Comparing Medicare Fee Schedule Updates to Inflation Rates
The United States has the highest per capita healthcare spending in the world. U.S. healthcare costs have outpaced inflation for several years. Over the past 20 years, the federal government has attempted to control costs—specifically Medicare costs.

Cost reduction strategies often focus on specific segments of the healthcare market. These segments include hospitals, outpatient facilities, labs, drugs, physicians, rehabilitation, durable medical equipment, etc. Medicare has unique fee schedules for the various segments of the healthcare economy. The annual changes to these various fee schedules have not been uniform.

The most striking finding among various provider fee schedule changes was the Medicare Physician Fee Schedule (MPFS), which controls how physicians are paid by Medicare. MPFS rates have remained relatively flat over the past decade. With annual rate changes between 0 percent and 1 percent, the average increase in the MPFS since 2007 was 0.24 percent. The average annual rate of inflation during the same period was 1.88 percent. It does not appear that Medicare will increase the MPFS in the near term. This occurs at a time when inflation is 2.5 percent and seems to be increasing. By failing to keep pace with inflation, this relative reduction of revenue and subsequent practice margin is disruptive for physicians and may challenge traditional practice models. Furthermore, other Medicare fee schedules have had more favorable annual changes, such as the hospital Inpatient Prospective Payment System (IPPS) and hospital Outpatient Prospective Payment System (OPPS).

Historical overview and background of Physician Fee Schedule
Healthcare costs in the United States continue to outpace inflation. According to the Advisory Board Company, healthcare spending was 17.8 percent of the total U.S. gross domestic product (GDP) in 2015, and the Centers for Medicare and Medicaid Services (CMS) estimates healthcare spending could reach close to 20 percent by 2020.

These spiraling healthcare costs are a significant concern to the government, which is responsible for funding the Medicare and Medicaid programs. Several pieces of federal legislation have attempted to control healthcare spending.

In 1997, President Bill Clinton signed into law the Balanced Budget Act (BBA), which established the Medicare Sustainable Growth Rate (SGR) methodology for physician payment. The BBA was designed to increase physician reimbursement when healthcare spending growth was below that of the GDP and decrease physician reimbursement if healthcare spending outpaced the GDP.

A cut to Medicare reimbursement by nearly 5 percent in 2002 caused the SGR to call for deep cuts to physician payment. The flawed SGR methodology was mitigated by Congress’ yearly stopgaps, which avoided cuts to physician reimbursement.

In 2015, the SGR was replaced when the Medicare Access and CHIP Reauthorization Act (MACRA) was signed into law by President Barack Obama. This legislation subsequently led to the Quality Payment Program (QPP), which mandates annual physician payment increases of 0.5 percent in 2016, 2017, and 2018 (compared to the current rate of inflation over the past 12 months of 2.5 percent).

Beginning in 2019, most physicians will be reimbursed under the Merit-Based Incentive Payment System (MIPS) program, which is budget neutral. The MIPS program has an adjustment payment that is based on a composite score of quality indicators, resource use, clinical practice improvement activities, and meaningful use of electronic health records. The payment to physicians can initially change as much as +/–4 percent in 2019 and will increase to +/–9 percent in 2022, depending on performance.

Fee schedules in the current environment
Medicare has several different fee schedules for various healthcare providers. Each schedule is typically adjusted annually.

We examined the five major Medicare fee schedules, including:

1. inpatient prospective payment system (IPPS)
2. outpatient prospective payment system (OPPS)
3. ambulatory surgical center (ASC)
4. clinical laboratory fee schedule (CLFS)
5. MPFS

The most readily accessible CMS data regarding annual Medicare fee changes date back to 2007. Annual updates to the MPFS lagged behind the updates to the other four fee schedules studied as well as inflation from 2007 to present (see Fig. 1).

In the last 11 years, the MPFS rates increased an average of 0.24 percent annually while inflation increased an average of 1.88 percent annually—an average difference of 1.64 percent. Annual changes to the IPPS, OPPS, ASC, and CLFS largely kept pace or exceeded the rate of inflation (see Table 1).

The MPFS rates may be further compromised in the future with MIPS adjustments beginning in 2019. MIPS has the potential to markedly reduce the margins of physician enterprises—such as orthopaedic surgeons—that treat Medicare patients. These changes may further decrease physician financial performance and financial resources for future investment.

Reduction in purchasing power (what can be purchased when adjusted for inflation) caused by flat MPFS reimbursement for physicians and their practices may create a cycle that further reduces payment from MIPS because of less capital to invest in practice infrastructure. Reduction in MIPS payments is particularly important for orthopaedic surgeons who had relatively low participation in earlier CMS pay-for-performance reporting programs. An inability to invest in practice infrastructure to participate in QPP may result in further reduction in physician payment. Medicare payment reductions combined with increased overhead demands required to optimize performance in QPP programs may continue to drive physician practice consolidation, hospital employment, and physicians exiting the market via retirement or career changes.

Conclusion
Controlling healthcare costs is a vital societal issue. For more than a decade, physicians unilaterally absorbed more negative payment pressure than any other provider stakeholder studied with the lowest annual Medicare fee schedule updates. The physician fee schedule updates were less than inflation for every year we studied. Although these annual shortfalls were relatively small, the cumulative effect was profound. The inflation adjusted decrease in the MPFS was more than 20 percent from 2007 to 2017 (2.68 percent versus 22.76 percent), as seen in Fig 2.

It is unclear why CMS singled out physicians for asymmetrical negative annual fee schedule adjustments. The other four provider stakeholders studied—hospital inpatient and outpatient, ambulatory surgical centers, and clinical laboratories—all had fee schedule adjustments that were nearly equal to and typically greater than inflation for the period studied.

This outcome is troublesome for physicians. The impact of this disparity is compounded when considering that most commercial payers benchmark their physician fee schedules off the MPFS. As legislators look to solutions to control healthcare costs in the future, they must consider the economic burden they have already placed on physicians. The adverse impacts of inadequate annual MPFS increases are additionally troubling as CMS adds costly physician compliance and reporting obligations as required in the MIPS and Alternative Payment Model payment tracks of the QPP.

John Cherf, MD, MPH, MBA, is the practice and payment section leader of the Health Care Systems Committee, a member of the Council on Education, and a member of the AAOS Now Editorial Board. 
Alex Paul is an administrative intern at Advocate Health Care and currently is enrolled at the University of Illinois at Chicago Master of Hospital Administration program.

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