MedPAC outlines rationale for new physician pay formula for Medicare

_{© Medicare Payment Advisory Commission}

Congress needs a new calculation to determine how much doctors should be paid for treating Medicare beneficiaries, according to the Medicare Payment Advisory Commission (MedPAC).

On June 12, MedPAC has published “Medicare and the Health Care Delivery System,” its June 2025 Report to Congress. The commission made two unanimous recommendations regarding physician payment:

• The Congress should replace the current-law updates to the Medicare Physician Fee Schedule with an annual update based on a portion of the growth in the Medicare Economic Index (MEI) (such as MEI minus 1 percentage point).
• The Congress should direct the secretary to improve the accuracy of Medicare’s relative payment rates for clinician services by collecting and using timely data that reflect the costs of delivering care.

AMA voices support

The concept of tying physician reimbursement to the MEI is not necessarily new — the commission members have discussed it for months and recommended doing so in its March 2025 Report to Congress.

Even so, the change would be “a major overhaul to how Medicare updates physician payments,” according to the American Medical Association (AMA), which is supporting the new calculation method.

“This is a pivotal moment for Medicare payment reform,” AMA President Bobby Mukkamala, MD, said in a news release. “MedPAC recognizes that continuing with inadequate updates is unsustainable. Linking payments to the actual cost of providing care is essential to ensure that patients can access the services they need.”

Based on dollars and cents, AMA has argued physician payment has dropped by 33% from 2001 to 2025. Practice costs are increasing 3.5% this year, but a 2.83% decrease in payment went into effect in January. Since then, members of Congress have introduced legislation to reverse that and add a 2% increase; those bills remain pending.

The long-term view

The March recommendation was for 2026, so the June 2025 report expands on longer-term reform to the updates in the Medicare Physician Fee Schedule, and the need for future review.

“Specifically, this chapter contemplates what default updates should be for future years,” the report said. “Changes to default PFS updates would not obviate the need for continued monitoring of access but instead would set default updates at a level the Commission determines is adequate, in the aggregate, to ensure continued beneficiary access to care, given current knowledge. The Commission will continue to monitor trends in access to clinician care and, to the extent needed, recommend higher or lower updates in the future as part of its annual payment-adequacy analysis.”

In his statement, Mukkamala praised MedPAC for the longer approach.

“For those who study Medicare — such as the experts at MedPAC — and those of us on the front lines of health care, this is a pivotal agreement on the path toward Medicare payment reform,” Dr. Mukkamala said. “It just makes sense that payment must keep pace with increasing costs as it does for hospitals. The AMA appreciates that MedPAC sees it that way as well and has been responsive to physicians on the front lines.”

A tough financial future

Without a change, it appeared physicians could expect practice expenses to outpace Medicare payment for coming years.

The current plan, starting in 2026, physician payment would increase 0.75% a year for those participating in advanced alternative payment models, and by 0.25% for all other clinicians. MEI projects clinician costs to rise an average of 2.2% a year from 2025 through 2034.

The gap between the reimbursement and practice expenses is greater than during the time before the COVID-19 pandemic, according to MedPAC, and that could lead to a bad effect on patients.

“This larger gap between input cost and payment-rate growth could create incentives for clinicians to reduce the number of Medicare beneficiaries they treat, stop participating in Medicare entirely, or vertically consolidate with hospitals, which could increase spending for beneficiaries and the Medicare program,” the MedPAC report said.

Benefits of a new formula

If enacted, the PFS reimbursement would be based on a measure of inflation below full MEI growth, such as MEI minus 1%. That would have some benefits:

• Reimbursement would automatically adjust to changes in inflation.
• It would improve predictability for physicians and other clinicians, beneficiaries, and policymakers.
• It would be simple to administer across the board to all PFS services.
• It would balance beneficiary access with beneficiary and taxpayer financial burden.

There would be a price tag for the change: up to $30 billion more in spending estimated over five years, as compared with current law. There also would be increases in beneficiary premiums and cost-sharing liabilities, the report said.

Hit the floor

Congress also could consider pairing an update formula with a minimum update floor or an update ceiling.

For an update floor, the Commission used the example of setting it at 0%, meaning updates could not be negative in times of low inflation. That may seem unlikely in today’s economy, but from 2001 to 2020, an update of MEI minus 1% would have led to negative updates in 2009, 2010, 2011 and 2012, the report said.

A cap on expenses

An update ceiling would put a brake on reimbursement during times of rapid inflation. For example, if MEI were to grow at 6% a year, an update of MEI minus 1% would result in a 5% increase. But a ceiling of 75% of MEI growth would lead to an increase of 4.5%, equal to 6% x 0.75.

“Such an update would still cover the growth in practice expenses and limit the financial burden on beneficiaries and taxpayers,” the MedPAC report said. “From 2000 to 2023, a 75% ceiling would only once (in 2022) have reduced an update that was based on MEI minus 1 percentage point and, based on projections of MEI growth, would not affect such updates through 2034.

“Nevertheless, a ceiling could be a useful policy tool to reduce unnecessarily high updates if MEI growth is higher than currently projected,” the report said.