Payment & Delivery Models

How Medicare’s budget-neutrality rule is slanted against doctors

Andis Robeznieks , Senior News Writer

Physicians have seen their inflation-adjusted payments drop 26% since 2001 to 2023, and those payments are further eroded by frequent and large payment redistributions statutorily required by budget-neutrality adjustments contained in the annual Medicare physician payment schedule.

Your powerful ally

The AMA amplifies physicians' voices in critical conversations on the Hill, fighting to protect physician payment and patients’ access to care.

The provision was included in the Omnibus Budget Reconciliation Act of 1989, which mandated that any estimated increases of $20 million or more to the Medicare physician payment schedule—created by upward payment adjustments or the addition of new procedures or services—must be offset by cuts elsewhere.

“It's time to update that number,” AMA Senior Vice President of Advocacy Todd Askew said in a recent episode of “AMA Update.” “We think $100 million is a reasonable number before Medicare needs to trigger those cuts.”

The evidence is clear: The Medicare payment system is on an unsustainable path threatening patient access to physicians.

Along with updating budget-neutrality requirements and triggers, the AMA strategy for reform involves:

  • Linking automatic inflation-based annual updates to the Medicare Economic Index.
  • Reforming the Medicare Quality Payment Program by making the Merit-based Incentive Payment System (MIPS) more clinically relevant and less burdensome.
  • Making more alternative payment models (APMs) available for practices to participate in.

Learn about how you can take part in the fight to fix Medicare on behalf of your patients and practices at the AMA's Fix Medicare Now website.

Leading the charge to reform Medicare pay is a critical component of the AMA Recovery Plan for America’s Physicians.

The AMA has challenged Congress to work on systemic reforms and make Medicare work better for you and your patients.

To help physician advocates and lawmakers get a stronger a grasp on the complicated terrain of Medicare physician payment reform, the AMA has developed a series of explainers that outline problems with the issues mentioned above and offer solutions:

The one- to two-page explainers offer straightforward explanations for policymakers and physician advocates about these elements of the payment system and why reforms are needed.

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The budget-neutrality explainer notes that, if the Centers for Medicare & Medicaid Services (CMS) projects net pricing changes for existing services that will result in boosting Medicare spending by more than $20 million, the agency must reduce spending elsewhere. This is typically done by adjusting the Medicare conversion factor.

A recent example of this was the conversion-factor cut CMS proposed to offset increases that followed implementation of much-needed reforms for coding and documentation of physician office-based evaluation and management services.

It took an act of Congress to mitigate those cuts in a COVID-19 relief bill. Otherwise, physicians in specialties that provide relatively few office visits would have seen their payment rates drop precipitously and patient access would have been put at risk.

It’s also not uncommon for CMS to trigger budget-neutrality cuts by overestimating the use of new services. In 2013, for example, CMS projected that 5.6 million new claims would be submitted after transitional care-management services were added to the physician payment schedule. But only 300,000 were submitted in the first year and, after three years, there were still less than 1 million such claims submitted.

Nevertheless, due to CMS overestimates of transitional care-management use, Medicare physician payments were cut by $5.2 billion through conversion-factor reductions between 2013 and 2021.

“Once these redistributions are made through the conversion factor, they are not added back—even when utilization is lower than expected,” the AMA explains. “The net result in these circumstances is not budget neutrality, but rather a permanent reduction in Medicare physician payments across-the-board.”

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To fix the problem, Congress should look at these proposals outlined by the AMA.

Provide a lookback period to reconcile overestimates and underestimates of pricing adjustments for individual services to allow for the Medicare conversion factor to be calculated with more accuracy based on actual utilization data.

Refine which services are subject to budget neutrality. When federal policy changes are expected to result in more use of certain services, those services should be exempt from budget-neutrality calculations. These could include newly covered Medicare services and technologies or high-value services that are being incentivized in an attempt to lower overall Medicare spending.

Increase the budget-neutrality trigger from $20 million to $100 million. Increasing the threshold would provide flexibility in making necessary pricing adjustments for individual services without triggering automatic, across-the-board Medicare cuts.