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Are Medicare Payment Adjustments Exacerbating Physician Shortages?

Healthcare analysts have focused a lot of attention on the physician shortage in the US, especially after the passage of the ACA, which increased insurance coverage and demand for services. One interesting resource the Centers for Medicare & Medicaid Services (CMS) makes publicly available is its Market Saturation and Utilization Tool, which can reveal insights about provider distribution. The tool was recently updated to include data on physical therapy, a specialty which, according to multiple reports, also faces a looming provider shortage. A review of the data available through the tool, as well as reimbursement statistics from Definitive Healthcare, suggests that Medicare rates could be exacerbating the problem by driving providers to higher-paying areas.

In the typical labor market, a greater demand for services pushes wages upward as companies hire more employees to increase production capacity, competing with each other to hire a limited supply of workers. Likewise, if an area exhibits high demand for specialty care, it should attract specialty physicians to the locality. However, as has been well documented, the healthcare market is anything but typical, and reimbursement data for physical therapy providers shows that the physicians with the most patients, reflecting a higher demand for services, tend to be reimbursed less per service than those with fewer patients. When ranking each state by average per procedure payment for the top five most common physical therapy services combined in 2014, higher-ranking states usually had lower per-physician patient volumes, as demonstrated by the negative trend line.

Source: Definitive Healthcare and CMS

The phenomenon is partially attributable to CMS’ payment system. Medicare primarily reimburses physicians through the Physician Fee Schedule, an annually updated list of payments for specific services. Each payment is subject to an adjustment that determines the cost of delivering each service, known as the Geographic Practice Cost Index (GCPI). The adjustment itself identifies three price determinants that

vary by location: Physician Work (compensation), Practice Expense, and Malpractice Insurance. Physician Work represents the prevailing wage and Practice Expense is the cost of office rent, staff salaries, equipment, and purchased services. In 2014, the two categories were given the heaviest weight for the GCPI at slightly more than 48 and 47 percent, respectively, with Malpractice Insurance taking up the remaining 4.3 percent.

While the Practice Expense and Malpractice Insurance adjustments are relatively straightforward to calculate, Physician Work poses a unique problem, as Medicare payments are a significant source of physician revenue, and basing the rate on the prevailing wage of physicians would produce circular results. Instead, CMS employs a wage index derived from the average income of other professional occupations in the area with high education demands like lawyers, architects, engineers, and computer scientists. As a result, no matter how many physicians may live in the area, a significant portion of Medicare reimbursement follows the labor market trends of other occupations, rather than the supply of and demand for physician services. Studies suggest that the effect is not limited to specialties serving predominantly Medicare patients, as many commercial insurers use Medicare as the basis of their payments and follow CMS reimbursement changes accordingly.

It’s also worth noting that the geographic distribution of physicians isn’t dependent entirely on relative wages, but physician preferences. According to a white paper from medical staffing company Merritt Hawkins, 67 percent of all first-year medical residents wanted to set up practices in communities of 250,000 people or larger, which tend to be more densely populated areas and have correspondingly higher Medicare reimbursements. Non-financial preferences are another reason CMS uses a wage index of other occupations, which should incorporate important living considerations like area schools, entertainment, and other local amenities. In addition, most medical schools are also located in metropolitan areas, and students often practice in the area where they trained after graduation.

CMS is aware of the Physician Work modifier’s effect on regional physician distribution. CMS recalculates its GCPI adjustments every three years, and reports from study groups commissioned to evaluate the program make clear that the Physician Work adjustment could be used to combat physician shortages in some areas, but believe that the strategy is better suited to a separate initiative. Such an initiative, the Health Professional Shortage Area Physician Bonus Program has been in existence since 1992, and in its most current form, gives a 10 percent reimbursement bonus on all Medicare services to providers in specific areas. However, it only applies to vital medical specialties like primary care, dental services, and mental health. In addition, its overall effectiveness is unclear and subject to criticism, so it may not be an ideal solution for other medical specialties. Even so, when so many specialties are facing future provider shortages, encouraging redistribution of existing physicians could be a worthwhile program in combination with other initiatives to increase the country’s physician training capacity.

Definitive Healthcare has the most up-to-date, comprehensive and integrated data on over 7,700 hospitals, 1.4 million physicians, and numerous other healthcare providers. Our databases include detailed information on inpatient and outpatient procedures at hospitals and clinics, including total charges, volume, and Medicare and commercial payments.

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