Medicare: Where does $1.1 trillion go — and where should it go?

Physician pay was not a major factor in the Medicare Payment Advisory Commission’s (MedPAC) April deliberations on at least one chapter of the draft report due to Congress in June.

MedPAC opened this month’s two-day meeting with a session on “Improving payment incentives in Medicare,” with a staff presentation and commissioners’ discussion about Medicare’s fee-for-service (FFS) and Medicare Advantage (MA) payment programs.

The commissioners acknowledged that health care sector observers sometimes claim MedPAC favors or “vilifies” one or another part of the program. That is not the case, said Chair Michael E. Chernew, Ph.D.

“So often I hear in the ether broad statements — APMs don't work, MA's horrible or … simply, you know, fee-for-service is a disaster, which I think, broadly speaking, is not the case,” Chernew said, referring to alternative payment models.

“I think there's a core role that these play, and I think the central issue is, what tools we put in place around a foundational sort of fee-for-service world to make sure that we give incentives to providers to provide high-quality, efficient care, which is very hard to do in a fee for service system,” he said.

Paying doctors for patient care

While physician reimbursement was not part of the April 9 discussion, MedPAC last month published its March report calling for a 0.5% increase in Medicare payment for 2027. Next year, that 0.5% bump would push the total payment increase to 1.25% for physicians in advanced alternative payment models (A-APMs), such as accountable care organizations that involve some financial risk. All other physicians would see an uptick of 0.75%.

But there’s another change coming because a temporary 2.5% payment increase expires at the end of 2026. That means net payments for 2027 would fall 1.2% for A-APM participants and 1.7% for other clinicians. Adding the recommended increase, “these net reductions would be smaller than what would otherwise occur under current law,” the MedPAC report said.

Getting to know Medicare

The April session opened with a presentation by Principal Policy Analysts Rachel Burton, M.P.P., and Luis Serna, M.S. They and Senior Analyst Stuart Hammond, M.P.P., M.P.H., were co-authors of the draft chapter that will become part of MedPAC’s June report, and they outlined the facts, figures and data surrounding Medicare spending in the nation.

Medicare uses three approaches to pay for health care, their report said:

• Stand-alone FFS Medicare
• APMs that are layered on top of FFS Medicare
• MA plans operated by private insurers

MedPAC uses three principles to guide its work:

• Payments should be sufficient to support beneficiary access to high-quality health care in appropriate clinical settings.
• Physicians, other clinicians and health care providers should have incentives to supply appropriate and equitable care in an efficient manner.
• Medicare payments should incentivize and reflect efficient care delivery, ensuring the programs fiscal burden on beneficiaries and taxpayers is not greater than necessary.

How much is Medicare spending?

At $1.1 trillion in 2024, Medicare constitutes approximately 3.8% of the nation’s gross domestic product. In the last 10 years, inflation-adjusted spending per beneficiary increased 19% for Medicare Part B services — i.e., care provided by physicians and other clinicians, hospital outpatient encounters, and physician-administered drugs. In FFS Medicare, spending per beneficiary has grown fastest to cover physician-administered drugs, according to the MedPAC data.

Burton and Serna outlined the basic designs of incentives that can influence volume and intensity in FFS Medicare, APMs and MA. Each has overall payment levels and relative payments, and the analysts noted in the overall payment levels, it is difficult to get payments “right.”

In their reviews, MedPAC commissioners have recommended policy changes to improve the programs. For example, standalone Medicare FFS tends to promote volume and intensity growth. APMs and MA plans have incentives and tools to manage spending but it is a challenge to design systems that save money for Medicare, according to the report. Those recommendations include site-neutral payment for ambulatory services delivered in more than one setting, for FFS Medicare. MA’s quality bonus program should be overhauled. For APMs, the Medicare Shared Savings Program should use different calculations for spending targets of accountable care organizations, the report said.

Analyzing the data

The commissioners spent an hour explaining their responses to the data and how it jibes with their experience in health care finance and policy.

Commissioner Gregory Poulson, MBA, praised the presentation for identifying critical issues with unusual clarity, particularly its characterization of Medicare as a "price taker" rather than a "price setter" for Part B drugs. He challenged the report's framework of lumping pharmaceutical spending growth under "volume and intensity," arguing that price increases of 6% to 20% on existing drugs, and 30% to 2,000% markups on replacement chemotherapy agents, represent a fundamentally different phenomenon — pure cost inflation, not clinical decision-making. He asked whether the commission has data to separate true volume and intensity changes from price-driven increases, since only the former falls within a clinician's purview and the distinction has significant policy implications.

Managing care controls spending

Drawing on decades of experience running health networks and serving as a chief medical officer, the Commissioner Thomas Diller, M.D., MMM, traced Medicare's cost curve from 1960 to the present, arguing that the historical data clearly show fee-for-service payment drives inflation while managed care models, particularly narrow networks with accountability, flatten it. He cited an Institute of Medicine report finding that roughly 30% of all health care spending generates no patient value, attributing that waste to unnecessary care, fraud, and excess administrative burden. The policy lessons are well established: Narrower networks with provider accountability and active medical management work, and what doesn't work is fee-for-service reimbursement layered with only modest APM incentives insufficient to fund the care management infrastructure those models actually require.

Benefits and risks

Commissioner Brian Miller, M.D., MBA, M.P.H., described a benefits-and-risks framework around Medicare Advantage and fee-for-service, arguing that MA functions as an essential financial safety net for working- and middle-class retirees who cannot afford to self-assemble Medigap and Part D coverage on the open market. Risk-adjusted capitation at the health plan level is not perfect but may be a superior budgeting mechanism for fee-for-service price regulation, which predictably triggers volume and intensity responses that prevent true cost control. MA's bundled approach also frees CMS and policymakers to focus on regulatory and oversight functions rather than micro-pricing thousands of individual services and drugs. Two decades of narrow APM interventions targeting small physician subsets have failed to bend the cost curve. Instead, the commission should instead pursue broader structural reforms while moving away from piecemeal price-targeting in both programs.

What about quality?

Commissioner R. Tamara Konetzka, Ph.D., urged the researchers separate the purely conceptual incentive structures of FFS, APMs, and capitation from their real-world design features and implementation variables. She also suggested a structured comparison table with rows covering efficiency, quality, and access for each model. The chapter did not have adequate analysis of quality, Konetzka said. She also highlighted two underexplored conceptual points:

• Beneficiary cost-sharing is a deliberate design choice meant to curb low-value utilization rather than an inherent feature of fee-for-service.
• The time horizon of plan enrollment critically shapes whether capitation's theoretical incentive to invest in prevention actually materializes in practice.

Why is Medicare losing participation?

The report was clear, although MedPAC could use another analytical lens, said Commissioner Robert A. Cherry, M.D., M.S. Along with examining incentives for value-driven care, MedPAC should examine what disincentivizes participation in each payment model, particularly from the health plan perspective. He pointed to a sharp spike in MA disenrollment as a concrete and underexamined warning signal, noting that involuntary disenrollment rates that ran around 1% from 2018 to 2024 surged to 6.9% and then 10% in successive years, displacing roughly 2.9 million beneficiaries as plans withdrew from markets where profitability had eroded, especially in rural areas.

That could be an early indicator of structural stress in the MA program, Cherry said, and future commission work could focus on plan viability as a prerequisite for beneficiary choice. Allowing health plans to become economically unviable would undermine the market infrastructure that makes MA a potentially sustainable long-term alternative to fee-for-service.

FFS as a program guardrail

The three payment models are interdependent, said Commissioner Stacie B. Dusetzina, Ph.D. FFS serves as a competitive guardrail that disciplines MA plans to offer strong benefits in order to attract enrollees, making its preservation strategically important even as capitation expands. Meanwhile, MA benchmarks are anchored to fee-for-service spending levels, so high fee-for-service costs flow directly into MA payments and fund supplemental benefits without generating net program savings for taxpayers.

As for APMs, they may be undermined by their own subtlety — when physicians and patients are unaware they are participating, the models cannot deliver their full potential. It could help to have mandatory, streamlined enrollment rather than the current voluntary and often invisible assignment approach.

Capping fee-for-service spending combined with value-based cost-sharing design could be a productive policy direction, Dusetzina said. But there also is a critical data gap about who in fee-for-service has supplemental coverage, making it difficult to accurately model the behavioral and budgetary consequences of such reforms.

Too much burden on primary care?

There is a structural mismatch running across all three payment models between what Medicare's aging, chronically ill population clinically needs and what the current delivery system, as shaped by payment incentives, actually provides, said Commissioner Scott Sarran, M.D., MBA. He argued that the appropriate care model for this population is a specialist-led, multidisciplinary team with coordination that is patient-centric. But all three payment mechanisms tend to reinforce a single-provider, primary care physician-centric structure that places an unrealistic burden of responsibility on primary care. He stopped short of proposing specific solutions but called on the commission to at least name this misalignment explicitly in the report. It is a systemic problem that transcends any individual payment model and will require sustained multi-year work to meaningfully address, Sarran said.

Aligning tools for best performance

Commissioner Joshua Liao, M.D., M.Sc., highlighted three strengths in the report:

• Even-handed treatment of the limitations of all approaches
• Appropriate context of APM performance relative to development of payment models
• Improved clarity in distinguishing conceptual design from real-world implementation.

MedPAC should elevate the theme that key tools such as prior authorization, volume-based clinician compensation, and fee-for-service infrastructure are not exclusive to any single payment model but operate across all three, with the goal of reinforcing the importance of calibrating those shared tools consistently. The Commission also could strengthen the APM section by noting that specialist incentives have historically been siloed within episode-based models rather than integrated with population-based models.

Greater spending, greater value?

The MedPAC analysis articulated the intended incentive structures of newer payment models and their unintended consequences, particularly gaming behaviors that drive up spending and encourage avoidance of complex patients, said Commissioner Cheryl L. Damberg, Ph.D. Closing that gap between conceptual promise and execution will be a central challenge for MedPAC.

The commissioners should be concerned about whether the system is actually delivering better value in return for greater spending across all payment models. Even where MA plans demonstrably reduce utilization and maintain or improve quality, it remains unclear whether those gains translate into real savings for taxpayers rather than simply redirecting money within the system, she said.

The latest review also flagged administrative costs as an underappreciated driver of total spending growth. Damberg said the added complexity imposed on patients, clinicians, and health systems by layered payment models must be weighed against any efficiency gains. MedPAC’s future work should focus on incentives that actively reduce administrative burden rather than compound it.

Specialists and employed physicians

Commissioner Paul Casale, M.D., M.P.H., returned to the earlier point about beneficiary and physician unawareness of ACO participation. He described his own experience leading an ACO where beneficiaries consistently self-identified as fee-for-service patients with no understanding of the alternative payment model they were enrolled in. Medicare models themselves can be designed to better communicate their purpose and potential advantages to patients.

Casale seconded the call to expand the chapter's treatment of specialist engagement, noting that while episode-based models are referenced, specialists remain largely disconnected from APMs despite driving a significant share of costs.

MedPAC should report on at least two additional structural tensions. There is a conflict between health system employment incentives and payment model requirements that creates contradictory signals for individual clinicians, especially given the rise of employed physicians. “The fact that we're really in a system in which driving accountability to the individual clinician really is not the way medicine is practiced,” he said.

Transparency and low-value care

Commission Vice Chair Betty Rambur, Ph.D., R.N., FAAN, suggested MedPAC could revisit and refresh two prior recommendations:

• A 2012 proposal for a traditional Medicare out-of-pocket maximum. She argued would both modernize a protection whose original rationale no longer applies and increase market competitiveness with MA
• A 2006 proposal for an independent expert committee to review fee-for-service valuation methods. That would offer a structural check on the outsized influence the RVS Update Committee currently holds over physician payment rates.

Value transparency is a critically underaddressed complement to the national price transparency conversation, Rambur said, arguing that knowing what something costs is meaningless for patient decision-making without also knowing whether it is needed.

U.S. health care has a low-value care problem. Rambur said it is routinely treated as an economic issue, but clinicians understand it as a moral one because the cascade of harm that follows unnecessary care is not just wasteful but tragic in a way that harm from necessary care is not.