# HCFA explores four ways to calculate costs

If you’ve taken a course in cost accounting or if that’s your specialty you know that methods for calculating costs are highly debatable. Add to that geographic variations, major payment impacts on various types of physicians, and sweeping overall revisions in Medicare policy, and you have a tangled argument over what appropriate statistical measures to use.

In the May 1 *Federal Register*, HCFA officials are scheduled to lay out in full how they arrived at changes to practice expense portions of the Resource-Based Relative Value Scale (RBRVS). They invite the public to respond in writing within 60 days after that issue.

If you want a head start in participating, however, HCFA has disseminated some of its costing logic to physician groups. If you want to posit arguments for or against the new system, you’ll have to know what that system is and how it works. Here are the costing steps HCFA is using, based on materials provided to medical associations across the country:

**1. Calculation of total practice expense relative value units (RVUs) direct and ****indirect costs.**

In this first step, officials simply calculate the total number of practice expense RVUs by multiplying the frequency of the given code by the current number of practice expense RVUs.

The next calculation is based on HCFA’s assumption that direct costs make up 55% of total costs, and indirect costs make up 45%. The percentage of total practice expense amounts recognized under the physician fee schedule would be divided into direct (55%) and indirect (45%) practice expense shares.

As part of this calculation, adjustments would be made for services subject to the site-of-service differential (a reduction made in payment when a service is more often provided in a physician’s office than in a hospital).

Also, other services subject to various specific payment rules, such as multiple surgery, bilateral surgery, and assistant-at-surgery payments, would be adjusted because the number of practice expense RVUs for these services is different from those for other services. For example, an assistant-at-surgery is paid less than the chief surgeon, and the practice expense RVUs for assistant-at-surgery are lower than for the chief surgeon.

**2. Calculation of specialty-specific indirect practice expense RVUs.**

This involves a sequence of three computations, which are as follows:

• *Calculate an indirect practice expense percentage per specialty.* This is done by analyzing the categories of practice expenses in the AMA’s Physician Market Place Statistics and aligning the categories of direct expenses so they are consistent between this data source and the data of the focus groups, referred to as Clinical Practice Expert Panels (CPEP) data.

• *Calculate an indirect practice expense percentage for each code by weighting the **indirect practice expense share per specialty by that specialty’s share of the total **allowed services. *In this process, the percentages would be computed on a code-by-code basis, rather than one for the entire specialty’s series of codes.

• *Calculate an indirect relative value per code by allocating the total pool of indirect **relative values to individual codes based on an allocation algorithm.* An example of an algorithm that would be used would be physician time or nonphysician time per code.

**3. Calculation of direct practice expense RVUs.**

To arrive at this calculation, officials take these three steps:

• *Calculate the total direct practice expense RVUs .* This is done by subtracting the total indirect practice expense RVUs from the total practice expense RVUs.

• *Factor in CPEP data.* The CPEP process provided the direct inputs per code for nonphysician clinical labor, medical supplies, medical equipment, and certain nonphysician administrative labor per code. These data were combined with standardized national prices to compute a direct expense per code.

• *Conversion of direct practice expense amounts into direct expense RVUs per **code. *This was done by multiplying the direct expense amount by the ratio of total direct RVUs to total direct expenses.

**4. Calculation of total practice expense RVUs.**

The direct and indirect RVUs are combined to arrive at a resource-based practice expense amount.