system was felt to be inequitable and inflationary.
In 1992, Medicare instituted the resource-based relative value scale (RBRVS), which significantly changed the way physicians are paid. The RBRVS aimed to decrease payment for procedure-oriented specialties and increase it for specialties, such as oncology, considered to be "cognitive" in nature.
The RBRVS includes "relative values" for each Current Procedural Terminology (CPT) code based on estimates of the amount of physician work, practice cost, and medical liability premium costs involved. Each of these components is geographically adjusted and then multiplied by a conversion factor that translates the total unit value for the CPT code into a dollar amount.
The value of the conversion factor is determined annually by the Centers for Medicare & Medicaid Services using a complex formula defined by federal statute that reflects Medicare's inflation ratethe Medicare economic index (MEI)and an "adjustment factor" based on the sustainable growth rate (SGR).
The SGR was created by Congress in 1999 to control Medicare spending on physicians' services. It sets expenditure targets that take into account the number of fee-for-service Medicare beneficiaries and the nation's overall economic growth.
If total physician spending exceeds the spending target set by SGR, a negative adjustment of up to 7% is applied to the MEI when the conversion factor is updated each year. Conversely, if total spending is below the SGR, a bonus of up to 3% may be applied to the MEI.
One problem with the SGR is that it attempts to set prices for individual services while at the same time controlling total Medicare spending. These two goals can very seldom be accomplished simultaneously because as the number of Medicare beneficiaries increases and the services provided to them get more complex and costly, the total spending for Medicare part B expands. To control this expansion in Medicare spending, reimbursement for individual services, as reflected by the value of the conversion factor, has to drop in order to meet SGR targets.