Does Medicare Underpay Physicians? Yes, No and Sometimes

There is a shortage of physicians in the United States. There is especially a shortage of primary care physicians willing to treat Medicare enrollees. People nearing the age of Medicare eligibility are often advised to begin searching for a primary care physician who accepts Medicare a year ahead of time.

Data published in 2020 by the Association of American Medical Colleges estimates that the U.S. could see a shortage of 54,100 to 139,000 physicians by 2033. That shortfall is expected to span both primary- and specialty-care fields.

Physicians in the United States are compensated by a mix of various payers. These include government programs, such as Medicare and Medicaid, private insurers, and cash. Doctors often complain that government programs underpay them compared to their market value. Medicare and Medicaid are often singled out as unprofitable. Medicare patients (and certainly Medicaid patients) are less desirable than commercially insured patients due to lower fees and other factors.

Physician income varies by specialty, with some specialties earning twice what others pay. The same is true for Medicare fees. There are about 10,000 different tasks that doctors can bill under Medicare. Some tasks are underpaid, while others are over-compensated.

Labor economics provides us an easy way to gauge whether someone is underpaid. If Medicare is substantially underpaying physicians, one would expect few physicians would be willing to treat seniors but that is not the case. Nearly 99% of licensed physicians participate in the Medicare program. Less than 2% have opted out. Some of those opting out have very specialized practices for services not generally covered by Medicare.

Nearly 8% of psychiatrists are not Medicare providers, the highest of any specialty. Plastic surgeons are also less likely to participate in Medicare. Insurance rarely covers cosmetic surgery, so it is hardly surprising that 4.2% of cosmetic surgeons opt out. The third highest specialty opting out of Medicare is neurology, at 2.8%. Less than 2% of all other specialties decline to participate in the Medicare program. What is more common than opting out of Medicare is limiting new Medicare patients to a ratio of privately-insured and cash-pay patients.

Why do so few physicians opt out of Medicare? Because it’s a big program. Reimbursements may not be as high as commercially insured patients but very few doctors can afford to turn away all Medicare patients.

Medicare provides health insurance coverage to 65 million adults–nearly 20% of the U.S population—and is a major source of revenue for providers, including physicians and other clinicians. In 2022, Medicare spending on Part B services (including physician services, outpatient services, and physician-administered drugs) accounted for nearly half (48%) of total Medicare benefit spending, and this share is expected to grow to more than half (52%) by 2032. Physicians are not required to participate in Medicare, though the vast majority of them choose to do so.

Physicians who choose to opt out of Medicare cannot pick and choose which seniors they will see through Medicare and which ones they will charge cash. A physician doesn’t have to accept every Medicare patient who asks for an appointment, but they cannot make some seniors pay cash for services, while others use their Medicare coverage. In the past some physician offices began to require a membership or concierge fee of, say, $100 a month, for a senior to be a member of their practice. These fees are for services Medicare supposedly does not cover. Neither can a Medicare participating physician balance bill seniors for more than Medicare pays.

Congress periodically adjusts physician reimbursements in Medicare. Certainly, higher pay would boost access to care for seniors but it’s not clear how much that should be. A program as large as Medicare has significant monopsony power as the single payer for seniors’ medical care. Another viewpoint is that doctors and prescription drugs are relatively cheap compared to hospitals. Seniors that end up in the hospital because they couldn’t get in to see an office-based physicians are more costly to treat. Thus getting physician reimbursement right should be an important goal.