MedPAC: $1.1 trillion in Medicare payments are generating the wrong incentives

The three major ways that Medicare uses to pay physicians all are generating the wrong incentives for patient care and reimbursement, according to the latest report from the Medicare Payment Advisory Commission (MedPAC).

Meanwhile, MedPAC maintained its recommendation for site-neutral payment for medical services performed at physician offices instead of hospital outpatient departments. But that is just one of a number of recommendations for reforms that Congress should consider for the $1.1 trillion Medicare program.

The June 2026 report, “Medicare and the Health Care Delivery System,” devoted its opening chapter to a comprehensive critique of Medicare's three main payment systems. In sum: Fee-for-service payment (FFS), alternative payment models (APMs), and Medicare Advantage (MA) all need work, the Commission report said.

Spending trajectory and the physician pay paradox

Medicare spent $1.1 trillion in 2024, 3.8% of U.S. gross domestic product, and MedPAC projects that figure will exceed 5% of GDP by 2032. The dominant driver is not enrollment growth or general inflation but what MedPAC calls "volume and intensity:" Beneficiaries receive more services and services have higher prices.

Even as overall Medicare spending climbs, the physicians delivering much of that care have seen their inflation-adjusted reimbursement fall 33% since 2001, according to the American Medical Association. MedPAC's March 2026 report recommended a 0.5% increase in physician payment for 2027, which would bring the total update to 1.25% for physicians in advanced alternative payment models and 0.75% for all others. But a temporary 2.5% payment increase enacted for 2026 expires at year's end. The net effect: Most physicians will see their Medicare payments decrease in 2027, by 1.2% for those in advanced alternative payment models and 1.7% for other clinicians, even after MedPAC's recommended raise is applied.

MedPAC said its recommended increase should be permanent and built into the baseline for future calculations. The AMA called the pattern of temporary patches and looming cuts "past-minute efforts to avert disruption in patient care." Rep. Greg Murphy, M.D., (R-North Carolina), a urologist, introduced the Provider Reimbursement Stability Act this spring to permanently restructure the physician fee schedule formula, including raising the budget-neutrality threshold and linking payment updates to the Medicare Economic Index, a measure of practice-cost inflation. The bill drew co-sponsors from both parties.

MedPAC: Increase physician pay by 0.5% for 2027

Three methods, all flawed

At the core of MedPAC's June report is an argument that Medicare's three payment approaches each generate financially driven distortions, and could be reformed. All three try to incentivize physicians to perform well on patient health quality measures, but that is a challenge. FFS, APMs and MA “are all susceptible to strategic behavioral responses that can inappropriately increase payments” — in a phrase, gaming the system.

Traditional fee-for-service, which now covers fewer than one in five Medicare beneficiaries on a stand-alone basis, pays providers for each service individually. That structure rewards volume over value, "financially rewarding providers who furnish more care than might be necessary," the report states, while disadvantaging those who choose lower-cost options. The commission notes the physician fee schedule relies on surveys of small, self-selected groups of clinicians "who may have financial incentives to overestimate their effort,” potentially a shaky foundation for setting prices across thousands of services.

MedPAC recommends collecting cost data from a cohort of efficient practices to establish more accurate payment rates, convening an independent expert panel to review fee schedule valuations, and adopting "site-neutral" payment rates that would eliminate the premium Medicare pays when the same procedure is performed in a hospital outpatient department rather than a physician's office. That premium currently gives hospitals a financial advantage in recruiting and acquiring physician practices.

That point was raised in a recent perspective article in The New England Journal of Medicine by Lawrence P. Casalino, M.D., Ph.D., a former MedPAC commissioner and 20-year primary care physician. Betty Rambur, Ph.D., R.N., FAAN, then Commission vice chair, revived a 2006 MedPAC proposal for an independent expert committee to review fee schedule valuation methods, calling it a necessary structural check on the outsized influence of the Relative Value Scale Update Committee, the American Medical Association panel that currently drives physician payment valuations.

APMs create more accountability, right?

Alternative payment models, including accountable care organizations under the Medicare Shared Savings Program, were designed to hold provider groups financially accountable for their patients' total spending, creating an incentive to eliminate unnecessary care.

In practice, after bonus payments, most APMs have not generated net savings for Medicare. The commission points to spending targets that inadvertently reward diagnostic coding and the selection of healthier patient panels rather than genuine efficiency. Specialists, who drive a large share of costs, remain largely disconnected from these models, and the bonuses that do flow to physicians in accountable care organizations tend to be too small relative to their fee-for-service revenues to change clinical behavior. At the April meeting, Commissioner Scott Sarran, M.D., MBA, argued that all three payment models reinforce a primary-care-centric structure that places an "unrealistic burden" on primary care physicians while failing to build the specialist-led, multidisciplinary teams that Medicare's aging, chronically ill population actually needs.

Is MA the solution?

Medicare Advantage, now chosen by 55% of Medicare beneficiaries, or 34.9 million people, receives monthly per-person payments adjusted for enrollees' recorded health conditions. MedPAC projects that in 2026, Medicare will pay MA plans $615 billion, an estimated $76 billion more than it would have spent had those same enrollees remained in traditional Medicare.

The gap stems primarily from two distortions:

• Favorable selection, in which plans attract healthier patients whose risk scores overstate expected costs
• Aggressive diagnostic coding, which inflates risk scores further

The commission projects that inaccurate risk scores will generate $22 billion in excess MA payments this year alone, even after a required coding adjustment is applied. Casalino, in his NEJM article, cited a MedPAC estimate that the agency provided $83 billion in MA overpayments in 2024, and he noted that insurers channel some of that money into acquiring physician practices.

The corporatization problem

The last point connects to what Casalino calls one of the most consequential and least-measured forces reshaping American medicine.

In the essay, "Physicians, Corporatization, and the Unmeasured Quality of Care," Casalino describes some of medicine's most important dimensions of quality: a clinician's ability to make a timely and accurate diagnosis, the trust built over years of caring for a patient, the professional judgment that guides a referral to just the right specialist.

Those cannot be captured by quality-measurement programs and therefore receive no financial reward. Society depends on physician professionalism to fill that gap. But as more physicians move into large organizations owned by hospitals, health insurers, and private equity firms, the conditions that sustain professionalism erode.

"Physicians who feel like widgets are more likely to behave like widgets," Casalino wrote. "Will widgets put patients first and provide high-quality care in areas in which quality isn't measured?"

His research found that while only one-third of physicians acted highly altruistically in economic experiments designed to measure it, the average physician was substantially more altruistic than members of the general public and considerably more altruistic than high-income, highly educated people in other fields. And more altruistic physicians, his research found, generated fewer potentially preventable emergency department visits and hospital admissions among their patients.

In an interview with Medical Economics, Casalino identified five converging pressures driving physicians out of independent practice:

• Lack of negotiating leverage with health insurers
• Administrative burdens that consume enormous time and staff resources
• Complexity of electronic health record systems
• Constant policy uncertainty
• Changing expectations about work-life balance among physicians coming out of training.

In his own primary care practice in California, he recalled two of the group's highest-paid employees spent nearly all their time seeking prior authorization approvals — not for procedures the practice would be paid to perform, but simply to refer patients to specialists.

He described the primary care crisis directly: "It's a tough time for primary care physicians."

In his NEJM article, Casalino proposed seven policy changes to address corporatization's negative effects, including stronger antitrust enforcement against physician practice consolidation, state-level bans on private equity ownership of medical groups, site-neutral Medicare payments, elimination of MA overpayments, reform of the 340B drug pricing program that subsidizes hospital employment of specialists, prohibition of contractual gag clauses that prevent physicians from reporting inappropriate corporate interference in patient care, and mandatory disclosure of practice ownership to patients.

MedPAC says it will continue studying Medicare payment and plans future analyses of spending trends, new tools to reduce low-value care in fee-for-service, and alternative methods for calculating MA payments. The commission's credibility on Capitol Hill, Casalino noted, spans party lines — congressional staffers from both parties regularly consult its work. "Congress actually sometimes listens," he said. "Sometimes it takes eight or nine years, but quite a few of the things MedPAC puts out there do become law."

What about drug prices?

MedPAC noted rapid growth of treatments of physician-administered drugs covered under Medicare Part B, which include treatments for cancer, macular degeneration, and arthritis. Adjusted for inflation, Part B spending per beneficiary rose 19% over the past decade. Physician-administered drugs within that category grew 8% per year in real terms from 2015 to 2023 — faster than any other component of Part B spending.

At the commission's April deliberations on the draft chapter, Commissioner Gregory Poulson challenged the report's framework for understanding that drug spending growth. He argued that price increases of 6% to 20% on existing drugs, and markups of 30% to 2,000% on replacement cancer agents, represent cost inflation, not clinical decision-making, and deserve a separate analytical lens.

In the June 2026 report, the Commission noted drugs “are nevertheless an important driver of spending and health outcomes,” but Medicare uses different payment approaches for drugs in FFS, APMs and MA, and past APMs generally have not targeted drugs. It is a topic for potential future work of MedPAC.

More to consider

The June 2026 analysis was the opening chapter of a 325-page report to Congress. Additional areas of consideration were:

• The complexity of Medicare enrollment decisions for beneficiaries
• Medicare payment operations and their role in identifying improper payments
• Estimated association between Medicare Advantage enrollment and hospitals’ and post-acute care providers’ finances
• Access to hospice and certain complex palliative services for beneficiaries with end-stage renal disease or cancer
• Assessment of the Medicare Ground Ambulance Data Collection System