Value erosion through intent + inflation

HCPs are accustomed to reduced payments from payers. What happens when those reductions are coupled with inflation? Downward pressure in one area & upward pressure in another → 🥲. Let's deconstruct

At the time of this writing, our colleagues at the Center for Medicare and Medicaid Services (CMS) released a tentative fee schedule for physicians. The salient points are summarized in this table, shared widely on social media.

Tables like these rightfully evoke emotions such as anger, frustration, and/or despondency. While these feelings are legitimate, we need to accurately interpret the data in order to know how much, and for how long, we should sulk.

Seriously, having accurate data may help us in our discussions with regulators, payers, and within our physician/provider community. So let’s look at the data in detail and understand what HCPs are facing with these RVU valuations.

Inflation, COLAs, and HCPs

Everyone knows what inflation is: the increase in the cost of goods/services over a period of time. Inflation is more common than deflation, and is expected to be > 0% each year. The presence of inflation isn’t the surprise.

For the broader economy, it is the magnitude and duration of inflation that matters more. All of us want our earnings (salary) to maintain pace with inflation. Maintaining pace is colloquially referred to as the cost-of-living adjustment (COLA). Many workers in the economy receive regular COLAs — HCPs do not.

Not maintaining pace with inflation

Not every worker in the economy receives a cost-of-living adjustment (COLA). In good times, the lack of a COLA does not significantly effect an employee. Good times are those periods in the economy when the year-over-year (YOY) inflation rate is low. As long as inflation occurs, you’ll have a devaluation of your earnings, but if that inflation rate is low, the devaluation is more likely imperceptible at the grocery, retail stores or other places in the economy.

The special case of HCPs

HCPs are special. Not only do we not receive cost-of-living adjustments to our RVUs, our RVUs face a deflationary pressure brought on by Congressional mandates placed upon CMS. Let’s take a deeper look at our special circumstance.

Decreasing valuation by intent

The intent of CMS to lower HCP reimbursements is obvious.

In 2020, the average RVU was worth $36.09. It is projected to be $32.75 in 2024. Unfortunately, it isn’t accurate for you to say that the difference is -$3.34. Why?

Because of the time-value of money, a simple arithmetic subtraction won’t reveal the true difference.

$32.75 (t = 4) - $36.09 (t = 0) != -$3.34 (t = 4)

where != means “does not equal”

So, while we see the intent of lowering HCP reimbursement, we cannot calculate the true decrease (in percentage) until we account for the difference in time.

Decreasing valuation by inflation

Unlike intent, a confluence of uncontrollable economic events, some whose deleterious effects have compounded over time, cause inflation.

A more accurate method to determine how much value was lost from 2020 (t = 0) to 2024 (t = 4) is to discount the projected RVU value at t = 4 to the 2020 value. By calculating the discount rate (in which we will use the inflation rate year-over-year (YOY)), we can determine what the present value (PV) of each RVU valuation is.

First, we need to know the inflation rate for each calendar year. That information can be obtained from the US Bureau of Labor and Statistics.

Since the rate changes, we will have to calculate the PV of each time point *one period prior*. For example, in order to know the PV @ t = 0 of the 2023 RVU ($33.89), we will need to discount that value to t = 2 using 2%, then discount that value (Value @ t = 2) to t = 1 at 6%, then discount that value (Value @ t = 1) to t = 0 using 7%.

Once you’ve analyzed this table, focus on the rows titled PV t = 0 and % Δ. The PV at each year shows dramatic economic decreases in RVU value, accounting for inflation. Even though there is a $3.34 accounting loss (↓6.1%) in RVU from 2020 to 2023, there is an economic loss of $6.80 (↓18.8%). The economic losses mean more than the accounting loss because the former includes both the accounting loss and the lost opportunity to combat inflation.

There’s no way to sugarcoat the proposed RVU valuations. My analysis doesn’t make the pill easier to swallow. Indeed the economic losses make the pain even worse. However, it’s important to know how to consider both accounting and economic changes to reimbursements/valuation in order to make smarter business decisions in your practice.

Let us know what business/financial changes you’re thinking of making to offset the forecasted Δ -26.0% drop in RVU from 2020 to 2024. Send me a message through Twitter, Threads, or LinkedIn.