End the Annual Medicare Doc Payment Cuts

Doctors facing yet another Medicare payment cut—this one set to take effect in January—have a prescription for Congress: fix this broken payment model.

So far, it’s just been band-aids. The Center for Medicare and Medicaid Services (CMS), the agency that runs Medicare, has proposed payment cuts for five years in a row, only to be blocked or modified by Congress. Even so, under current law, the trajectory of Medicare physician payment slants downward. The latest payment rule, if finalized, would cut the average Medicare physician payment next year by 2.8 percent.

While CMS is continuing to cut Medicare doctors’ payment, the physician workload is getting much heavier. Medicare enrollment is projected to jump from roughly 67 million today to over 80 million in 2033. According to an American Medical Association estimate, adjusting for practice cost inflation, Medicare physician payment has already declined by 29 percent over the period 2001 to 2024.

Worse, we face a shortage of 86,000 doctors by 2036. While today almost all doctors take Medicare patients, an increasing number of the ones we already have are refusing to take new Medicare patients. A 2022 California Medical Association survey revealed that 70 percent of the Golden State’s doctors are limiting their Medicare practice. Likewise, a 2023 Medscape survey reports that only 65 percent of American physicians say they will take new Medicare patients. The main reason: the reimbursement does not ”cover the cost” of providing care to Medicare patients.

Make no mistake. Medicare and its payment structure is an iconic example of government central planning, price controls and bureaucratic governance. Doctors have to navigate reams of government red tape to participate and get paid. They deal with a massive volume of Medicare paperwork, rules, regulations, and reporting requirements.

Not surprisingly, almost half of all physicians have experienced symptoms of “burn out.” Medicare is not solely responsible, of course, but as the nation’s largest payer, it contributes a lot at the doctor’s office.

Medicare’s Board of Trustees has routinely warned Congress that its physician payment is inadequate. Next year, they report, physician bonuses will be cut $500 million; and in 2026, they will be cut another $500 million.

Moreover, say the Trustees, “the law specifies the physician payment updates for all years in the future, and these updates do not vary based on underlying economic conditions, nor are they expected to keep pace with the average rate of physician cost increases.” The result, the Trustees warn, would be a decline in Medicare patients’ access to quality care.

Medicare physician payment—flawed in theory and practice since the 1990s—has been an epic federal policy failure. Reforming this broken system will be a huge task. Lawmakers should intervene before the 2025 cuts go into effect by replacing the cuts with a temporary stop-gap payment update and buy time to undertake a more comprehensive overhaul of this overly bureaucratic system.

One option being proposed is indexing the annual physician payment update to the Medicare Economic Index (MEI), measuring medical practice cost inflation. For 2025, that would amount to a 3.6 percent increase. Not surprisingly, the American Medical Association strongly favors that option, and bipartisan legislation (H.R. 2474) would enshrine it in law.

Obviously, the MEI proposal would reverse annual payment cuts, but it would not restrain Medicare’s rapid spending growth, a big driver of annual deficits and increasingly dangerous debt. A milder alternative, proposed by the Medicare Payment Advisory Commission (MedPAC), a panel advising Congress, would update annual physician payment with an increase equal to 50 percent of the MEI.

In the short term, striking the right balance between slowing Medicare spending with a more prudent Medicare payment update is crucial. But in the long term, securing a stable and fiscally healthy Medicare program will require a comprehensive, market-based solution that will secure high quality health care at an affordable cost for patients and taxpayers alike.

In the meantime, as a third alternative. Congress should consider the Chained-CPI (C-CPI) to update annual Medicare payment as a temporary measure.

The Consumer Price Index (CPI) is a common metric of inflation. But, as the Congressional Budget Office (CBO) reports, C-CPI is a better than CPI because it accounts for month-to-month changes in consumer preferences, capturing the dynamism of consumers’ response to pricing pressures.

While CMS is proposing a 2.8 percent payment cut, it is noteworthy that the C-CPI increased 2.8 percent over the last 12 months. Under a C-CPI update, Medicare doctors would be substantially better off than under this dysfunctional status quo until more comprehensive reform can be adopted.

Reforming the complex Medicare payment system is an enormous legislative task, realigning lots of moving parts. But lawmakers should first stop the bleeding.

Robert E. Moffit is a Senior Fellow in the Center for Health Policy at The Heritage Foundation.