The Medicare Physician Fee Schedule formula calculates what Medicare pays doctors for each service

The Medicare Physician Fee Schedule (PFS) is the official list of how much Medicare pays for nearly every service a doctor can provide — from an office visit to surgery to imaging. The payment for each service is not a fixed number. Instead, Medicare uses a formula that multiplies three separate components together: the service's relative value unit (RVU), a geographic adjustment factor, and an annual conversion factor.

The formula looks like this: RVU × Geographic Adjustment Factor × Conversion Factor = Medicare Payment. Each piece changes year to year and sometimes varies by location. Understanding what each piece does helps you see why your doctor's Medicare reimbursement differs from what another doctor receives for the same procedure, and why the payment amount changes annually.

Key Takeaways

  • The PFS formula multiplies three numbers together: the RVU (which measures the work and resources a service requires), a geographic adjustment factor (which accounts for regional cost differences), and a conversion factor (which Congress sets each year).
  • The RVU has three parts: physician work, practice expense, and malpractice insurance cost, each weighted differently depending on the type of service.
  • The geographic adjustment factor is based on your zip code and reflects differences in rent, wages, and other costs across regions.
  • The conversion factor is a dollar amount that Congress controls; when it drops, all PFS payments drop proportionally unless the RVU itself increases.
  • Medicare publishes the full PFS file each November for the following year, showing the exact payment for thousands of specific services.

What the Relative Value Unit (RVU) measures

The RVU is a number assigned to each medical service that reflects how much work, resources, and risk that service involves. A simple office visit has a lower RVU than a knee replacement. The RVU itself has three parts that are added together.

Physician work is the largest piece for most services. It accounts for the time the doctor spends, the mental effort and judgment required, the technical skill needed, and the stress or risk to the patient. A 15-minute follow-up visit has a lower work RVU than a complex surgical procedure. Practice expense covers the cost of the office, equipment, staff, supplies, and other overhead needed to deliver the service. A procedure done in an operating room has a higher practice expense RVU than an office visit. Malpractice insurance is the smallest piece and reflects the liability risk for that service; high-risk procedures like surgery have a higher malpractice RVU than a routine exam.

Medicare's Specialty Relative Value Scale Committee (the RUC) recommends RVU values to CMS each year based on surveys of physicians. CMS reviews these recommendations and sets the final RVU for each service code. The RVU does not change every year — many services keep the same RVU for several years in a row — but when the medical community argues that a service's complexity or time has changed, the RVU can be adjusted up or down.

How the geographic adjustment factor works

Medicare recognizes that the cost of running a medical practice varies dramatically by location. Rent, staff wages, and equipment costs are much higher in New York City than in rural Montana. The geographic adjustment factor (GAF) is a multiplier that adjusts the payment up or down based on where the service is delivered.

The GAF has four separate indices, each tied to a specific zip code or region. The work index adjusts for physician wage differences. The practice expense index adjusts for regional differences in office costs. The malpractice index adjusts for regional differences in insurance premiums. Each index is a decimal number, usually between 0.8 and 1.3, where 1.0 means the national average. A GAF of 1.2 means the service is paid 20 percent more than the national baseline; a GAF of 0.9 means it is paid 10 percent less.

Your zip code determines which GAF applies. A doctor in Manhattan will use a different GAF than a doctor 20 miles away in New Jersey, even though they treat similar patients. Medicare publishes the GAF for every zip code in the country each year. If you move your practice or receive care in a different location, the GAF changes.

The conversion factor and how Congress controls it

The conversion factor is a dollar amount that Medicare multiplies by the RVU and GAF to arrive at the final payment. It is the only part of the formula that Congress directly controls. In recent years, the conversion factor has hovered around $33 to $35 per RVU, but this number changes annually based on federal law.

Congress sets the conversion factor using a formula called the Sustainable Growth Rate (SGR) mechanism, though in practice Congress has overridden the SGR formula repeatedly to prevent large payment cuts. When Congress does not act, the conversion factor is supposed to drop automatically. When Congress passes a law to prevent the cut, the conversion factor stays flat or increases slightly. This is why doctors and medical groups watch Congress closely each year — a change in the conversion factor affects every single PFS payment proportionally.

For example, if the conversion factor drops from $34 to $33, every service on the PFS is paid roughly 3 percent less, regardless of the RVU or GAF. Conversely, if the RVU for a specific service increases but the conversion factor drops, the net effect on payment depends on which change is larger.

Putting the formula together with a real example

Suppose a doctor in Denver provides a routine office visit for an established patient. The service code is 99213. The RVU for 99213 is 1.5 (this is a simplified example; actual RVUs vary). The geographic adjustment factor for Denver is 0.95 (slightly below the national average). The conversion factor for that year is $34.

The payment is: 1.5 × 0.95 × $34 = $48.30. That is what Medicare pays the doctor for that visit. If the same doctor were in New York City with a GAF of 1.15, the payment would be: 1.5 × 1.15 × $34 = $58.65 — about 21 percent more, even though the service and RVU are identical. If Congress cuts the conversion factor to $33 the following year, the Denver payment drops to $47.03, a 2.6 percent reduction across the board.

Where to find the actual PFS rates for a specific service

Medicare publishes the complete Physician Fee Schedule file each November on the CMS website. The file includes the RVU, the GAF for every zip code, and the conversion factor for the upcoming year. You can search by service code (the five-digit CPT or HCPCS code) to find the exact payment amount for a specific procedure in a specific location.

The file is large and technical, but it is the authoritative source. If you are a patient trying to understand what Medicare will pay your doctor, ask your doctor's billing office — they use this same file to calculate what they will receive. If you are a provider, your billing software typically imports the PFS file automatically each year and recalculates payments based on the new rates.

Why the PFS formula matters for patients and doctors

For patients, the PFS formula determines what Medicare covers and how much your doctor receives. If Medicare's payment is low, your doctor may limit the number of Medicare patients they see or charge you a higher out-of-pocket amount. For doctors, the formula determines their revenue from Medicare, which is often 30 to 50 percent of their total income. A small change in the conversion factor or a shift in RVU for a common procedure can affect a practice's bottom line significantly.

The formula also creates incentives that shape how medicine is practiced. Services with high RVUs are paid more generously, which can influence which procedures doctors recommend. Geographic variation means doctors in high-cost areas are paid more for the same work, which affects where doctors choose to practice. Understanding the formula helps you see that Medicare payment is not arbitrary — it is the result of a specific calculation that changes predictably each year.

Frequently Asked Questions

Does the RVU change every year?

No. Most RVUs remain the same for several years. The RUC reviews services and recommends changes, but CMS does not update every RVU annually. High-profile services or those with significant changes in complexity or time may be adjusted, but the majority stay constant. The conversion factor and geographic adjustment factors change every year, but the RVU typically does not.

Why does my doctor get paid more than another doctor for the same service?

The geographic adjustment factor is the most common reason. If your doctor practices in a high-cost area, their GAF is higher, so Medicare pays more for the same service code. The RVU and conversion factor are the same nationwide, so location is usually the main driver of payment differences for identical services.

Can a doctor charge me more than the PFS rate?

If your doctor is enrolled in Medicare and accepts Medicare assignment, they are bound by the PFS rate and cannot charge you more than Medicare's payment plus your coinsurance or deductible. If your doctor does not accept assignment, they can charge more, but Medicare still only pays the PFS amount, and you are responsible for the difference.

What happens if Congress cuts the conversion factor?

All PFS payments drop proportionally. If the conversion factor falls 5 percent, every service on the fee schedule is paid roughly 5 percent less, unless the RVU for that service increases to offset the cut. Doctors typically respond by seeing more patients, raising prices for non-Medicare patients, or reducing services to Medicare beneficiaries.

How do I find the PFS rate for a specific procedure in my area?

Use the CMS Physician Fee Schedule lookup tool on the CMS website, or ask your doctor's billing office. You will need the CPT or HCPCS code for the procedure and your zip code. The lookup will show the RVU, the GAF for your location, and the resulting Medicare payment amount.