Strengths And Weaknesses Of Introducing An Inflation Factor Into The Medicare Physician Fee Schedule

Unlike most other Medicare fee schedules, the Medicare Physician Fee Schedule does not include an automatic inflation update. We describe the history of Physician Fee Schedule update systems and present paradigms for evaluating the merits of adding an inflation-based adjustment factor to the schedule's updating formulas. We adopt an incentive paradigm, which emphasizes how access to care and the consolidation of health care facilities are affected by fees. Although evidence suggests that the impact of fee changes on access has been small, it might not remain so. Moreover, the disparity in fees, and fee updates, between care delivered in an outpatient facility as opposed to a physician office may induce consolidation. Because existing evidence does not support the idea that there is a current access crisis in Medicare, we believe that a partial, inflation-based, across-the-board update (for example, inflation minus 1) would help sustain access into the future and potentially slow consolidation. This approach would be reasonably easy to implement and have better distributional properties than some alternatives, such as differential updates for the work and practice expense components of the Medicare Physician Fee Schedule.