Physician payment outlook

First came inflation, with even the cost of basic office supplies eating into profit margins that were already thin. This was followed by staffing shortages that further drove up payroll expenses. Then, at the end of 2022, Medicare reimbursement cuts loomed.

The threatened cuts were an almost annual occurrence by this point, with Congress always rallying at the last minute to stop them — but not this time. And the cuts for this year came amid a challenging financial environment.

Yes, the cuts were reduced from what had been proposed, but the sting still hurts. The more Medicare patients on a patient panel, the bigger the likely financial pain to be faced this year is. Although there are some bright spots when it comes to reimbursement, the final Physician Fee Schedule may have the biggest impact on most practices.

Here is what physicians need to know about reimbursement for the rest of the year and beyond.

Medicare payment cuts

The bad news for physicians treating Medicare patients is that they receive a 2% pay cut in 2023. The good news is that it could have been 8.5%. This creates a situation in which doctors are being paid less to do a job that is costing them more in expenses thanks to record-high inflation.

“We were advocating for physicians to receive an update commensurate with inflation, because that’s what other providers in Medicare receive, but we certainly didn’t get an inflation update,” says Anders Gilberg, senior vice president, government affairs, for the Medical Group Management Association (MGMA).

The Medicare Payment Advisory Commission, an advisory body to Congress on Medicare issues, recently recommended linking payment increases to 50% of the Medicare Economic Index, a measure of inflation.

Although it is a positive development, Jack Resneck Jr., M.D., president of the American Medical Association (AMA), said it does not go far enough. “As the only Medicare provider without an inflationary payment update, physicians have waited a long time for this change,” Resneck stated. “When adjusted for inflation, Medicare physician payment has declined 22% from 2001 to 2021. Physicians have struggled to keep their practices open in the face of rampant inflation, COVID(-19) and growing costs of running a medical practice, and Medicare payments have not responded adequately.”

Congress typically deals with pending Medicare conversion factor cuts through actions that delay the cuts, rather than addressing the underlying funding issues — something a sharply divided Congress is unlikely to tackle — and 2022 was no different. Of the original 8.5% of scheduled cuts, 4% was kicked down the road to 2025, when it will be an issue again.

As for the end of 2023, Gilberg says physician fee schedule cuts will be looming again. “We are in fact facing a similar situation with respect to the fee schedule,” says Gilberg. “We don’t know exactly what that is, although we predict that there will be some type of cut based on early predictions of what will be in the proposed rule coming this summer. Congress did appropriate enough money to offset approximately 1.25% of any prospective cut in 2024, but I don’t believe that will be enough to offset the cuts completely.”

The continual cuts to the money doctors earn for treating Medicare patients leave many physicians with difficult decisions. “It puts incredible pressure on their practice,” says Gilberg. “One of the things our members told us is that they might seriously look at reducing access for new Medicare beneficiaries. Most of our members do accept Medicare, but that doesn’t necessarily mean that they can accept every new Medicare beneficiary — or they may be forced to limit the number of patients within their practice that have Medicare as insurance.”

For many services, Medicare already does not provide enough reimbursement to cover the cost of providing care and can be significantly lower than what commercial payers provide for the same service. This means practices must rely on commercial contracts that pay better to offset the losses.

“Medicare wasn’t even a good payer going into this, and now they are going to be less so because of this cut,” says Gilberg.

The ramifications can stretch beyond Medicare patients. With staffing costs rising as workers demand more, many practices are facing more financial strain than they can handle. So, in addition to possibly reducing the number of patients with Medicare they will see, the lost revenue may force them to reduce hours or close satellite offices at a time when patients are demanding more retail-like conveniences.

And if enough doctors limit or eliminate coverage for Medicare patients, what good is a program so poorly funded that it cannot function as intended?

“That underscores what the MGMA, the AMA and others are going to be pushing next year,” says Gilberg. “What we are looking for is likely to have a two-pronged approach, with some reforms to the Medicare quality programs where some of the incentive money expired in 2023, and how we can create quality programs that reward high-quality, cost-effective care that are not as burdensome as some of the existing programs, like MIPS (Merit-based Incentive Payment System).”

He says there must be more incentives to enter alternative payment models, but there have not been enough to allow practices to move out of fee-for-service.

“So, we’re kind of stuck in this middle ground where Medicare has not adopted enough value-based care opportunities, where at the same time, fee-for-service payments have stagnated, and that’s where we find ourselves today.”

Gilberg acknowledges that any discussions about Medicare funding will be challenging in an environment that may include congressional discussions about entitlement reform and reducing the overall cost of Medicare to the country. But at the same time, the physician portion of Medicare costs is not as high as the hospital or inpatient portion.

“If done correctly, I think we could potentially make sure that physicians receive adequate reimbursement and are incentivized to provide preventive care and other services that keep patients out of the hospital and ultimately save money to the Medicare program,” says Gilberg.

Another year-end casualty in 2022 was the 5% bonus for physicians participating in Advanced Alternative Payment Models. This 5% bonus on fee-for-service payments helped doctors transition to more value-based care, but Congress lowered it to 3.5%.

“There wasn’t explosive growth in the program with the 5% bonus, so lowering it at this point is certainly not going to help,” says Gilberg. “So, if physicians are in an Alternative Payment Model, they should be mindful of that.”

On the positive side, the flexibility for telehealth has been extended for two years, including the payment parity between in-person visits and services delivered via telehealth. These flexibilities were introduced during the COVID-19 pandemic and have proven popular with patients and doctors. Gilberg says this means practices that have invested in telehealth can still benefit from it.

Private payer trends

Payers are increasingly tying compensation to the amount of risk assumed by physicians, and this can put more pressure on private physicians than on those employed by larger medical systems, says Thom Bales, partner, Health Services Consulting Solutions Leader, PwC US.

“PCPs (primary care physicians) are being asked to take on greater risk and invest in and spend more time on care management planning, all in an increasingly complex health ecosystem,” says Bales. “To manage this risk, physicians will need to leverage new technology. In addition, PCPs are seeing either larger networks, systems or new businesses pull demand for higher reimbursement services, and they will likely continue to feel that pressure.”

Bales says PCPs are critical for the industry’s shift to value-based care, which favors evidence-based approaches and data that prove quality outcomes and cost containment, and that reimbursement will increasingly be tied to this.

“Fee-for-service continues to drive about 40% of total health care payments, but the big shift has been from pay-for-performance and quality bonus-only programs to more traditional value-based care programs tied to cost and outcomes-based quality measure targets,” says Bales. “As an independent practice PCP, they need to think about cooperatives or health plans that have the capabilities to support them. We are starting to see some health plans provide better insights, services and health capabilities. They also need to consider the fundamental question on going alone or joining a PCP aggregator — whether that’s large, increasingly integrated health systems or the rise of some of the larger physician groups often supported by private equity.”

One other private payer trend to watch for in 2023 also directly ties back to Medicare: prior authorizations. Although they are not related to reimbursement, they do cost practices untold amounts of money and time.

The Biden administration is putting out rules, which apply to Medicare Advantage plans, that will limit use of prior authorizations (Gilberg says there is support for bipartisan legislation on the same topic that will likely be reintroduced this year after having stalled in the Senate last year). Because Medicare Advantage plans are largely private plans, the hope is that the improvements will spread.

“If we can move the dial with respect to prior authorization on Medicare Advantage, then that would also impact the same types of processes that private health plans use for their commercial products,” says Gilberg. “If approved, that will hopefully put some more structure around things like electronic transmission of information to ensure that prior authorization requests are undertaken and adjudicated in a timely manner.”

One other negative carryover from the Medicare rate cuts is the potential effect on physicians with private payer contracts.

“Many of the commercial plans base their private contracts on Medicare rates,” says Gilberg. “They might be 150% of the Medicare rate in your contract for a commercial plan. Anytime Medicare cuts occur, that also will have a commensurate reduction in contracted rates with private plans if those plans link to Medicare.”

Bales says it is in the best interest of PCPs and insurers to identify and manage care around value.

“PCPs by themselves are limited in the ability to follow a patient across their care experience and sites of care, fill in gaps and stitch together a broader community that can include community services, advocates and even caregiver roles in different locations,” says Bales. “Insurers remain dependent on physicians to coordinate and execute on care plans.”

With Medicare reimbursement cuts and private payers trending toward data-driven value-based care, can the small practice still survive?

“It depends on the circumstances,” says Bales. “For those looking for independence and are comfortable with greater variability and reduced compensation, there is a choice. For others — and most small and rural PCPs — it’s going to be a challenge.”