Geographic practice cost indexes

The purpose of this memorandum is to explain 

how Medicare varies its payments to physicians 

by geographic area. 

Under Medicare’s physician fee schedule, 

geographic practice cost indexes (GPCIs) adjust 

payment rates to account for differences in the 

price of inputs used in furnishing physician 

services. There are three GPCIs, one 

corresponding to each component of the relative 

value scale: physician work, practice expense, 

and professional liability insurance (PLI) 

expense (Table 1). The three GPCIs are 

computed and then applied to determine rates for 

each of 89 payment areas. Because input prices 

can rise faster in some areas than in others, the 

GPCIs are updated every three years. 

How GPCIs are calculated 

GPCIs are constructed so that they have national 

averages of 1.0. Geographic areas that have 

costs above the national average have index 

values above 1.0; areas with below-average costs 

have index values under 1.0. 

In order to account for varying input prices, the 

data sources used to construct the GPCIs must 

reflect practice costs in all geographic payment 

areas. The physician work GPCI is based on the 

earnings of professionals (lawyers, engineers, 

and others) reported in the decennial census. By 

law, this GPCI only reflects 25 percent of the 

national variation in those earnings. For 

example, if professional earnings in an area are

Table 1. Geographic practice cost indexes for a moderate complexity office visit, 

selected payment areas, 2003 

Payment area 

Physician 

work GPCI 

Practice 

expense 

GPCI PLI GPCI

Physician 

work RVU 

Nonfacility 

(office) 

PE RVU PLI RVU 

2003 CF 

($) 

Payment 

amounts ($) 

Alabama 0.978 0.870 0.807 0.670 0.690 0.030 36.79 47.08 

Chicago, IL 1.028 1.092 1.797 0.670 0.690 0.030 36.79 55.04 

DC & MD/VA suburbs 1.050 1.166 0.909 0.670 0.690 0.030 36.79 56.48 

Detroit, MI 1.043 1.038 2.738 0.670 0.690 0.030 36.79 55.08 

Houston, TX 1.020 1.007 1.336 0.670 0.690 0.030 36.79 52.18 

North Dakota 0.950 0.880 0.657 0.670 0.690 0.030 36.79 46.48 

San Francisco, CA 1.068 1.458 0.687 0.670 0.690 0.030 36.79 64.10 

Note: PLI (professional liability insurance), RVU (relative value unit), CF (conversion factor).

Source: CMS 

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601 New Jersey Avenue, N.W. • Suite 9000 

Washington, DC 20001 

202-220-3700 • Fax: 202-220-3759 

www.medpac.gov 

Glenn M. Hackbarth, J.D., Chairman 

Robert D. Reischauer, Ph.D., Vice Chairman 

Mark E. Miller, Ph.D., Executive Director
20 percent above the national average, its 

physician work GPCI is calculated to be 1.05, 

not 1.20. This results in a smaller payment 

increase than if the full reported variation were 

taken into account. Similarly, if professional 

earnings in an area are 20 percent below the 

national average, the physician work GPCI 

would be 0.95, not 0.80. This results in a smaller 

decrease in payment than would occur were the 

full variation taken into account. 

The practice expense GPCI is constructed to 

account for geographic differences in nonphysician staff wages, office space costs, and 

equipment and supplies. 

 

• Staff wages (clerical workers, registered 

nurses, licensed nurse practitioners, and 

health technicians) are based on the U.S. 

census, and account for about 40 percent of 

practice expenses and thus a similar share of 

the practice expense GPCI. 

• Office space expense, about 27 percent of 

this GPCI, is based on year 2000 residential 

apartment rental data from the Department of 

Housing and Urban Development; there has 

been insufficient commercial rental data for 

all geographic areas to employ commercial 

rather than residential data. 

 

• The remaining third of this GPCI is 

attributed to medical equipment, supplies, 

and miscellaneous items. These inputs are 

assumed to be bought in a national market, 

so about 33 percent of the practice expense 

GPCI is 1.0; that is, it pays physicians the 

same regardless of where they practice. 

The PLI GPCI is based on data CMS 

periodically collects from the largest malpractice 

insurers in each state. This GPCI now reflects 

1996 to 1998 data. 

Physician payment areas 

 

Prior to 1997, there were 210 payment areas, 22 

of which consisted of entire states. In order to 

simplify the payment process, CMS has 

periodically combined areas with similar input 

prices. Currently, there are 89 areas, 34 of which 

are statewide. 

Physicians (usually through the state medical 

associations) may request that CMS designate 

their state a statewide area, in order to equalize 

reimbursement among physicians practicing 

within the state. However, in this instance, since 

payments to a given state must remain budget 

neutral, petitions require substantive support by 

physicians in that state. 

Calculating 2003 physician payments: 

an illustration 

The payment rate for a service is: 

(work GPCI x work RVU) + 

(practice expense GPCI x practice expense RVU) + 

(PLI GPCI x PLI RVU) 

x conversion factor 

= payment amount 

In Houston, TX, the 2003 payment rate for a 

moderate complexity office visit is: 

(1.020 x 0.670) + (1.007 x 0.690) + (1.336 x 0.030) 

x $36.79 = $52.18 

Updating the GPCIs 

The law requires that the GPCIs be revised at 

least every three years. Since the GPCIs were 

implemented in 1992, there have been three 

revisions in 1995, 1998, and most recently in 

2000; data sources were updated and reviewed. 

GPCI updates are budget neutral at the national 

level. Thus, GPCI revisions result in total 

payments being redistributed among payment 

areas. The total amount Medicare pays to 

physicians nationally is determined by the update 

of the fee schedule’s conversion factor. 

Staff Contacts 

Kevin Hayes 

Ann Marshall 

(202) 220-3700 

August 12, 2003