Signature
CF_c = X_c / R_tot; C_i = CF_c * R_i
| Inputs | Definition | Unit |
|---|---|---|
X_c | Health system's total spending on category c in the year | US dollars per year |
R_tot | Sum of the relative value units of all encounters in category c in the year | relative value units per year |
R_i | Relative value units of encounter i, from the procedure codes recorded | relative value units |
CF_c | Health system spending per relative value unit in care category c | US dollars per relative value unit |
|---|---|---|
C_i | Cost assigned to encounter i at the category's cost per unit | US dollars per encounter |
Function
Medicare physician fee schedule payment from relative value units and the conversion factor
Turns the relative value units of a service, adjusted for local practice costs, into a dollar payment by multiplying by the conversion factor, and updates the factor each year by a chain of statutory and budget neutrality adjustments. Relative values set the ratios between services; the conversion factor sets the money level of all of them. Notation follows the Conversion Factor article, with its 2026 factors from the CMS final rule.
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Implementations
Excel
Category cost per unit and encounter costs from named cells
With the category's spending named CatSpend and the units of each encounter in a range named EncRVUs, the first formula returns the cost per unit, held in CostPerRVU, and the second spills the encounter costs, held in EncCost.
=CatSpend/SUM(EncRVUs); =CostPerRVU*EncRVUs
Assumptions
Resource use proportional to Medicare relative values
Within a category, the health system's resources per encounter are assumed proportional to the Medicare relative values of its codes, as HERC assumes for VA outpatient care.
One cost per unit for each category of care
The factor is computed separately for each category (HERC uses 12), so relativities are kept within a category but not imposed across categories.
Worked examples
Category with 9 million dollars of spending and 200,000 units
The cost per unit is 45 dollars, so an encounter of 2.30 units is costed at 103.50 dollars (computed here for illustration).
X_c = 9000000; R_tot = 200000; R_i = 2.3; CF_c = 45; C_i = 103.5
Second HERC care category with a higher cost per unit
A category with 2.4 million dollars of spending and 40,000 units has a cost per unit of 60 dollars, so the same 2.30-unit encounter would be costed at 138 dollars there (computed here for illustration).
X_c = 2400000; R_tot = 40000; R_i = 2.3; CF_c = 60; C_i = 138
Second category with a higher cost per unit
A category with 2.4 million dollars of spending and 40,000 units has a cost per unit of 60 dollars, so the same 2.30-unit encounter would be costed at 138 dollars there (computed here for illustration).
X_c = 2400000; R_tot = 40000; R_i = 2.3; CF_c = 60; C_i = 138
Common errors
Using one cost per unit across all categories of care
HERC assigns every VA visit to one of 12 categories and finds a factor for each, so a single system-wide rate would move cost between categories whose costs relative to Medicare differ.
Costing a procedure with its global fee
HERC advises applying separate relative values for a procedure and the visits before and after it rather than a global fee, so that the estimate reflects the visits that actually occur, and the facility practice expense values for care in VA medical centres.
Sources
HERC outpatient average cost method
HERC, US Department of Veterans Affairs. HERC Outpatient Average Cost Data. Web page, accessed 3 October 2026 (full text read). Methods: every VA visit is assigned to one of 12 categories of outpatient care; for each category a specific factor converts the relative value to a VA cost estimate, assuming the resources used are proportionate to the Medicare relative values. Data Overview: the estimates represent the hypothetical Medicare reimbursement given the procedure codes of the visit, adjusted so that they tally to actual national VA expenditures for that type of care.
HERC guidance on Medicare relative values for costing outpatient care
HERC, US Department of Veterans Affairs. Estimating Medicare Payments. Web page, accessed 3 October 2026 (full text read). Medicare Basics: to find the cost of outpatient services HERC recommends Medicare reimbursement rates, with relative values converted to a reimbursement by a conversion factor; Global Fees: apply separate RVUs for the procedure and the pre-procedure and post-procedure visits rather than global fees; Facility vs non-facility RVUs: apply the facility weights for care at VA medical centres.
Canonical Identity
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