Medicare’s 2025 payment updates: Why hospitals and physicians think the methodologies are flawed

Neither hospitals nor physicians found much reason for encouragement in final 2025 Medicare payment rules released Nov. 1.

The rules, which were made available as pre-publication drafts, finalized a 2.9% increase for hospitals under the payment system for Medicare outpatient services and ambulatory surgical centers (ASCs). Meanwhile, physicians were dealt a 2.83% cut that they hope Congress will adjust before year’s end.

Collectively, the updates reinforced the sense that providers cannot count on Medicare payments to cover the costs of caring for seniors. A March report to Congress by the Medicare Payment Advisory Commission (MedPAC) projected a 2024 aggregate Medicare margin for hospitals of minus 13% when excluding the $9 billion in onetime remedy payments made through the 340B Drug Pricing Program.

The 2025 payment updates will “further widen the gap between Medicare reimbursements and the actual operational costs healthcare providers shoulder daily,” Premier Inc. said in statement, referring to the final rules for outpatient payments, physician payments and payments to home health agencies.

“This update misses the mark, failing to recognize the real cost pressures providers face — particularly labor,” the company added in the statement by Soumi Saha, senior vice president for government affairs. “It’s time CMS adopted more realistic methodologies and data sources to keep up with these escalating challenges.”

Hospital update seen as lacking

The hospital outpatient payment update is derived from a 3.4% increase in the market basket and a reduction of 0.5 percentage points as required based on the economywide productivity adjustment. Any hospital that does not fulfill quality-reporting requirements will face a reduction of 2 percentage points to its update.

Prior regulations established that ASCs receive the same annual update as hospitals through at least 2025.

In the final rule, CMS acknowledged the concerns of stakeholders who commented that a roughly 3% update is inadequate to keep up with inflation (e.g., a 6.1% increase in costs of hospital services in July). Commenters also noted that administrative costs are on the rise amid intensified denials activity by private payers and that cybersecurity requirements are inflicting higher costs.

Some of those commenters said CMS should adopt MedPAC’s recommendation to add 1.5 percentage points to the payment update generated for 2025 under the current methodology.

Stakeholders also suggested looking for other ways to gauge labor expenses, saying the Employment Cost Index (ECI) is not a sufficient measure to account for the cost spike that happened during and after the pandemic.

Some commenters focused on the plight of rural hospitals, noting that 11 hospitals in rural and underserved areas have closed in the past two years despite the advent of the rural emergency hospital designation. Average operating margins are 2.2% for independent rural hospitals and 1.7% for system-affiliated rural hospitals, according to the comments.

Stakeholders also said the productivity adjustment, mandated as an annual pay-for to cover the costs of coverage expansion under the Affordable Care Act, is an errant metric because it assumes that productivity gains in the hospital sector track those in other industries.

CMS doesn’t budge

As it has in past years, CMS said the Medicare statute constrains the agency’s ability to take action on the payment rate beyond the market-basket increase and specified adjustments. The outpatient update is required to match the corresponding year’s increase for inpatient payments unless there is evidence of a substantial cost divergence between the two settings.

In the outpatient payment final rule, CMS repeatedly referred to explanations provided in the FY25 inpatient payment final rule about why the market basket remains an appropriate determinant of the annual payment change.  

In declining to use its “exceptions and adjustments authority” to modify the inpatient payment update, CMS said it believes the market basket as currently constituted “reflects an index of appropriately weighted indicators of changes in wages and prices that are representative of the mix of goods and services included in such inpatient hospital services.”

The agency also defended the ECI, noting the index includes contract-labor wages in its forecasts.

“We believe that the ECI for wages and salaries for hospital workers is accurately reflecting the price change associated with the labor used to provide hospital care,” the agency stated. “The ECI appropriately does not reflect other factors that might affect the rate of price changes associated with labor costs, such as a shift in the occupations that may occur due to increases in case-mix or shifts in hospital purchasing decisions (for instance, to hire or to use contract labor).”

Referring to an apparently accelerated shift to higher-skilled hospital occupations, as indicated by a 6.5% increase in the case-mix index, CMS said the market basket for 2025 “reflects a projected increase in compensation prices of 3.9%, which is 1.1 percentage points faster than the 10-year historical average.”

Physicians plead for help

Whereas hospitals will reap a small increase, physicians are counting on Congress to avert or at least soften a looming payment cut. That has happened at the end of each year since 2020.

For now, the conversion factor is set to drop by 2.83%, or $0.94. Due to the varied impact of RVU changes, the impact on specialties ranges from increases of 4% for clinical social workers, 3% for clinical psychologists and 2% for anesthesiologists to 2% declines for diagnostic testing facilities, ophthalmology and vascular surgery.

There also is variance within each specialty depending on whether the clinician is facility-based (see Table 111 on page 2329 of the pre-published rule PDF).

Physician advocacy groups such as the American Medical Association (AMA) have noted that the Medicare Economic Index (MEI) projects a 3.5% cost increase for 2025. When adjusted for practice-cost inflation, payments have fallen by 29% since 2001.

“You don’t have to be an economist to know that is an unsustainable trend, though one that has been going on for decades,” Bruce Scott, MD, president of the AMA, said in a written statement. “For physician practices operating on small margins already, this means it is harder to acquire new equipment, harder to retain staff, harder to take on new Medicare patients and harder to keep the doors open, particularly in rural and underserved areas.”

In an August survey of AMGA members, 45% said the ongoing payment cuts would force them to furlough nonclinical staff and 31% said the same would apply to clinical staff. In addition, 27% said they would not accept new Medicare beneficiaries as patients. (AMGA, formerly known as the American Medical Group Association, represents physicians in multispecialty medical groups and integrated health systems.)

Potential solutions for MDs

CMS said its hands are tied because of statutory payment provisions, including the 0% update required for 2020-25 by the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) and the expiration of the 2.93% payment bump that Congress issued to limit the 2024 cut.

Some type of adjustment is likely during the lame-duck session of Congress, and advocates are holding out hope for a substantive gain rather than merely a lessened decrease. For example, a newly drafted bipartisan House bill would increase physician payments by 4.73%, meaning a net gain of nearly 1.9%.

Beyond that, Congress should consider requiring annual updates to be tied to a metric such as the MEI in the same way hospital payment changes are based on inflation yardsticks, the AMA and other advocates have said. In October, a bipartisan majority of House members signed a letter to the chamber’s leadership, urging legislation to enact that provision and, among other recommendations, to:

• Implement a 2.5% cap on annual changes to the conversion factor
• Modify budget neutrality requirements that bring down the conversion factor when there are increases to RVUs

“Physicians and patients are watching, wondering if Congress is up to the task of fixing this broken reimbursement system,” Scott said.