Americans prefer independent physician practices over corporate-owned hospitals by nearly a five-to-one margin. But despite patient preference, only 18% of physicians are practicing medicine in physician-owned settings, a new low amid high rates of hospital consolidation.
Why is independent medicine disappearing, despite its popularity? Government policy is a significant part of the problem. Medicare’s payment system leaves independent physicians dependent on reimbursement rates set in Washington, and those payments are repeatedly subject to scheduled reductions and temporary congressional fixes even as the cost of running a medical practice rises.
That is a poor substitute for a functioning health care market. As government health programs like Medicare have expanded, patients and physicians have less freedom to determine the value of care themselves. Independent practices instead have to make basic business decisions around payment rates established by the federal government. When those rates fall short of the cost of providing care, providers may determine that they are better off joining large hospital systems and patients may end up with fewer independent options.
Americans may not care about the mechanics of Medicare reimbursement, but they do care about having access to independent providers. Congress now has an opportunity to improve the way Medicare pays the independent practices patients prefer through certain provisions of the Patients First Act.
The Patients First Act would replace some of Medicare’s recurring stopgap physician-payment fixes with annual reimbursement updates tied to changes in the cost of running a medical practice. That would make the government’s payment formula better reflect the actual cost of providing care.
In a truly market-based health care system, Washington would not be deciding what doctors should be paid in the first place. Patients and physicians would have far more freedom to determine the value of care themselves. But as long as the federal government sets Medicare reimbursement rates, those rates should not make it harder for patients to continue seeing independent physicians.
The Patients First Act does not move us closer to a market-based healthcare system, but it would make Medicare’s existing physician payment system less damaging to independent practices and patient choice. Still, improving physician reimbursement should not become an excuse to expand government spending. In the short term, higher reimbursement will cost money, and Congress should offset that cost rather than simply adding it to Medicare’s tab.
Ensuring that the bill works for taxpayers requires a two-part approach: fix the provisions in the Patients First Act that could unnecessarily increase spending, and find savings elsewhere in Medicare to help cover the cost.
One provision in particular needs work. The Patients First Act would automatically raise over time the amount of new physician spending Medicare can absorb before requiring savings elsewhere. A one-time adjustment may be reasonable, but automatically loosening that spending restraint on top of new annual physician payment increases goes too far.
Without offsets elsewhere in Medicare, that additional spending would ultimately have to be covered by taxpayers and beneficiaries, adding to the program’s already mounting fiscal burden.
Congress should look to other areas of Medicare where Congress could reduce wasteful spending and use those savings to help pay for physician payment changes.
Site-neutral payment reform is an obvious place to start.
Today, Medicare can pay more for certain services when they are delivered through a hospital-owned practice than when the same service is delivered by an independent physician. MedPAC has warned that this difference can encourage hospitals to acquire physician practices because hospital ownership can unlock higher Medicare payments. Site-neutral reform would reduce those differences for appropriate services, saving Medicare money while removing an incentive that works against the very independent practices Congress is trying to preserve.
Congress should also look at cutting waste, fraud, and abuse in Medicare Advantage, a program that allows beneficiaries to receive Medicare coverage through private insurance plans paid by the federal government.
Medicare pays private Medicare Advantage plans more to cover patients who are documented as sicker. During health assessments, plans can add diagnoses that increase those payments, even when there is no other medical record showing the condition was evaluated or treated. In 2023, the Department of Health and Human Services inspector general found that diagnoses appearing only on these assessments and related chart reviews generated an estimated $7.5 billion in Medicare Advantage payments.
Reforming the incentives that lead to this waste, fraud, and abuse could unlock billions of dollars to help finance physician-payment reform.
Congress should not respond to one government-created distortion by creating another. If lawmakers are going to improve Medicare physician payments, they should pair those changes with reforms that reduce unnecessary federal spending elsewhere in the program.
Ultimately, preserving independent medicine requires giving patients and physicians more control over health care decisions and reducing the distortions created by government payment policy. The Patients First Act will not create that kind of market-based system. But Congress can improve the legislation by keeping the physician-payment reforms that better reflect the cost of care, removing provisions that unnecessarily expand spending, and paying for the changes through reforms such as site-neutral payments and Medicare Advantage.
Charles Sauer is president of the Market Institute.
