Resource Based Relative Value Scale

The competitive market analysis summarized in Figure 3.1 was used by Hsiao et al. (1988) as the model for determining what physicians’ costs would be in the United States in the absence of market imperfections.

Medicare (the government insurance policy for the elderly) reimbursed doctors using their ‘reasonable and customary’ charges. Many physicians believed that reimbursements on this basis undervalued cognitive services where evaluation was necessary and overpaid surgery and procedures. A new method for estimating the resource cost of physician services was devised called the ‘Resource Based Relative Value’ scale (RBRV or RBRVS). Hsiao et al.’s work was so influential that in 1992 their scale replaced the customary charge system for Medicare.

The logic behind the RBRV was articulated by Hsiao and Dunn (1991) as:

‘In a competitive market, the long-run equilibrium price of a good should approximate the long-run average cost of its production. (We assume that the long run marginal cost approximately equals the long run average cost).

The RBRVS we have developed is a method for approximating the average relative costs required to produce a range of physicians’ services.’

The RBRV method is built around this formula for measuring the resource input for a physician service:

RBRVTW (1RPC)(1AST) (3.4)

where TW is the total work input by the physician, RPC is an index of rel-ative specialty cost, and AST is an index of amortized value for the oppor-tunity cost of specialized training. TW includes work done preceding, during and after the service has been provided. It is mainly made up of the physician’s time (and effort) expended in an activity.

A standard service is taken as the benchmark for each specialty and all other services in that specialty are ranked relative to it. For example, under general surgery, an uncomplicated inguinal hernia repair was assigned a value of 100. If a physician working on a lower anterior resection for rectal

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carcinoma judged this to be four times more difficult than doing the hernia operation, then the resection would be given a score of 400. This is the ‘rel-ative value’ component of the RBRV and its role is similar to the baseline cost used to construct the RVU in the hospital cost accounting system (described in section 3.3.2). Estimates of TW were obtained from a question-naire given to 3164 physicians and a reasonable consensus about the relative difficulty of various services was found. The TW then was given what we can call a ‘mark-up’, according to both the special equipment required in a specialty (via RPC) and the forgone income when physicians undertake addi-tional years of specialty training rather than entering practice (via AST).

The RBRV figure derived for a service is in physical units. To express it in monetary terms a conversion factor had to be applied to it. Hsiao et al.

used a conversion factor that would ensure ‘budget neutrality’. That is, the total amount of all physician services times their RBRV values must approximate the total sum that was spent under Medicare using the old cus-tomary charge system in 1986.

Table 3.5 shows what difference would be made by using the RBRVs instead of the Medicare charges. Hsiao et al. listed 30 main services (and dealt with over 7000 services and procedures): see their Table 2. We cover four of these in our table. As with the analysis of RCCs in section 3.3.2, a ratio of unity is the benchmark. This time it is the RBRVs that provide the gold standard for the Medicare charges. Ratios less than one indicate ser-vices whose costs are underestimated by Medicare charges (and therefore would benefit from having RBRVs) and services with ratios greater than one have costs that are overestimated by Medicare charges (and thus would suffer a loss of revenues with RBRVs).

The results in the table support Hsiao et al.’s claim that office visits were paid less under the old Medicare system and that surgery and procedures were paid more. Certain specialties, like family practice and psychiatry, concentrate mainly on evaluative-type services and thus nearly all of their services are underestimated under Medicare (all their ratios are less than unity), while for other specialties (e.g., thoracic and cardiovascular surgery) most of their services have values greater than unity. The overall conclusion by Hsiao et al. was that using the RBRV scale to replace the previous system would increase the payments for evaluative and management services by 56%, while reducing invasive, imaging and laboratory services payments by 42%, 30% and 5% respectively.

Clearly, then, the RBRV scale gives a different estimate of costs than before. The issue is whether it gives a better estimate of costs. According to Hadley (1991), ‘the formula for calculating RBRVS is inconsistent with the economic theory of cost in that it omits both the scale of production and the possible presence of economies (or diseconomies) of scope’. This criticism Types of costs and their measurement 77

follows because Hsiao et al. had assumed that (the long run) AC equaled MC, which implies constant returns to scale. However, this is really an empiri-cal conjecture (that constant costs do not exist in physician markets) that is not related to theory, because economic theory can be used to explain any type of returns to scale (as we did in the last chapter). A criticism that does rely on economic theory is to point out that the RBRVS is simply an average of physician resource costs and is not necessarily the cost-minimizing amount for any given level of service.

Hadley’s main contribution is to analyze the Hsiao et al. proposition that existing physician markets were distorted due to the existence of non-uniform insurance coverage that raises the demand for some services and not for others. Say evaluative-management (EM) services are not covered and proce-dures (PR) are covered by insurance. The higher demand for PR services will

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Table 3.5: Resource based relative values and Medicare charges

Procedure Service description RBRVs Medicare Ratio of

code ($) charge Medicare

($) charge to RBRVS Dermatology

90050 Office visit, limited service 38 25 0.66

90020 Office visit, comprehensive service 113 41 0.36

11900 Injection, intralesional 23 28 1.22

11642 Excision, malignant lesion 159 220 1.38

Family practice

90050 Office visit, limited service 49 21 0.43

90630 Initial consultation, complex service 283 86 0.30 45300 Proctosigmoidoscopy, diagnostic 118 53 0.45 90370 Subsequent care, skilled nursing 159 37 0.23

Psychiatry

90831 Telephone consultation 50 41 0.82

90862 Chemotherapy management 69 30 0.43

90844 Individual medical psychotherapy 94 75 0.80 90849 Multiple-family group psychotherapy 210 51 0.24

Thoracic and cardiovascular surgery

90020 Office visit, comprehensive service 213 64 0.30 32020 Tube thoracostomy with water seal 346 382 1.10 32480 Lobectomy, total or segmental 2148 2275 1.06

33512 Coronary artery bypass 2871 4662 1.62

Source: Hsiao et al. (1988)

raise their prices relative to EM services. But, given the existence of compet-itive markets, the equilibrium position is characterized by P⫽AC (as shown in Figure 3.2). So again, relative prices would reflect relative costs just as in the absence of insurance. As Hadley says: ‘Insurance in and of itself does not make a competitive market non-competitive, even if it leads to higher quan-tities and higher fees.’ It is the existence of non-competitive health care markets, with or without insurance, which brings costs and prices out of line.

With prices and costs out of line, how should one measure the value of physician services? In terms of Figure 3.3, where the level of services is Q_M, should one use the price P_M or the cost MC_M? The main criticism of the RBRVS raised by Hadley (and others) is that it just focuses on resource inputs and ignores the consumer satisfaction (WTP) of the services. Hadley argues:

‘Viewing the problem as how to get value for money implies that Medicare should concentrate on what it gets as a result of a fee schedule, not on how physicians combine inputs to produce services.’ Effectively, then, Hadley is recommending the use of the price that consumers are willing to pay, given by P_M.

There is a technical literature in economics that analyses how best to combine the consumer price and producer cost to estimate the social value of a good or service – for a summary see Brent (1996, ch. 6). But, there is a much simpler way of looking at matters. From a CM perspective, to measure costs, one has a dilemma whether to use the consumer price or what produc-ers must receive to put a level of output on the market. However, from a CBA perspective, one plans to look at both the benefits and the costs of phy-sician services. So one can use resource inputs to measure costs, just as with the RBRVS. In addition, one will be looking at the WTP of consumers when one turns to measuring the benefits. The demand for physician services is derived from the value of the services that they produce. Thus, when one tries to estimate the benefits of total knee arthroplasty (or any other inter-vention that follows from a physician performing a service) in terms of the WTP, one is valuing the service from the consumer’s point of view.