Traditional Medicare Provider Payment – General

Traditional Medicare (also called Original Medicare) uses several payment systems to pay providers for services: prospective, episode-based, and fee-schedule payment systems. Congress defines the payment systems. The Centers for Medicare & Medicaid Services designs the payment mechanisms within the legal framework.

Under a prospective payment system, providers get a predetermined amount based on the patient’s diagnosis or health conditions and other factors that affect providers’ costs, such as local wage levels. The amount is intended to reflect the average cost of providing services to patients with a similar diagnosis or health conditions, such as an inpatient hospital. With episode-based payment, a single payment is made for all specified services provided during a specified episode of care, such as a 30-day home health care episode. As with prospective payment, the amount depends on the patient’s health care needs. With fee-schedule payment systems, providers are paid a set amount for each service they provide, such as an office visit or a diagnostic test. Medicare also uses and tests other payment models that combine features of fee-schedule and episode payment to include financial incentives based benchmarks for costs of episodes outcomes reflecting quality (see alsoValue-based purchasing).

Medicare sets payment rates for most physician services according to a fee schedule. That schedule is based on certain work factors, including the time, skill, and intensity required for appropriate medical care, in addition to other practice expenses and malpractice costs. Nurse practitioners, certified nurse-midwives, physician assistants, and other health professionals also bill from the physician fee schedule. They are similarly affected by the issues and policies discussed here.

Medicare payments to physicians and other health professionals are adjusted for differences in geographic costs. Additionally, physicians who provide services in locations designated as health professional shortage areas receive a 10 percent bonus payment for Medicare-covered services. An objective of these bonus payments is to attract more physicians to geographic areas that are underserved by health professionals.

The Centers for Medicare & Medicaid Service (CMS) developed the Quality Payment Program to create incentives to encourage quality and efficiency following a mandate to do so from Congress. Beginning in 2019, physicians and other eligible clinicians who receive a specified amount of revenue from a qualifying advanced alternative payment model (APM), such as a qualifying accountable care organization, are eligible for additional annual payments. In addition, beginning in 2026, clinicians qualifying for the advanced APM path will receive larger annual payment updates than clinicians who do not. Most physicians and health professionals who do not qualify for the advanced APM pathway are paid under the Merit-based Incentive Payment System (MIPS). In MIPS, performance measures are used to determine a positive, negative, or neutral adjustment to each eligible clinician’s payments. Several organizations have been critical of the MIPS program, including the Medicare Payment Advisory Commission (MedPAC), which has raised concerns regarding its complexity, burden, ineffectiveness, and focus on process over outcomes.

The Affordable Care Act requires the Centers for Medicare & Medicaid Services (CMS) to review the system for assigning relative payment rates for physician services. CMS must identify those services that may be overvalued. Overvaluation may create incentives for doctors to provide more of these services. This drives up spending. Primary care services have historically been undervalued, which has prompted some doctors to choose other specialties. Advanced Practice Registered Nurses are becoming more common in primary care settings, helping to meet some of the increasing demand.

MedPAC is required to monitor physician payment rates. The commission has concluded that Medicare beneficiaries have good access to physicians and that the overwhelming majority of physicians are willing to accept Medicare’s standard fees as full payment. Only a small proportion of non-pediatric physicians (about 1 percent of non-pediatric physicians) opt out entirely from Medicare and see Medicare patients only under private contracts (see alsoMedicare—Traditional Physician Balance Billing and Private Contracting).

However, a lower proportion of psychiatrists are accepting new Medicare patients than other specialist physicians. A 2022 survey found that among psychiatrists who were taking new patients, only 81 percent accepted new Medicare patients.

Some physicians who take Medicare have adopted “boutique medicine” or “concierge care” arrangements (sometimes also referred to as “membership” practices). These require patients to pay an extra fee (typically on an annual basis) for services not covered by Medicare. Those not paying the extra fee may no longer be able to see the doctor. Doctors adopting such arrangements say they are able to devote more attention to the patient and offer additional services. Critics argue that these arrangements discriminate against people who may be unable to pay the extra fee and may make it more difficult for people to get access to physician care unless they join one of these practices.