Jackson Hammond is a Senior Policy Analyst at Paragon Health Institute. He has been active in the federal and state health policy space since 2017.
Prior to joining Paragon, Jackson was a health care policy analyst for American Action Forum (AAF). While at AAF, his work focused on payer issues including private insurance, Medicare, and Medicare Advantage. Furthermore, Jackson wrote extensively about the 340B Program and contributed to AAF’s research on a variety of drug pricing issues.
Mark Howell is a Research Assistant at Paragon Health Institute. He is passionate about advancing free-market solutions to improve healthcare access and affordability.
Every year, the Centers for Medicare and Medicaid Services (CMS) issues payment rules governing how Medicare pays for hospital services—in both inpatient and outpatient settings—and physician services, along with base payment rate changes. This Paragon PIC shows the cumulative changes in base payment rates across hospitals and physicians over the past decade. These base rates are the starting point for calculating Medicare payments, but actual payments for each service can vary significantly based on numerous additional factors.
The primary base hospital payment rate for inpatient services—known as the Inpatient Prospective Payment System (IPPS) operating base rate—has increased by 30 percent since 2016, mainly because of statutory formulas. The outpatient services base rate—known as the Outpatient Prospective Payment System (OPPS) conversion factor—has increased by 26 percent since 2016, also mainly because of statutory formulas. Meanwhile, the physician base payment rate—known as the Physician Fee Schedule (PFS) conversion factor—has declined by 7 percent over the same period.
The declining PFS conversion factor and the rising hospital base rates are not an accident but a result of policy choices made by Congress. From 2020 through 2025, changes to the PFS made in the Medicare Access and Chip Reauthorization Act (MACRA) of 2015 kept the PFS conversion factor flat. These provisions were designed to offset concerns about excessive spending growth and to fund other payment reforms, including performance-based bonuses. Since 2020, Congress has often adjusted the PFS conversion factor above what was authorized in MACRA, most recently as part of the One Big Beautiful Bill where Congress provided a one-year 2.5 percent increase to the PFS conversion factor. By comparison, the way the statutory formulas for hospital base rates are constructed and the inputs they use have led hospital base rates to consistently increase year-over-year.
This decline in the PFS conversion factor does not mean that physicians are being compensated less for a given service than they were in the past. Physician payments are calculated by adjusting the conversion factor to reflect the amount of time, effort, and resources involved in each service as well as other inputs including geographic adjustments, provider type, and performance bonuses. Changes in payments vary by specialty and service.
While the amount of the physician base payment rates has declined, total Medicare spending on physician services continues to grow due to enrollment growth, increased utilization, and other factors. Like payment amounts, spending growth varies across different services and specialties.
Controlling Medicare spending is important and significant differences in the growth of base rates because of policy choices create government-induced distortions. Policymakers should examine if the current trends in base rate growth for hospitals and physicians financially advantage hospitals and contribute to provider consolidation that raises prices for patients and taxpayers.
To reduce distortions, hospital payments in Medicare should be subject to similar fiscal sustainability pressures as physician payments. Policymakers should consider proposals that address distortions and, in particular, site neutral payment policies that equalize payments for the same services across all providers.
Every year, the Centers for Medicare and Medicaid Services (CMS) issues payment rules governing how Medicare pays for hospital services—in both inpatient and outpatient settings—and physician services, along with base payment rate changes. This Paragon PIC shows the cumulative changes in base payment rates across hospitals and physicians over the past decade. These base rates are the starting point for calculating Medicare payments, but actual payments for each service can vary significantly based on numerous additional factors.
The primary base hospital payment rate for inpatient services—known as the Inpatient Prospective Payment System (IPPS) operating base rate—has increased by 30 percent since 2016, mainly because of statutory formulas. The outpatient services base rate—known as the Outpatient Prospective Payment System (OPPS) conversion factor—has increased by 26 percent since 2016, also mainly because of statutory formulas. Meanwhile, the physician base payment rate—known as the Physician Fee Schedule (PFS) conversion factor—has declined by 7 percent over the same period.
The declining PFS conversion factor and the rising hospital base rates are not an accident but a result of policy choices made by Congress. From 2020 through 2025, changes to the PFS made in the Medicare Access and Chip Reauthorization Act (MACRA) of 2015 kept the PFS conversion factor flat. These provisions were designed to offset concerns about excessive spending growth and to fund other payment reforms, including performance-based bonuses. Since 2020, Congress has often adjusted the PFS conversion factor above what was authorized in MACRA, most recently as part of the One Big Beautiful Bill where Congress provided a one-year 2.5 percent increase to the PFS conversion factor. By comparison, the way the statutory formulas for hospital base rates are constructed and the inputs they use have led hospital base rates to consistently increase year-over-year.
This decline in the PFS conversion factor does not mean that physicians are being compensated less for a given service than they were in the past. Physician payments are calculated by adjusting the conversion factor to reflect the amount of time, effort, and resources involved in each service as well as other inputs including geographic adjustments, provider type, and performance bonuses. Changes in payments vary by specialty and service.
While the amount of the physician base payment rates has declined, total Medicare spending on physician services continues to grow due to enrollment growth, increased utilization, and other factors. Like payment amounts, spending growth varies across different services and specialties.
Controlling Medicare spending is important and significant differences in the growth of base rates because of policy choices create government-induced distortions. Policymakers should examine if the current trends in base rate growth for hospitals and physicians financially advantage hospitals and contribute to provider consolidation that raises prices for patients and taxpayers.
To reduce distortions, hospital payments in Medicare should be subject to similar fiscal sustainability pressures as physician payments. Policymakers should consider proposals that address distortions and, in particular, site neutral payment policies that equalize payments for the same services across all providers.
Jackson Hammond is a Senior Policy Analyst at Paragon Health Institute. He has been active in the federal and state health policy space since 2017.
Prior to joining Paragon, Jackson was a health care policy analyst for American Action Forum (AAF). While at AAF, his work focused on payer issues including private insurance, Medicare, and Medicare Advantage. Furthermore, Jackson wrote extensively about the 340B Program and contributed to AAF’s research on a variety of drug pricing issues.
Mark Howell is a Research Assistant at Paragon Health Institute. He is passionate about advancing free-market solutions to improve healthcare access and affordability.
