What Is the Practice Expense Component in RVUs?
The Practice Expense RVUs reflect the cost of clinical and nonclinical labor and expenses of the practice. These include medical supplies, office supplies, clinical and administrative staff, and pro rata costs of building space, utilities, medical equipment, and office equipment. The PE factor takes overhead and necessary expenses into account to accurately determine reimbursement rates for healthcare services. A conversion factor multiplies the PE-RVU, the Work RVU, and the Malpractice RVU to calculate the final reimbursement rate.
Practice expenses account for 44% of the total RVU value, malpractice expenses for 4%, and work RVUs for 52%. The PE component covers essential costs for running a medical practice efficiently, and 44% of the total RVU value is a significant amount.
Direct costs include salaries for non-physician clinical staff, medical supplies, and equipment. These are vital for day-to-day operations and impact patient care quality. Indirect costs, or overhead expenses, include rent or lease payments, utilities, equipment maintenance, and administrative salaries. These ensure the smooth operation and upkeep of the practice environment.
Healthcare providers aim to deliver quality care while covering their operational expenses. Accurately calculating how to support the financial health of a medical practice will enable it to continue providing essential healthcare services. It is wise for you to understand the PE component since it sets the reimbursement rates by Medicare and, many times, by commercial carriers. These amounts will, in turn, directly affect your collections.
How Are Costs of a Medical Practice Calculated into the RVU?
To calculate how practice expenses figure into the final RVU, costs for operating a medical practice first are organized into five categories:
- Staffing: Non-physician clinical staff, non-clinical support staff, EHR (Electronic Health Records), salaries, and benefits.
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- Calculation – Salaries and benefits of non-physician staff are based on actual payroll records. EHR costs are based on subscription or maintenance fees.
- Clinical Services, Supplies, and Equipment: Clinical support services, disposable supplies, drugs, acquisition and depreciation costs of equipment.
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- Calculation – Direct costs derive from expenses for medical supplies, drugs, and equipment used during patient care. Equipment depreciation is calculated based on acquisition cost decreased over its useful life as the equipment becomes either obsolete, inadequate or inoperable.
- Office Space: Rent or lease payments, maintenance costs, utilities.
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- Calculation – Rent and lease payments are based on monthly or annual payments. Maintenance and utility costs are aggregated from bills and invoices.
- Office Supplies and Services: IT systems, electronic and computer equipment, non-IT office supplies, and maintenance costs.
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- Calculation – IT systems and computer hardware costs are calculated based on initial purchase and setup followed by ongoing subscription fees and invoices for maintenance and repairs by service providers. Non-IT office supplies are tracked through purchasing records.
- Professional Services: Third-party services (billing, accounting, management), professional memberships, certifications.
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- Calculation – Costs for professional services are based on contracts and invoices from third-party providers. Membership and certification fees are based on payments for initial and ongoing annual dues.
Considering the large percentage of the RVU rate, 44%, you as a contributing physician would be wise to monitor the quarterly and annual reports for these these cost calculations. You can also review Medicare’s periodic updates for approved PE values based on collected data that reflects the true cost of providing healthcare services in your region.
How Do Practice Expenses Affect the RVU in Physician Compensation?
The revenue generated by billing patients and their insurers must be offset by the overall costs of the entire medical practice. The PE component of the RVU formula takes into account these costs. By including the costs of supplies and equipment as well as indirect costs like rent and administrative expenses, the RVU will reflect the true value of medical services rendered by the practice.
It is axiomatic that providing healthcare services to patients is an expensive endeavor, and a physician’s relative value to the practice includes the ability to support the overall financial health of the practice. But is the amount that is deducted from your total billings fair when compared to the expense contributions of the other physicians working in the practice? The only way for you to know that is to understand the various expenditures made by your practice and how much of that total you are supporting.
Effective management of PE components improves financial cycles in healthcare organizations. Aligning costs with reimbursement rates allows practices to forecast financial outcomes, reduce risks, and adapt to changing reimbursement policies. Maintaining clear and accurate financial records also will go a long way to avoid legal issues and successfully survive audits.
After years of education and refining your expertise, you should understand the PE component of the RVU for fair compensation and financial stability. It would behoove you to spend the time necessary to learn the financial demands of your practice and how your work for the practice is supporting the overall demands.
Contact an Expert
RVUs determine in large part your compensation for providing medical services. If you’re curious about Practice Expense RVUs and how they influence your practice and your compensation, we’re here to offer clarity and guidance.
