Doctors claim they can’t seem to catch a financial break as inflation puts a squeeze on earnings, which is exacerbated by the widening gap between the rising cost of healthcare delivery and stagnating Medicare reimbursements.
Data points out healthcare prices grew faster than other components of the economy, rising by 3.3% between 2001 and 2021, unlike all goods and services, which only expanded by 2.2% during the same period.
However, the Bureau of Labor Statistics (BLS) data shows health insurance experienced a yearly rise of 28% in September 2022, higher than the inflation rate of 8.2%. Moreover, although health prices traditionally outpace inflation, the consumer price index (CPI) grew by 3.5% in March 2024, while medical prices rose by only 2.2%.
So, does this prove doctors are better off? Not really.
There seems to be a downward spiral of doctors’ earnings, with a study pointing to a 24.9% decrease in inflation-adjusted reimbursements to radiologists per beneficiary between 2005 and 2021. This article provides an in-depth analysis of the effect of inflation on Medicare reimbursements and its contribution to impoverishing doctors.
The Rising Cost of Healthcare Delivery
The government uses the Medicare Economic Index (MEI) as a measure of inflation in medical practice costs. 2024’s adjustments in reimbursements (effective 7/1/2024) raised the MEI percentage to 4.7%, up from 3.8% in 2023. This is the highest MEI percentage this century.
The American Medical Association (AMA) compared the rise in physician payments to inflation and found it declined 29% between 2001 and 2024. This proves payments are not keeping up with practice cost inflation.
Physicians’ payments do not match inflation
Source: https://www.ama-assn.org/system/files/2024-medicare-updates-inflation-chart.pdf
This is in stark comparison to other health professionals who have their annual increases based on MEI. If that were to apply to physicians, they would have seen their payments increased by 4.6%, not reduced by 4.7%.
John Corker, MD, emergency physician, put it succinctly:
“…over about the last quarter-century, doctors’ offices and physician practices have been dying a slow death by a thousand paper cuts as it pertains to Medicare reimbursements.”
From 2001 to 2021, physicians’ pay dropped by 1.1% per year on average, for a cumulative decline of 20%. The pay diminished a further 4% (adjusted for inflation) between 2021 and 2023.
Medicare payments compared to inflation (2001 to 2021)
Source: https://www.ama-assn.org/system/files/medicare-pay-chart-2021.pdf
By comparison, the CPI grew by 3.5% in March 2024 year-over-year (YoY) compared to a 2.2% rise in medical care prices. This does not follow the usual trend as medical care prices typically outpace the CPI historically.
Increased costs of medical equipment, supplies, and technology
The cost of inpatient and outpatient hospital and related services (7.7%) and nursing homes (3.9%) rose higher than physicians’ services (0.7%) and prescription drugs (0.4%). By 2021, an estimate shows the average pharmaceutical supply costs increase by nearly 12% annually ($10.21 million per hospital in 2014 vs. $18.4 million in 2021).
Medical surgical costs increased by about 6.5% on average between 2017 and 2021. Digging deeper, the costs went up by 3% between 2019 and 2020 compared to a 10% increase between 2020 and 2021.
Rising cost of medical and surgical supply costs
Source: https://www.definitivehc.com/resources/healthcare-insights/changes-in-supply-costs-year-to-year
This is impactful since medical and surgical supply costs make up about 35% of all hospital supply expenses. Moreover, the Centers for Medicare and Medicaid Services (CMS) predicted that hospital provider spending will increase by 50% between 2022 and 2030.
The impact of inflation on operational expenses
While supply and labor costs are rising, hospital margins continue to shrink. The AMA notes that the cost of running a medical practice between 2001 and 2021 grew by 39% (1.6% increase yearly increase), while the MEI leaped by 51% during the same period (2.1% annually).
With inflation still some way above ideal levels, hospitals are struggling to maintain staffing levels. Further, healthcare workers’ incomes were at a 4.5% deficit compared to national income levels in 2022. This has contributed to a nursing shortage estimated to run well into the near future.
Nursing shortage projections
Source: https://kpmg.com/kpmg-us/content/dam/kpmg/pdf/2023/the-impacts-of-inflation.pdf
Healthcare labor costs per adjusted hospital discharge increased by 25% between 2019 and 2022, with services at 16%, supplies at 18%, and pharmaceuticals at 21%. Labor costs still remain high, which could lead to a 10-20% deficit in registered nurses and a 6-10% shortage in doctors by 2025.
The Labor shortages could lead to a decline in health systems and cause access risks because of increased wait times and site-of-care closures. John Corker, MD, observed:
“…Doctors are forced to make difficult decisions about what days they can be open, what staff…they can afford to pay, and…what services they can provide for their patients.”
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The Stagnant Medicare Reimbursement System
The Biden administration slashed 2024 Medicare reimbursements by 1.25% from a year ago. This included a 3.4% decrease in the conversion factor. Keen observers would have noted this follows in the steps of a 2% reduction in physicians’ payments in 2023.
Data shows that health insurance prices in September 2022 had grown by 28% from the previous year, while inflation growth was only 8.2%. It came as no surprise when the shares of health insurers fell by 6% and 12% in April 2024 when announcements for the Medicare Advantage payments by the government signaled a cut in 2025 rates.
The rates were only a 0.2% drop from the previous rates but were enough to trigger suspicions of a margin squeeze from an industry grappling with high medical costs. Insurers are under pressure to lower the number of benefits due to the low rates and high costs.
How did we get here?
The formulas used to determine the prices of healthcare services are not only used to determine the prices in the prevailing year but are also used to update prices over time. In short, each year’s update is determined using projected changes in the “market basket index,” which is usually finalized in Q2 of the preceding year.
This quirk in price planning means projection errors sometimes occur and are often not accounted for when determining the payment updates. Failure to fix the error results in lower payments and creates a domino effect of lower prices in subsequent years.
For instance, the market basket increase projections for 2021 (made before the spiraling inflationary trends experienced at the back end of 2020) were determined at 2.4%, but the actual increase was 3.1%. The following year (2022), the projections of 2.7% were also made in Q2 2021 (during periods of relatively low inflation), yet the actual market basket increase was higher than 4.1%.
Projected vs actual market basket changes
Remarkably, the market basket projections between 2009 and 2019 were 0.4% above the real increase on average.
How Medicare reimbursements are determined
Medical reimbursements are typically pegged at 80% of the cost of services provided, although they could drop to 75% for clinical social workers and rise to 85% for clinical nurse specialists.
The establishment rate schedule contains pre-determined base rates calculated using the resource-based relative value scale (RBRVS) grounded on a formula that takes into account several factors:
- Complexity of service provided
- Type of equipment used
- Geographical location of the facility and services
- Type of medical facility or professional
- Adjustments for inflation on the services and procedures
It is multiplied by a conversion rate to determine the final disbursement.
Impact of inflation on the purchasing power of Medicare payments
Since healthcare services account for 16% of personal consumption spending on average, any changes in inflation will have some impact on Medicare payments. According to the Medicare Plans Patient Resource Center, nearly 33% of Medicare recipients spend 20-30% of their monthly wages on healthcare.
Most beneficiaries pay the base amount of Medicare Part B, which is adjusted yearly for inflation and is paired with the cost of living adjustment (COLA). The Social Security Administration determines the COLA increases since most premiums are deducted from social security benefits, and the goal is to ensure the stability of the beneficiaries’ buying power.
However, COLA does not always keep up with inflation. For instance, COLA was 5.9% in 2022, but the average inflation rate stood at 8%, which was not enough to cover Part B premiums.
The same trend is seen in Medicare Part D costs, where in 2020, prices of 50% of all prescription medications covered by Part D outstripped the inflation rate. Average prices rose from $31.47 monthly in 2021 to $33 in 2022. This meant Part D participants paid higher premiums for medication coverage and made more out-of-pocket payments.
John Corker, MD, observed:
“…And I think at the end of the day, it all comes back to access. If doctors can’t keep their doors open and they can’t have appropriate staff because of dwindling reimbursement rates for Medicare, patients can’t access services from their doctors.”
The Impact on Patient Care
Inflationary pressures could lead to a reduction in patient volumes, causing medical facilities to cut costs by reducing investments in healthcare. The financial pressures also affect doctors’ ability to provide quality care, and patients postpone or stop treatment to stay within their budgets.
For instance, when inflation breached a 40-year ceiling in 2022, about 38% of adults skipped or delayed treatment. They cut back on essentials like food and utilities or borrowed money to pay medical bills.
This could spell doom for 116 million people living with hypertension, 37 million with diabetes, and others with other chronic diseases who can’t afford to postpone or skip medication as it could be life-threatening.
People are forced to choose between day-to-day necessities, which compete with the need for healthcare. And if they were to decide to take on second jobs, the extra hours spent on working could harm their health. A study shows that for every $1 spent on healthcare benefits, $0.61 of productivity is lost to injury and illness.
A 2024 National Bureau of Economic Research study shows that every $100 (24.4%) decrease in the monthly budget for prescription drugs resulted in a 13.9% rise in deaths, primarily caused by patients cutting back on costly medication for hypertension, asthma, diabetes, and heart disease.
As Dr. Jason Goldman, MD, put it:
“…fix Medicare now, not just because physicians need to be paid fairly, but because the patients need their physicians. And if they do not fix Medicare, we will not have a healthcare system.”
It should also be noted that inflation raises costs in the long term, which can cause changes in behavioral health that may negatively impact overall health.
Potential Solutions
Several proposals have called for physicians’ pay to be tied to inflation. In late March 2024, the Medicare Payment Advisory Commission (MedPAC) recommended the pay be pegged at 50% of MEI, but the AMA proposed an annual inflationary payment update tied to the MEI.
That’s because the practice-expense part of physicians’ pay accounts for more than half of Medicare physicians’ payments. MedPac wrongly asserted that half of MEI covers all physician’s practice costs. However, this assertion omits the costs of running a medical practice, such as the energy, time, and expertise spent treating patients.
The AMA also called on congressional leadership to ensure physicians’ pay keeps up with inflationary growth in health care costs yearly. It is worth noting that physicians are the only providers who are unrepresented in the inflationary payment update.
This is especially important because a payment freeze is in place until 2026 and will resume at a 0.25% yearly increase indefinitely, although projections show clinician’s costs will rise by more than 2% annually from 2025 through 2033.
Final Word
While inflation is inevitable, the foremost issue physicians face is that Medicare reimbursements do not keep up with inflation. Further, the CMS estimates national health expenditure will grow 5.4% yearly from 2019 through 2028.
These will add to the cost of ballooning wages, capital, overhead, and maintenance costs, making it increasingly difficult to remain in practice. Physicians are faced with tough choices in the face of underpayment relative to inflation, forcing them to cut corners that negatively impact the provision of patient care.
Physicians will continue to feel the inflationary pressures for the next 2-3 years until the subsequent renegotiation of contracts to align payment with costs.
What can you do?
- Be a voice of change: Reach out to your congressman, association, patients, and state medical society and express your views on the matter.
- Optimize operations: Streamline operations to minimize wastage and hire staff appropriately.
- Network: Partner with other physicians or medical facilities to pool operational resources.
