On March 15, 2022, the Medicare Payment Advisory Commission (MedPAC) released its report to Congress, recommending that federal officials maintain Medicare reimbursement rates for physicians and not provide any increases for 2023—even with general inflation surging.(1) On July 7, 2022, CMS released the annual changes to the physician fee schedule, which proposed a 4.4% conversion factor decrease in the face of average inflation rates of nearly 8% in 2022.(2,3) Most individuals would expect a service provider to have payment rates that would at least keep up with general inflation. If rates cannot keep up with inflation, physician could be expected to limit the number of Medicare patients in their practice.(4) Thus, the access and quality of care for the growing population of over 60 million Medicare beneficiaries could be put at risk.(5)( )MedPAC and Congress have put off the day of reckoning for years, such that the inevitable is already starting: there are wide ranges of unexplained or inappropriate rates of healthcare utilization nationwide, and some Medicare enrollees have difficulty with access.
Figure 1 shows the cumulative change in consumer price index (CPI) compared with the cumulative change in conversion factors (CF) for Medicare physician payments.(6,7) Medicare CF is the number of dollars assigned to a relative value unit (RVU), and an RVU is the value assigned to a service or procedure relative to all services and procedures.(8,9) Over the 26-year period from 1995 to 2021, general inflation has grown by 58.30%, yet the Medicare physician CF is basically the same as it was 26 years ago. What makes this statistic even more alarming is that physician practice expenses have been growing at an even greater rate than general inflation.(10) Therefore, the ways available for physicians to try to have revenue keep pace with general inflation and increasing expenses include: increasing Medicare use rates; shifting cost to the commercial insurance, employers, and patients younger than 65; and lobbying CMS for higher RVUs. One need look no further than Medicaid, the federally subsidized state insurance program for low-income residents, to observe the effect of low payment. The Kaiser Family Foundation Medicaid-to-Medicare Fee Index reports that, nationally, Medicaid pays primary care providers only 67% of Medicare, while beneficiaries report difficulty finding a physician who will accept them as a patient.(11,12)
Figure 1. Cumulative change in Consumer Price Index (CPI) and Medicare physician conversion factor (CF) payments (1995-2021). Source: Authors’ analysis of data from CMS Actuary, 1998-2018 CMS Conversion Factors.
The Medicare payment system has remained afloat largely due to cost shifting toward commercial insurers, employers, and younger patients. In response to the reduced inflation-adjusted payments from public payers, providers have raised the prices they charge patients and commercial insurers.(13) Figure 2 demonstrates this trend for hospitals from 1995 to 2018.(14) The aggregate hospital payment-to-cost ratios for Medicare and Medicaid show a steady decline throughout the years and had fallen to 86.6% and 89.3%, respectively, by pre-pandemic 2018. Meanwhile, hospitals, on average, have maintained a small overall operating margin (2.4% in 2019 according to Moody’s) only because the commercial insurance hospital payment-to-cost ratio has risen over the years, reaching 144.8% by 2018.(15)
Figure 2. Cost shifting of aggregate hospital payment-to-cost ratios from Medicare and Medicaid to private payers from 1995 to 2018. Source: Authors’ analysis of data from the American Hospital Association Trendwatch Chartbook 2020.
For a policy option such as Medicare-for-all to function in the United States, Medicare payment rates would need to increase by more than 50% (outpatient and inpatient combined) if everyone were to be covered by Medicare.
A legitimate question is whether Medicare provider payment rates are, in fact, adequate, and providers are just incredibly inefficient. If a cost shift to private payers was not possible, would the present Medicare payment rates suffice? The answer to that question, based on the experience of one state that has all-payer rate setting, would be that Medicare rates are substantially too low.(16,17) Maryland’s All-Payer System (MAPS) is a statewide rate-setting program that requires all insurers, both public and private, to pay the same administratively set rate for any hospital service. Legislation for hospital rate regulation in Maryland was created in 1971, and the law created the Health Services Cost Review Commission (HSCRC). The HSCRC has the authority to set hospital rates and was created with the goals of achieving: 1) cost containment; 2) access; 3) solvency; and 4) equity. When compared with standard Medicare payment rates for a similar population of patients around the country, Maryland’s all payer rate setting, with the four goals in mind, paid 44% more than Medicare for inpatient payments by 2019 and 66% more than Medicare for outpatient payments.(18) Given these numbers, for a policy option such as Medicare-for-all to function in the United States, Medicare payment rates would need to increase by more than 50% (outpatient and inpatient combined) if everyone were to be covered by Medicare.
Are there any other data that support the conclusion that Medicare payment rates are too low? In recent years, several U.S. states, including Colorado and Washington, have discussed a “public option” for health insurance, which can help provide further insight into Medicare rates.(19) Washington was the first state to approve such public insurance, in 2019, with the Cascade Care program.(20) A public option means that a government-controlled health insurance plan is sold alongside commercial coverage on the ACA insurance marketplace. It is interesting that in Washington state it was determined that the public option plan would need to pay providers 160% of the Medicare rate.(21) Additionally, preliminary analysis of a public option in Colorado has showed a need to pay providers 155% of Medicare.(22) Thus, both state public option plans are considering payment rates in the same general “increase above Medicare level” that has been put in place in Maryland with price controls. Because these public option plans are so recent and have relatively low enrollment, there are few data on how they are performing, but future studies should analyze how these implemented state-level public options perform in the coming years.
Conclusion
The data indicate that the government’s attempts to hold down healthcare costs by setting payment rates at a rate significantly below even general inflation does not appear to hold in the real world—that is, without cost shifting to younger patients. Instead of focusing on controlling line-item costs, Medicare should focus on the value of care provided, i.e., patient outcomes and total cost per person. Several studies have shown that in the United States there is significant variability in total cost and patient outcomes by geography and by medical center.(23–25) To encourage better patient outcomes and lower cost per patient (e.g., better value), Medicare payments must be linked with higher value. Payments also must not place high-value care providers out of business. Reimbursement models toward this end may include bundled payments, risk-adjusted prices, 2% to 5% margins to maintain financial reserves, and so on.(5) This approach would encourage low-value providers to improve by learning from the best-value providers while keeping hospitals financially viable. Demand for a high-value healthcare system would more likely be fulfilled if we target pay based on value. This will certainly offer a better chance for improvement than the present approach of not even allowing for general inflation on rate increases.
References
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Cass A. CMS pitches physician payment rule for 2023: 7 things to know. Becker’s Healthcare. July 8, 2022. www.beckershospitalreview.com/finance/cms-pitches-physician-payment-rule-for-2023-7-things-to-know.html . Accessed November 10, 2022.
Current U.S. Inflation Rates: 2000-2022. U.S. Inflation Calculator. 2022. www.usinflationcalculator.com/inflation/current-inflation-rates/ . Accessed November 10, 2022.
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Freed M, Biniek JF, Damico A, Neuman T. Medicare Advantage in 2021: Enrollment update and key trends. KFF. June 21, 2021. www.kff.org/medicare/issue-brief/medicare-advantage-in-2021-enrollment-update-and-key-trends/ . Accessed May 5, 2022.
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What are relative value units (RVUs)? AAPC. December 30, 2020. www.aapc.com/practice-management/rvus.aspx . Accessed May 5, 2022.
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Haber S, Beil H, Morrison M, et al. Evaluation of the Maryland All-Payer Model, Volume I: Final Report. RTI International. November 2019. https://downloads.cms.gov/files/md-allpayer-finalevalrpt.pdf
Scott D. The public option is now a reality in 3 states. Vox. June 17, 2021. www.vox.com/platform/amp/policy-and-politics/22535267/public-option-health-insurance-nevada-colorado-washington . Accessed May 5, 2022.
Cascade Care. Washington State Healthcare Authority. 2022. www.hca.wa.gov/about-hca/cascade-care . Accessed May 5, 2022.
Hawryluk M. The 1st public option health plan in the U.S. struggles to gain traction. NPR. February 21, 2022. www.npr.org/sections/health-shots/2022/02/21/1081913184/the-first-public-option-health-plan-in-the-u-s-struggles-to-gain-traction . Accessed May 5, 2022.
Ollove M. 3 States pursue public option for health coverage as Feds balk. Stateline. July 22, 2021. www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2021/07/22/3-states-pursue-public-option-for-health-coverage-as-feds-balk . Accessed May 13, 2022.
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Rosenberg BL, Kellar JA, Labno A, et al. Quantifying geographic variation in health care outcomes in the United States before and after risk-adjustment. PLoS ONE. 2016;11(12):e0166762.
Institute of Medicine. 2013. Interim Report of the Committee on Geographic Variation in Health Care Spending and Promotion of High-Value Care: Preliminary Committee Observations. Washington, DC: The National Academies Press. https://doi.org/10.17226/18308 .