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Physicians have complained that Medicare reimbursement rates have not kept pace with inflation, and now in 2025, are dealing with a 2.83% reimbursement cut. There's little chance of relief in sight. How did we get here?
When Medicare was signed into law in 1965, lawmakers set out to establish a system that provided older Americans with health care coverage and ensured physicians were fairly compensated. Over the decades, Congress has adjusted, overhauled and patched physician reimbursement formulas in an ongoing effort to balance rising costs with the needs of both patients and physicians.
That balance has not always been maintained. A longstanding concern among physicians is that Medicare’s annual updates to payment rates have consistently lagged behind general inflation as well as the cost of running a medical practice. According to the American Medical Association (AMA), Medicare physician payment rates rose by only 11% between 2001 and 2021, while practice expenses increased by 39% during that period, illustrating how reimbursement has failed to keep pace with economic realities.
Similarly, the Medicare Payment Advisory Commission (MedPAC) has highlighted in its reports to Congress that physician reimbursement updates under the Medicare Physician Fee Schedule do not adequately reflect inflationary pressures, making it increasingly difficult for practices to sustain operations without cutting services or shifting more costs to privately insured patients. MedPAC has recommended tying Medicare physician reimbursement to the Medicare Economic Index and to add payments to doctors treating low-income beneficiaries.
This growing gap between payment rates and inflation remains a central issue in health policy debates, as it can lead to access challenges for Medicare beneficiaries if physicians opt to limit their participation in the program.
This came into stark reality in 2024. In November, the U.S Centers for Medicare & Medicaid Services (CMS) finalized the 2025 Medicare Physician Fee Schedule, bringing a 2.83% across-the-board cut to physician reimbursement. The reduction immediately sparked concerns throughout the medical community, with many physicians and professional organizations pushing for congressional intervention. Although there was optimism that Congress would act in late 2024 to avert or soften the cut, those efforts ultimately failed.
So how did we get here? This explainer details out the history for Medicare’s reimbursement policies, the current setup and what the future may look like.
Medicare has undergone multiple transformations in its nearly 60-year history—revisions driven by lawmakers’ attempts to control costs, ensure patient access and maintain fair compensation for physicians. From the early days of “usual, customary and reasonable” fees to the more recent emphasis on value-based care, Congress has played a pivotal role in shaping how health care professionals are reimbursed for treating Medicare beneficiaries. Below is a historical overview detailing key legislative milestones, with narrative context to illuminate how and why each shift took place.
“No longer will older Americans be denied the healing miracle of modern medicine. No longer will illness crush and destroy the savings that they have so carefully put away over a lifetime.” With those words, President Lyndon B. Johnson signed Medicare legislation into law in 1965.
When Johnson signed the Social Security Amendments of 1965, the Medicare program was born, providing health insurance primarily for Americans 65 and older. At the outset, physicians were reimbursed based on their “usual, customary and reasonable” (UCR) charges. This approach aimed to respect a doctor’s established fee structure while still allowing the government to review charges for fairness and accuracy.
The signing ceremony on July 30, 1965, took place in Independence, Missouri, the birthplace of former president Harry S Truman. As president from 1945 to 1952 Truman had led the first concerted efforts to establish a national health program, initially one that would cover all Americans, and later a plan that would cover just the elderly. Both failed, due in large part to fierce opposition from the American Medical Association, a role it would reprise later with Medicare.
Medicare was just one element in a torrent of laws and initiatives passed in the mid-1960s that became known collectively as the Great Society legislation and included the Civil Rights Act of 1964, the Economic Opportunity Act, the Voting Rights Act of 1965, Medicaid (which Johnson signed at the same time as Medicare), the National Endowment for the Arts and Humanities, the Immigration and Nationality Services Act of 1965, the Higher Education Act of 1965 (which included the creation of what later came to be called Pell grants), and Head Start, among others.
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Still, in terms of longevity and impact, Medicare ranks among the major accomplishments of the Great Society, Joseph Califano, an aide to President Johnson (and later secretary of the U.S. Department of Health, Education and Welfare) said in a telephone interview with Medical Economics in 2015.
“In terms of what people remember, and what affects millions of people, it’s right there at the top,” Califano said. ”It changed everything.”
Over time, however, policymakers grew concerned about the potential for unchecked inflation in physician fees and wide variations in what could be deemed “reasonable.” Because Medicare was a new program, the government was hesitant to push too hard on cost controls, fearing that strict limits might discourage physicians from accepting Medicare patients. This tension between ensuring physician participation and preventing runaway costs became a recurring theme in the decades to come.
Rising health care expenditures through the 1970s and 1980s led many in Congress to question whether the UCR model was sustainable. Medical technologies were advancing rapidly, and growing administrative burdens also contributed to higher costs. Various committees — most notably the House Ways and Means Committee and the Senate Finance Committee — launched investigations and introduced bills aimed at reining in Medicare spending.
Lawmakers grappled with balancing budgetary pressures against the desire to maintain physician engagement in the Medicare program. Proposed reforms included introducing ceilings on allowable fees and experimenting with different ways to calculate fair market rates. The result was a patchwork of temporary fixes and incremental adjustments that only partially addressed the fundamental challenge of tying physician pay to an ever-evolving health care landscape.
In 1983, Medicare instituted pre-determined payment amounts, known as diagnostic-related groups (DRGs) for hospital stays. Before the advent of DRGs, Medicare reimbursed hospitals for their costs, and physicians according to the UCR rates of the time.
“That basically meant that physicians and hospitals got to decide what their Medicare reimbursements were going to be, and as a result, federal spending on Medicare blew through the budget projections,” says Chapin White PhD., senior researcher with the RAND Corp, told Medical Economics in 2015.
By the late 1980s, Congress sought a more structured approach to physician payment. The Omnibus Budget Reconciliation Act of 1989 was a turning point, as it laid the groundwork for the Resource-Based Relative Value Scale (RBRVS). This shift represented a philosophical change in reimbursement policy: Instead of tying physician payments to historical charges, RBRVS was designed to measure the resources — time, expertise, overhead — necessary to provide each service.
The RBRVS system’s origins trace back to 1988 research led by Dr. William C. Hsiao at Harvard University, who sought to move beyond the “usual, customary and reasonable” model by systematically quantifying the “work” component of various procedures. The RBRVS formula is based on three components: physician work, practice expense, and malpractice liability costs. These are then summed, geographically adjusted, and multiplied by a “conversion factor” to establish payment rates for each service.
When RBRVS took effect in 1992 and was fully implemented by 1996, it ushered in many aspects of reimbursement that physicians are familiar with today such as Medicare Fee Schedule, a standardized formula that assigned relative value units (RVUs) to different medical procedures and services. These RVUs were then adjusted geographically and multiplied by a conversion factor to calculate final reimbursement rates.
While RBRVS was considered more equitable than UCR, its complexity also triggered debates about whether certain medical specialties were favored over others and whether the government’s calculations truly reflected the costs of running a medical practice.
While the RBRVS system was a significant advance in rationalizing Medicare payments, critics argue that it has introduced complexities and disparities of its own. For instance, some studies have questioned whether certain procedural specialties benefit more than primary care fields because of how the Relative Value Update Committee (RUC), an advisory body convened by the American Medical Association, collects and analyzes data. The RUC’s reliance on specialty societies for input led to concerns about specialty-dominated decision-making, potentially skewing relative value units (RVUs) toward procedures. Additionally, the budget neutrality requirement means that if CMS increases RVUs for some services, it must proportionally reduce them elsewhere. As a result, any attempt to realign or update the values, such as recognizing newer procedures or reevaluating under-compensated tasks, can create winners and losers among physician specialties.
Another challenge involves accurately measuring the “physician work” component for complex, evolving services like care coordination and chronic disease management. Critics say that the original metrics do not adequately capture cognitive skills, time spent on non-face-to-face care (e.g., reviewing records, coordinating across teams) or the expanding use of telehealth.
Over the years, CMS has attempted to address these gaps by periodically adjusting RVUs, but providers often contend that the system still underrepresents the demands of primary care and non-procedural specialties. Consequently, discussions about replacing or significantly reforming the RBRVS structure — possibly by incorporating more robust measures of value and patient outcomes — remain a consistent theme in health policy debates.
Amid persistent concern over escalating health care spending, Congress introduced the Sustainable Growth Rate (SGR) formula as part of the Balanced Budget Act of 1997. The idea was to tie Medicare physician payment updates to the performance of the broader economy. If overall Medicare spending on physicians outpaced economic growth, the formula would mandate automatic reimbursement cuts in subsequent years.
Almost immediately, the SGR formula began calling for negative payment updates — often substantial ones. Fearing that significant pay cuts could jeopardize patient access to care, Congress routinely enacted short-term legislative patches, known as “doc fixes,” to stave off these scheduled reductions. This annual scramble became a fixture of health care politics, as physician groups lobbied aggressively to prevent cuts, they said would force them to limit services or stop accepting new Medicare patients. While the SGR’s intentions were clear (to control spending) its practical application proved unwieldy and unpredictable.
Momentum built over the life of the SGR for a permanent fix. The AMA president at the time, Robert Wah, MD, pointed out in early 2015 that “Congress has spent a staggering $170 billion on 17 patches in a 12-year period, the cost of which has far exceeded the cost of eliminating the SGR altogether. This continuous cycle of putting a Band-Aid on the real problem creates an unpredictable environment that makes it difficult for physicians to budget and plan for practice innovations that could improve quality and reduce costs.”
After more than a decade of “doc fix” legislation, lawmakers from both parties recognized the unsustainable nature of the SGR formula. In 2015, Congress passed the Medicare Access and CHIP Reauthorization Act (MACRA) with overwhelming bipartisan support. This landmark legislation permanently repealed the SGR, eliminating the threat of yearly payment cliffhangers.
MACRA introduced a new reimbursement framework that shifted Medicare more decisively toward value-based care, creating the Quality Payment Program (QPP). Physicians could choose between two primary tracks:
MACRA’s passage marked a significant step away from traditional fee-for-service medicine toward incentivizing outcomes and value. Yet it also introduced new complexities and reporting requirements for physicians, who had to adapt to an increasingly data-driven payment ecosystem.
Since its inception, MACRA’s implementation has seen multiple refinements and exceptions, largely designed to ease the transition for physicians and account for varying practice circumstances.
In the initial years of MIPS (starting with the 2017 performance year), CMS adopted a “pick your pace” approach to ease physicians into the new reporting framework. Clinicians could submit minimal data to avoid penalties, or more comprehensive data to earn incentives. Over time, CMS has raised performance thresholds, meaning clinicians now must report more robustly to avoid negative payment adjustments. However, a variety of exceptions were put in place:
Despite these provisions, many clinicians have found reporting requirements to be administratively burdensome, and stakeholders continue calling for simplifications to MIPS.
MACRA also established financial incentives for clinicians to join risk-bearing, “Advanced” APMs, such as certain Accountable Care Organizations (ACOs) or bundled payment initiatives. Eligible participants who meet threshold requirements in these models can earn a 5% incentive payment on their Medicare Part B professional services, bypassing some or all MIPS reporting requirements.
However, adoption of Advanced APMs has varied. Larger health systems with robust data analytics and care coordination infrastructure tend to find it easier to participate. Small or independent practices often struggle to assume financial risk, invest in technology, or meet participation thresholds. Although CMS has rolled out new model options, like Primary Care First, stakeholders continue to advocate for more streamlined pathways into Advanced APMs and calls to extend or increase bonuses.
Since 2015, Congress has periodically revisited aspects of MACRA to refine how clinicians are measured, how performance thresholds are set, and how risk is defined in Advanced APMs. For instance, Congress and CMS have offered additional hardship exceptions during events like natural disasters or the COVID-19 pandemic. Payment adjustments themselves have also evolved; the upside for high performers and the downside risk for low performers have gradually increased, a design intended to spur higher performance but which some fear could inadvertently penalize small or resource-limited practices.
While MACRA significantly reshaped the Medicare physician payment landscape, debates continue over whether its two-track structure (and associated reporting burdens) ultimately benefits patient care and physician sustainability. Policymakers are exploring ways to simplify MIPS, incentivize more participation in APMs, and better account for social determinants of health.
In the meantime, physicians are forced to navigate a complex set of rules, thresholds, and exceptions each year, underscoring that MACRA’s impact is still evolving a decade after its passage.
Medicare reimbursement remains a hotly debated issue in Congress. Annual physician fee schedule updates from the Centers for Medicare & Medicaid Services (CMS) are scrutinized for their impact on both federal spending and physician practice viability. Critics argue that, even under MACRA, updates often fail to keep pace with inflation or the rising costs of providing care. Supporters of the value-based approach note that focusing on outcomes can incentivize more efficient, higher-quality treatment.
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Meanwhile, bipartisan proposals regularly surface to refine MACRA’s provisions, stabilize payment rates and expand reimbursement for services like telehealth. Lawmakers also grapple with how best to promote health equity, control prescription drug costs and address the mounting financial challenges faced by small and independent practices.
As demographic shifts increase demand for Medicare services, and as technology continues to reshape patient care, the debate over how to pay physicians fairly—while ensuring that the Medicare program remains fiscally sound—will likely intensify. The story of Medicare physician reimbursement is ultimately one of continuous adaptation. For physicians, understanding the political and economic drivers behind these policy changes is as critical today as it was in 1965.
In November 2024, the Centers for Medicare & Medicaid Services (CMS) finalized the 2025 Medicare Physician Fee Schedule, confirming a 2.83% across-the-board cut to physician reimbursement. Physicians and professional organizations reacted swiftly, voicing concerns that repeated fee schedule reductions would jeopardize practice viability—particularly for smaller or rural groups—and ultimately restrict patient access to care. Many of these groups pinned their hopes on congressional action to avert or soften the blow, but a confluence of budget pressures and legislative gridlock thwarted those efforts.
Months earlier, in July 2024, CMS released the proposed version of the 2025 fee schedule. Physician advocates immediately noted the projected 2.8%–2.9% decrease and warned that inflation, administrative burdens and overhead costs had already stretched many practices thin. Organizations such as the American Medical Association (AMA) submitted formal comments, urging CMS and lawmakers to consider mitigating the cut or introducing a short-term relief mechanism. Over the summer, key congressional committees held hearings at which physician representatives testified about the potential harm of yet another reduction.
By early fall, bipartisan letters circulated in both the House and Senate, with some lawmakers pushing leadership to include a “doc fix” in larger fiscal packages. However, identifying the budget offsets necessary to finance the fix proved challenging. Legislators faced competing priorities—ranging from government funding negotiations to debates over telehealth extensions—leading to a logjam in which the physician fee schedule fix struggled to gain traction.
When CMS published the final 2025 Physician Fee Schedule in November, it confirmed the 2.83% reduction would stand. In its commentary, CMS pointed to statutory requirements, budget neutrality rules and adjusted RVUs as the main drivers behind the decrease. Despite renewed calls for relief, efforts to pass stand-alone legislation or insert a provision into an end-of-year omnibus bill ultimately failed. Lawmakers who supported a freeze or a positive update could not overcome broader budgetary constraints and political disagreements. They also faced an end-of-year legislative calendar packed with other high-stakes negotiations.
As a result, the cut took effect on January 1, 2025, leaving many practices grappling with the financial realities of lower Medicare reimbursement. Although some members of Congress pledged to revisit the issue in the new legislative session, the final weeks of 2024 served as a stark reminder that, in times of fiscal and political pressures, even widely supported measures can stall. Looking ahead, physician advocacy organizations continue to push for more fundamental reforms that address not only payment cuts and inflation but also the mounting administrative complexities of Medicare participation.
Whether bipartisan consensus can be reached to reshape the physician payment system in a meaningful, long-term way remains uncertain.
Despite physician advocacy groups intensifying their calls for congressional action to reverse the 2.83% reduction in the 2025 Medicare Physician Fee Schedule, efforts in the new legislative session have so far made limited progress. Several lawmakers in both the House and Senate have signaled their intention to introduce or support measures that would restore the conversion factor to 2024 levels—or provide a modest positive update in lieu of the cut. Legislators who favor this approach have framed their arguments around patient access and physician practice sustainability, warning that persistent payment reductions may compel doctors to limit the number of Medicare patients they see.
Doctors and their supporters in the House of Representatives introduced in late January 2025 the bipartisan Medicare Patient Access and Practice Stabilization Act, legislation that would cover the 2.83% cut. Bill co-sponsor Rep. Greg Murphy, MD (R-North Carolina) noted that decrease plus a projected practice cost increase of 3.6% would add up to a 6.43% cut unless Congress acts.
After years of Medicare reimbursement cuts, the future of private practice medicine “is in dire straits,” Murphy said in his announcement about the legislation. He noted it is the most cost-efficient and personalized form of health care, and the legislation would ensure it remains viable.
“Doctors see Medicare patients out of compassion, not for financial gain,” Murphy’s statement said. “The cost of caring for a Medicare patient far outpaces the reimbursement that physicians receive for seeing them.”
What looms in the near future is the March 14 deadline that forces Congress to pass a continuing budget resolution or risk a government shutdown. The Medical Group Management Association put the stakes in stark terms in a January 2025 letter: “Lawmakers are playing a dangerous game that will ultimately damage patients’ access to physicians who can no longer deal with the chaos caused by congressional inaction to fix a reimbursement formula that continues to destabilize the Medicare program,”
Does this bill or any other have any chance of becoming law and eliminating the reimbursement cut before March 14 arrives? Stay tuned to find out.
