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This seems to be the question on every student's mouth since decades!
And ironically the answer is still UNKNOWN!
OK, now if you don't have time to read this rather lengthy post. Let me give you the final answer now; Nobody knows!
Yes, there are many theories about it and all kinds of speculations. But up to the time writing these lines, there's no official explanation of how scores are calculated and even no consensus theory agreed upon.
The latest USMLE bulletin of information 2011 does say this:
(On the threedigit scale, most Step 1, 2 CK, or 3 scores fall between 140 and 260. The mean score for firsttime examinees from accredited medical school programs in the United States is in the range of 210 to 230, and the standard deviation is approximately 20. Your score report will include the mean and standard deviation for recent administrations of the examination. The twodigit score is derived from the threedigit score. It is used in score reporting because some medical licensing authorities have requirements that include language describing a "passing score of 75." The twodigit score is derived in such a way that a score of 75 always corresponds to the minimum passing score).
So first of all, let me dispel a public myth. The two digit score is not a percentile and here are the proofs:
So it's obvious that the two digit score is not a percentile. The two digit score is merely an extrapolation from your three digit score and standardized in a way to mean that 75 is the passing score and 99 is the highest possible score with a range in between the two. Perhaps, the reason behind the two digit score is just to give "humans" a number that they can understand, however, in reality it has only complicated matters further!
Now how do they calculate the three digits score?
Well, I don't know and nobody else knows. If you are thinking that the three digit score is actually the number of questions you answered correct then you are wrong and here's why;
One thing we know for sure is the passing score for each step as reported in this official NBME web page. Currently the pass score for step 1 is 185, for CK is 184, for step 3 is 187. Note that these passing scores are revised every two years or so and they are variable however the 75 two digit passing score is always the same which is a proof that the two digit score is standardized and extrapolated from the original three digit score.
We also know that there are 336 questions in step 1 and 352 questions in step 2 CK (the latter is revised recently see this thread for details).
They also tell us that the percentage of question items to get right in order to meet the minimum pass score is 60 to 70 (Reference for this is found in the USMLE Bulletin 2011 scroll down to paragraph 10 "multiple choice items" and read the last line).
Using the numbers gathered above then we should simply deduce that 65% of the 336 step 1 items to pass the exam is equal to 218.4 questions. But the passing three digit score is 185 as we said! Let's calculate it also for CK (65% of 352 = 228.8, but the passing three digit score is 184!).
So the conclusion is that the three digit score does not by any means (using simple math) correspond to the number of questions you got right in the exam.
Confounding factors:
There are several other factors that complicate the calculation further. Examples:


And ironically the answer is still UNKNOWN!
OK, now if you don't have time to read this rather lengthy post. Let me give you the final answer now; Nobody knows!
Yes, there are many theories about it and all kinds of speculations. But up to the time writing these lines, there's no official explanation of how scores are calculated and even no consensus theory agreed upon.
The latest USMLE bulletin of information 2011 does say this:
(On the threedigit scale, most Step 1, 2 CK, or 3 scores fall between 140 and 260. The mean score for firsttime examinees from accredited medical school programs in the United States is in the range of 210 to 230, and the standard deviation is approximately 20. Your score report will include the mean and standard deviation for recent administrations of the examination. The twodigit score is derived from the threedigit score. It is used in score reporting because some medical licensing authorities have requirements that include language describing a "passing score of 75." The twodigit score is derived in such a way that a score of 75 always corresponds to the minimum passing score).
So first of all, let me dispel a public myth. The two digit score is not a percentile and here are the proofs:
 First, if the two digit score was a percentile then a 75 passing score means that only 25% of students pass the exam at all times! Thanks God this is not the reality as we would have been crying if that was the truth. In the year 2008 for example, there was a 73% passing percentage among IMG First Takers and even higher percentages for US/Canadian grads. Reference for this info is in this official NBME page.
 Second, if the two digit score was a percentile then one standard deviation above the mean would mean 84th percentile. Using the numbers given to us directly from the NBME as mentioned above (mean 210230 and SD=20) then a three digit score of 240 is equal to the 84th percentile. While in reality a three digit score of 240 have always meant 99 two digit score (see this thread for a correlation table) throughout the history of USMLE!
So it's obvious that the two digit score is not a percentile. The two digit score is merely an extrapolation from your three digit score and standardized in a way to mean that 75 is the passing score and 99 is the highest possible score with a range in between the two. Perhaps, the reason behind the two digit score is just to give "humans" a number that they can understand, however, in reality it has only complicated matters further!
Now how do they calculate the three digits score?
Well, I don't know and nobody else knows. If you are thinking that the three digit score is actually the number of questions you answered correct then you are wrong and here's why;
One thing we know for sure is the passing score for each step as reported in this official NBME web page. Currently the pass score for step 1 is 185, for CK is 184, for step 3 is 187. Note that these passing scores are revised every two years or so and they are variable however the 75 two digit passing score is always the same which is a proof that the two digit score is standardized and extrapolated from the original three digit score.
We also know that there are 336 questions in step 1 and 352 questions in step 2 CK (the latter is revised recently see this thread for details).
They also tell us that the percentage of question items to get right in order to meet the minimum pass score is 60 to 70 (Reference for this is found in the USMLE Bulletin 2011 scroll down to paragraph 10 "multiple choice items" and read the last line).
Using the numbers gathered above then we should simply deduce that 65% of the 336 step 1 items to pass the exam is equal to 218.4 questions. But the passing three digit score is 185 as we said! Let's calculate it also for CK (65% of 352 = 228.8, but the passing three digit score is 184!).
So the conclusion is that the three digit score does not by any means (using simple math) correspond to the number of questions you got right in the exam.
Confounding factors:
There are several other factors that complicate the calculation further. Examples:
 All these numbers are variable and revised from time to time.
 Some questions items are experimental and do not count toward the total score.


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