Medicaid/Medicare Medicare

Regional Variation in Medicare Physician Reimbursement: Geographic Practice Cost Index (GPCI)

Medicare pays physicians in New York City more for the same procedure than they do if that same physician was located in rural Wyoming.  Why do they do this?

The obvious reason is that the cost of operating a practice in New York City is much higher than in rural Wyoming.  Medicare determines the amount of additional money physicians in high cost areas receive compared to those in low cost areas according to a Geographic Practice Cost Index (GPCI).  Section 1848(e) of the Social Security Act mandated that Medicare establish these geographic indices as part of the Resource-Based Relative Value Scale (RBRVS) method for reimbursing physicians.  The RBRVS payment methodology measures the amount of physician time/experience, overhead, and malpractice insurance inputs to provide any given services.  These three input quantities are known as the work RVU (relatively value unit), practice expense RVU, and malpractice insurance RVU.  To adjust the price physicians receive for providing services, Medicare adjusts these three RVUs with three different GPCIs.  Today, I will provide more detail on how Medicare constructs these GPCIs.

The GPCI components are: the physician work GPCIW, the practice expense GPCIPE and the malpractice insurance GPCIMP.  The practice expense GPCI is the most complicated as it is made up of indices for employee wages and the relative costs for office rents.  The current data sources to build data sources (as well as alternative data sources) can be found here.

One can summarize the impact on the three GPCIs into a single Geographic Adjustment Factor (GAF) which weights the work GPCI at 52%, the practice expense GPCI at 44% and the malpractice GPCI at 4%.

Using these GPCI’s one can calculate a physician’s payment as follows:

  • Pricing Amount =[(Work RVU * Work GPCI) + (PE RVU * PE GPCI) +(MP RVU * MP GPCI)] * Conversion Factor

[Note: The PE RVU will vary depending if the procedure occurs in a facility or non-facility setting.]  Over time, the amount of RVUs will not change unless the input composition of any procedure changes.  In addition, the GPCIs are normalized so the national average is unity.  Thus, the only way physicians earn more money over time is through inflation to the conversion factor.  The conversion translates the geography-adjusted RVUs into dollars and cents, based on the Medicare Economic Index (MEI).

How large is the conversion factor? According to the CMS website: “…the conversion factor for claims provided from January 1, 2010 through May 31, 2010…is $36.0791.  On June 25, 2010, the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 was signed into law. Section 101 of Pub. L. 111-192 provides for a 2.2 percent update to the 2010 PFS, effective for dates of service June 1, 2010 through November 30, 2010. The conversion factor for services furnished during this time period is $36.8729.”

The current GPCIs are calculated for 89 localities, down from an original set of 210 payment areas prior to 1997.  (Historical GAF values by locality are available here.)

How big are localities?  Big.  California only has nine localities, Texas has eight, New York five, and Illinois 4 and Florida 3.  Ten states have only two localities and thirty seven localities are comprised of an entire state [Note: The number of states sums to 52 because the statistics also includes DC and PR as states].  The average locality is made up of 36 counties, although the median locality is made up of 12.5 counties.

There are a many caveats for constructing the GPCIs.  For instance, However, Congress requires that physician work GPCIs reflect only one-quarter of the relative cost differences, compared to the national average.


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