The time has come for a real fix to Medicare physician fees. The big stall is hurting healthcare.
Poor Medicare docs. They have been on a proverbial reimbursement roller coaster for decades now. They are literally the ugly stepchildren of Medicare fee-for-service (FFS) providers. Hospitals, other facilities, and other provider groups get more attention, with hospitals dominating the money. The ups and downs have undermined independent practices, led to our primary care deficit, and actually fostered physician group acquisitions that increase costs in the healthcare system in several ways.
More background
The long and short of it is that Medicare physicians have had a rather broken rate system dating back to 1992. The bad system has been undermined further with various budget reduction requirements applied to the physician rates along the way.
Congress created the Medicare physician fee schedule through the Omnibus Budget Reconciliation Act of 1989. At the time, the fee schedule had three components to calculate rates each year – a relative value scale, geographic multipliers, and a conversion factor. All this comes together to translate the relative values into fees. The new fee structure was put in place in 1992. The fee schedule calculation was simplified.
From the start, it was pretty clear that primary care was a big loser compared with specialists. The rate-setting system emphasized paying more for services and surgeries than what is known as evaluation and management (E&M). Sure, specialists bill under E&M, but it is primary care that is almost exclusively reimbursed under E&M. Thus, the structure essentially undervalued primary care.
Along came the Balanced Budget Act of 1997. The act included what is known as the sustainable growth rate (SGR), where all physician payments were limited by a budgetary growth cap, which limited increases and even mandated reductions in certain years depending on growth overall in Medicare physician expenditures. The SGR had numerous flaws. Some of them were fixed in 1997. The SGR was repealed in 2015 as part of the Medicare Access and CHIP Reauthorization Act (MACRA) but caused great damage for many years.
In addition, there have been other budgetary sequester measures to restrain spending and lower deficits/debt that have further limited physician rates by forcing reductions over the years.
With the SGR repeal, MACRA introduced value-based incentive payments as part of Medicare physician reimbursement. Other provisions have been passed as well. These quality incentive payment programs include accountable care organizations (ACOs), the Merit-Based Incentive Payment System (MIPS), and other alternative payment schemes. But these programs can lead to both reductions and rewards based on performance. Providers have great costs to meet the requirements. And in the case of MIPS, the program is budget neutral – there are annual winners and losers.
Over the years, due to the poor fee schedule, the SGR, and budgetary sequesters, Medicare docs have been hit hard. In real terms, physician fees have not kept up with healthcare inflation. Some argue the real drop is about 33% since 2001.
The roller coaster continues
While the SGR is gone, Congress has refused to really fix the physician fee formula due to its sheer cost. In fact, lawmakers have led physicians through a political game. To stop the huge reductions in fees, Congress passes stop gap measures, which temporarily overrule mandatory reductions in whole or in part. But physicians can wait weeks, months, or more to see these temporary overrides come through. Congress has eventually given temporary relief from reductions and some temporary increases more than twenty times over a number of decades. In some years, SGR would have enacted devastating cliffs of 20% to 30% reductions in the fee schedule without the temporary reprieves. With the SGR gone, those major cliffs have gone away. But the permanent fix to the formula itself has proven elusive and physicians continue to face reductions before temporary measures are put in place by Congress. Imagine trying to run a business under these circumstances.
Some primary care relief
A Medicare rule in 2020 did offer some relief for primary care doctors. The rule increased payments to primary care by boosting the overall value of office visit E&M codes by an estimated 12% and adding in various new reimbursement and add-on codes to facilitate upfront care management. But this change does not fundamentally change the underfunding and roller coaster Medicare docs are on.
Budget neutrality
The law continues to require that any changes to the Medicare physician fee schedule be budget neutral. Increases in payments for any specific codes must be offset by reductions in others. This creates a competition between primary care and specialists which is very unhealthy.
What has happened to docs?
There is little evidence of physicians bowing out of Medicare FFS in huge numbers; opting out completely is relatively low (around 1%). But the rate of exit from traditional fee-for-service Medicare has surged of late. Exits nearly doubled over a recent decade, with primary care physicians, solo practitioners, and doctors in rural or underserved areas bowing out at the highest rates. And remaining independent physicians are now saying this could become even more of a reality nationwide.
But actually, something more sinister has happened. Many doctors did not give up on the Medicare program but gave up their practices instead. As the ongoing fee schedule issues grew, more and more left the ranks of independent entrepreneurs in favor of becoming employees of hospitals and health systems, health plans, and private equity firms. Admittedly fees were just one reason for this trend, but an important one. The rate issues meant independent practices became a difficult financial proposition, were an administrative headache, and caused physician burnout.
What lawmakers miss in the debate over a permanent fix for Medicare doc rates is that the program is likely paying more now than if they had funded primary care and physician payments reasonably. If they had, fewer independent practices may have folded. When hospitals and health systems got their hands on doctors, the costs of physician services shot up as the docs were now part of a hospital entity. Hospitals also demanded their new employees change their practice patterns to treat at more-expensive hospital-owned facilities. I would note, too, that the decades of poor physician fee schedules in Medicare have led to the erosion of primary care in the nation.
What happened in CY 2025 and CY 2026?
No surprise, but Medicare docs saw yet another rate cut for CY 2025. The reduction was about 2.89% for 2025, after a 1.7% cut in CY 2024. For 2026, while the final rule implemented a 2.5% reduction, the One Big Beautiful Bill Act (OBBBA) reversed the reduction in favor of a 2.5% increase.
The 2027 draft rule
Under a recent proposed rule, the conversion factor used to calculate payment rates would drop by 1.68% for doctors who don’t participate in alternative payment models and by 1.19% for doctors who do. This is largely a result of the expiration of the temporary 2.5% boost in 2026. So, yet another reduction. Another reform includes sunsetting MIPS in favor of a value-based care pathway.
Opportunities for change
A new bipartisan bill would provide critical relief to doctors in the program. Critically, it would reverse the years of real (against inflation) payment declines in favor of tying annual hikes to inflation and ease the budget neutrality provision in the payment law. The formula proposed would take the Medicare Economic Index and subtract one percentage point.
The bill would also boost primary care and encourage participation in value-based care programs. One reform would establish a primary care hybrid payment pilot program, with independent physicians receiving a per-member-per-month capitated payment alongside some of their traditional fee-for-service reimbursement. MIPS would also be reformed as is being proposed by the Trump administration in a new rule.
It is a start. Doctors will need to lobby for this given the costs and the complexity of unraveling the inequities in existing law in terms of the calculation.
Docs deserve better, especially as we enter the looming healthcare staff shortage. What message are we sending in our treatment of physicians, especially those in primary care? Studies show other developed countries spend more than double what the U.S. does on primary care. And that investment leads to lower costs and better outcomes.
When will lawmakers get a backbone and prioritize this crisis?
#primarycare #medicare
— Marc S. Ryan
