Practice costs, defined as those costs of medical practice that exclude the physician's own time and effort, represent a substantial portion of the resources necessary to perform a service. In this article we describe the development of the practice cost index used in constructing the Resource-Based Relative Value Scale (RBRVS). We derived the practice cost index value for each specialty, using specialty-specific practice costs and gross revenue data. The index values for all other specialties are standardized to the value for general surgery, and these are used to adjust the resource-based relative values for services performed by each specialty; in this way, the RBRVS incorporates practice cost variations. The data used in the construction of the practice cost index are the 1983 Physician Practice Cost and Income Survey data, adjusted to reflect the relative levels of 1986 professional liability insurance. Our findings show that among most specialties, the range of relative difference in practice costs as a percentage of gross revenue is approximately 15%. Four specialties fall outside this range: pathology, psychiatry, rheumatology, and orthopedic surgery. We discuss problems with the available data on practice costs as these relate to their use in the RBRVS and conceptual issues in applying practice costs to the construction of the RBRVS.