Traditional Medicare Provider Payment – General

Traditional fee-for-service Medicare uses several payment systems to pay providers for services in the traditional program: 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 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. With episode-based payment, a single payment is made for all services provided during a specified episode. As with prospective payment, the amount depends on the patient’s diagnosis. With fee-schedule payment systems, providers are paid a set amount for each service they provide (for more on payment in Medicare, see Value-based purchasing). 

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

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. Beginning in 2026, providers qualifying for the advanced APM path will receive larger annual payment updates than providers who do not. Most physicians and health professionals who do not qualify for the 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. CMS began measuring clinicians’ performance in 2017. Payments based on those measures began in 2019. 

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. 

The Medicare Payment Advisory Commission is required to monitor physician payment rates. The commission has concluded that Medicare beneficiaries have good access to physicians and that most physicians are willing to accept Medicare’s standard fees as full payment. A small proportion of physicians (about 1 percent of non-pediatric physicians) opt out entirely from Medicare and see Medicare patients only under private contracts (see also this chapter’s section on Traditional Physician Balance Billing and Private Contracting). 

Some physicians who accept Medicare have adopted “boutique medicine” or “concierge care” arrangements. 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 practices 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.