It’s no surprise that the U.S. Medicare and Medicaid systems – both federal health service and insurance programs – face systemic issues and challenges.
Rising healthcare costs, fraud and insurance abuse, fragmented access to care, and long-term sustainability are all structural issues that must be addressed.
But there’s one specific area of concern that is growing increasingly fragile: physician payment reforms within the Medicare system.
Medicare Physician Payments and Reimbursements at a Glance
The current system uses various payment mechanisms to compensate healthcare providers for the services they deliver.
But the traditional fee-for-service (FFS) payment system reimburses physicians based on the volume of services provided.
Payments are typically determined by a set fee schedule established by the Centers for Medicare and Medicaid Services (CMS), which assigns relative values for different services or procedures. The fee schedule is updated annually and considers factors such as the complexity of the service, time, and resources required.
Medicare also incorporates payment adjustments based on geographic location and other factors.
- For example – some areas may receive higher payment rates to account for the cost of providing care within those regions.
In addition to the fee-for-service model, Medicare has implemented alternative payment models and value-based care initiatives to move away from volume-based reimbursement.
Such payment reforms aim to strike a balance between fair compensation for physicians and appropriate utilization of healthcare services while improving the overall quality of care for Medicare beneficiaries.
However, implementing and scaling these payment reforms across the entire healthcare system has proved complex and challenging.
As a result, while physician payment reforms under Medicare have evolved over time – with the goal of aligning reimbursement with value-based care principles – there’s been unintended consequences.
Most notable is the healthcare system being squeezed between wildly lagging inflationary updates to physician payments and further Medicare reimbursement cuts.
Lack of Medicare Physician Payment Reform is Squeezing Doctors Dry
According to Becker’s Hospital Review – ‘real’ (adjusted for inflation) CMS physician pay has declined 22% over the last two decades.
The American Medical Association (AMA) and other organizations wrote a letter to Congress in March 2023 highlighting declining physician pay, noting that, “unlike nearly all other Medicare providers and suppliers, physicians do not receive an annual inflationary payment update.”
Clinicians – many of whom are small practice owners – must contend with rising costs, including administrative burdens, staff salaries, rent, and purchasing essential equipment to perform patient care.
So without an update to inflationary expenses in Medicare physician payments, this amplifies the difficulty in providing quality Medicare services.
Because of this growing unbalance, the Medicare Payment Advisory Commission (MedPAC) – a panel that makes payment and policy recommendations to Congress on Medicare issues – recently urged Congress to update doctors’ reimbursement under the 2024 Physician Fee Schedule (PFS) at 50% of the Medicare economic index (MEI). That would lead to a 1.25% boost in payments for 2024 if adopted.
But according to the American Hospital Association (AHA), this isn’t nearly enough.
The AHA wrote to MedPAC leadership in early January that, “the current inflationary economy and ongoing workforce challenges have put unprecedented pressure on America’s hospitals and health systems.”
The AHA further added, “The recommendation to increase PFS rates by 50% of MEI will not fully offset the impact of rising input costs.”
Meanwhile, Congress has further cut Medicare reimbursements by 2% in 2023 and may bring at least another 1.25% cut in 2024.
Squeezing physicians at a time when Medicare beneficiaries are on the rise is probably an unsustainable situation.
For instance, U.S. demographics remain a headwind for the healthcare system (Medicare covered 65 million Americans last year – with the vast majority being 65 and older).
And this trend is only increasing in the coming decades as the baby boomer and Gen X generations grow older.
The combination of rising Medicare beneficiaries and anemic physician payments/reimbursements has created a situation in which doctors are paid less to do a job that is costing them more to perform.
Gayle Lee – Senior Director, Policy, and Regulatory for the Association of American Medical Colleges (AAMC) – said, “We are deeply concerned about the impact of these significant cuts to payment for physicians. The updates have not kept up with inflation, while the cost of running a medical practice has increased substantially. We recommend that Congress pass legislation that provides an annual inflation-based payment update based on the full Medicare Economic Index (MEI) that keeps up with the cost of practicing medicine.”
She further noted that, “Significant reductions in payment could reduce access to medically necessary services and exacerbate workforce shortages. The demand for providers continues to grow faster than supply, leading to shortages in both primary and specialty care. The total physician workforce shortage is projected to reach between 37,800 and 124,000 by 2034.”
The U.S. is already dealing with a medical staff shortage – which has driven up payroll expenses, adding to the instability.
The potential risk here is if enough doctors limit – or outright eliminate – coverage for Medicare patients because of stagnant reimbursements, the Federal government will face dire blowback.
How Did the System Get so Imbalanced?
A big driver was the Medicare Sustainable Growth Rate (MSGR) model – which was put in place in 1997. The design was meant to control the costs of Medicare payments to physicians.
While MSGR was created with good intentions – to persuade physicians to provide better care, not excessive care and overbill – it’s had consequences.
That’s because MSGR is a form of price-control. As history shows, price controls aren’t efficient.
A big reason for this is that the MSGR formula essentially ties physician payments to growth in the national economy.
But it was set in the 1997 economy, when economic growth was much higher and medical costs were much lower.
This dynamic provided physicians with increased payments. But since the early-2000s, growth has slowed considerably as medical costs have risen steadily. For perspective:
- U.S. annual growth (GDP) averaged roughly 4.3% in the second half of 1990, when MSGR was enacted. But between 2000 and 2022, annual growth has averaged around 1.9%.
- Meanwhile, the consumer price index (CPI) for medical care services has risen 280% since 1990, compared to the 140% for the CPI (all-consumer items).
Even though the flawed SGR formula system was repealed in 2015 – replaced by the Medicare Access and CHIP Reauthorization Act (MACRA) in attempt to significantly change how the federal government pays physicians and encourage a transition to ‘value-based’ care – the damage was already done. MACRA proved to be little more than a band aid.
The cost of medical services continues rising – especially since the COIVD-19 pandemic – and physicians must navigate a tethered Medicare payment system along with mounting reimbursement cuts.
Medicare physician payment issues are just one variable in a system that must find reforms.
But physician reimbursement has long-lasting structural impacts on future healthcare.
Access to care is already bifurcated and inadequate. Without proper physician payment reform, there is the worry that many practices will be forced to stop taking on new Medicare patients at a time when there’s a wave of elderly individuals needing more care.
With a looming doctor shortage and structural inflation entrenched in the medical system, this is a topic likely to grow only more contentious in years to come.
