Medicare’s 2021 Physician Fee Schedule: A Redistribution That Requires Further Refinement

Payments for individual physician services have been regulated for nearly three decades. In the late 1980s, federal price controls garnered bipartisan support because professional costs were skyrocketing. Medicare was becoming unsustainable. Since then, accumulated pricing distortions that favor proceduralists have led a skewed physician workforce. Select specialties have incomes that are multiples of their peers. As a result, workforce shortages have emerged in primary care and other similar cognitively focused specialties such as infectious diseases, endocrinology, and neurology.

The Centers for Medicare and Medicaid Services (CMS) has commendably begun to address these distortions. However, the agency’s efforts may inadvertently worsen relative compensation for some cognitively focused practitioners, notably infectious diseases physicians, who are already poorly paid compared to their counterparts in other fields. In this post, we review the measures CMS has taken to address distortions in physician compensation and look at some likely effects of these measures. We also offer some questions raised by CMS’s efforts and review possible next steps.

How Are Physician Services Priced By Medicare?

The Resource-based relative value scale (RBRVS), developed by William Hsiao and Peter Braun, has been used since 1992 by CMS to establish the annual Medicare Physician Fee Schedule (MPFS). Before the RBRVS, Medicare paid the self-determined “usual and customary” charges for each physician. This free-market approach created a race to the top as physicians saw what colleagues were able to get for the same work. The RBRVS was meant to rationalize pricing and correct disparities of income by valuing all professional services relative to one another.

Currently, physician services in the US are priced by Medicare every January 1 in relative value units (RVUs). Every physician service is assigned a Medicare-allowed price in RVUs based on its work “intensity” defined by time, effort, skill, and stress relative to all other services. RVUs are converted to dollars via the Medicare “conversion factor,” which CMS sets annually. Total Medicare allowed payment for each service also includes RVUs for practice expenses and malpractice risk, which are theoretically unrelated to physician compensation.

Commercial insurers generally use the same RVU fee schedule as the basis for physician payments. Value-based payment models use Medicare valuations for calculating costs and payments.

In recent decades, technological advances have substantially expanded the number of procedural services, which are generally priced far above evaluation and management (E/M) services. As procedures are increasingly completed safely in less time, the RVU generation potential of procedurally oriented physician work has also grown. In contrast, the analogous expansion of therapeutic choices and medications that are at the core of E/M services have not been reflected by increased valuations. This has contributed to widened income gaps between proceduralists and non-proceduralists, leading to the lack of incentives for trainees to enter lower-reimbursed specialties, including primary care, endocrinology, oncology, rheumatology, and infectious diseases.

CMS Actively Responds To Medicare Pricing Distortions

In 2018, CMS began to reassess the definitions and allowed payments (pricing) for the outpatient, cognitively focused E/M services, which comprise roughly a quarter of all Medicare physician payments. In January 2021, CMS increased Medicare payments for outpatient E/M services an average of 8 percent for new patients and 35 percent for established patients. Because Congress has been committed to “budget neutrality” for Medicare’s physician payments, this was financed by reducing Medicare’s conversion factor by about 3.5 percent, from $36.09 per RVU to $34.89 per RVU. The original reduction was near 10 percent, but Congress intervened for a single year to mitigate the overall impact.

The increase in outpatient E/M valuations will likely impact commercial insurance payments because, as noted, other payers use the underlying Medicare RVU backbone. Negotiations between insurers and physicians largely center on the RVU conversion factor, rather than the inherent number of RVUs underlying services.

How Do 2021 Medicare Physician Payment Policy Changes Play Out Within And Among Specialties?

CMS has embarked on a necessary but essential process of addressing the “relativity” in the pricing of physician services, but any redistribution that increases the value of one service ripples through the payments for all other services. To get a sense of these ripples, we approximated the likely intra-specialty and inter-specialty impact on 2021 Medicare compensation of the increased Medicare work RVU payments for outpatient E/M services within select specialties. Internal medicine and infectious diseases specialties were selected to represent physicians who deliver a mixture of outpatient and inpatient E/M services and a few procedural codes. Dermatology and ophthalmology were selected to represent physicians who deliver both outpatient and inpatient E/M services and many procedural codes. In the case of dermatology, the procedural codes are generally paid at a lower rate, and in the case of ophthalmology, the procedural codes are generally paid at a higher rate.

Using the 2018 Medicare Provider Utilization and Payment Data: Physician and Other Supplier (Medicare Part B) Public Use File, we calculated the volume of services used by each National Provider Identifier (NPI) within each specialty. We projected Medicare allowable payments to each NPI for the pre-pandemic baseline year, 2019, and 2021, using work RVUs from the 2019 and 2021 Medicare Physician Payment Schedules in three broad categories: outpatient E/M services, other E/M services, and non-E/M services. For each specialty, we divided the NPIs into quartiles based on 2018 Medicare outpatient E/M payments. We assume no changes in volume or other coding behaviors (see exhibit 1). (More details on these methods are available in the appendix below.)

Exhibit 1: Changes in Medicare work payments per physician in 2019 versus 2021, by quartile of outpatient evaluation and management service

Source: See appendix below.

Internal medicine physicians in the top quartile project to receive on average a 16 percent increase in Medicare work RVU payments in 2021 (from $100,000 to $116,000), while those in the lowest quartile are in line for a 3 percent decrease. Infectious diseases specialists face a payment reduction writ large—due to cuts to inpatient consultation codes that exceed the increase in their outpatient E/M services—with a 2 percent loss among those with the lowest outpatient work and only a 1 percent gain among those with the highest.

Dermatologists in all quartiles stand to receive an increase in Medicare work RVU payments ranging from 7 percent to 13 percent (increasing $199,000 to $215,000 in the top quartile). Ophthalmologists project to see a 4–8 percent drop in Medicare payments, although their projected reimbursement ($218,000 in the highest quartile) exceeds that of the other specialties.

Our estimates assume that physicians do not change their practice patterns or intensity of billing. However, studies have shown that Medicare price changes can raise or lower the volume of services that physicians render, depending on the relative sizes of the income and substitution effects. Moreover, prior cuts in outpatient professional fees have led to physicians moving their practices into the hospital outpatient facility setting, where the same service garners higher total RVU Medicare payments due to facility fees. As noted, these projected Medicare spending changes will likely be extended to commercial payers, suggesting the policy would have an even greater impact on total physician compensation.

Physician Payment Policy Changes Beyond 2021

In a notable departure from historical precedent, the 2021 Medicare Physician Fee Schedule begins to redistribute payments from procedural to non-procedural physician services in a meaningful way. While such redistribution may accomplish the policy goal of rebalancing the relative payments for outpatient E/M services with respect to other services, there are broader implications for the health care system. There has been a relative incentive toward procedurally based services over the past several decades, and those physicians whose practices have emerged with these incentives now face a period of adjustment. Hopefully, improved valuation of outpatient E/M services will encourage trainees to enter primary care and similar outpatient-oriented specialties and shift the composition of the workforce over time.

Importantly, specialties that rely on inpatient consultations or services, such as infectious diseases (which is already compensated less relative to other specialties) or hospital medicine, could face a sizeable payment reduction. Thus, redistributing payments at the service-code level by changing RVUs is not necessarily a means to redistributing dollars toward specialties that are relatively undercompensated.

Our results motivate several questions for the current administration. First, should non-outpatient E/M service codes, specifically the inpatient E/M codes, also undergo a review of their definitions and valuations? This would certainly seem necessary given the extraordinary work of the infectious diseases physician community over the past year and the drop in income projected as a consequence of the improved work valuations for the outpatient E/M service codes and the resulting drop of the conversion factor.

Second, if the redistribution is met with resistance and policy makers are pressured to mitigate reductions to the RVU conversion factor, would Congress consider spending more on Medicare physician payments? Currently, the anticipated drop in the 2021 conversion factor was tempered by congressional action as part of the pandemic response. Alternatively, policy makers could also shift resources from work not done under CMS global payment policies for some procedural services. Other possibilities include shifting spending from Medicare Part A into Part B, using savings from site-neutral payments that lower facility fees and move them into professional fees or using savings from other Medicare payment policies, such as improving efficiency in the Medicare Advantage program.

Third, should the process of service code definition and valuation be refined by the Center for Medicare and Medicaid Innovation? Physician payment policies have a profound effect on health care access and spending. Given that Congress has stipulated that Medicare use the RBRVS for the pricing of services, Congress must also ensure evidence-based, publicly accountable, and transparent processes that incorporate broad professional input and the expertise of the health services community.

The shift in Medicare payments toward non-procedural outpatient care offers the potential to change the existing paradigm of physician payment in the US by placing a higher priority on non-procedural outpatient care. Ultimately, this may impact the career choices of graduating physicians by reducing the income disparities that have left the workforce with fewer physicians in primary care and similar specialties.

Policy changes of this magnitude, although they may start small, could powerfully influence the delivery system. On the surface, this will redistribute Medicare payments toward specialties that bill more office visits from those who rely on all other codes. However, a closer examination of the policy reveals broad, sometimes seemingly arbitrary, implications. Some physicians may push to reverse these changes as their revenues are affected; others could call for more change since there are other cognitively oriented services, such as the inpatient E/M codes, that have yet to be addressed. The new administration will have to balance these competing forces in a way that is ultimately accountable to the health care needs of the country.

Methods Appendix: Intra-Specialty And Inter-Specialty Impact On 2021 Medicare Compensation Within Select Specialties Of The Increased Medicare Work RVU Payments For Outpatient E/M Services

We chose four physician specialties for this comparative analysis. Internal medicine and infectious disease were selected to represent physicians who deliver a mixture of outpatient and inpatient E/M services and a few procedural codes. Dermatology and ophthalmology were selected to represent physicians who deliver both outpatient and inpatient E/M services and many procedural codes. In the case of dermatology, the procedural codes are generally paid at a lower rate, and in the case of ophthalmology, the procedural codes are generally paid at a higher rate.

We used the calendar year 2019 and 2021 finalized MPFSs to obtain the 2019 and 2021 work RVU values for all service codes employed by each specialty. Only codes that were common to both years, 2019 and 2021, were included for our analysis to minimize the impact of new or deleted codes.

We used the most recent (2018) publicly available Medicare Provider Utilization and Payment Data: Physician and Other Supplier (Medicare Part B) Public Use File database to project the number and distribution (volume) of service codes that would be billed to Medicare for each physician NPI for the baseline year (2019) and the comparison year (2021).

Using the Healthcare Common Procedure Coding System (HCPCS), we mapped the 2018 Medicare Public Use File derived service code volume for each NPI for each specialty with the 2019 and 2021 MPFS files. We modeled service-code volume per NPI for projected payments for the baseline year (2019) and the comparison year (2021) in three categories: outpatient E/M, other E/M, and non-E/M services. For each year, work RVUs and conversion factors of that specific year were applied to the formula, $36.04 for 2019 and $32.41 for 2021. For example, with each NPI, payment per NPI = ∑: (# service code X)( MPFS wRVUs for service code X) + (# service code Y)( MPFS wRVUs for service code Y) + etc.) X (CF). The HCPCS codes included in outpatient E/M and other E/M groups are provided below. All remaining codes were categorized as non-E/M codes. We assumed no changes in volume of services from 2018 data year.

We compared changes in average projected payments for each NPI within each specialty based on the work RVUs only. Other payments for practice expense RVUs and malpractice RVUs were not included. Both practice expense- and malpractice-allowed RUVs are theoretically physician-compensation neutral and changes from 2019 to 2021 should not affect income. Our estimates assume that physicians do not change their practice patterns or intensity of billing.

For each of the four specialties, we divided the NPIs into quartiles based on the actual Medicare outpatient E/M service code payments made in the reference year (2018). Within each specialty, we projected the 2019 and 2021 average payments for outpatient E/M service codes, other E/M service codes, and non-E/M service codes per NPI for each quartile.

List Of Healthcare Common Procedure Coding System (HCPCS) Codes Included In Outpatient E/M And Non-Outpatient E/M Service Categories:

Outpatient E/M Codes

• New outpatient codes: 99201–05
• Established outpatient codes: 99211–15
• Welcome to Medicare (Initial Preventive Physical Exam, G code): G0403
• Annual wellness visit, initial (G code): G0438
• Annual wellness visit, subsequent (G code): G0439
• Transitional care management codes: 99495–96
• Chronic care management codes: 99487, 99489–91
• Telephone codes: 99441–3
• Outpatient consultation codes: 99241–5

Other E/M Codes, Including Inpatient E/M Codes

• Hospital observation codes: 99217–20
• Hospital observation subsequent care codes: 99225–26
• Hospital observation/admit and discharge codes: 99234–36
• Inpatient admission codes: 99212–23
• Inpatient discharge: 99238–39
• Inpatient subsequent: 99231–33
• Inpatient consult: 99251–55
• Emergency care: 99281–85
• Critical care: 99291–92
• Domiciliary or rest home new: 99324–28
• Domiciliary or rest home established: 99334–37
• Nursing facility, initial: 99304–06
• Nursing facility, subsequent: 99307–10
• Nursing facility, Discharge: 99315–16
• Nursing facility, other: 99318
• Home care oversight: 99339–40
• Home care, new: 99341–15
• Home care, established: 99347–50
• Prolonged services with contact: 99354–57
• Prolonged services without contact: 99358–59
• Prolonged services supervision: 99415–16
• Team conference, face to face: 99366
• Team conference, non-face to face: 99367–68
• Care plan oversight: 99374–79
• Preventive medicine, new: 99381–87
• Preventive medicine, established: 99391–97
• Counselling: 99401–04, 99406–09, and 99411–12
• Telephone consult: 99446–49
• ECare: 99444
• Basic life and disability: 99450
• Work disability: 99455–56
• Cognitive assessment: 99483
• Advanced directive: 99497
• Psychiatry Collaborative Care Management: 99492–94
• Behavioral counselling: 99484
• Alcohol counselling: G0396–97
• Complex care: G0506
• Chronic care management, complex: G2064–65

Authors’ Note

Dr. Goodson is chair of the Cognitive Care Alliance, in Washington, D.C. Dr. Song received funding for this work from the National Institutes of Health Office of the Director (DP5-OD024564) and National Institute on Aging (P01 AG032952).