Changes are Coming: Considerations for Physician Compensation Under the Proposed 2021 CMS Physician Fee Schedule

October 7, 2020

With significant changes to relative value unit (“RVU”) values proposed to take effect in 2021, the time for hospitals and health systems to prepare for action is now.

Proposed CMS Physician Fee Schedule Changes

In August, the Centers for Medicare & Medicaid Services (“CMS”) released proposed changes to the Medicare physician fee schedule that will significantly impact physician compensation arrangements in 2021. The biggest proposed changes are to the evaluation and management (“E&M”) codes, the base codes used by primary care and other office-based physicians for patient visits in the clinic.

Under the proposed rules, the work relative value unit (“wRVU”) component of the total RVU for office visits will increase by approximately 32% for established patients, and 9% for new patients. The other components of a total RVU, practice expense RVUs and malpractice RVUs, are increasing by a much smaller amount.

By rule, CMS must make all its changes budget neutral, and has proposed an 11% reduction to the conversion factor it uses to calculate reimbursement for physician services, from $36.09 in 2020 to $32.26 in 2021 to account for increased RVU values. As a result, while RVU values are increasing for physician office visits, Medicare reimbursement levels will remain flat overall considering the totality of services physicians typically provide.

How Big Is the Impact?

This situation is problematic for organizations because most organizations pay employed and contracted physicians on productivity-based compensation models that pay physicians based on the number of wRVUs they generate. If an organization does not adjust its physician compensation arrangements to account for these wRVU changes, it risks overcompensating physicians relative to the physicians’ work effort in 2021.

Consider a typical family medicine physician, who generates approximately 5,000 wRVUs annually at a rate of $50 per wRVU for a total salary of $250,000 on revenue of $500,000. In 2021, for the same level of work effort, that physician will generate 6,000 wRVUs and will be paid $300,000, a $50,000 increase (20%) for a likely much smaller increase in revenue.

This effect is exacerbated for heavily office-based specialties like primary care, endocrinology, and other non-surgical specialties, but the impact will be felt across the board. Based on VMG’s preliminary calculations, a typical health system that employs 500 physicians will see its physician compensation pool increase by nearly $16 million in 2021 for effectively the same level of revenue as in 2020.

Heading into the fourth quarter of 2020, organizations must carefully examine the potential impact of the proposed changes to their organization and consider adjustments to compensation programs to remain compliant and not break the budget.

The Issue with Relying on Surveys

Organizations typically rely on industry surveys from the Medical Group Management Association (“MGMA”), Sullivan Cotter, and others to set the rates per wRVU that are used in their physician compensation plans. Most survey organizations recently released the 2020 editions of their compensation and productivity surveys, which provide data on physician compensation and productivity levels performed during calendar year 2019.

The 2021 editions will reflect compensation and work effort levels in 2020, so the first surveys that give organizations a glimpse into the actual impact of the 2021 CMS changes will be the 2022 surveys, which will not be released until the spring to summer of 2022 for potential use in 2023 compensation plans.

As they plan for 2021 and 2022 compensation plans for employed and contracted physicians, organizations should consider what adjustments may need to be made to the survey wRVU and compensation per wRVU values to ensure these data points remain relevant for their physician compensation plans.

Actions Health Systems Can Take Now

Clearly, doing nothing to prepare for the proposed changes is not a viable option. Below are some steps health system leadership can take to ensure the organization does not overcompensate the organization’s employed and contracted physicians in 2021.

Review Your Compensation Arrangements

The first step organizations should take is take an accounting of all employed and non-employed physician compensation arrangements to determine which arrangements are tied to wRVUs and how much of a physician’s compensation is derived through wRVUs.

An organization will also want to work with its legal and compliance teams to understand the key contract terms in non-employed physician contracts to determine when (or if) and how an organization might be contractually able to modify the contracts.

Understanding how many physicians are impacted and the extent of the impact will help an organization make the decision on how to approach any changes.

Determine Impact to Compensation and Revenue Levels

Once an organization understands who is impacted, the next step is to estimate the impact to the organization’s revenue and physician compensation pool if the organization does nothing. To understand revenue, in addition to evaluating its Medicare business, an organization will need to closely examine its contracts with non-government payers to determine what, if any, impact the CMS changes will have on the revenue associated with those contracts.

After establishing a baseline, an organization will have the information it needs to make key decisions on potential changes to physician contracts. If physician compensation is projected to increase 20% for a 5% increase in revenue, for example, that organization can consider a 10-15% reduction to the 2021 conversion factor to temper the compensation plan to the realities of the expected reimbursement changes, while still allowing for market-based compensation adjustments.

Consider Alternative Solutions

CMS will not issue its final rules for 2021 until late October to early November, which leaves little time for organizations to fully analyze the changes and understand the overall impact to the organization. One strategy organizations have historically used when faced with significant changes to the CMS fee schedule is “freezing” the physician fee schedule at the current year’s level to allow time for the organization to assess the impact and to allow the physician compensation surveys to catch up.

These considerations will help ensure an organization’s physician compensation program remains consistent with an organization’s budget while still providing competitive levels of physician compensation and remaining compliant with federal fraud and abuse laws.

How VMG Health Can Help

VMG Health’s provider compensation design and consulting service line can help your organization assess the potential impact and determine strategic adjustments to your provider compensation plan to set your organization up for success in 2021. VMG Health can help analyze the impact to your organization’s compensation plan if your organization uses the 2021 CMS values in the physician compensation plan without any adjustments, and will help consider targeted adjustments to ensure the compensation plan provides competitive compensation levels to your employed providers without significantly impacting your budget.