Multi-Year Medicare Physician Fee Freeze Threatens Access: Pair Relief With Reforms

Medicare pays for physician services on the basis of a fee schedule. The fee schedule assigns a “relative value” for each service that reflects the estimated resources necessary for that service (in relation to a reference service) and a “conversion factor” translates the relative value for each service into a dollar amount. An index of input prices faced by medical practices, called the Medicare Economic Index (MEI), was one of the factors used when the Centers for Medicare and Medicaid Services (CMS) annually updated the conversion factor.

From 2002 to 2015, the Congress repeatedly passed legislation avoiding reductions in the conversion factor as called for under the Sustainable Growth Rate (SGR) mechanism, with the resulting updates being less than inflation as measured by the MEI. The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) replaced the SGR, eliminating a scheduled 21.2 percent fee cut. But instead of including the MEI as a factor in annual updates, MACRA froze updates through 2025 and thereafter limited them to 0.75 percent per year for physicians with enough participation in Advanced Alternative Payment Models (AAPM), and to 0.25 percent for those lacking that. Temporary legislative changes have subsequently modified the fees paid to physicians in the past several years but, without further legislation, will result in fees in 2023 declining by more than 8 percent below 2022 fees.

The impact of eliminating an adjustment for inflation for physician fees is greater when inflation specific to medical practices is high than when it is low. In 2019, the MEI increased by 1.5 percent: the most recent but outdated MEI projection for 2022 was a 4.3 percent increase. More general measures of inflation have been running higher: the PCE Deflator increased by 6.2 percent in August 2022 from the same month last year. Indeed, the fact that net physician income averages only about half of revenue, given the need to pay staff, rent, and related practice expenses, magnifies the impact of a fee freeze on physician compensation.

By establishing specific, highly restricted amounts for future updates that have no link to increased costs of operating a medical practice, Congress has left itself (and physicians and beneficiaries) at the mercy of higher and now difficult-to-predict inflation. When combined with the expiration of recent, temporary fee increases, the high inflation experienced to date and its possible continuation threatens access to care for Medicare beneficiaries. To ameliorate access problems and related pressures, Congress will have to increase Medicare physician fees, with an initial temporary fix potentially passing during December’s likely “lame duck” session. Rather than simply increasing physician fees, which will be expensive, Congress should require important policy reforms as a condition for providing such “must pass” relief.

With Fees Frozen, High Inflation Threatens Access To Care And Has Other Consequences

With the surge in inflation, physicians have already experienced, and are likely to continue to face, large and permanent declines in inflation-adjusted payment rates in the absence of legislative relief. These sharp current-law reductions in effective payment rates could have a number of undesirable consequences.

Access Barriers

Medicare beneficiaries could face growing barriers to access. Declines in inflation-adjusted payment rates increase incentives for physicians to limit their Medicare caseloads, especially for those specialties more dependent on visits, which are relatively less profitable than procedures. Beneficiaries seeking a new primary care provider, perhaps because of relocation or the retirement of a longstanding physician, will be affected the most, with the uneven impacts making decreasing access challenging to detect through surveys. While annual surveys by the Medicare Payment Advisory Commission (MedPAC) have shown beneficiary access continuing to be good, the 2021 survey found that of the 8 percent who sought a new primary care physician, 41 percent reported a problem finding a new one. The gap between what commercial insurers and Medicare pay—according to MedPAC, commercial rates averaged 138 percent of Medicare in 2020—is already wide. This underscores the risks that a few years of sharp reductions in inflation-adjusted Medicare payment rates could lead to increasing problems for beneficiaries in accessing primary care and those specialties heavily dependent on visits.

A Shift To Concierge Practices

Reductions in inflation-adjusted payments will likely accelerate shifts by physicians to concierge practices. Not only will many beneficiaries not be able to afford the annual fees of these practices, which are not paid by either Medicare or Medigap policies, but concierge medicine magnifies the impacts on access through its lower physician caseloads, effectively reducing the availability of physicians to patients not able or willing to pay such annual fees.

Disproportionate Impact On Primary Care And Specialties That Emphasize Visits

The impacts of lower payment rates will affect physicians very unevenly. Over the 30 years since Medicare implemented its physician fee schedule, a flawed process for updating the relative value scale has led to large shifts in physician income from those specialties (and individual physicians) whose work involves mostly patient visits to those performing extensive numbers of procedures With procedures now generally seen as far more lucrative than visits, the impacts or inflation-adjusted pay cuts will be greatest for primary care and for specialties that do many visits but few procedures.

Accelerating Shift Of Physicians To Employment By Hospitals

The shift of physicians away from independent practice in favor of employment by hospitals will accelerate, in part because an important portion of Medicare payments to hospitals for physician services continues to be based on input-price increases—precisely the payment component that MACRA’s omission of the MEI eliminated for physicians in independent practice. Payment differentials between hospital employment and independent physician practice mean that shifting employment patterns, with physicians increasingly moving to hospital employment, lead to higher payments by Medicare and other insurers and patients.

The History

Medicare per-beneficiary spending on physician services has grown markedly for decades, notwithstanding multiple policy initiatives to constrain increases in Medicare spending on physician services, which included freezing fees, replacing a passive system of screening charges with a fee schedule based on estimates of relative resources for different services, and reforming payment to reduce the dependence on fee for service. Unlike other Medicare systems of administered prices that reflect changes in input prices over which providers do not have control, updates to the Medicare physician fee schedule have not increased with inflation for almost two decades due either to caps on aggregate spending or eliminating the MEI as a factor determining updates.

Medicare FFS physician costs per beneficiary have annually increased significantly faster than physician fees due to increases in the volume and intensity of services, which have long driven the bulk of growth in annual spending. Unlike fee schedule increases (or the cancellation of such increases), growth in the volume and intensity of services remains beyond the control of Medicare, determined instead mostly by physician’ decisions on what services to provide and bill for.

After a major research project, Medicare in the 1990s transitioned physician payment from a formula that determined “reasonable and customary prices” to a fee schedule that established relative values for services based on estimates of resources involved in producing each service. Conversion-factor updates translating the relative value for each service to a dollar amount were based on formulas in which increases would depend in part on how spending per beneficiary compared to a target rate of growth. Although, in theory, this might have motivated organizations of physicians to support steps to make care delivery more efficient, incentives for individual physicians to do so were minimal—a “tragedy of the commons.”

Congress in 1997 revised the initial approach to capping aggregate physician spending, replacing the Medicare Volume Performance Standards with the SGR. When aggregate physician spending exceeded allowable amounts and the SGR formula called for a substantial reduction in fees, Congress acted repeatedly to temporarily postpone the reductions, enacting either no or very small increases in payment rates each time it acted. Despite declining inflation-adjusted rates, the effect of repeated postponements of cuts and small nominal payment increases generated an impending cliff-like decrease under the SGR in physician payment rates—until Congress enacted MACRA in 2015 to eliminate the required 21.2 percent cut under the SGR.

Unlike the SGR, in which payment rate updates depended on how aggregate spending compared to a target, MACRA had incentives for physicians to participate in Advanced Alternative Payment Models (AAPM). But to address concerns about the budgetary impact of eliminating the SGR-mandated cut in payment rates, MACRA specified very small annual payment rate increases for a lengthy period—0.5 percent annual increases from 2015 to 2019 and no further increases from 2020 to 2025. (After a substantial increase in the relative values for some types of visits that took effect in 2021, which reduced fees for procedures, the Congress has enacted two ad hoc and temporary increases in the conversion factor to offset the reductions, paralleling the years of ad hoc actions to avoid substantial fee reductions under the SGR. It is likely that the Congress was more receptive to the pleas of the specialties most impacted as a result of the many years without an increase in physician fees.) With none of the annual updates tied to an index of input prices, the policy was highly vulnerable to a sharp increase in general inflation, which is where we are today.

Reforming Medicare Physician Payment

A key element for long-term reform is revamping the Medicare physician fee schedule by replacing the dysfunctional process used to update the relative value scale over the last 30 years. A second important reform element is accelerating the shift away from fee for service towards population- and episode-based payment. Our first two recommendations embody these elements. Our third recommendation, aimed at assuring the longer-term viability of Medicare physician fees, would link annual physician updates to changes in input prices. We address each element in turn.

Recommendation 1: Recognize Essential Role of Medicare Physician Fee Schedule, Adequately Funding its Administration

For Medicare, Medicaid programs and commercial insurers, Medicare relative values typically provide the basis for physician compensation, most directly through payment of FFS claims, but also indirectly by providing the bulk of payments in shared savings arrangements such as ACOs, and when used to value physician services (i.e., encounters) in capitated arrangements. While providers paid under partial or full capitation have some ability to deviate from the perverse incentives caused by the distorted relative values, the distortions nevertheless make it more difficult for them to realize the full potential of capitated payment approaches.

Some of the distorted incentives for individual physicians remain even under full capitation, where the Medicare relative value scale typically measures physician work and helps determine compensation. As such, relative values are hugely important, underlying physician payments of $200 billion in 2022 in Medicare and even more in commercial insurance and Medicaid. Even were population health payments to completely replace FFS, alternative payment systems would likely continue to rely on relative values in distributing compensation to physicians, sending critical price signals determining payment for specific services and the distribution of physician income by specialty.

One of us (Ginsburg) participated in a project with others who, in former lives, had responsibility for designing or implementing the Medicare Fee Schedule at MedPAC or CMS. The group recently submitted formal comments to CMS on its proposed rule for the 2023 fee schedule detailing some of the many opportunities to improve the accuracy of the relative value scale. Key takeaways include that CMS must take more responsibility in-house and rely less on the American Medical Association’s relative value update committee (RUC).

While the RUC can continue to be a source of technical expertise on specific procedures, much of the data it relies on are biased—data used by the RUC reflect the self-interest of the more powerful specialties and fail to meet basic statistical standards for reliability, resulting in serious distortions to relative values. More accurate data can be made available from other sources. Serious reform requires both process reform and increased administrative resources. In addition to staff at CMS taking on a far more active policy-making role, the government must invest in collecting far more accurate, balanced, and statistically robust data.

Consistent with the formal comments to CMS referenced above, we recommend statutorily directing CMS to set a predictable, multi-year direction for policy reforms to improve the fee schedule, initiate research, and collect and analyze needed data. A key element of this work would be creating within CMS an expert advisory committee compliant with the Federal Advisory Committee Act (FACA). The committee would help CMS staff create and periodically update a much-needed research and development program focused on obtaining objective data to support improving the fee schedule, as well as advising on practical considerations when adopting changes. Members of this expert committee should have diverse expertise in areas such as clinical medicine, health economics, social determinants of health, research design, and payment policy.

Implementing this reformed process will require adding significantly to CMS administrative resources to fund data collection to establish accurate, unbiased relative values. While sizeable relative to the CMS administrative budget, the needed increase in discretionary spending is a literal rounding error relative to the hundreds of billions that Medicare spends annually on physician services. Without additional funding and a changed role for CMS, relative values will continue to reflect self-interested specialty societies seeking increases in “their” share of the physician pie based on inadequate, biased data, and opportunities to lower payment for services with inflated relative values will be lost.

Recommendation 2: Shift To Population Health From FFS

To accelerate the shift to alternative payment, we need better payment models and stronger incentives for physicians, hospitals and patients to participate in them. Accountable care organizations (ACOs) and episode payment both have a role, but they need to be integrated, as MedPAC recommended in Chapter 1 of its June 2022 Report to Congress.

Population health systems should hold providers accountable for what they can affect but not for factors beyond their control. A critical step for better aligning patients and systems of care to promote quality and constrain cost increases would have beneficiaries designate their primary provider; this could be a primary care clinician, medical practice, or hospital system. One approach would initially reward beneficiaries with lower coinsurance for doing this and, later on, also impose a higher coinsurance for not doing so. Such a designation would allow physicians to know in advance the beneficiaries for whose care they are accountable, allowing the physicians to reach out to engage the beneficiaries. Incentives could also encourage beneficiaries to use the provider that they have designated and seek care from other aligned providers. To be effective, differential coinsurance would have to apply to both Medicare cost sharing and supplemental payments by Medigap plans.

Although it is feasible to mandate provider participation in some episode payments, as is currently the case with joint replacement in some areas, mandating provider participation in ACOs would be problematic. However, current financial incentives could be enhanced over the initial steps taken by MACRA, which increased payments by 5 percent to physicians who meaningfully participate with AAPMs. Paying an additional amount when physicians and beneficiaries are both affiliated with an ACO—and a reduced amount for services to other patients–would give both providers and beneficiaries incentives to align with population health systems of care. This would increase participation and facilitate the evolution of AAPMs into true delivery systems for which quality and cost can be measured. As discussed above, the need to accelerate the movement to alternative payment detracts from neither the need to revamp the physician fee schedule nor the urgency to do so.

Recommendation 3: Link Physician Fee Updates To An Appropriate Measure Of Input Prices

Mitigating the short-term risks of unintended sharp reductions in future inflation-adjusted payment rates will significantly increase Medicare spending above the budget baseline, which currently assumes frozen updates through 2025 and very attenuated increases thereafter. Congress should act quickly to bring the MEI back into the formula to update the conversion factor. This is needed to avoid actual policy impacts from differing sharply from what is assumed at any point in time.

The inevitably of increasing Medicare spending to address the looming crisis presents an opportunity to trade adding money for meaningful reform of physician payment to achieve longer-term savings and improve quality of care. At a minimum, meaningful payment reform should include changing the process for setting relative values, enhancing the shift from FFS to population health, and linking physician fees to an appropriate input price index. Indeed, given that access problems are more of a concern for visit-dependent specialties, reform of the fee schedule to reduce bias against these specialties could lessen the magnitude of relief needed to reduce the risks to access from declines in inflation-adjusted fees. If Congress addresses Medicare physician fees during the “lame duck” session later this year, it should provide very short-term relief—perhaps six months—using the time to engage stakeholders and develop the policy reforms described above.

Authors’ Note

Paul Ginsburg is a professor at the University of Southern California, which is a provider of Medicare physician services and may have taken policy positions relevant to this article. He is also a Public Trustee of the American Academy of Ophthalmology, whose members provide Medicare physician services and which may have taken positions relevant to this article.