The Issue

The Centers for Medicare and Medicaid Services (CMS) is testing alternatives to fee-for-service payment that incentivize physicians to deliver better value to patients and the Medicare program. These alternative payment models (APMs), however, must work with the existing Medicare physician fee schedule, which is itself in need of retooling. Medicare, as well as private insurers and state Medicaid programs, follow the schedule in reimbursing doctors. With Commonwealth Fund support, Robert Berenson, M.D., a fellow at the Urban Institute, and Paul B. Ginsburg, director of the Center for Health Policy at the USC-Brookings Schaeffer Initiative for Health Policy, reviewed components of the physician fee schedule for Health Affairs to find opportunities to improve accuracy and value.

$90 billion annual charges for services paid under the Medicare physician fee schedule


At CMS, the Center for Medicare is responsible for overseeing the Medicare physician fee schedule, while the Center for Medicare and Medicaid Innovation develops and tests APMs. Historically there has been little interaction between the two parts of CMS.

In setting physician fees, CMS is required to consider the following:

  • physician work, reflecting time and intensity and obtained through surveys
  • practice expenses, estimated from many sources, and
  • malpractice expenses, based on professional liability premiums by specialty.

Opinions vary on how to correctly estimate these relative costs, particularly how to obtain accurate measures of physician time and intensity and whether relative costs should be the only basis for determining the value of physician services. The Medicare Payment Advisory Commission (MedPAC) recently identified flaws in how CMS calculates relative costs, noting a lack of current, accurate, and objective data on clinician and staff time involved in practice expense. In 2018, MedPAC recommended ways to make these estimates more accurate.

The Proposal

Building on MedPAC’s recommendations, the authors argue that estimates of relative costs should not be the only basis for determining value. They propose the following steps:

  • Reevaluate the relative value units (RVUs) assigned to certain codes, while monitoring physician response.
  • Limit the fee reductions associated with such reevaluation to 10 percent to 15 percent per year, while limiting the aggregate percentage of spending subject to discretionary reductions in any year to 5 percent to 10 percent.
  • Empower CMS to identify policy objectives that can be promoted with fee changes. Payments for services could then be selectively increased to achieve those objectives, using savings from fee reductions on overpriced services.
  • Broaden the scope of the Physician-Focused Payment Model Technical Advisory Committee to facilitate integration of the fee schedule with APM demonstrations.

The Bottom Line

A revamped Medicare physician fee schedule could be part of a new value-based approach to provider payment if relative fees are prudently modified.