ACR Bulletin

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How Does Inflation Impact the Medicare Physician Fee Schedule?

We need to stabilize the physician payment system and protect patient access to physician services in a time of unprecedented challenges.

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Andrew Moriarity, MD
Guest Columnist

October 02, 2023

From the Chair of the Commission on Economics
Gregory N. Nicola, MD, FACR

William J. Bernstein, MD, PhD, a neurologist and financial theorist, wrote in his book Deep Risk that he considered the “four horsemen” to include Inflation, Deflation, Confiscation and Devastation. He notes that these deep risks result in the permanent loss of capital that is damaging to the success of investor portfolios. 

The United States experienced a prolonged period of low inflation extending from the 1990s through the COVID-19 pandemic. After this, a combination of supply chain disruption and monetary policy contributed to record inflation over several years that has steadily cooled during 2023. This exposed a deep risk in healthcare payment policy that many physicians had not experienced since the 1992 implementation of the resource-based relative value scale (RBRVS) physician payment system used by CMS.

This spike has also brought additional awareness to the devastating long-term effects of inflation on physician practices. This is primarily the result of “budget neutrality” adjustments required in the annual Medicare physician payment schedule by a provision included in the Omnibus Budget Reconciliation Act of 1989, which required any increase of $20 million or more to the Medicare physician payment schedule be offset by cuts elsewhere in the program. Increases can be the result of upward payment adjustments through increasing the relative value unit (RVU) or a specific service or procedure such as the Evaluation and Management (E/M) updates in 2020, through the addition of new procedures or services each year, and changes in non-physician work such as practice expense or the recent clinical staff labor updates in 2022.

According to AMA data, Medicare physician payment has dropped by 22% adjusted for inflation between 2001 and 2021, and another 4% between 2021 and 2023 because of this requirement. Moreover, because these cuts represent a permanent “deep risk” to the long-term stability of physician practices, the AMA has appropriately highlighted this fact: “Once these redistributions are made through the conversion factor, they are not added back — even when utilization is lower than expected. The net result in these circumstances is not budget neutrality, but rather a permanent reduction in Medicare physician payments across-the-board.” 

Importantly, budget neutrality does not apply to payments for hospitals, nursing facilities, hospice care and ambulatory surgery centers, which all have mandated annual updates. This imbalance has resulted in spending per enrollee for these other parts of Medicare increasing 3.6% to 42.1% over the last decade even as spending on physician services per enrollee dropped by 1%.

A recent study published in the JACR® and supported by the Harvey L. Neiman Health Policy Institute® titled “Budget Neutrality and Medicare Physician Fee Schedule Reimbursement Trends for Radiologists, 2005 to 2021” demonstrated a substantial 24.9% decline in inflation-adjusted reimbursement to radiologists per beneficiary. This decline was only partially offset by large increases in productivity, primarily attributed to the lack of inflationary updates to the Medicare Physician Fee Schedule (MPFS) on the backdrop of budget neutrality. Without legislative action, this will further erode relative access to care for Medicare patients compared to commercial patients and the ability of physicians to maintain independent practices serving their patients and communities.

The statutory freeze in annual Medicare physician payments is scheduled to continue until 2026, when updates resume at the anemic rate of 0.25% for an indefinite period. That level of increase will hopelessly trail any inflation, even if the Federal Reserve is successful in continuing the reductions from recent dramatic highs. Even worse, budget-neutrality rules that penalize physicians for changes beyond their control will continually trigger further reductions in Medicare physician payments such as the recent clinical labor updates and the recent proposal to update the Physician Practice Information Survey for indirect practice expense in 2024.

In response to advocacy efforts by the ACR-led coalition of physician and non-physician clinician organizations, U.S. Reps. Raul Ruiz, MD (D-CA), Larry Bucshon, MD (R-IN), Ami Bera, MD (D-CA), and Mariannette Miller-Meeks, MD (R-IA), introduced H.R. 2474, the Strengthening Medicare for Patients and Providers Act, to add a permanent Medicare Economic Index-based inflationary update to the MPFS. 

This is just one of many crucial steps needed to stabilize the physician payment system and protect patient access to physician services in a time of unprecedented challenges.

Author Andrew Moriarity, MD,  chair of the ACR Committee on HOPPS/APC