At the end of last year, all eyes were on Congress to get the government funded by Christmas. But within the executive branch and to much less fanfare, Medicare had already finished enacting its annual payment rules weeks before. Absent congressional tinkering, these regulations will dictate how much the program pays health care providers and insurers in 2025. These updates are usually quite technical, but they can still inspire intense lobbying interest and potentially fervid backlash in the health care industry. Figure 1 displays the cumulative changes in Medicare payment rates for select providers since 2016. These trends are key to understanding some of today’s biggest health care policy debates and where policymakers can focus future efforts at cost containment: Hospitals and post-acute care providers have been the big winners over the past decade, MA plans have seen recent headwinds, and physicians have been the clear losers.
MACRA was the result of numerous successive efforts to control physician spending – it established a schedule of low-to-nonexistent rate updates in exchange for repealing significant pay cuts scheduled under the previous payment formula. These policies reversed the trend of large physician price hikes in the early years of the Medicare program, but have raised concerns about how to balance spending, access to care, and payment accuracy in Medicare going forward. A Doc Fix for 2025 has not materialized yet, but several lawmakers have made it clear that they wish to revisit MACRA in favor of a more politically sustainable approach that does not require regular legislative intervention.
It is important to note that payment rates are only one part of the formula for total payments – growing volume and intensity (i.e., complexity) of care has enabled growing clinician spending even in the face of stagnating rates per-procedure.
Hospitals
Controlling Medicare spending on clinical services has many benefits, but failure to do so across the board can distort the health care sector and lead to harmful outcomes. For example, hospitals account for the biggest share of U.S. health expenditures. Medicare pays for inpatient and outpatient hospital services under two separate payment systems, which have both seen consistent increases over time (Figure 1 averages the percentage rate changes in these payment systems for simplicity). While outpatient hospital services tend to be far less expensive than inpatient hospital services, outpatient services in a hospital are twice as expensive as those in a physician office on average.
The growing disparity in Medicare payment rates between independent physician practices and hospitals is a key reason why more physicians now work for hospital systems, which get higher Medicare payments, can offer more consistent compensation, and take on the fixed and administrative costs that practices must otherwise bear themselves. Hospitals take advantage of this arrangement by acquiring more practices and rebranding them as “off-campus” outpatient departments that receive hospital rates. Site-neutral payments, which establish equal Medicare payment rates for the same services to the same patients, regardless of the setting of care, would be a simple remedy to combat the incentives for consolidation while reducing costs to patients and taxpayers.
Post-Acute Care
Medicare has four separate post-acute care payment systems for long-term care hospitals (+23 percent increase in payment rates since 2016), skilled nursing facilities (+31 percent), inpatient rehabilitation facilities (+24 percent), and home health agencies (+24 percent). Figure 1 displays the simple average of the cumulative changes in these payment rates, which yields a 25 percent increase since 2016, the biggest pay hike in this figure. There have been various proposals to reform the substantial payment rates for post-acute care: past presidential budgets have suggested greater bundling or establishing a unified payment system, while the Medicare Payment Advisory Commission regularly recommends cutting these payment rates.
Medicare Advantage
The final trend to note is with Medicare Advantage (MA). This refers to average government payments to MA plans (which are technically not proposed and finalized through regulation but through a similar rate announcement process). While its payment updates were historically similar to those received by hospitals and post-acute care providers, the final two rate announcements of the Biden administration included pay cuts that left the cumulative increase in average payment rates at 18 percent. Over that same time frame, the administration also finalized numerous other new regulations on MA plans in areas like marketing and prior authorization.
The recent impetus to reduce payments for MA plans is tied closely to a broader debate about how much MA costs relative to traditional Medicare. For our part, Paragon has proposed statutory changes to MA to improve program efficiency and reduce government spending coupled with more flexibilities (rather than restrictions).
Conclusion
Medicare is one of the biggest drivers of federal spending and greatly influences the health care sector overall. While cost containment efforts have taken shape in some aspects of payment policy, policymakers need to take a comprehensive view on controlling Medicare spending rather than focusing on some providers and payers but not others. Doing so would help contain costs for patients, taxpayers, and the health care sector overall.
