Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How the Federal Government Pays Doctors Below Market Rates
Transcript
- Lucas: So here's a number that I think is genuinely underappreciated. In 2026, the Medicare Physician Fee Schedule sets the base rate for a level-three office visit — the kind where your doctor listens to your chest, writes a prescription — at around $106. Private insurers, in the same city, pay closer to $150 for that exact same visit. Luna: That's a roughly 30 percent discount. And we're not talking about a small program — Medicare covers something like 65 million people. Lucas: Right, plus Medicaid in many states pays even less than Medicare. So the federal government, through these two programs, is the single largest buyer of physician services in the country. And it's using that market power to set prices well below what private insurance pays. Luna: Which sounds like a good deal for taxpayers in the short run. But the question is, what happens downstream? Lucas: Exactly. And the classic answer in health economics is something called cost shifting. The idea is that hospitals and doctors don't just absorb that 30 percent haircut — they make it up by charging private insurers more. So your employer-sponsored health plan premiums go up partly because Medicare pays below cost. Luna: But there's a newer argument that cost shifting is less automatic than people think. Some economists say that in competitive markets, providers can't just raise prices on private payers at will — they have to be able to negotiate. Lucas: That's a fair nuance. And the evidence is mixed. But one thing we can say for sure: the gap between Medicare rates and commercial rates has been widening. In 2000, Medicare paid about 80 percent of what private insurers paid for the same services. By 2020, that had dropped to around 70 percent. And it's probably even lower now. Luna: So the discount has gotten deeper. And that creates a real access problem. If you're a primary care physician and your patient panel is 40 percent Medicare, 20 percent Medicaid, and 40 percent commercial — you're basically subsidizing the public programs with your private-payer revenue. Lucas: And some doctors just stop accepting new Medicare or Medicaid patients. The data backs that up. A 2023 survey from the Medicare Payment Advisory Commission found that about 20 percent of primary care physicians were not accepting new Medicare patients. For Medicaid, it's even higher — closer to 40 percent. Luna: Which is ironic, because the programs were designed to ensure access. But the administered prices are so low that access actually shrinks. Lucas: Let's make this concrete. Take Cincinnati, Ohio — a mid-sized city, not rural, not coastal. A family physician there, Dr. Sarah Miller, told a local paper last year that her practice runs a loss on every Medicare patient. She said she keeps seeing them because she's been in practice for thirty years and doesn't want to turn away her long-term patients. But she's not taking any new ones on Medicare. Luna: And that's a real person making a real economic decision. She's not being greedy — her overhead is fixed, her staff needs salaries, and the rent on her office doesn't get a government discount. Lucas: Right. So the federal government has, in effect, set a price ceiling for its own program. In most markets, price ceilings create shortages. And that's exactly what we see: a shortage of doctors willing to treat Medicare patients. Luna: But wait — Medicare is actually pretty popular with seniors. So why doesn't Congress just increase the fee schedule? It seems like an obvious fix. Lucas: Because it's expensive. Increasing physician fees by even 5 percent would add roughly $10 billion to the federal budget annually. And in a climate where every dollar of discretionary spending faces scrutiny, that's a hard sell. Plus, there's a legitimate concern that higher fees could lead to more volume — more tests, more procedures — without improving outcomes. Luna: So we have this tension: the government wants to control costs, but in doing so, it undermines the program's core purpose of ensuring access. It's a classic trade-off. Lucas: And it's not just primary care. Specialists face similar dynamics. A cardiologist might get $150 for a consult from Medicare, while private insurance pays $250. So the incentive is to see fewer Medicare patients and more privately insured ones. That can mean longer wait times for seniors who need heart care. Luna: Which, by the way, is why some Medicare Advantage plans have been able to offer extra benefits — they negotiate their own networks and rates, often paying doctors a bit more than traditional Medicare. But that's a whole other episode. Lucas: Look, if walking through the economy with us has made something click — like why your doctor might not take Medicare, or why your premiums keep rising — we want this show to be a resource you can rely on. We deliberately don't run ads on these, so if you want to support that choice, the link is buy me a coffee dot com slash fexingo. Luna: Yeah, we keep it ad-free because the topic deserves a clean discussion, not a commercial break. It's a small way to keep the conversation honest. Lucas: So back to the policy dynamics. Another angle here is that the federal government is effectively using its monopsony power — it's the dominant buyer of physician services — to hold down prices. In theory, that could be efficient if the alternative is unregulated monopoly pricing by providers. But in practice, the administered price is set by a political process, not by market forces. Luna: And political processes tend to lag. The Medicare fee schedule is updated annually, but the formula is based on a sustainable growth rate mechanism that was repealed in 2015 and replaced with a series of patchwork fixes. It's not exactly nimble. Lucas: Right. And the result is that the real price of physician services in Medicare has barely kept up with inflation. According to the American Medical Association, between 2001 and 2024, Medicare physician payment rates fell by 29 percent when adjusted for inflation. That's huge. Luna: While the costs of running a practice — rent, staff salaries, malpractice insurance — have all gone up. So the margin gets squeezed, and eventually something has to give. Lucas: Now, there's a counterargument that says Medicare rates are actually adequate for efficient practices. The Medicare Payment Advisory Commission, or MedPAC, which advises Congress, has said that overall, Medicare payments are sufficient to cover costs for most providers. But that's an average — it hides a lot of variation by specialty and region. Luna: A rural primary care doctor in Mississippi is in a very different position from a cardiologist in Manhattan. So averages can be misleading. Lucas: Exactly. And that's why the access problems are worst in rural areas, where the patient mix is already heavily Medicare and Medicaid. If you're the only family doctor in a county of 5,000 people, and 60 percent of your patients are on public insurance, you might simply not be able to keep the doors open. Luna: So what are the proposed solutions? Beyond just raising rates across the board? Lucas: One idea is to target increases to specific high-need areas or specialties. For example, boost primary care fees by 10 percent while leaving specialist fees flat. That would cost less and might better address the shortage of primary care physicians. Luna: Another idea is to allow Medicare to negotiate prices more flexibly — not just a fee schedule, but something more like value-based payment, where doctors get bonuses for keeping patients healthy. That's already happening in some pilot programs. Lucas: Right, accountable care organizations, bundled payments. But those require significant administrative infrastructure, and not all practices have the resources to participate. So they tend to favor larger health systems. Luna: Which brings us back to a recurring theme on this show: the unintended consequences of government pricing. You set a price, and the market responds in ways that the price-setters didn't anticipate. Lucas: And in this case, the response is partly a quiet withdrawal of physician supply from the Medicare market. It's not a crisis in the sense of people dying in the streets — but it's a slow erosion of access that disproportionately affects older Americans and low-income families. Luna: So the next time you hear a politician talk about protecting Medicare, the real question might be: are we protecting the payment rates, or are we protecting the ability to actually see a doctor? Lucas: That's the right question. And the answer probably involves either more money or a smarter way to spend it. But for now, the system muddles through, with doctors and patients absorbing the friction. Luna: And maybe that's the most fiscal-policy thing about it. The budget is balanced on the backs of primary care doctors who keep accepting Medicare patients out of a sense of duty, even when the numbers don't work. Lucas: Yeah. That's not something you can model in a spreadsheet, but it's real. And it's worth remembering when we talk about the cost of government programs.