Topics in valuation: Relative Value Update Committee (RUC)

June 14, 2012

Is valuation going to be the new hot topic in social studies of finance? If so, heath care and health insurance reform provide a fascinating place to study how market and non-market mechanisms of valuation are being stitched together.

In the US, a powerful professional group—the American Medical Association (AMA)—sets the billing codes that govern medical practice.  As this Marketplace report explains, the AMA has a group called the Relative Value Update Committee (RUC) that is in charge of putting a price on all individual medical procedures.

The potential problems with fiat pricing by close-door committee are well known.  As one RUC member admitted in the report, “Doctors end up coming in and lobbying for their own interests. Having a seat on the RUC is a pathway to do that”.

Market mechanisms of valuation claim to break up the control that specific interest groups have over value.  But it’s difficult to envisage how markets could ever fully attain in medicine.  Patients may end up with choices over health insurance products, but they are not in a position to determine their own needs in the bio-medical marketplace.

The medical profession’s hold over value is an important political piece of the economics of US health reform.  For while government mandated medical insurance is supposed to be bought and sold in an open and competitive marketplace, the price of the medical services is still being set by a much older mechanism—the guild.

Thanks to Ine van Hoyweghen, sociologist of biomedicine at Maastriche University, for pointing out this article.

7 Responses to “Topics in valuation: Relative Value Update Committee (RUC)”

  1. joseossandon Says:

    Hi Martha,
    nice topic. One question, do you really think this pricing mechanism is so strange?
    It does not seem to me so different to other “singular goods”, such as those described by Karpik in his Valuing the Unique…
    (let’s say good wine or lawyers…where quality and price are defined by experts or professional associations)
    And about the market… my impression is that health insurance reforms tend to assume that is not consumer’s demand what changes health care prices, but the ability of insurers to bargain big quantities of health provisions…the problem, as the US case has shown, is that prices keep going up anyway,
    all the best
    j

    • marthapoon Says:

      Hmmm Jose…

      The analogy between heath services and singular goods is interesting!

      The singularity of the person in medicine is a fairly new idea. For a long time (before the genome), however, the authority of medicine was arguably based on a universal biological body. The medical profession is an expert intermediary whose judgement has traditionally been required to match disease conditions with an appropriate treatment.

      The interesting observation in the Marketplace report is to show that this professional power over medical knowledge also serves an economic function, one that intersects with a second market – the market for insurance. Valuation is the outcome of how the market for services (controlled by the medical profession) meets the market for payment (health insurance).

      This second market is not present in wine or legal advice.

      To your second point, it seems to me the pricing of medical services is somewhat different from the pricing of pharmaceuticals. Medicare Prescription Drug, Improvement, and Modernization Act of 2003 was highly criticized for preventing the federal government from negotiating with pharmaceutical companies in order to lower the prices of drugs for Medicare participants. This was seen by many as a collusion between the Bush Administration and big pharma…

      • marthapoon Says:

        PS. Also, medicine really does affect almost everybody unlike wine or legal services. So the way that it values is far more consequential. Under Obama Care, health care and health insurance will become an even more important institutional location where inequality gets decided and entrenched…

  2. joseossandon Says:

    Hi Martha,
    OK. There are 2 markets: health care and insurance. But there also are few markets involved in wine (wine producers, wine critics, wine traders, wine retailers, wine investors and so on). However, you are right, the interface between health provision and health insurance is quite particular…
    But it is not only about services and payments… As far as I know, from my own research in Chile, health provisions is a combination of at least two very different worlds: doctors (whom like lawyers sell their expert knowledge that is regulated by a guild type of association) and medical providers (that are instead like universities, investing to produce a stable quality in a specific niche) … On the other hand, insurance is about payments (and this is what insurers negotiate with providers) but also risk (actuaries, health statistics, and pricing) and security (brands and providing a good package or coverage). I have studied more the insurance side of this, but there is still a lot to do to connect all these different markets.
    In more policy terms, my impression is that normally this situation is understood as a dyadic market between users and insurers (and the whole health insurance economics…of moral hazard, adverse selection and so on) without paying much attention to the multiple interface of different markets involved, and, as you said, the particular chain of valuations that compose a privatized health care.
    Best
    j

  3. Barbara Levy, MD RUC Chair Says:

    It is disappointing that the reporter of the Marketplace story did not contact the RUC or the AMA for information before filing the misleading story. If he had he would have learned that the RUC does not set prices for medical services. The government does. Far from secret, more than 300 people attend RUC meetings and their process is publically available at http://www.ama-assn.org/go/rbrvs. The RUC is a group of physicians from many different specialties who share recommendations with the government, as all individuals and groups have the ability to do. Their work is done at no cost to taxpayers. The issue related to a code for sinus surgeries mentioned in the Marketplace article was resolved very quickly after the RUC alerted the government of a problem and urged them to fix it. The story is much ado about nothing.

  4. Frank Opelka Says:

    The relative value process is not perfect but it is an excellent way to assess the resources needed to provide a service. Currently, those resource definitions imply the price of the services.
    The resource basis of valuing services stems from a time when we thought that all services were essential to good care.

    Now the times have changed. Not all services are clearly essential and defined good care. What does that mean for the resource basis of valuing services?

    It is unclear what steps need to be taken to add to the RBRVS value. For now I would say that a resource basis as elaborate as the RBRVS is a great starting point. It provides an assessment of the resources used on the supply side.

    It is the demand side of the equation that is changing. Where once demand was constant, it is no longer left up to the physician to determine demand. So, do not look at the RBRVS as the problem. It is not. The RUC and the RBRVS are only a part of the solution, where they were once the whole solution. The next step will be in defining how the prices are modified to meet the demand side economics.

    Will the demand side come from evidence based medicine, from value based modifiers? Perhaps the problem of the limitations of the RBRVS could come from adding a new adjustment to each RBRVS code from outside the RUC, a patient “demand” or market adjustment factor set by evidence based sources. The answer does not lie in the RBRVS, nor does it mean the end of the RBRVS. Take it for what it is worth, the supply side. Then begin work on the demand side.

    What is certain is that payments will evolve to meet the changing demands. The RBRVS and the RUC are great first steps but they fall short of a real answer.


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