The Fee Schedule

There are three factors involved in calculating your contract's fee schedule.  They include: the payment methodology, the relative value and the conversion  Let's take a look at each one.

The Payment Methodology

The payment methodology tells you which relative values should be used to calculate payment. Some of these methodologies include:

RBRVS (resourced based relative value studies by Medicare), McGraw-Hill (a leading information services provider), OMFS (official medical fee schedule used by the Department of Labor for Worker's Compensation), CRVS (California relative value studies developed by the California Medical Association) and Medicaid (developed by the Department of Health Services.)

The Relative Value

The CPT code, created by the American Medical Association in 1966, is the common language used by physicians and health plan to describe medical services performed on patients. Each payment methodology assigns a relative value for each CPT code based upon the complexity and time involved in performing that procedure. The assigned unit is called a relative value, because the value is "considered in comparison with something else." If one procedure is more complex and time consuming than another, then this procedure code will be given more "value" or "worth".


The Dollar Conversion Factor

The relative value quantifies a comparison of "worth" in units, but no dollar amount is associated or implied. This is where the dollar conversion factor helps complete the process. The relative value is multiplied by the dollar conversion factor stated by the health insurance plan and the resulting dollar amount is the monetary worth of that procedure code.

First, determine which Payment Methodology is used, then perform the calculation:

CPT Code's Relative Value * Dollar Conversion Factor = Maximum Dollar Allowance

Examples of Calculating Maximum Dollar Allowances

Let's say your medical group is in the process of negotiating a contract with ABC Insurance Company.  How will you know what rate you negotiated? You can answer this question by calculating samples of this new fee schedule.

Examples of Calculating Maximum Dollar Allowances

Let's say your medical group is in the process of negotiating a contract with ABC Insurance Company. How will you know the rate you have negotiated? You can answer this question by calculating samples of this new fee schedule.

ABC Insurance Company proposes to pay you $96.00 for each surgical procedure, using the McGraw-Hill payment methodology. So, what does this mean? Let's calculate the result.

CPT Code 42821         Tonsillectomy and adenoidectomy, over age 12

Payment Methodology   McGraw Hill
Relative Value Units       5.2
Conversion Factor         $96.00

Calculation = CPT code relative value * Conversion factor = Payment allowance

                  = 5.20 * $96.00 = $499.20

If you accept this negotiated rate, your payment for a Tonsillectomy and Adenoidectomy, would be $499.20.  Is this payment for this service acceptable to you?

Let's do a second example. ABC Insurance Company will pay $5.75 for each office visit, using McGraw-Hill payment methodology.

CPT Code 99213         "Intermediate office visit"

Payment Methodology   McGraw-Hill
Relative Value Units       12.75
Conversion Factor         $5.75

Calculation = 12.75 * $5.75 = $73.31

*Notice that the conversion factor is different than the one used for surgery. Sometimes, health plans have different conversion factors for different types of services (radiology, laboratory, surgery, office visits, injections, etc). Be cautious of this.

When negotiating a contract, it is prudent to perform calculations on a few of your most common procedures and compare the payment against your cost and against the payment of other health plans.  You can begin to get a gauge of how well the plan pays, overall.  The secondary benefit is that once you have signed the dotted line on the contract, you can develop a fee schedule to verify that your health plan is paying according to your contract.  Comparing your payment with your maximum allowances makes your appeals process less labor intensive and removes the guesswork of your billing staff.