Medical Economics Physician Finances

Why Doctors Can No Longer Make A Living From Professional Revenue Alone

There has been a seismic change in physician employment models over the past two decades with most physicians now being hospital-employed. The days of physicians in solo or independent small group practices are largely over. The main driver for this shift in employment is that physician reimbursement for professional services has fallen to such an extent that most physicians simply cannot make a reasonable living without salary subsidization. The cause of the fall in physician reimbursement is that Medicare has not even come close to keeping up with inflation when it comes to payment for physician services.

Physicians have been paid by the RVU since 1992.

The amount that Medicare pays per RVU is called the conversion factor and has not changed significantly since 1992.

Inflation has resulted in average price of goods in 2024 being 2.17 times higher than prices in 1992.

When adjusted for inflation, physicians in 2024 are getting paid one-third of what they were paid in 1992 to perform the same services.

Salary supplementation by hospitals has become necessary to maintain physician incomes.


The RVU (Relative Value Unit) system

Central to coding and billing is the RVU or relative value unit. When I first started practicing medicine, there were no RVUs. Physicians simply set their own fees for services and then they got paid those customary charges by patients and insurance companies. But in 1992, the federal government rolled out a new system that standardized payment for Medicare services for all doctors. That meant that if a Medicare patient came to the hospital with pneumonia, any doctor doing the patient’s admission history and physical exam would be paid the same rate. The way that Medicare standardized physician reimbursement was by assigning a relative value unit to every service and procedure.

The RVU is composed of three separate components. The work RVU (wRVU) accounts for the physician’s time, skill, training, and the intensity of work to perform any given service. This is the amount of money that a physician should expect in take-home pay after expenses. The practice expense RVU (peRVU) accounts for the overhead cost to perform that service including rent, equipment, supplies, and office staff. The malpractice RVU (mpRVU) accounts for the average malpractice insurance premium cost to perform that service. Adding these three components together gives you the total RVU. Each year, Congress determines how much money an RVU is worth and this is called the RVU conversion factor. For 2024, the Medicare conversion factor is $33.29 per RVU.

The conversion factor has not kept up with inflation

When the RVU system was implemented in 1992, the conversion factor was $31 per RUV. The conversion factor peaked in 2008 at $38 per RVU. Currently, an RVU is worth $33.29. To put that into perspective, based on inflation, $31 in 1992 would be worth $69 in 2024. That means that if the Medicare conversion rate had kept up with inflation, then the conversion rate should be $69 per RVU in 2024 rather than $33.29. So, in other words, in inflation-adjusted dollars, physicians today are getting paid about one-third of what they were paid per RVU in 1992.

wRVUs have not significantly changed

We have now seen that the Medicare conversion rate has been essentially flat for the past three decades. But have the number of RVUs associated with each physician service increased in order to keep up with inflation? The answer is decidedly… no. One of the criticisms of the RVU system in its first years was that the work RVUs for procedures were very high whereas the work RVUs for evaluation and management CPT codes were relatively low. As a consequence, primary care physicians were felt to be under-compensated whereas specialists performing procedures were felt to be over-compensated. Medicare attempts to keep the combined total number of RVUs constant every year. As a result, if Medicare increases the RVUs for one service or procedure, it must decrease the RVUs with some other service or procedure. Over the years, Medicare has increased the wRVUs associated with some services and procedures and decreased the wRVUs associated with other services and procedures in order to eliminate perceived inequities between different specialties in the early years of the RVU system. The result has been an increase in reimbursement for primary care physicians accompanied by a decrease in reimbursement for surgeons, radiologists, and other procedure-oriented specialties.

This can be seen in the following graphs comparing the work RVUs, practice expense RVUs, and malpractice RVUs for selected services and procedures in 2003 and 2024. Medicare maintains an archive of the physician fee schedule for every year since 2003 so I have selected 2003 RVUs to compare to current RVUs. The first set of graphs compares RVUs for evaluation and management codes. Depicted are the RVUs for a level 2 new inpatient visit (CPT code 99222) and a level 4 new outpatient visit (CPT code 99204). These RVUs have increased since 2003, largely as a result of Medicare’s efforts to increase reimbursement to primary care physicians. For a new inpatient visit, since 2003, the wRVU has increased by 21% (2.14 RVU to 2.6 RVU), the peRVU has increased 40% (0.75 RVU to 1.05 RVU), the mpRVU has increased 185% (0.08 RVU to 0.23 RVU), and the total RVU has increased 31% (2.97 RVU to 3.88 RVU). The changes for a new outpatient visit are similar with increases in wRVU of 30%, peRVU of 46%, mpRVU of 140%, and total RVU of  40%.

The second set of graphs show the changes in RVUs for two common procedures: an outpatient EKG performed in a physician office and an outpatient colonoscopy performed in a hospital-based endoscopy center. For an EKG, the wRVU was unchanged (0.17 RVU both years), the peRVU decreased 63% (0.50 RVU to 0.24 RVU), the mpRVU decreased 33% (0.03 RVU to 0.02 RVU), and the total RVU decreased 39% (0.71 RVU to 0.43 RVU). For colonoscopy, the wRVU decreased by 12%, peRVU increased by 3%, mpRVU increased by 110%, and total RVU decreased by 3%. The notable reduction in practice expense RVU for outpatient EKGs is multifactorial with contributions including lower costs for EKG machines and lower reporting costs due to electronic medical record efficiencies.

The third set of graphs show the changes in RVUs for two common surgical procedures: laparoscopic cholecystectomy (usually performed by general surgeons) and total knee replacement (performed by orthopedic surgeons). In both surgical procedures, the work RVUs have fallen since 2003. For cholecystectomy, the wRVU decreased by 5% (11.09 RVU to 10.47 RVU), peRVU increased 36% (5.01 RVU to 6.81 RVU), mp RVU increased 134% (1.33 RVU to 2.64 RVU), and total RVU increased 16% (17.23 RVU to 19.92 RVU). For total knee replacement, the wRVU decreased 30%, peRVU increased by 1%, mp RVU increased by 34%, and total RVU decreased by 14%.

The overall trend has been an increase in the work RVUs for some services and procedures offset by a decrease in work RVUs for other services and procedures. Malpractice RVUs have overall increased with rare exceptions, such as outpatient EKGs. Malpractice insurance premiums are closely tied to the overall national inflation rate and Medicare has chosen to increase the malpractice RVUs to keep up with inflation. Similarly, the change in practice expense RVUs tends to coincide with the overall national inflation rate since overhead costs (rent, utilities, staff salaries, supplies, etc.) are tightly associated with inflation. However, the implementation of electronic medical records has improved office efficiency and reduced many overhead costs to partially offset the effect of inflation on overhead expense.

The overall effect of inflation

We have now seen that work RVUs have not increased enough to keep up with inflation and the Medicare conversion rate has essentially not increased at all over the past 32 years. By combining the effects of the conversion rate and changes in work RVUs, we can see the net effect of inflation on reimbursement for physician services and procedures over the past two decades. Since 2003, the cost of living has increased such that in 2024, it would take $165 to purchase the same amount of goods that could be purchased for $100 in 2003. Therefore, to keep up with inflation, a physician would need to earn $165 in 2024 to perform the same service or procedure that he/she would have earned $100 to perform in 2003. As shown in the table below, this has not been the case.

In this table, the “2003 wRVU $” is the 2003 wRVU multiple by the 2003 Medicare conversion factor; this is the amount of money that a physician would expect to personally be paid to perform a service or procedure, after overhead expenses and malpractice insurance premiums in 2003. The “2003 wRVU $ adjusted for 2024 inflation” is the amount that the wRVUs for services or procedures would be worth in 2024 if the 2003 reimbursement was increased by the increase in cost of living (inflation). The “Actual 2024 wRVU $” is the 2024 wRVU multiplied by the 2024 conversion rate; this is the amount that a physician is acutally personally paid to perform a service or procedure in 2024. The “Lost value since 2003” is the difference in what physicians are actually paid to perform the work of a service or procedure in 2024 versus what they would have been paid is the 2003 reimbursement rates had simply kept up with inflation.

In every case, physicians are being paid less to perform services and procedures in 2024 than they were in 2003, when adjusted for inflation. In order to avoid a loss of purchasing power of their total annual income, there are only two options for physicians: (1) see more patients and do more procedures or (2) get hospitals to subsidize their income. In many cases, physicians have been able to see more patients and perform more procedures in 2024 than they could in 2003 due to efficiencies brought by electronic medical records, improved scheduling software, faster operating room turn-over times, etc. However, these increases in efficiency can only increase physician take-home income so much. Thus, most specialties now rely on hospitals to subsidize incomes. This has been a major reason for physicians to shift from being privately-employed to now being hospital-employed. Even physician private practices now contract with hospitals for financial support in exchange for providing medical care to the hospital’s patients.

Commercial health insurance companies have done a better job of keeping up with inflation and commercial insurance companies pay physicians considerably more per RVU than Medicare. According to the U.S. Census, in 2022, 54.8% of Americans are covered by commercial insurance insurance provided by an employer and another 13.9% are covered by a directly-purchased commercial insurance plan; 18.5% are covered by Medicaid, 21.2% are covered by Medicare, 2.7% are covered by TRICARE, and 2.2% are covered by the Veterans Affairs. Another 8.0% of Americans are uninsured (note that because many Americans  have insurance from more than one source, the percentages add up to greater than 100%). However, these percentages do not equate to most physician’s payer mix because older persons and disabled persons have more medical problems, get sick more often, and use medical services more than younger persons. For this reason, Medicare and Medicaid account for a disproportionately large percentage of physician income.

Data from the National Health Expenditure Fact Sheet from CMS indicates that in 2022, 39% of U.S. healthcare expenditures for physician services came from private health insurance, 26% from Medicare, 12% from Medicaid, 2% from TRICARE, 2% from Veterans Affairs, 1% from CHIP, 1% from worker’s compensation, 1% from other Federal programs, 7% from other private revenue, and 8% from patient out-of-pocket payments. Medicare patients will comprise an increasingly large percentage of physician’s practices as the U.S. population over age 65 is projected to increase from the current 18.8% in 2023 to a future 23% in 2060. Increases in commercial insurance payments are not sufficient to make up for the reductions in inflation-adjusted medicare payments.



Given that Medicare is projected to become insolvent in 7 years (in 2031), it is exceedingly unlikely that physicians can expect to have a significant correction to the loss in inflation-adjusted Medicare reimbursement in the near future. In fact, it is more likely that physicians will see even greater reductions in inflation-adjusted reimbursement due to future inflation, even if the U.S. is able to achieve the Federal Reserve’s target of 2.5% per year increase in inflation. This will drive even more physicians to hospital-employed or hospital-subsidized employment models over the next several years.

Physicians in some specialties may be relatively immune to these forces, however. For example, physicians who care largely for commercially insured patients, such as those whose patients are mostly between 18 and 64 years old. Also, physicians who rely on out-of-pocket payment for elective procedures, such as cosmetic surgeons.

Hospital executives often ask “Why are so many of our doctors asking for money?”. The reason is simple, it is because they have to – it is no longer possible for most physicians to survive on professional revenue alone due to the decline in inflation-adjusted Medicare reimbursement.

June 3, 2024

Medical Economics

Why Hospitals Should Pay Attention To Zoning Laws

This week, Columbus Mayor Andrew Ginther submitted a plan to the City Council to completely revamp the city’s zoning laws and this could have a huge impact on regional hospitals. Columbus, Ohio is not unique – many U.S. cities are changing zoning laws to increase housing density in urban areas with the effect that we may see significant shifts in population growth.

For decades, the American dream was to own a house with a yard, and a 2-car garage in the suburbs. This led to urban sprawl – low density residential developments on the outskirts of cities and towns. Americans’ preference for automobiles over mass transit helped to fuel urban sprawl. In order to maintain housing low density homogeneity. communities adopted zoning laws that restricted building height, restricted the number of housing units per land parcel, and mandated a certain number of parking spaces per multi-family residential buildings. Over the past 100 years, our metropolitan areas rapidly grew outward and the demand changed from townhouses with no yards to quarter-acre lots and then to half-acre lots for single-family homes. As a result, previously rural towns became suburbs, highway outer belts became inner belts, commute time to work increased, and previously affluent communities close to downtown became low-income communities.

And then came COVID and working from home.

Zoning changes in Columbus, Ohio

Cities like Columbus rely on its tax base to support services and maintain infrastructure. As upper and middle class families moved outward into suburbs, cities were often left with a population of relatively lower income residents and lower property values. The result was lower city revenue from property taxes. Cities could still rely on income taxes from those workers who live in suburbs but commute to work in the city and income tax comprises the largest source of revenue for Columbus. As an example, the 2022 Columbus city revenue sources are as shown in the figure below:

Columbus, Ohio 2022 City Budget

Some states and cities do not have an income tax. In these cities, alternative sources of revenue fund the city budget, such as higher property taxes, sales taxes, and higher charges for permits and licenses. For example, there is neither Tennessee state income tax nor Nashville city income tax so Nashville’s city revenue comes from other sources, mainly property tax and sales tax. This gives Nashville a strong incentive to encourage residential high-density housing within the city since that translates to higher revenue from property taxes. Because those city residents tend to make purchases close to home, it also translates to higher city revenue from sales taxes.

With COVID came a shift in white-collar jobs from working in centralized offices to working from home. In many cases, the income taxes previously collected from the cities hosting business offices are now collected by the suburbs where work-from-home employees live. One strategy for cities to maintain revenue from income taxes in a work-from-home world is to grow the number of people living within the city limits. But city limits are generally land-locked by the surrounding suburbs making geographic expansion impossible so the only option is to increase population density within the city. And that is where zoning law changes become necessary.

Many of the land parcels close to downtown Columbus are zoned for commercial use only. Those zoned for residential use generally have a height restriction of 35 feet tall and require 1.5 parking places per residential unit. The Mayor’s proposal would designate certain areas along major transportation corridors as “urban core”. These areas would no longer be restricted to commercial use and would be permitted to be up to 12 stories tall (16 stories tall if affordable housing units are included). A second group of areas would be designated as “urban center” and would permit buildings up to 7 stories tall. Neither the urban core nor the urban center areas would have any requirements for off-street parking. Instead, residential parking would be left up to the free market, with developers determining the amount of parking necessary to provide in order to compete for occupants to fill those residential units.

The Columbus metropolitan region is growing and expected to have a shortage of 110,000 housing units by 2032. Without the zoning changes, the affected land parcels could be converted into 6,000 housing units but with the zoning changes, these parcels could become 88,000 housing units. By limiting the zoning changes to corridors with mass transit availability, there will be less need for households to own multiple cars. In fact, currently 30,000 Columbus households do not own a car and rely on mass transit, instead.

So, what does this have to do with hospitals?

People need healthcare and they want those healthcare services close to where they live. These services include inpatient hospitals, outpatient physician offices, urgent care centers, rehabilitation centers, and diagnostic centers. For the past 40 years, there has been economic pressure for hospitals to relocate services from city centers to suburban areas because that is where the patients are (and in particular, the well-insured patients). Many downtown hospitals closed while new hospitals were built in the outlying suburbs. The same has happened with multi-specialty outpatient clinics.

But as cities like Columbus change their zoning laws, there will be a reverse population migration that will return to the downtown areas. There are several reasons why our hospitals need to begin planning for this population change.

  • Emergency squads go to the closest hospitals. One of the main drivers of the relocation of hospitals to the suburbs is that EMS squads typically take patients with medical emergencies to the nearest hospital – having a cardiac catheterization lab at a downtown hospital doesn’t do you any good if EMS squads take heart attack patients to suburban hospitals. In the future, there will be a need for emergency hospital services closer to downtown areas.
  • Patients prefer to see primary care doctors who are close to home. All other things being equal, parents prefer a pediatrician office that is 1 mile from home rather than 10 miles from home. In the near future, we will need more physician outpatient practices located near downtown areas.
  • Patients usually go to the closest urgent care center. When a person is sick and cannot get in to see their PCP that day, they go to an urgent care center. Unlike primary care where patients have allegiance to their usual PCP, patients have no allegiance to urgent care centers. They just look on Googlemaps to see where the closest urgent care center is located. Urgent care centers will be needed in new areas of increased population density.
  • Access to mass transportation will be increasingly important. Buses, light rail, and commuter trains are only economically feasible if there is sufficient population density to support mass transit. As population density increases, so does the availability and frequency of mass transit services. Hospitals and outpatient services need to be located along main mass transportation corridors to optimize patient access.

There are several tactics that hospitals should be taking when city zoning regulations change:

  1. Project the effect of zoning changes on residential housing construction. An increase of 500 housing units may not have much impact on local healthcare utilization but an increase of  50,000 housing units can make expansion of healthcare facilities more financially viable. This means speaking not only with city officials (who are prone to being overly optimistic) but also developers (who are the ones who will be making actual construction decisions).
  2. Determine the demographics of population growth. Single room apartments will primarily attract young singles who have less need for inpatient care but will need outpatient primary care providers. On the other hand, condominiums may be more attractive to retirees who are more likely to use inpatient services. Multi-bedroom apartments and single-family homes will attract families with children and urgent care facilities will be in demand. It is not simply the number of people moving into a re-zoned area but the ages of those people that dictate the type of healthcare services to be anticipated.
  3. Buy property parcels. Re-zoned areas in cities are currently relatively inexpensive but as developers began to move in, the cost of those parcels will go up dramatically. Hospitals should purchase land now in anticipation of building facilities in 5 – 10 years. Even if the hospital ultimately decides against new construction, those parcel purchases will likely be excellent long-term investments as they can later be sold at a premium to developers.
  4. Stake your claim early. A primary determinant of whether to build a new hospital or outpatient facility is what the competition is in the immediate area. The first health system to publicize building plans in a re-zoned area can often ward-off other health systems from building competing hospitals.
  5. Plan outpatient expansion. Unlike a new hospital that costs hundreds of millions of dollars and requires many years of construction, office space can be rented and renovated for outpatient medical services in a matter of months. One of the first things a person does when moving into a new community is find a new primary care provider. A health system would be wise to grow primary care services as the population density in rezoned city areas increases. Early on, the population growth in a re-zoned area may only require 2 primary care providers but as additional housing units are built, the need may increase to 8 primary care providers. Inevitably, the initial outpatient office will outgrow its space so it is better for the hospital to buy or lease more space than they initially need so that they can grow into it.
  6. Don’t forget about parking. In the zoning changes proposed for Columbus, the decision about how many parking spaces will be left up to the developers. Parking lots are very expensive – a large surface lot consumes a large and expensive land parcel. A parking garage requires less land but is very expensive to build. In most urban hospitals, scarce (and expensive) parking is a major complaint by patients, visitors, and staff. By locating a healthcare facility along a major mass transit corridor, hospitals can reduce the need for parking. Innovative strategies can include providing free mass transit vouchers for patients and constructing bus and train stops inside of buildings (or at least with roofed protection from weather). Strategies for staff can include charging for on-site automobile parking but providing free mass transit vouchers, providing free bicycle parking, promoting work-from-home when feasible, and providing free remote parking with shuttle bus service to hospital facilities.
  7. Not all cities are the same. Different metropolitan areas have different growth potentials. Currently, many midwestern cities are often losing population while many southern cities are rapidly gaining population. A zoning change in a city losing population will have little impact on healthcare resource allocation whereas a similar change in a city gaining population can have a big impact. The best information about changes in city populations comes from the U.S. Census Bureau data. The graphs below show the change in populations in metropolitan areas in the United States between April 2020 and July 2023. In all, there are a total of 393 different metropolitan areas listed. For the purpose of simplicity, the areas in the graphs below include only the largest city in the metropolitan areas. So, for example, the Dallas, TX metropolitan area actually includes the Dallas-Ft. Worth-Arlington region. The top graph shows the 32 metropolitan areas with the largest population gains. Zoning regulation changes have the greatest potential impact on healthcare delivery in these metro areas. The bottom graph shows the 32 metropolitan areas with the greatest population losses. Zoning regulation changes will likely have minimal impact on healthcare delivery in these areas. It is important to note that the period 2020 to 2023 was affected by COVID with work-from-home initiatives causing many workers to relocate from some cities – it is unclear if these trends will continue as work-from-home opportunities level off and as many workers return to offices.

And back to Columbus…

With an increase of 41,330 population between 2020 and 2023, Columbus had the 32nd greatest growth in population out of the 393 U.S. metropolitan areas. Future projections are for this population increase to continue over the next decade with several large manufacturing and corporate building projects underway. Therefore, apartments and condominiums creating denser urban populations will likely come from net population growth rather than relocation of existing populations. So, hospitals in Columbus would be well advised to start planning for how to provide healthcare services to this expanding urban population now. The same holds for other metropolitan areas with high population growth and recent zoning reform.

In most communities, the zoning commission is not on the public’s mind, unless you are trying to build an addition on the back of your house. But zoning regulations can have an enormous impact on our nation’s health systems by affecting urban population density and growth.

April 10, 2024

Hospital Finances Medical Economics Physician Finances

Beware Of Health Care Sharing Ministries

Health care sharing ministries are an alternative to regular health insurance but they are a poor substitute for most patients and an annoyance (at best) for most hospitals and physicians. The basic idea is that people of similar religious beliefs pool their money in order to help each other pay for their medical bills. The concept arose from Amish and Mennonite communities that do not normally participate in programs like health insurance.

As an example, a number of years ago, I was the attending physician in our medical intensive care unit when a young Amish man was transferred from a rural hospital with a cardiac sarcoma, a rare malignant tumor of the heart muscle that is usually incurable and fatal. He lived on a mechanical ventilator for a couple of weeks before dying and in the process, generated a huge medical bill. Like most Ohio Amish at the time, he did not have health insurance. A few months after his death, an older Amish man walked into the MICU carrying a bundle of cash and handed it to the unit clerk. Their community had taken up collections to pay for his hospital charges. This was their normal practice to pay for medical bills.

About 30 years ago, this concept expanded to other Christian communities in the United States and became known as health care sharing ministries (HCSMs). When the Affordable Care Act was passed in 2010, it was estimated that about 100,000 Americans participated in HCSMs but that number has grown to now more than 1.7 million Americans. Participants are attracted by the like-minded religious beliefs of other members and by the lower monthly costs compared to regular health insurance.

Any time the word “ministries” is included as an attributive noun, it implies that the other noun that it is describing is virtuous, righteous, and morally principled; however, all too often, HCSMs are anything but. Instead, HCSMs can limit patient access to healthcare, burden patients with unexpected healthcare costs, and leave physicians unpaid.

What is a health care sharing ministry?

There are currently 107 HCSMs certified by the U.S. Department of Health and Human Services. HCSMs are registered as 501(c)(3) non-profit charity organizations. Rather than paying monthly health insurance premiums, participants pay monthly membership fees. These fees are usually less expensive than health insurance premiums. Membership is limited to people who share a common religious faith and often must attest to regular attendance at a specific church. Because they are not considered to be regular health insurance companies, HCSMs are not regulated by state insurance commissioners in most states. When participants incur medical bills, they then submit those bills to the HCSM for payment.

There are a number of coverage restrictions. HCSMs can decide what conditions they will and will not cover and frequently do not cover healthcare expenses for conditions that they find morally objectionable, such as abortions, out-of-wedlock maternity expenses, contraception, sexually-transmitted diseases, obesity-related conditions, or smoking-related diseases. HCSMs are also not required to cover pre-existing conditions or cap out-of-pocket costs.

The problem with health care sharing ministries

On the surface, HCSMs sound like a fabulous idea – it is like getting health insurance without having to pay for all of the bureaucratic overhead costs. Furthermore, it eliminates having to pay for other members’ healthcare costs that are incurred by “immoral” behavior. But there is a dark side of HCSMs that can be financially ruinous to patients. Here are some of the specific problems with HCSMs:

  1. They do not have to cover pre-existing conditions. Most HCSMs will have definitions of pre-existing conditions such as any disease that you have had to be treated for anytime in the past 3-5 years. As a result, participants tend to be young, otherwise healthy individuals whereas older people who are more likely to have diabetes, hypertension, or high cholesterol can be denied. Some HCSMs will cover the care of certain pre-existing conditions (such as hypertension) but those participants are charged a higher monthly fee.
  2. Many conditions are not covered. Each HCSM can decide what conditions will and will not be covered. Some of the common uncovered conditions include those that result from tobacco use, drug abuse, alcohol use, obesity, or “non-Biblical lifestyles”. Most HCSMs do not cover mental health expenses. Durable medical equipment is often not covered. Most HCSMs will have a limit on the number of months any new medical condition will be covered – for example, only covering the first 3 months of prescription medications for newly diagnosed diabetes.
  3. Maternity care is often limited. Pregnancy is considered a pre-existing condition by most HCSMs and so they will not pay maternity expenses for the first 10 months of a participant’s membership. In addition, maternity costs are often only covered for married women. Abortions are generally not covered, with no exception for rape.
  4. Preventive care is generally not covered. This can include regular physical exams, check-ups, health screenings, cancer screenings, well-child visits, and vaccinations.
  5. Provider network restrictions. Some HCSMs will only cover expenses from in-network physicians and hospitals. These are usually very limited in number, making it difficult for participants to find a participating doctor. This is especially true if the participant requires hospitalization and may not have a choice in their ER physician, surgeon, hospitalist, anesthesiologist, radiologist, or pathologist. Other HCSMs will allow participants to see any physician and then the HCSM will attempt to negotiate fees with the physician or hospital after the fact.
  6. Participants get charged “standard charges”. Every hospital and every physician group has publicized standard charges for every service and procedure. The thing is that the only people who have to pay standard charges are those who are uninsured – patients with health insurance always pay less. The reason is that every health insurance company will negotiate contracts with every hospital and every physician group and those contracts will include an agreement for the maximum amount that the insurance company will pay for every service and procedure. If the hospital’s “standard charge” is less than the insurance company’s contractual limit, then the patient and the insurance company only has to pay the standard charge. However if the standard charge is higher than the contractual limit, then the patient and the insurance company only have to pay the amount of the contractual limit. Because of this, every hospital and every physician group in the country sets their “standard charge” higher than the most that they can get from their highest-paying insurance company contract. To put this in perspective, most hospitals and physician groups set their standard charges at several times higher than the maximum amount that Medicare will pay. In other words, no one with health insurance pays the sticker price – only the uninsured pay the sticker price. HCSM participants are considered to be uninsured so they have to pay the standard charge amounts. The result is that HCSM members get charged a lot more for any given service or procedure than people with health insurance are charged.
  7. No guarantee of payment. The HCSMs are not legally obligated to pay for medical bills. In months when the member fees are less than the members’ health expenses, the members may only receive a prorated amount of the funds to cover their healthcare bill. As a result, the members never know up front how much of their medical bill will be covered by the HCSM and how much they will be responsible for themselves.
  8. The maximum coverage amount is usually capped. Most HCSMs will have a maximum amount that will be paid for any given participant’s healthcare costs – for example, a $50,000 per year and $1,000,000 lifetime limit. Any healthcare costs above these limits are the responsibility of the individual participant. When being billed “standard charges” by the hospital and the physicians, few patients can get through an ICU admission for less than $50,000.

HCSMs are bad for doctors and hospitals

One of the most basic metrics in healthcare finance is the number of days in accounts receivable (AR). This is how many days it takes to get paid after a bill is sent out and generally ranges between between 30 – 70 days. If your average days in AR is greater than 50 days, it is a sign of problems in your revenue cycle department. As the treasurer of our Department of Internal Medicine, I would monitor our days in AR every month. For insured Americans, the hospital (or doctor) first sends the bill to the insurance company (or Medicare) and then bills the patient for the amount of their co-pay or deductible. Medicare and insurance companies are generally pretty quick in getting those bills paid. But with HCSMs, the patient gets billed and not the HCSM. The patient then submits their bill to the HCSM to have the their bill “shared” with the other HCSM participants. This process can take months and as a result, days in AR can skyrocket.

The patient is responsible for the doctor bill or hospital bill and will be charged the amount of the “standard charges”. This is often tens of thousands of dollars that most people do not have sitting in their checking accounts. HCSMs will often advise their members to request that the bill get written off as charity care or to set up a payment plan with the doctor or hospital rather than pay the full amount of the bill. That way, the member does not have to pay the full amount of the standard charges all at once and can spread out payments until the HCSM determines whether it will cover the bill and if so, how much of the bill it will cover. If the patient does not initially pay their medical bill on time with out-of-pocket funds, then the hospital or physician group typically sends that bill out to a collection agency which takes a percentage out of whatever money it collects on that bill, reducing the amount that the doctor or hospital ultimately gets paid. If the patient sets up a monthly payment plan, then the hospital or physician group’s cash flow suffers since payment may be spread out over a year or longer. In addition, the hospital or physician group has to pay someone to send out the monthly payment plan bills to the patient and monitor whether or not the patient actually pays those bills – this adds additional overhead expenses in the revenue cycle department.

For catastrophic illnesses, the HCSM will have a limit on the amount that it will cover, for example, $50,000.Once that limit is exceeded, the patient becomes responsible for everything over that amount. This can often be considerably more than patients have in savings with the result that they have to sell some of their assets in order to pay their medical bills. This can result in very late payment to the hospital or physician group and can result in legal fees incurred by the hospital or physician group. As an example, I had a patient who was a healthy farmer in his 40’s that decided to go without health insurance. He unexpectedly developed pancreatitis complicated by respiratory failure and was in the ICU for several weeks. If he had health insurance, the negotiated charges would have been about $300,000 and he would have had out-of-pocket co-pay expenses of a few thousand dollars. But since he was uninsured, we legally had to bill him the hospital’s standard charges which totaled more $1 million. He eventually had to sell the farm that had been in his family for generations in order to pay his medical bills and it took the hospital 2 years to finally get paid.

Many HCSMs will negotiate fees on behalf of their members, but only after the member submits their medical bills. This can result in a lot of frustrating haggling between the HCSM and the hospital or doctor. It would be like trying to run a restaurant and having the customers trying to negotiate a lower price for their meal after they have finished eating. Any business prefers to negotiate the price of a service before they provide the service rather than several months after they provide that service; doctors and hospitals are no different.

HCSM lessons from Ohio, Missouri, and Colorado

Liberty Healthshares is an HCSM based out of Ohio. It served 70,000 Christian faith families between 2014 and 2020. It had an annual budget of $56 million and employed 470 workers. Members sued Liberty alleging failure to pay for medical bills and that Liberty funneled money to the company’s founders. The State Attorney General additionally reached a settlement agreement with Liberty agreeing to pay thousands of dollars in fines. Last year, ProPublica reported that the family that founded Liberty used tens of millions of dollars of members’ monthly fees to buy the family a marijuana farm, $20 million in real estate, and a private airline company. Since it was an HCSM, it was not subject to the regulatory oversight required of traditional insurance companies and as a result, it got away with misuse of funds for years.

Medical Cost Savings was an HCSM based out of Missouri. Last year, its founder pleaded guilty in federal court to an $8 million wire fraud conspiracy that cheated hundreds of members. Medical Cost Savings paid only 3.1% of healthcare claims and in some years paid none of its claims at all. The founder and his co-conspirators pocketed more than $5 million.

Colorado is unique among states in that it requires financial reporting by HCSMs operating in the state. In the most recent annual report by the Colorado Department of Regulatory Agencies, Colorado HCSMs collected $78 million in annual membership fees in 2022 and paid out $66 million to cover members’ medical bills. However, in that same year, members submitted $180 million in healthcare bills to these HCSMs. In other words, the HCSMs only paid 37% of submitted medical bills. In Colorado, HCSMs used advertising, social media, and “producers” (independent brokers) to recruit new participants. Four of the 16 HCSMs operating in Colorado reported the amount they paid these producers, totaling $1.8 million. HCSMs also reported marketing themselves to employers to offer to their employees. Some HCSMs required members to first request charity care and financial support from local governments and consumer support organizations in paying the member’s health care bills before the HCSM would consider paying those bills.

Caveat emptor

Let the buyer beware is nowhere more pertinent than health care sharing ministries. Operating outside of the insurance regulatory environment, they can pretty much cover whatever healthcare costs they choose to cover and are particularly susceptible to fraud and abuse of funds. Although most HCSMs are legitimate non-profit organizations run by well-meaning members of religious faiths, some are run by scammers who prey on the devout by appealing to their faith-based values.

So, are HCSMs appropriate for anyone? The only people who should even consider using an HCSM instead of health insurance are those who are young, have no medical conditions, take no medications, are not obese, do not have sex outside of marriage, are non-smokers, non-drinkers, and are willing to pay for their preventative healthcare out-of-pocket. Even then, if you are hospitalized for a serious injury, diagnosed with a chronic disease like cancer, or hospitalized with an unexpected serious infection then it could still cost you hundreds of thousands of dollars and result in financial ruin. Using an HCSM is better than being totally uninsured, but not by much.

For hospitals and physicians, taking care of patients who use HCSMs causes an additional overhead expense and often results in no payment at all. In the best of circumstances, the HCSM results in a delayed payment for services rendered that puts an added burden on the revenue cycle staff. As a doctor, I’ll take a patient with regular medical insurance over a patient with an HCSM any day. Even Medicaid beats an HCSM.

January 13, 2024

Medical Economics

Helping Patients Understand Medicare Part D

Health insurance in the United States is confusing… really confusing. And it gets even more confusing once a person is eligible for Medicare. In the past, Medicare did not cover outpatient prescription medications. However, in 2003, President George W. Bush signed the Medicare Modernization Act that provided a mechanism for prescription drug coverage for American seniors by the creation of Medicare Part D. Today, 50.5 million Americans receive prescription drug benefits through Medicare Part D. But navigating the Part D options can be difficult – and even treacherous.

Categories of Medicare Part D

Overall, 88% of Medicare enrollees have some type of prescription drug insurance. Most have a Medicare Part D plan but about a million Medicare enrollees have drug coverage through employer-sponsored retiree plans and a few million have coverage through federal plans such as the Veterans Administration or TRICARE. Medicare itself does not administer Part D plans – instead, Medicare contracts with various commercial insurance companies to sell and oversee Part D plans. There are four ways of obtaining Part D coverage:

  • Non-employer Prescription Drug Plans. These are “stand alone” plans that seniors electively sign up for. Medicare divides the country into 34 different prescription drug plan regions and insurance companies must offer coverage to all Medicare beneficiaries in the given region that it serves. Each insurance company is given an identifier code consisting of four numbers preceded by the letter “S”. This is followed by a hyphen and then a three digit code that corresponds with each of the various prescription drug plan options offered by that particular insurance company. So, for example, United HealthCare sponsored the AARP Preferred Plan and is coded as S5820-004.
  • Non-employer Medicare Advantage Prescription Drug Plans. These are Part D plans that are provided to seniors enrolled in various Medicare Advantage Plans (“Medicare Part C”). This essentially combines Medicare Part C with Medicare Part D. Seniors who enroll in these Medicare Advantage Plans are automatically enrolled in the corresponding Part D plan and generally cannot opt out. In fact, if a senior enrolled in a Medicare Advantage plan signs up for a separate Part D drug plan, they will be disenrolled in the Medicare Advantage plan and returned to basic Medicare parts A and B. These drug plans have a similar identification code but start with the letter “H” instead of the letter “S”. Making things even more confusing is that some organizations will have both a Medicare Advantage plan (without drug coverage) and a separate stand-alone Medicare Part D plan. The best way to determine which one a person has is to see if the drug plan starts with an “S” or an “H”.
  • Employer-only Group Prescription Drug Plans. These are only available to a specific employer’s (or union’s) employees so seniors not working for that employer cannot enroll in these drug plans.
  • Employer-only Group Medicare Advantage Prescription Drug Plans. These are also only available to a specific employer’s (or union’s) employees. Their identification code starts with the letter “E”.

When Medicare Part D was first rolled out in 2006, most Part D prescription drug plans were “stand alone” plans, accounting for 73% of all Part D plans. In 2023, most Part D prescription drug plans were provided through Medicare Advantage plans (56%) and stand-alone plans fell to 44%.

In the past, prescription drug coverage was available through some Medicare Supplemental Insurance policies (also known as “Medigap” policies). These were sold by private health insurance companies to cover what Medicare does not cover. However, Medigap policies can no longer be sold with drug coverage so seniors who purchase a Medigap policy must also purchase a separate Part D prescription drug plan.

When can seniors sign up for a Part D plan?

There are only certain times of the year that a Medicare enrollee can sign up for a Part D plan or switch to a different Part D plan:

  • At age 65 when initially enrolling in Medicare Parts A and B.
  • During the annual open enrollment period between October 15 and December 7.
  • During the annual Medicare Advantage open enrollment period between January 1 and March 31. This is only for seniors who are already enrolled in a Medicare Advantage plan and want to switch to a different Medicare Advantage plan or switch from their Medicare Advantage plan to basic Medicare Parts A and B plus a stand-alone Part D drug plan.
  • During a “special enrollment period”. This is only for certain life situations, such as moving to a new address, losing or changing one’s current health insurance coverage, or getting Medicaid.

During the regular open enrollment period, seniors are inundated with phone calls, emails, and letters from insurance companies that administer Medicare Advantage plans and Part D drug plans. These are sales pitches to try to get seniors to enroll or switch to that company’s plans. This is where I have seen many of my patients make costly mistakes – often switching to a lower cost Part D plan only to later find that the new plan does not cover their particular prescription medications.

Choosing a Part D prescription drug plan

Fortunately, Medicare has a very good on-line tool to help seniors choose a Part D prescription drug plan. These are the instructions to tell your patients:

  • First, enter your zip code.
  • Next, choose whether you want to see Part D plans (stand-alone) or Medicare Advantage plans (the Medicare Advantage plans may include their own Part D drug coverage).
  • Next, enter all of the prescription medications that you take including dose and the number of pills used per month.
  • Next enter your pharmacies. Because different Part D plans will have different “in-network” and “out-of-network” pharmacies, it is best to enter all of the various pharmacies in your area and also include mail-order pharmacies. Costs for medications at out-of-network pharmacies can be thousands of dollars more than in-network pharmacies.
  • This will then bring up a list of all of the Part D (or Medicare Advantage plans) in your area. Each plan will show the monthly premium, the annual deductible, and the monthly drug cost at each of the pharmacies that you previously entered. For many patients, trying to weigh the amount of the monthly premium against the amount of the deductible and the cost of the drugs can be very difficult. The good news is that the on-line tool shows the patient exactly how much they will pay each month for their medications when the costs of the premiums, drugs, and deductibles are all factored together. This “bottom line” amount is very helpful when choosing a specific Part D plan.

Overall cost is an important reason but not the only reason to choose one Part D plan over another. Each plan is also given a star rating score ranging from 1 to 5. This score is based on customer service, enrollee satisfaction, enrollee complaints, ease of getting prescriptions, and drug safety measures. Many patients will place greater value on a high star rating than a low overall cost.

The best plan for one person may not be the best plan for another person, depending on their different drug prescriptions. Therefore, every member of a household who is enrolled in Medicare should do their own search for Part D plans or Medicare Advantage plans. In many cases, it is prudent for spouses to each have plans from different insurance companies.

Drugs that are not covered

Each insurance company sponsoring a Part D prescription drug plan has its own formulary of covered drugs. A drug that is covered by one insurance company’s formulary may not be covered by a different insurance company’s formulary. Moreover, insurance companies change their formularies every year. Many patients do not factor this into their decision-making when switching to a different Part D plan and every January, physicians scramble to change their patients’ prescriptions from a previous medication to a new similar medication that is on the patients’ new formularies. But in addition to insurance company-specific formularies, there are certain classes of medications that are not covered by any Part D plans including:

  • Over-the-counter drugs.
  • Drugs for weight loss or gain, even if used for non-cosmetic purposes, such as to treat morbid obesity.
  • Cough and cold preparations, when prescribed for symptomatic relief only.
  • Fertility drugs.
  • Erectile dysfunction drugs.
  • Cosmetic and hair growth drugs.
  • Drugs purchased in another country.
  • Vitamins and minerals, except niacin products, Vitamin D analogs (when used for a medically accepted indication), prenatal vitamins and fluoride preparations.
  • Drugs that are covered under Medicare Part A or Part B (see below).

And to add to the complexity… In certain situations, medications are not covered by Medicare Part D but are instead covered under a different part of Medicare or covered by the patient.

  • Inpatient hospitalization. Medications given during inpatient hospital stays are covered by Medicare Part A (and not Part D).
  • Skilled nursing facilities. These stays are considered as inpatient stays. Thus, medications are covered by Medicare Part A.
  • Hospice. Medications given for symptom control or pain relief when a patient is enrolled in hospice are covered by Medicare Part A.
  • Observation status. When a patient has a hospital stay that is considered “observation status”, it is covered by Medicare Part B (and not Part A). Medications given during an observation stay are covered by Medicare Part D. But medications given while in the hospital are administered through the hospital’s inpatient pharmacy and inpatient pharmacies are considered out-of-network for Medicare Part D. Because of this out-of-network status, patients typically have a significant out-of-pocket cost for medications they receive in the hospital during an observation status stay.
  • Outpatient intravenous drugs. Medications that are typically administered in a physician office (rather than being self-administered at home) usually fall under Medicare Part B. These include intravenous chemotherapy drugs given for cancer and intravenous biological drugs given for rheumatologic diseases.
  • Drugs delivered via DME (durable medical equipment) devices. Medications given via a home infusion pump or a nebulizer are covered by Medicare Part B. These include insulin when given by an insulin pump and albuterol when given by a nebulizer.
  • Vaccines. Most vaccines are covered by Medicare Part D plans. However, four vaccines are covered by Medicare Part B instead. These include vaccinations for: influenza, pneumococcal pneumonia, hepatitis B, and COVID. There are a few other uncommon exceptions where vaccinations are covered by Medicare Part B, such as rabies vaccinations if a person is bitten by an animal. Regardless of whether a vaccination is covered by Medicare Part B or Part D, there is no out-of-pocket co-pay for any vaccination recommended by the CDC.
  • Miscellaneous drugs covered by Part B. There are numerous other carve-out exceptions to Medicare drug coverage. In these situations, mediations are covered by Part B (and not Medicare Part D), even when self-administered in the patient’s home. These include:
    • Intravenous immunoglobulin
    • Blood clotting factors for hemophilia
    • Injectable osteoporosis drugs
    • Renal dialysis drugs
    • Oral chemotherapy drugs
    • Oral anti-nausea drugs used for chemotherapy nausea
    • Immunosuppressive drugs for organ transplant
    • Leqembi (a new Alzheimer’s drug)
    • Intravenous feedings and tube feedings

These exceptions are important because they will fall under the Medicare Part A or Part B co-pay and deductibles. For patients with basic Medicare Parts A and B, these costs can be considerable. For patients who additionally have a Medigap policy or who are enrolled in a Medicare Advantage plan, the out-of-pocket costs will vary depending on the terms of their specific policy.

The “donut hole”

This is often referred to as the “coverage gap”. This happens when some patients have a temporary limit on how much the Part D plan will pay for prescription medications. The coverage gap begins after a patient and their drug plan have spent a certain amount for covered drugs ($5,030 in 2024). When the patient enters the coverage gap, drug costs get complicated. While in the coverage gap, the patient is responsible for 25% of the cost of a brand name drug, the manufacturer is responsible for 70% of the cost of the drug, and the insurance company is responsible for 5% of the cost of the drug. In addition, there is a dispensing fee for each drug – 75% of this fee is covered by the insurance company and 25% is covered by the patient. Generic drugs are handled differently in the coverage gap – the patient still pays 25% of the cost but the Part D plan covers the other 75% of the cost.

Once the total out-of-pocket amount paid by the patient exceeds $8,000 (for 2024), the patient moves out of the coverage gap and into “catastrophic coverage”. This means patients only have to pay a minimal copayment (generally 5% or less) for covered Part D drugs for the rest of the calendar year in 2024. However, in 2025, the Medicare Part D out-of-pocket costs will be capped at $2,000!

Once again, the good news is that Medicare’s on-line Part D tool factors in the coverage gap (if any) to show patients how much they will pay for each of their medications for each month of the year.

Some drugs will be cheaper in the future

In 2024, all Medicare Part D plans will include a cap on the price of insulin of $35 per month. Beginning in 2026, Medicare will negotiate prices directly with manufacturers for ten common (but expensive) Part B and Part D drugs:

  • Eliquis
  • Jardiance
  • Xarelto
  • Januvia
  • Farxiga
  • Entresto
  • Enbrel
  • Imbruvica
  • Stelara
  • Fiasp; Fiasp FlexTouch; Fiasp PenFill; NovoLog; NovoLog FlexPen; NovoLog PenFill

Medicare will expand the number of Part B and Part D drugs subject to subject to price negotiation each year thereafter. By having Medicare negotiate these prices (rather than individual health insurance companies), Medicare can leverage its buying power to lower the cost of these drugs to enrollees.

It’s complicated…

During a person’s working years, health insurance is fairly straight forward – you either get insurance through your employer or purchase it through the federal government’s Health Insurance Marketplace. These health insurance plans are comprehensive and cover outpatient care, inpatient care, and prescription medications. However, once a person turns 65-years-old, health insurance becomes much more complex. Seniors have to sign up for basic Medicare Parts A and B. But basic Medicare only covers some healthcare costs, in particular it does not cover outpatient prescription medications. So, seniors have to decide whether to purchase an additional Medigap policy plus a stand-alone Part D plan or to purchase a Medicare Advantage plan that includes drug coverage, which is essentially a Medigap policy bundled with a Part D plan. Or, patients who are lower income may qualify to have both Medicaid plus Medicare. Or, patients may elect to just go with basic Medicare Parts A and B and then pay for any additional costs out-of-pocket. Given the high costs of healthcare and given that healthcare needs are often unpredictable after age 65, most seniors either opt to purchase a stand-alone part D plan or a Medicare Advantage plan with drug coverage.

As physicians, it is our responsibility to advise patients in a fiduciary manner. Frequently, we are the only ones who provide unbiased advice when it comes to choosing between different Medicare Part D plans or Medicare Advantage plans. Therefore, it is incumbent on all physicians to understand how these plans work and how various plans differ.

December 19, 2023

Medical Economics Physician Finances

Impact of the 2024 Medicare Physician Fee Schedule

The final 2024 Medicare Physician Fee Schedule was published yesterday in the Federal Register. The fee schedule will impact different specialties differently and as usual, there were some winners and some losers but mostly losers – all physicians will see a reduction in their total Medicare reimbursement. The entire fee schedule is a 1,230 page document. Here are some of the key take-aways.

Summary Points:

  • The conversion factor will drop by 3.4% to $32.74 per RVU
  • Primary care physicians will get a supplement to outpatient E/M codes by using CPT code G2211
  • Telemedicine did not get cut
  • Different specialties will see different changes to their Medicare payments ranging from +3% to -4%
  • Caregiver training will now be covered by Medicare
  • There is better clarification of whether a physician or advance practice provider should submit a bill for split/shared encounters
  • Medicare will provide a $38.55 supplement for 4 different vaccines when given in a patient’s home


Overall lower reimbursement

The single most important item that affects how much physicians get paid is the annual conversion factor. This is the amount that Medicare pays physicians per RVU. In brief, each service or procedure performed by a physician is assigned a number of RVUs (Relative Value Units) that correspond with the complexity and amount of time it takes to perform that serve or procedure. There are 3 subcomponents of the RVU: a work RVU (physician effort), an expense RVU (overhead expense to perform that service or procedure), and a malpractice RVU (cost of malpractice insurance to perform that service or procedure). For example, a level 4 outpatient visit for a new patient is worth a total RVU of 5.44 (2.60 work RVU + 2.61 expense RVU + 0.23 malpractice RVU).

Every year, Medicare adjusts the conversion factor. Because Medicare is mandated to be budget-neutral, in most years Medicare reduces the conversion factor since there is not enough money to increase physician reimbursement while expanding Medicare coverage for new areas of spending. For 2024, Medicare will again lower the conversion factor, this time to $32.74, which is a decrease from 2023’s conversion factor of $33.89, 2022’s conversion factor of $34.61 and 2021’s conversion factor of $34.89. Thus, over the past 3 years, Medicare is has reduced physicians’ pay by 6.2%. During that same time, inflation has risen by 17.62%. To put these numbers in perspective, in 2021, an RVU could buy 9.8 gallons of milk but in 2024, an RVU will only buy 7.8 gallons of milk. This means that the purchasing power of 1 RVU has fallen by 20% since January 2021.

Given this rather enormous drop in the purchasing power of an RVU over the past 3 years, private practice physicians have few options to prevent lower income: spend fewer minutes with each patient or work more hours. Hospital-employed physicians require greater subsidy per physician from the hospital in order to overcome both inflation and the reduction in income generated by Medicare payments to the physicians.

Primary care got a boost

Primary care physicians have to do a lot of work behind the scenes to coordinate care among various specialists, fill out patient paperwork, negotiate with insurance companies for prior authorizations, answer phone calls, and respond to EMR patient portal questions. This additional work has not been compensated in the past. New for 2024 is an add-on CPT code, G2211, that accounts for this extra work performed by primary care practitioners after the patient leaves the office. It can be added onto most primary care office visit CPT codes, thus increasing Medicare payment for primary care services. Medicare estimates that it will eventually be used for 54% of all outpatient office visits that are billed using E/M codes. G2211 will be worth 0.33 RVUs (about $10.91).

Telemedicine did not get cut

The COVID pandemic resulted in Medicare loosening restrictions on telemedicine by allowing most outpatient E/M services to be paid when performed using telemedicine. Prior to the pandemic, telemedicine could only be performed in limited situations, such as when the patient lived in an isolated remote region of the country. During the pandemic, patients and physicians all throughout the country found that telemedicine was convenient, efficient, and in many situations just as effective as in-person office visits. In short, Americans liked telemedicine. As the pandemic has been winding down, there was fear that Medicare would revert to previous telemedicine restrictions, making telemedicine inaccessible to most patients and physicians. For 2024, Medicare has decided to extend the telemedicine waivers and will continue to pay for telemedicine through the end of 2024.

To bill for a telemedicine encounter, there must be both an audio and a video connection between the patient and the physician. This has been problematic for patients who lack high-bandwidth internet connections or lack video cameras on their computers or cell phones. In these situations, the encounter is generally converted to an audio-only telehealth encounter – essentially a phone call. In the past, Medicare would not pay for these phone calls but during the pandemic, Medicare did pay for phone calls when they were done as a telehealth encounter that substituted for an in-person office visit. For 2024, Medicare will continue to pay for audio-only telehealth encounters.

Prior to the COVID pandemic, telemedicine was difficult to perform in teaching settings since the resident and physician needed to be in the same physical location. For 2024, Medicare will permit the resident and the attending physician to be connected by video conferencing during a telemedicine encounter, thus permitting them to be in different locations.

Medicare had originally proposed that if a physician performed a telemedicine encounter from their home (rather than the office), that their home address would need to be registered on Medicare enrollment and billing forms. Presumably this would also apply to telemedicine encounters performed by a physician located in a hotel room, AirBNB, or family member’s home. An implication of this was that all of these various addresses would then need to also be approved by malpractice insurance companies as “medical practice locations”. This would place an enormous burden on physicians and practice administrators by adding a huge volume of paperwork to be completed anytime a physician performed a telemedicine encounter from any location other than their regular medical office. The good news is that Medicare decided to NOT make this requirement for 2024. Instead, when a physician performs a telemedicine encounter from their home, they can use their regular office as the site of service for billing purposes.

Changes in reimbursement for specialists

Every year, Medicare tinkers with the amount that it pays for any given service or procedure. 2024 is no exception and as a result, the RVUs for some services and procedures went up and for others, went down. Because of the budgetary net neutrality requirement, an increase in RVUs for one service must be accompanied by an equivalent decrease in RVUs for another service. The result of this is that some specialties will see an increase in their total annual Medicare allowable charges and other specialties will see a decrease in their allowable charges. Medicare estimates the impact of the 2024 Physician Fee Schedule on various specialties on page 79,468 of the Federal Register. The table below shows these estimates for selected physician specialties.

This table lists the charges by specialty, not the actual reimbursement. The change in charges ranges from +3% (endocrinology and family practice) to -4% (interventional radiology). When added all together, the charges have to total zero due to net neutrality requirements. The effect of the reduction in the conversion factor is on top of any changes to charges. Because the conversion factor will fall by 3.4% ($33.89 to $32.74), all specialities will actually see a drop in reimbursement. To see the actual estimated effect on Medicare reimbursement for any specialty, subtract 3.4% from the percentages in the table above.

New CPT codes

The American Medical Association creates CPT codes and then Medicare decides which codes will be reimbursed and the amount of RVUs assigned to each new CPT code. For 2024, the AMA announced that there will be 230 new CPT codes, 49 deleted CPT codes, and 70 revised CPT codes. This brings the total number of CPT codes to 11,163. It can take a while for a newly created CPT code to work its way through the RVU assignment process. The best resource to determine whether a CPT code is currently reimbursed by Medicare is the Medicare Physician Fee Schedule Look-Up Tool on the Medicare website. By entering a CPT, you can find out what the RVUs are for that CPT code and also the dollar amount that it reimburses. The 2024 data has not yet been entered into this on-line look-up tool but should be available in January 2024.

Although commercial health insurance companies tend to pay for the same CPT codes as Medicare, on occasion, a particular insurance company may reimburse for a CPT code that Medicare does not reimburse for. This adds a layer of complexity to the revenue cycle office of any medical practice. By billing for these CPT codes, the revenue cycle department accepts that there will be denials from those insurance carriers that do not reimburse for a particular CPT code. However, no one wants to leave money on the table from the insurance carriers that do cover that CPT code.

Caregiver training services now covered

New for 2024, Medicare will pay for providers to train caregivers (often family members). Although these codes will likely primarily be used by physical, occupational, and speech therapists, other providers (including physicians) can also bill for these services. These CPT codes should be used to support patients with certain diseases or illnesses (e.g., dementia) in carrying out a treatment plan. This can cover a broad range of skills, from assisting with activities of daily living to more complex tasks such as transfers, mobility, communication, and safety practices. These codes should be used when only the caregiver is present and the patient is not present.

  • CPT 97550 – first 30 minutes of caregiver training. It is valued at 1.00 work RVUs.
  • CPT 97551 – each additional 15 minutes of caregiver training. It is valued at 0.54 work RUVs.
  • CPT 97552 – group caregiver training. It is valued at 0.23 work RVUs.

Spit/shared evaluation and management services

Under Medicare, a service can be billed by only one practitioner, and if non-physician practitioners (for example, nurse practitioners) bill for a service, they receive only 85% of the physician rate. Frequently, a nurse practitioner will do an initial assessment and then the physician will follow the NP later to confirm the assessment and finalize management recommendations. In the past, it has been controversial about whether the bill for the service should go out under the NP or the physician in these situations when the clinical service is considered “split/shared”. In past years, Medicare has stated that it should be whichever of the two providers were responsible for the “substantive portion” of the visit but did not provide a good definition of substantive portion. For 2024, Medicare has defined “substantive portion” of a split or shared service to mean more than half of the total time spent by the physician and the non-physician practitioner. This should eliminate much of the administrative confusion.

The implication is that when physicians bill for split/shared visits, they should document that they performed the substantive portion in their progress note in case of a billing audit by Medicare carriers. Medicare carriers sometimes differ in their documentation requirements so physicians (or their billing staff) should check with their specific Medicare carrier to learn what chart documentation is sufficient. Most likely, it will be something along the lines of: “I personally performed more than 50% of the total time required for this split/shared visit in conjunction with the advance practice provider“. In other words, just one more lengthly phrase to clutter up progress notes in patient medical records.

Vaccinations given in a patient’s home

As a pulmonologist, I have personally given many influenza vaccinations to patients on mechanical ventilators during home visits. I have also given many flu shots to patients during home hospice visits. Those vaccinations were reimbursed at the same rate as if they were given in a physician office. In 2021, Medicare approved paying providers $35.50 extra to give COVID vaccinations in a patient’s home, over and above the usual charge for the vaccinations. This was done to encourage widespread use of the COVID vaccines, particularly in vulnerable patients who were confined to their home due to chronic disease.

For 2024, Medicare will continue to pay the supplemental reimbursement for COVID vaccinations given in a patient’s home and will also expand the list of vaccines that are eligible for this supplement to include pneumococcal pneumonia, influenza, and hepatitis B vaccines. This supplemental payment for 2024 will be $38.55 and will be added to the usual Medicare Part B payment of $32.57 for influenza, pneumococcal, and hepatitis B vaccinations and $43.43 for COVID vaccinations.

It will be harder to maintain a private practice

Over the past decade, it has become increasingly difficult for physicians to fund their salary from billing for professional services alone. Because such a large percentage of physician revenue comes from Medicare, the changes to the Medicare Physician Fee Schedule have played an out-sized role in the inability of physicians to rely on their billings alone. Currently, 33.4% of physician professional billing revenue in the United States comes from Medicare. Medicaid accounts for an additional 8.5%, private health insurance accounts for 38.4%, and out-of-pocket payments account for 7.6%. The remaining 12.2% is from other federal health programs such as the Department of Veterans Affairs, the Department of Defense, the Indian Health Service, and CHIP. The changes that Medicare makes to the annual Physician Fee Schedule are generally also made by other payers, especially Medicaid and the other federal health programs.

When adjusted for inflation, over the past 22 years there has been a 26% decline in Medicare payments to physicians During those same 22 years, there has been a 47% increase in medical practice expense. This reduction in physician income from professional billing coupled with this increase in overhead office expense has led to most physicians now being hospital-employed rather than in a private practice. As hospital-employees, physicians can receive monetary subsidies from the hospital in order to maintain salaries that cannot be supported by professional revenue alone.

Due to inflation during 2022 and 2023, we have seen many unions win contracts with double-digit wage increases for union workers whereas Medicare is reducing payment to physicians for clinical services. This further reduction in physician payments by Medicare in 2024 is likely to push even more physicians out of private practice and into hospital-employed models as private practice becomes increasingly unsustainable.

November 17, 2023

Medical Economics

Why Conservatives Should Fund Planned Parenthood

I know what you’re thinking about the title of this post: “Didn’t he mean defund Planned Parenthood?” No, you read the title right, I am going to make the argument that social conservatives should donate to and fund Planned Parenthood and similar organizations. The reason why? Because by funding Planned Parenthood, we can decrease the number of U.S. abortions. Now you’re thinking: “That makes absolutely no sense and he is totally crazy“. However, if we apply root cause analysis to U.S. abortions, it turns out to make perfect sense.

Sakichi Toyoda

Root cause analysis is the process that we use in hospitals to figure out why a medical error occurred in order to fix the root cause of that error. The father of root cause analysis was Sakichi Toyoda, a Japanese inventor and entrepreneur who invented the automatic power loom used in textile manufacturing. His company later evolved into the Toyota automobile manufacturing company. Sakichi Toyoda championed the 5 whys: when a manufacturing problem occurs, ask “why” five times to find the true source of the problem in order to correct it. The 5 whys are the basis of the principle of lean manufacturing, a method of improving production efficiency and are a key component of the Six Sigma manufacturing process improvement training program.

A case study using the 5 whys

The best way to understand the 5 whys is by looking at an example of how we use the process in hospital quality control. Let’s take a hypothetical hospital that finds it has a very high rate of post-operative surgical infections. Now, let’s ask the 5 whys and see what the hospital’s solution would be if it stopped before getting to the fifth and last why:

If we only ask 1 why, then the hospital’s solution to the high post-operative wound infection rate would be to close down the operating rooms on Thursdays. This would be terribly unpopular with the surgeons and anesthesiologists who would see a 20% drop in their billable income. The surgery schedule will get backed up with the result that patients become unhappy because they have to wait a long time to get their surgeries. And the hospital’s financial margin would suffer as surgical revenue falls. So, let’s ask a second why:

In this case, Thursday is the day that all of the orthopedic surgeons do their knee replacement surgeries during the Thursday orthopedic surgery OR block time. But if the hospital stops doing knee replacement surgeries, the orthopedic surgeons will be irate because that is one of their primary surgical procedures. Patients will be irate because they will have to go to another hospital to get their knee replacements. And the hospital chief finance officer will be irate because the hospital makes more money on knee replacements than any other surgery. How about the third why:

Drilling down further, it turns out that just one orthopedic surgeon, Dr. Smith, has all of the post-op knee replacement surgical wound infections. If we stop with the third why, then the solution is to take away Dr. Smith’s knee replacement surgery privileges. He will be upset and will have to re-tool his practice to start doing other types of orthopedic surgical procedures, such as hip replacement surgeries. And as we will see, this will not fix the root cause of the problem. So, we now go to the fourth why:

An astute epidemiology nurse discovers that Dr. Smith’s sterile surgical gloves frequently break in the middle of his operations, thus potentially contaminating the surgical field with the bacteria on his skin. Therefore, the medical director of infection control recommends that Dr. Smith double glove so that if the outer glove breaks, there is a back-up inner glove to prevent contamination. But what about if we go all the way to the fifth why:

By asking the final why, we determine that Dr. Smith has unusually large hands and he needs size #9 sterile gloves. But the operating room only stocks size #7 and #8 gloves so Dr. Smith has been using gloves that are too small. The result is that his gloves frequently break, causing his patients to frequently have infections. The root cause of the hospital’s post-op surgical infection rate was that the operating room was not stocking the correct size gloves. The solution was to stock large gloves in the O.R.

If the hospital stopped with the first why, the orthopedic surgeons would just operate on a different day. If the hospital had stopped with the second why, the orthopedic surgeons would just do surgeries other than knee replacements. If the hospital stopped with the third why, Dr. Smith would start doing hip replacements rather than knee replacements. If the hospital stopped with the fourth why, Dr. Smith would have breaks in 2 pairs of gloves instead of just 1 pair of gloves. In all four of these situations, there would have been no effect on the hospital’s post-op surgical infection rate. It is only when the hospital gets to the fifth why that the infection rate actually drops. Now let’s see how we can apply the 5 whys to the problem of abortion.

Abortion and the 5 whys

Just about every American, both conservative and liberal, will agree that we do too many abortions in the U.S. In 2020, there were 930,160 abortions performed in the U.S. To put this number in perspective, there were 350,000 COVID deaths in the U.S. in 2020, the first year of the pandemic. In other words, there were more than two and a half times more abortions than COVID deaths. Overall, 20.6% of all pregnancies ended in abortion and one out of every four American women has had an abortion at some time in her life. So our challenge is to reduce the number of abortions and to do that, we need to do a root cause analysis. So, let’s apply the 5 whys to the problem of abortion in the United States.

If we only ask the most superficial why, we determine that we have a lot of abortions in the U.S. because organizations like Planned Parenthood offer abortion services. When the U.S. was living in the era of Roe v. Wade, this was the approach taken by those opposed to abortion. Conservative states prohibited public funds to be used for abortion and created laws to make it as hard as possible for organizations like Planned Parenthood to perform abortions. But the 930,160 abortions performed in the United States in 2020 indicates pretty clearly that stopping at the first why did not significantly reduce the number of abortions in our country. So, let’s ask a second why:

With the Supreme Court ruling on Dobbs v. Jackson Women’s Health Organization a year ago, those opposed to abortion focused on the second why. The result is that many states have passed or plan to pass laws making it illegal for doctors to perform abortion in most situations. These laws will certainly stop doctors from performing abortions but they will not stop women from pharmacologically inducing abortions on their own and these laws will most certainly not get at the root cause. Now let’s see what happens at the third why:

Here, we find that the doctors were not actively seeking women to convince them to have abortions. Instead, the women were seeking the doctors and requesting abortions. If we stop with this why, then the solution is to make it illegal for a woman to have an abortion. This would not prevent some women from pharmacologically inducing an abortion on their own. For example by buying misoprostol on the street the way people by cocaine on the street or by taking a high dose of FDA-approved drugs like methotrexate or non-steroidal anti-inflammatory drugs. State laws making it illegal for a woman to willingly undergo an abortion will not eliminate abortion any more than laws making marijuana illegal has stopped marijuana use. Such state laws also would not stop women from traveling to another state to get an abortion where it is legal. What about the fourth why:

Now we find that America’s abortion problem is actually an unwanted pregnancy problem. If we stop with the fourth why, then the solution would seem to be to tell women and men that it is illegal or immoral to have sexual intercourse unless they are married and are doing it in an attempt to have children. The Catholic Church has been trying this tactic for nearly 2,000 years and it hasn’t worked yet. I can confidently say with 100% certainty that telling people in their teens and 20’s that they can’t have sex outside of marriage will not work. You can’t stop people from having sex any more than you can stop the sun from rising. So let’s look at the fifth why:

Now we see that abortions are performed because of unwanted pregnancies that in turn resulted because adequate birth control methods were not used and because of a lack of sex education. And where do many women (particularly low income women and teenage girls) go to get birth control? …Planned Parenthood. In addition, organizations such as Planned Parenthood provide free community sex education and this fills an unmet need in those communities that lack effective sex education in their schools – either because of state laws or school board decisions in the case of public schools or religious doctrines in the case of private schools.

The economics of abortion

If we approach abortion from an economic viewpoint, it all comes down to supply and demand. Focusing on laws that penalize doctors from performing abortion or penalize women from having an abortion is supply-side economics. If social conservatives really want to reduce the number of abortions, then it is necessary to focus on demand-side economics. And that means finding ways to reduce unwanted pregnancies and redirecting efforts to address the fifth why. So, what should pragmatic conservatives do to really make a difference in the number of abortions performed in the United States?

  1. Restore effective sex education in schools. Avoiding talking about sex with teenagers in schools and banning books about sex in libraries will only increase unwanted pregnancies. Similarly, teaching that abstinence is the only way to get to heaven in our private schools is out of touch with reality. Sure, it would be nice if every parent had “the talk” with each of their children at age 12 but history has proven that this just does not always happen. Schools are the only realistic venue for universal sex education.
  2. Make effective birth control available. The emphasis here is on the word “effective“. Not all forms of birth control are equally effective. Condoms are frequently ineffective and birth control pills are sometimes ineffective. A law requiring all commercial health insurance policies and all state Medicaid programs to provide IUDs, hormonal implants, vasectomies, and tubal ligations with no co-pays would eliminate far more abortions than defunding Planned Parenthood or making abortion illegal in your state. What are effective birth control methods?
    1. > 13 pregnancies per 100 women per year: withdrawal, condoms, spermicides, diaphragms, calendar methods
    2. 4 – 7 pregnancies per 100 women per year: birth control pills, hormonal patches, cervical rings, hormone injections
    3. < 1 pregnancy per 100 women per year: IUDs, implants, vasectomy, tubal ligation
  3. Donate money to Planned Parenthood for pregnancy prevention programs. Who goes to Planned Parenthood for birth control? It’s women who do not have a primary care provider, women who lack health insurance coverage for effective birth control, and girls who do not want their parents to know that they are sexually active (Sorry to tell you this America, but your kids did not have sex because they went to Planned Parenthood, they went to Planned Parenthood because they were having sex). This is actually a huge part of what Planned Parenthood really does and this is often neglected in public discussion. If you really want to reduce abortions, then pay organizations like Planned Parenthood to reduce unwanted pregnancies.

You can’t stop all unwanted pregnancies

Not every unwanted pregnancy can be avoided. Sometimes, even diligent use of an effective method of birth control does not work. Sometimes people have unplanned consensual sex or unplanned sex when intoxicated. Sometimes pregnancy results from rape. Sometimes complications of pregnancy pose a health risk to the woman. And sometimes there are severe fetal abnormalities even when pregnancy was intentional. So, we cannot totally eliminate the demand for abortion but by focusing on birth control availability and sex education, we can substantially reduce the demand for abortion. By doing so, we can reserve abortion for these other situations where there is perhaps less controversy about whether abortion should be accessible. That would be fare less polarizing and decisive than making abortion illegal except in these situations.

By stopping at the first, second, third, or fourth why of abortion, all we do as a society is engender anger and cause Americans to face off against each other, without actually reducing the demand for abortion. It is just like the analogy with the hospital with a high post-op surgical infection rate. It is only by reaching the fifth why that we can actually make a difference in abortion demand and reduce the number of abortions in our county.

I fear that history will judge us as foolish. Instead of directing our efforts at the underlying root cause of abortion, we as a society have put all of our energy into the downstream effects of that underlying root cause. In this way, we are like the man who kept blasting away every night at the snakes and wrecking his house rather than simply closing the back door so that the snakes could not get into the house in the first place.

June 26, 2023

Hospital Finances Medical Economics

Working From Home: Short-Term Benefits But Long-Term Costs

During the COVID pandemic, working from home was mandatory for many workers. But now that the pandemic is fading, working from home is becoming optional. In our hospitals, some employees could not work from home, for example: nurses, respiratory therapists, pharmacists, radiology technicians and lab technicians. But other jobs could be done remotely, for example: scheduling, revenue cycle, customer service, and finance. Should these workers now return to work in the hospital?

In many industries, remote working has now become the norm. Historically, the U.S. average office space vacancy rate was 12.5%. In the first quarter of 2023, that rate is now 18.5%. New office construction has plummeted and many downtown office buildings are being converted into apartments. 39% of American workers have “tele-workable” jobs that can be done remotely. During the height of the pandemic, 55% of these workers with tele-workable jobs did work from home. Currently, 35% of these workers continue to work from home. Overall, 22 million Americans work from home all the time and many more have “hybrid” work, meaning that they work from home some days and work in the workplace building other days.

Advantages of working from home

Every job is a little different and some jobs have more benefits from working remotely than other jobs. There are benefits to both the employer and the employee to working from home. For the employer, advantages include:

  • Reduced need for office space and conference rooms
  • Reduced need for parking space
  • Reduced utility expenses
  • Reduced need for security staff and janitorial services
  • Reduced use of sick time by employees who are either on COVID isolation or have other infections with only mild symptoms
  • Reduced use of personal time-off by employees to stay home with a sick child
  • Improved employee satisfaction
  • Ability to draw workers from a larger geographic area

For the employee, there are even greater advantages:

  • Reduced commuting transportation costs
  • Elimination of daily commute time
  • More time with family and pets
  • Reduced expense of commercially-prepared food (lunches, coffee, snacks)
  • Reduced cost of work attire
  • Potential for fewer work-time interruptions by co-workers
  • Greater flexibility of working hours
  • Flexibility of living location
  • Greater flexibility to take care of errands and appointments
  • Reduced exposure to infected co-workers (not only COVID but also influenza and common colds)

Disadvantages of working from home

As the pandemic has been winding down, many employers are requiring their employees to return to the office, at least some days of the week. The reason is that for many employers, there are disadvantages to remote working that out-weigh the advantages. Some of these disadvantages to the employer include:

  • Potential for some employees to not work the expected number of hours per week
  • Potential for worker distraction by children, spouses, pets and other temptations of home
  • Reduced ability to have group “brainstorming”
  • Reduced spontaneous interactions with other employees
  • Potential for communication errors from inability to pick up on non-verbal communication
  • Reduced mentoring of junior employees by more experienced employees

For the worker, there can also be disadvantages, including:

  • Reduced access to mentoring by senior employees
  • Reduced visibility to company leaders for promotion consideration
  • Reduced networking with other employees outside of one’s own department
  • Social isolation and loneliness
  • Elimination of on-site work perks such as office supplies, coffee, company fitness centers
  • No daily change of scenery
  • Expenses such as computers and video equipment

So, who should and who should not work from home?

Every year, the senior leaders of our hospital would get together for an all-day retreat. We would set our goals for the upcoming fiscal year as well as the strategies and tactics we would use to achieve those goals. Part of that process included succession planning for hospital managers and directors. We would identify not only those employees who we thought had potential for promotion in their own department but also those employees who demonstrated skills that predicted success in a different department. The workers who were most typically considered were those who we knew from interpersonal interactions in the hospital or who we had been able to directly observe at work. Working from home can put the employee at a disadvantage when senior leaders do succession planning and consider employees for promotion.

Working from home is a trade-off of advantages and disadvantages. The balance between those advantages and disadvantages will differ between different employers and departments; it can also differ between different employees in the same department. Every employer and every department within the employer needs to determine where that balance lies in order to decide about continued utilization of working from home. For most employers, offering the option of working from home can insure access to highly qualified employees who, because of geographic location or personal preference of remote working, would otherwise not consider working for that employer. For the employee, choosing to work from home may be preferable at a time in their life when their priorities are the flexibility of work hours and time savings from the lack of a commute. However, for employees who need the benefit of workplace visibility and mentoring for promotion and career advancement, working in the workplace is often preferable.

Work from home is not a one-size-fits-all proposition. Most employers (including hospitals) should neither require all employees to come to work in the workplace nor require all employees to work from home. Just because someone can do their job working from home does not mean that they should do their job working from home. The U.S. unemployment rate is currently 3.4%; the last time the rate was lower was in 1953. With the unemployment rate at a historic low, employers experience stiff competition for the best employees. By not offering a work-from-home option, employers restrict the pool of job applicants and risk resignation of some existing employees. But by not offering in-workplace options, employers miss opportunities for professional growth of their employees which in the long-term can stifle innovation and expertise development.

The COVID pandemic has showed us that working remotely is possible for our hospitals. With the worst of the pandemic behind us, we now must decide which jobs can be performed remotely and which employees are best served by working remotely. Hospitals and employees also need to realize that the short-term advantages of working from home can sometimes come at long-term costs.

May 21, 2023

Inpatient Practice Medical Economics Outpatient Practice

U.S. Physicians Are Working Fewer Hours Per Week

A recent study in JAMA Internal Medicine showed that the number of hours physicians work per week has fallen significantly over the past 20 years. The data was derived from the U.S. Census Bureau’s Current Population Survey that included 87,297 monthly surveys of physicians between 2001 and 2021. During this 20-year period, the average number of hours worked per week has steadily fallen.

In the study, respondents were asked how many total hours they worked at all jobs during the previous week. The average weekly work hours from 2001 – 2003 were compared to average weekly work hours from 2019 – 2021. Overall, the average physician worked 52.6 hours per week in 2001 – 2003 and this number dropped to 48.6 hours per week in 2019 – 2021. When only physicians working full-time were included, the work hours decreased from 55.6 hours per week in 2001 – 2003 to 51.1 hours per week in 2019 – 2021.

There has been a change in work hours by physician age. In the time period 2001 – 2003, the youngest physicians (age 35 – 44) worked the most hours per week, followed by middle aged physicians (age 45 – 54), and then older physicians (age 55 – 64). In the more recent time period of 2019 – 2021, the opposite was true – older physicians (age 55 – 64) worked the more hours per week than younger physicians.

On average, male physicians currently work more hours per week (49.7 hours) than female physicians (46.8 hours). However, this gap has been narrowing with a gender difference of 5.3 hours per week in 2001 – 2003 versus a gender difference of 2.9 hours per week in 2019 – 2021. Differences in the percentage of women in different specialties may be responsible for some of the gender difference in hours worked per week. Other physician demographic variables did not differ significantly in the current number of hours worked per week including race, country of origin, urban vs. rural, and dual household earners versus single household earners.

The 2023 Medscape Physician Compensation Report surveyed 10,011 physicians between October 7, 2022 and January 17, 2023. The report found that there is substantial variation in physician work hours among different specialties. Hospital-based specialties that tend to involve patient care at night and on weekends work the most hours per week including critical care, general surgery, cardiology, and nephrology. On the other hand, outpatient specialties that generally do not require seeing patients at night or on weekends had the lowest work hours per week including allergy, dermatology, and ophthalmology. Emergency medicine also had a low number of hours worked per week, owing to the shift work nature of the specialty.

A problem with the Medscape survey is that all of the information is self-reported and thus susceptible to either over-estimation or under-estimation. Furthermore, the survey is voluntary and the physicians who choose to report data may not be truly representative of the population of physicians as a whole. Nevertheless, the recent Medscape data for work hours by specialty are remarkably similar to a 2011 study published in the Archives of Internal Medicine.

At the onset of the COVID-19 pandemic (during the 2nd quarter of 2020), the average number of hours physicians worked per week fell as elective procedures were canceled. However, weekly work hours quickly rebounded by the 3rd quarter of 2020 as shown in the graph below derived from data from the recent study in JAMA Internal Medicine. Notably, over the the 24 quarters from 2016 through 2021, the overall trend has been for physician work weeks to become shorter.

Do work week hours correlate with income?

Intuitively, one might assume that specialties with longer work weeks also have higher incomes. However, the 2023 Medscape Physician Compensation Survey indicates that there is little relationship between the number of hours worked per week and the annual compensation by specialty. The graph below shows average number of hours worked per week in red and annual compensation in blue for 29 specialties.

By combining the data from the two graphs above, we can calculate the average income per work-week hour. Note that this is not same as hourly compensation – that would require dividing the income per work-week hour by the number of weeks worked per year. The Medscape Physician Compensation Survey did not report the number of work vs. vacation weeks per year by specialty so true hourly compensation cannot be determined. The graph below shows that plastic surgeons, orthopedic surgeons, dermatologists, and radiologists have the highest income per work-week hour. Infectious disease specialists, family practitioners, pediatricians, and general internists have the lowest compensation per work-week hour. Notably, family medicine, pediatrics, and general internal medicine have shorter residencies (3 years) than the other specialties.

As stated in a previous post, the data for infectious disease is particularly alarming. Physicians specializing in infectious disease have the lowest income per work week hour of all 29 specialties in the Medscape Physician Compensation Survey. In order to become board-certified in infectious disease, a physician must first complete a 3-year internal medicine residency and then complete a 2-year infectious disease fellowship. However, infectious disease specialists have both a lower total annual income and a lower income per work week hour than general internists. The implication is that an infectious disease specialist is financially penalized for doing a 2-year fellowship after internal medicine residency. As a result, many infectious disease specialists are either supplementing their income by working part-time as hospitalists or are leaving the specialty of infectious disease altogether to work as general internists or hospitalists. Because of the nature of physician billing and RVU determination, it is not possible for infectious disease specialists to increase their income by professional billing alone. There is an urgent need for U.S. hospitals to financially supplement their infectious disease specialists in order to preserve the infectious disease physician workforce.

Physicians are working fewer hours but are they happier?

The Medscape Physician Compensation Report found that 73% of physicians would choose medicine again if they were just now starting their career. However, the Medscape survey five years ago found that 77% of physicians would choose medicine again, indicating that physicians are less satisfied with their careers now than five years ago.

Undoubtably, the COVID pandemic has had an impact on physician job satisfaction. During the pandemic, many physicians retired early or left the workforce for other jobs. In 2019, there were 989,684 clinically active physicians practicing in the United States. In 2021 that number fell to 923,419, a 6.7% decrease. Hopefully, as the pandemic winds down and the practice of medicine gets back to normal, the exodus of physicians from the profession will slow.

The continued creep in paperwork and administrative tasks is a dissatisfying factor for many doctors – physicians reported spending an average of 15.5 hours per week on these chores, of which 9 hours are for electronic medical record documentation. Advances in artificial intelligence technology offers hope that the use of electronic medical records will be streamlined in the near future, giving physicians more time to engage in direct patient care. Over the past decade, there have been increasing concerns raised about the extent of physician burnout. Long work hours have been suggested to be a cause of physician burnout but the data suggests that physicians are less satisfied despite working fewer hours than in the past.

What about nurse practitioners and physician assistants?

The large number of retiring physicians coupled with reduced physician work week hours indicates that the overall supply of physician services is declining. Over the past decade, this has been offset by an increase in nurse practitioners. It is far less expensive to train a physician assistant or nurse practitioner (6 years education post-high school) compared to a physician (11 to 16 years education post-high school, depending on specialty). Many services traditionally performed by physicians can be equally or near-equally performed by PAs and NPs. However, specialized medical care and complex procedures still require the additional training and experience of physician specialists and so there is a limit to the degree that PAs and NPs can substitute for physicians.

Are the numbers good or bad?

The reduction in physician work hours is both good and bad. It indicates an improvement in a profession that has historically been seen as arduously time-consuming. But it also implies reduced availability of physician services to the general population. In the future, reduction in administrative and paperwork time coupled with strategic utilization of NPs and PAs could allow physicians to enjoy a good lifestyle while still ensuring that Americans have access to the best possible healthcare.

May 2, 2023

Emergency Department Inpatient Practice Medical Economics

It’s Time To Do Away With Observation Status

“Observation status” was originally conceived of as a way to watch patients presenting to the emergency department for a few hours in order to determine whether or not they needed to be admitted to the hospital. The purpose was to reduce unnecessary inpatient hospitalizations and thus reduce overall healthcare costs. But there has been a creep in the use of observation status as well as the healthcare bureaucracy to administrate it. The result is that observation status has now increased overall healthcare costs. It is time to consider eliminating observation status in the United States.

Summary Points:

  • In observation status, hospital admissions are considered to be outpatient rather than inpatient admissions
  • As an outpatient visit, patients are responsible for more of the hospital charges than they would be for an inpatient visit
  • Medicare will not pay for skilled nursing facility care for patients in observation status
  • Observation stays reduce Medicare costs by transferring costs to the individual patient
  • Overseeing observation status is expensive for hospitals
  • Overall per capita U.S. healthcare costs can be reduced by eliminating observation status

How did we get here?

Prior to 1960, emergency departments were staffed by residents and general practitioners. The doctor who saw you in the ER was generally the same doctor who took care of you in the hospital. Emergency medicine became a specialty in 1968 with the creation of the American College of Emergency Medicine. The first emergency medicine resident began training in 1970 and the first board examination in emergency medicine was offered in 1980. The result was that the doctor that took care of a patient in the ER was no longer the same doctor who took care of them once they were admitted to the hospital. In 1983, DRGs were first used to determine the amount of money that Medicare would pay hospitals for inpatient admissions for any given diagnosis. After the introduction of DRGs, it became immediately clear that there needed to be some way of determining which patients were sick enough to warrant admission to the hospital from the emergency room, otherwise, the hospitals would be incentivized to admit as many people as possible, even if they were not very sick.

Initially, that determination was left to the emergency room physician. But that ER doctor needed to find an inpatient physician who would agree to admit the patient. During my residency, we had a designated “medical admitting resident” each day who would make the decision about which patients were sick enough to require admission. Some residents got the reputation of being “sieves”, meaning that they would admit everyone that the ER physician called them about whereas other residents got the reputation of being “walls”, meaning that they would block admissions from the ER unless the patients were at death’s door. You always wanted to be on-call at night with a resident who was a “wall” because that meant you would have to do fewer history and physical exams, your inpatient service census would be lower, and you might actually get a few hours of sleep that night.

In order to provide some rules for which patients warranted inpatient admission, Medicare directed that patients who could be sent home within 24 hours should be observed in the ER rather than admitted to the hospital. However, keeping a lot of patients in ER beds for 24 hours was impractical so hospitals started putting those observation patients in regular hospital beds to avoid congestion in the emergency department. The unintended consequence was that this simply led to keeping patients in the hospital for longer than 24 hours, just so they could be classified as inpatients. This was especially a problem with outpatient procedures when many hospitals kept patients overnight for procedural recovery and then billed Medicare for both the outpatient procedure plus an inpatient hospital admission. Medicare countered in 2002 by agreeing to pay hospitals specifically for observation stays in order to provide an alternative to inpatient admission for those patients who were only mildly ill or who needed extra time to recover from an outpatient procedure. Initially, the only diagnoses that could be billed as observation stays were heart failure, chest pain, and asthma. In 2008, Medicare began paying for observation stays for all diagnoses.

In parallel with the development of reimbursement policies for observation stays, Medicare began policing hospital admissions by using the RAC (recovery audit contractors). RAC auditors would review the charts of patients who had been admitted to the hospital and if the auditor determined that there was not sufficient documentation in the chart to justify inpatient admission, Medicare would collect penalties from the hospital for overpayment. By 2014, the RAC program had collected $2.3 billion from hospital overpayments. One of the most common reasons by RAC auditors when denying an inpatient admission was that “…the patient could have safely and effectively been treated as an outpatient.” The auditors were often incentivized to deny admissions since more denials often led to bigger bonuses for the auditors. As a result, the denials were frequently capricious and arbitrary. 25 years ago, a coder for a commercial insurance company confided in me that her supervisors told her to randomly deny every 10th hospital admission because hospitals usually found that it was too expensive to contest denials. Fear of RAC audits resulted in physicians and hospitals increasing the use of observation status in order to avoid the risk of being penalized for an unnecessary inpatient admission.

A second strategy employed by Medicare was to create a list of surgical procedures that were classified as “Medicare Inpatient-Only Procedures”, meaning that those operations required an inpatient admission. Any surgical procedure not on the list was to be classified as an outpatient procedure unless there were extenuating circumstances that uniquely required a patient to be admitted to the hospital. Medicare pays much more if a surgery is performed as an inpatient (Medicare Part A) than if it is performed as an outpatient (Medicare Part B). Over time, the Medicare Inpatient-Only list shrank as more and more surgical procedures were reclassified as being appropriately done as outpatient and not requiring of hospital admission. Thus, knee and hip replacement surgeries were initially considered to require inpatient admission  but are now considered to be outpatient procedures.

Medicare also changed its definition of observation stays to be any condition that requires the patient to be in the hospital for “less than 2 midnights”. Although it could be argued that this gave hospitals longer than 24 hours to treat an observation status patient and send them home, the 2-midnight definition was somewhat arbitrary. For example, a patient presenting to the emergency department at 11:00 PM would spend 25 hours in the hospital before crossing 2 midnights but a patient presenting at 1:00 AM would spend 47 hours in the hospital before meeting the 2-midnight definition. However it is not how many midnights a patient actually spent in the hospital that Medicare auditors used when deciding whether to deny a hospital admission. Instead, it is whether the auditor believed that had the patient been managed appropriately, that patient could have been sent home before 2 midnights have elapsed. For example, if a patient came to the emergency department on Saturday evening with chest pain but the hospital could not do a cardiac stress test until Monday morning (2 midnights later), the auditor would still deny an inpatient admission since if the hospital offered 7-day a week stress tests, they could have sent the patient home on Sunday (after 1 midnight).

The observation vs. inpatient status bureaucracy


In order to avoid losing money from admission denials, hospitals started to go to great lengths to insure that the medical record contained sufficient documentation to justify every hospital admission. This was greatly facilitated by the development of electronic medical records that permitted realtime review of each patient’s hospital stay to ensure that the patient’s chart had appropriate documentation to meet Medicare’s requirements to bill that hospital stay as an inpatient admission. Some of the measures that hospitals now take in order to oversee their hospital admission practices include:

  1. Physician training. When a patient is admitted to the hospital from the emergency room, the admitting physician has to enter an order directing that the patient is an “inpatient” or “observation” admission. This means that the physician has to estimate how long the patient will need to be in the hospital at the very beginning of the hospital stay and that estimated length of time dictates whether a patient will be inpatient or observation status. We now train residents in how to correctly estimate length of stay. For example, patients admitted for chest pain, syncope, and dehydration are generally observation status unless there are extenuating circumstances.
  2. Nurse admission reviwers. Hospitals will generally hire a group of nurses or other healthcare workers to review every patient’s chart on a daily basis to determine if the medical record documentation justifies inpatient admission. These nurses get special training in the Medicare inpatient admission requirements. If the patient’s chart does not contain the proper documentation, the nurse’s first step is usually to contact the physician since frequently, all that is needed is an extra sentence or two in the medical record describing how sick the patient actually is. If that does not resolve the issue, the next step is to contact a physician admission advisor.
  3. Physician admission advisors. Many times, the admitting physician is uncertain whether or not a patient’s illness justifies an inpatient admission order. Or the nurse reviewer’s determination is different from the physician’s admitting order for observation vs. inpatient status. For this reason, hospitals employ physicians whose main job is to arbitrate inpatient and observation orders. Often, this will be a private physician review company where the physician reviewers can access patient charts on a daily basis. Larger hospitals usually do this internally by hiring some of its own emergency medicine physicians or hospitalists to dedicate a certain number of hours per day reviewing admissions.
  4. Hospital medical directors. When another layer of physician review of how to classify a patient’s admission is required, it then goes to the hospital medical director. Even for a small hospital, this is usually several charts to review every week. It takes about 15-20 minutes to do one of these reviews and then contact the admitting physicians to try to talk them into changing an admission order from inpatient to observation or vice-versa. Frequently, it requires the medical director to either enter an administrative note in the electronic medical record or to send the hospital utilization review office a letter so that the hospital has a documentation  paper trail in the event of a Medicare denial. More often, the medical director is sent charts for patients who had an inpatient admission order but were discharged before 2 midnights had elapsed. This is a red flag for Medicare auditors. We then have to provide written documentation for why the patient should be billed as an inpatient. Sometimes, this is easy, for example, when a patient dies from their condition in the hospital before 2 midnights elapse. But more frequently, it is because the admitting physician legitimately believed that the patient would need to be in the hospital for at least 2 midnights when that patient first arrived at the hospital. Several years ago, I attended a Medicare seminar and one of the medical administrators from Medicare told us that when this happens, we should use the phrase “The patient had an unexpectedly rapid recovery and was able to be discharged after less than 2 midnights”. Pretty much every time a patient in inpatient status was discharged before 2 midnights, one of our hospital medical directors would review that chart and send the billing office a letter using that phrase.
  5. Pre-admission testing consultation. Patients who are planned to undergo a surgical procedure will frequently be sent for pre-operative medical consultation by an internist, family physician, or specially trained advance practice provider. Although designed to identify medical co-morbidities that could increase the risk of complications during surgery, these consultations are increasingly being used to determine whether or not a given patient’s surgery should be classified as an inpatient or an outpatient surgery. And most importantly, these consultations ensure that there is sufficient documentation in the electronic medical record to justify an inpatient procedure. For example, most knee replacement surgeries are now considered outpatient procedures. But if the chart documents that the patient has sleep apnea requiring CPAP, brittle diabetes, COPD requiring supplemental oxygen, and a history of vomiting after anesthesia, then that patient’s knee replacement can be done as an inpatient and the hospital gets paid considerably more. Surgeons are trained to be experts in surgery but are not trained in the nuances of co-morbid medical illnesses that they do not normally manage. Consequently, the surgeon’s outpatient notes often do not contain documentation of the significance of those medical co-morbidities and whether they are severe enough to warrant an inpatient admission for the surgery. That is why the pre-op medical consultation is so highly valued. If the surgeon admits the patient as an inpatient to do the surgery and then discharges that patient before 2 midnights pass, the chart once again gets sent to the medical director so that a letter containing the phrase “The patient had an unexpectedly rapid recovery and was able to be discharged after less than 2 midnights” is sent to the utilization review and billing offices for a documentation paper trail in the event of an admission denial by Medicare.
  6. Utilization review staff. Every hospital employs a large number of personnel devoted solely to coding, billing, and utilization review. Before a bill goes out to Medicare or a commercial insurance company, these staff will do a final review to ensure that all of the proper documentation justifying an inpatient admission is present in the chart, including physician admission advisor notes and hospital medical director correspondence.There will also usually be personnel whose only job is to work denials when Medicare or an insurance company denies an inpatient admission. These personnel will then prepare and submit documentation contesting that denial in hopes of overturning the denial and getting paid for the hospital stay.
  7. Attorneys and peer reviewers. When Medicare or an insurance company refuses to overturn an admission denial after the billing staff contest the denial, the next step is to turn to the legal system. This usually starts by paying an independent physician reviewer to opine whether the patient’s hospital stay should be classified as inpatient or observation. Next, hospital attorneys get involved by contacting Medicare attorneys about the denial. Sometimes, contested denials require adjudication, requiring more attorney time.
  8. Medicare staff. On the other side of the bill, Medicare and commercial insurance companies employ large numbers of staff to review charts to decide whether they think that hospitalizations should be inpatient or outpatient.

So, for any given patient’s hospitalization, there is an army of Medicare nurse reviewers, physician reviewers, utilization review staff, and attorneys that face off against an army of the hospital’s  nurse reviewers, physician reviewers, utilization review staff, and attorneys. In the end, more money is sometimes spent battling an admission denial than is actually paid to the hospital for the admission. Hospitals are willing to occasionally spend the excessive cost to contest a denial since it sends Medicare or the insurance company a signal that the hospital will not go down easily for future admission denials. It is kind of like a basketball coach throwing a tantrum about a penalty call in order to try to dissuade the referee from calling future penalties.

The net result of all of this is that the United States has created an enormous bureaucracy devoted to preventing and contesting hospital admission denials.  So, why don’t hospitals just classify more patients as being in observation status and avoid all of the expense of justifying inpatient status? The reason is money.

The finances of inpatient vs. observation status

The genesis of observation status was to reduce Medicare costs by eliminating unnecessary hospital admissions. For any given diagnosis, hospitals get paid much less if a patient is designated to be in observation status than if that same patient is designated to be in inpatient status. Overall, the reimbursement is about 1/3 less for observation stays. In other words, Medicare can reduce overall Medicare costs by pressuring hospitals to put more patients in observation status. The same holds for commercial insurance companies.

Until several years ago, Medicare also paid doctors less if patients were in observation status. However, it became clear to Medicare that this was incentivizing doctors to preferentially use inpatient status rather than observation status. And since doctors are the ones who write the admission orders, Medicare realized that it could reduce inpatient admissions by removing the physician financial incentive to put patients in inpatient status. Because the physician professional fees are much, much less than the hospital fees, by paying physicians the same whether a patient was in observation or inpatient status, Medicare would pay a little more to the doctors but would pay a whole lot less to the hospitals.

But the biggest savings to Medicare in observation status is that it transfers much of the cost of the hospital stay from Medicare to individual patients. This is because Medicare considers observation stays as outpatient visits. Outpatient services are billed to Medicare Part B but inpatient services are billed to Medicare Part A. This is hugely important to patients because patients have much higher co-pays and deductibles for their Part B charges than their Part A charges.

  • Medicare Part A covers inpatient admissions including a semi-private room, nursing care, medications, meals, and tests done during inpatient admissions. Part A also covers skilled nursing facility care, home health care, and hospice care. Medicare Part A is free to Americans over age 65 who have previously worked at least 10 years (or have a spouse who worked 10 years). There are no monthly premiums and no annual deductible. The amount that Medicare covers depends on the length of stay of the hospital admission:
    • $1,600 deductible per admission
    • Days 1-60: Part A covers in full
    • Days 61-90: patients are responsible for $400 per day co-pay, either by co-insurance or out of pocket if the patient lacks co-insurance
    • Days 91-lifetime reserve limit days: patients are responsible for $800 per day co-pay, either by co-insurance or out of pocket if the patient lacks co-insurance
    • After lifetime reserve limit days (total of 60 over the entire lifetime): Part A pays nothing and patients (or their co-insurance) are responsible for the entire costs
  • Medicare Part B covers hospital outpatient charges and physician professional charges. Unlike Part A, there is a monthly premium for Part B of $165/month with higher premiums for those with higher incomes. There is an annual deductible amount of $226. Patients also have additional deductibles and co-pays that are either paid by secondary insurance or out of pocket if there is either no secondary insurance or the insurance policy has limited benefits:
    • 20% co-pay for all physician charges
    • 20% co-pay for hospital outpatient charges (hospital room, nursing care, meals)
    • 20% co-pay for x-rays and procedures
    • Part B does not cover medications so the patient (or their Part D insurance) is responsible for medication charges during observation stays

The net result of these differences is that the patient will have greater out of pocket expenses for an observation stay than for an inpatient admission. This is especially true for the 7.5% of Americans over age 65 who are enrolled in Medicare Part A only and do not enroll in Medicare Part B – these patients pay the entire cost of their observation stay out of pocket.

Another financial implication of observation vs. inpatient stays is in skilled nursing facility (SNF) coverage. Medicare Part A pays for 100% of SNF charges for up to 20 days (there is a $200/day co-pay for days 21-100). However, Medicare will only pay for SNF care if a person first has an inpatient hospital stay of at least 3 days. Medicare will not pay for SNF care after an observation stay. If a patient is in observation status (or has an inpatient stay of < 3 days) and gets transferred to a SNF, the patient is responsible for all of the SNF charges.

Why observation status is really, really dumb

CMS absolutely loves observation status. It reduces Medicare costs by paying the hospitals less for any given diagnosis and it also reduces Medicare costs by transferring much of the costs directly to the patient. This allows CMS officials to report to Congress that they are reducing federal spending on healthcare. Congressional representatives can then report to voters that they are reducing government spending. But there is no such thing as free healthcare… the cost of healthcare does not go away, it just gets transferred to the patient. The individual American ends up with more out of pocket costs for co-pays, medication charges, and SNF costs that would have otherwise been covered by Medicare Part A had their hospital stay been inpatient status as opposed to observation status. So, in the long run, the average American does not save any money by being in observation status.

Nationwide, 16% of all hospital stays are observation stays and 84% are inpatient stays. But this percentage can vary widely from hospital to hospital. A tertiary care referral hospital will usually have a lower percentage of observation stays since its patients tend to be sicker with more complex medical problems. On the other hand, a community hospital, especially one that cares for underserved patients, will have a higher percentage of observation stays, typically 25% or more. About the best a hospital can hope for is to break even on observation patients – most hospitals actually lose money on observation stays.

It’s bad enough that observation status does not really save money by transferring the cost of care to the individual patient rather than Medicare. The worst part about observation status is that it actually increases U.S. healthcare expenses. Not only do hospitals have to spend an enormous amount of money justifying inpatient admissions and working inpatient denials, but Medicare spends an enormous amount of money paying staff who police admissions in order to deny inpatient admission charges.

The net result is that observation status represents the epitome of U.S. healthcare dysfunction. It has led to an enormous bureaucracy devoted entirely to deciding whether Medicare or individual patients should pay for hospital care. And that bureaucracy is enormously expensive.

How can we fix this?

Americans pay way more for healthcare than people in any other country. In 2021, the average per capita healthcare cost in the U.S. was $12,914. It will undoubtedly be much higher in 2023. One of the contributors to this is too much of the healthcare costs go into trying to decide whether Medicare or the individual American will be responsible for paying for healthcare. Getting rid of the observation status designation can reduce U.S. per capita healthcare costs. Here is how to do it:

  1. Create low-acuity DRGs. For conditions that are currently commonly managed by observation status (chest pain, syncope, dehydration, etc.), CMS can create inpatient DRGs that pay the hospital less, thus simulating the amount that CMS would have paid for an observation stay.
  2. Require a modest Part A co-pay for hospitalization. The biggest argument against eliminating observation status is that Medicare costs would go up since co-pay costs currently paid by patients would go back to Medicare. The solution to this would be to require a small co-pay for hospitalization days 1-60. The amount to keep Medicare’s annual budget neutral could be as little as $10 or $20 per day.
  3. Outpatient should mean outpatient. How in the world we ever got to the point that we define outpatient care as needing to be in the hospital for more than 2 midnights is baffling. Either a patient needs to be in the hospital or they don’t. I once had a admission denial for a patient in respiratory failure admitted from the ER to our ICU on a mechanical ventilator. The Medicare reviewer said that in his opinion, I should have been able to correct the respiratory failure, extubate the patient, and discharge her before 2 midnights passed. Really?
  4. Eliminate the SNF 3-day rule. The whole idea behind the 3-day rule was that Medicare wanted to see if a patient really needed SNF care before it would pay for it. But the unintended consequence is that if one of our patients needs to go to a SNF, we have to figure out a way to admit them to the hospital for at least 3 days first. This means that we have to wait until they fall at home and break their hip or wait until they get septic from an infected decubitus ulcer if they are unable to get out of bed. For patients undergoing surgery, such as a knee replacement, we have to keep them in the hospital for 3 days after their surgery before they can go to a SNF for rehabilitation, even if they live alone and cannot walk after their operation.
  5. Eliminate the observation industry. By eliminating observation status, hospitals would no longer have to spend money on nurse admission reviewers, physician admission advisors, and medical directors who laboriously review charts for inpatient justification. Hospitals could reduce their utilization management staff and Medicare could reduce its admission reviewer staff. Hospitals, patients, and Medicare would have less need for attorneys to contest admission denials. Yes, a lot of people would lose their jobs but the overall U.S. healthcare costs would drop.

Elimination of the observation status designation would make everyone happy. Patients would not be surprised by unexpectedly high hospital bills. Doctors would not have to spend time entering unnecessary documentation in their hospital notes to justify why a patient warrants an inpatient admission. Hospitals would not have to pay as much for staff to oversee admission determination. A fundamental concept of industrial engineering is that the more complex a process is, the more energy it takes to keep that process working. Observation status has created a terribly complex process. It is time to simplify the U.S. admission process.

January 22, 2023

Medical Economics Physician Finances

Inflation Is Like A Disease – Here Is The Cure

As a physician, I have spent decades diagnosing diseases and then prescribing treatments. For many diseases, there is more than one single cause and there are more than one possible treatment. Sometimes the treatment is easy but sometimes the treatment is worse than the disease. Inflation is no different. Here is how to fix inflation from a physician’s vantage point, when we look at inflation the way we look at a disease.

What causes inflation?

In 1976, my college macroeconomics professor said that understanding inflation at its basic level is simple – it is too many dollars chasing too few goods and services. 46 years later, that central tenet is still true: inflation occurs when demand exceeds supply. In this sense, inflation is similar to a medical condition like respiratory failure. In respiratory failure, the patient gets short of breath when the body’s demand for oxygen exceeds the supply of oxygen that the lungs can deliver. The treatment of respiratory failure is to either increase the supply of oxygen being delivered to the body’s tissues or reduce the demand for oxygen by the body’s tissues. Preferably, you do both.

Like respiratory failure, there is usually not just one simple cause of inflation but instead there are several alterations in the things that cause demand for goods and services as well as the things that affect the supply of goods and services. Although demand can be affected by changes in what consumers want to purchase, it is more often caused by the amount of money consumers have in their hands to make purchases. In our nation’s current bout of inflation, there are contributions from both the supply side and the demand side. In addition, there is an effect of the national psychology attendant to inflation expectations.

  1. Alterations in demand for goods and services:

    1. Increased disposable income from COVID relief programs. When COVID surged, the U.S. unemployment rate spiked and the government response was to inject money into the economy in the form of COVID relief checks. This resulted in many Americans having cash on hand and no place to spend it during the COVID isolation period. In 2021 and 2022, when isolation restrictions eased up, many Americans started to spend these built up cash reserves and we all started to buy stuff.
    2. Exceptionally low interest rates to borrow money since 2010. Borrowing money has never been less expensive in the U.S. as it has been for the past 12 years. Low interest rates result in more people buying houses and cars. Low interest also result in companies borrowing more money to expand their business operations. As more people borrow money, there is more money circulating in the economy and that results in more money available to spend on goods and services.
    3. Historically low federal income tax rates enacted by the 2018 income tax cuts. The current U.S. income tax rates are among the lowest Americans have had in generations. This graph shows the effective income tax rates for all incomes in 2016 (before the 2018 tax cuts) and in 2020 (after the 2018 tax cuts). As a result of these tax cuts, all Americans had more money to spend on goods and services over the past year.
    4. Federal student loan forgiveness programs. In August 2022, President Biden authorized $10,000 per person federal student loan forgiveness ($20,000 for those with Pell grants). This week, former students can start to apply for those funds. The economic effect of this will not be felt until individuals get their forgiveness applications approved but many affected Americans have already changed their spending habits based on the expectation that they will have $10,000 or $20,000 more to spend on goods and services than they had budgeted for earlier this year.
    5. Increasing federal deficit spending since 2002. The U.S. government has a long habit of spending more money than it takes in each year. In fact, the only years that the government ran an annual surplus in recent memory were in 1998 – 2001 due to combined efforts by Democratic president Bill Clinton and Republican House Budgetary Chairman John Kasich. When the government spends money, it primarily goes to purchasing goods and services and puts more money in the hands of Americans that produce those goods and services.
  2. Alterations in supply of goods and services:

    1. COVID brought supply chain disruptions. These disruptions made it difficult to get foreign-produced products into the United States. These supply chain disruptions also made it difficult to get raw materials and production components into the U.S. resulting in decreased domestic production. As a result, products such as appliances made abroad and U.S.-manufactured cars that depend on foreign-made computer chips became suddenly scarce.
    2. Changes in consumer buying patterns during COVID. As a result of the pandemic, Americans wanted computers in order to work from home and wanted new suburban homes to work and live in. This resulted in heightened demand for houses and computers. There were also transient demand spikes for toilet paper and subscription video streaming services, like Netflix. During the pandemic, consumers could not spend money on services (like travel, restaurants, and concerts) and shifted their spending patterns to goods, like appliances, TVs, and furniture. Quite rapidly, the demand for these goods exceeded the supply of these goods.
    3. COVID rebound spending. As isolation practices eased, Americans started to act on their pent-up consumption appetite. We started eating out at restaurants again. We began planning vacations involving air travel and car rental. We started buying new clothes to wear as we returned to the office. But restaurants had just recently laid off staff, airlines had stopped replacing retired pilots, and car rental companies had sold off their rental car stocks. As a result, these industries were unable to meet the rebounded demand for their goods and services.
    4. War in Ukraine. The global disruption in gas and oil supply resulting from global sanctions on Russia after its invasion of Ukraine has been felt in most Western nations, including the United States. As a result, the worldwide supply of gasoline exceeded the supply and the price per gallon spiked.
    5. Foreign import tariffs. A tariff is a tax on imported goods. By making these goods more expensive, the demand for those goods drops and is replaced by demand for more expensive domestically-produced goods. In addition, tariffs can cause foreign manufacturers to redirect their sales to other countries that do not have tariffs in order to maximize their profits. As a result, the amount of foreign-produced goods falls and U.S. consumers pay more for a given item. Tariffs introduced by President Donald Trump resulted in a drop in supply of many foreign-produced goods.
    6. Low unemployment rates. The supply of services is often reflected in the unemployment rate. When the unemployment rate rises, there are too many workers competing for too few jobs and when the unemployment rate falls, there are too many jobs for too few workers causing employers to increase wages to attract workers. The pandemic resulted in many workers retiring early and also restricted the flow of immigrants and seasonal foreign workers into the United States thus shrinking the labor pool. Consequently, we now have too many job openings for too few workers, particularly for low wage jobs and farm workers.
  3. Alterations in the expectation of inflation:

    1. Worker expectations. When workers think inflation is getting worse, they proactively demand increased wages. This was evidenced recently but the increase in unionization over the past year with the assumption that by unionizing, they could use collective bargaining to get pay raises.
    2. Manufacturer and employer expectations. Forecasts of inflation also affects the costs of goods and services – when companies forecast inflation in the near future, they increase the price of their goods and services in anticipation of increased costs to produce those goods and services in the future.
    3. Consumer expectations. The psychology of inflation is often discussed in terms of worker and employer expectations but consumer psychology is just as important. When consumers hear that inflation is going up, they come to believe that they should be paying more for goods and services. This can result in a mentality of: “Well, normally I’d never pay $25 for a pizza but inflation is happening so I guess it is OK to spend that much”.

How do we cure inflation?

With disease, we often focus too often on treating the symptoms rather than treating the underlying cause. Symptom-based treatments can provide transient relief but do not cure the underlying disease. You can give a patient with sepsis Tylenol and make his fever go away but he’ll still die of sepsis. Similarly, a disease with multiple causes requires treating all of the underlying causes and not just one. When a trauma patient is bleeding from 5 different gunshot wounds and you only suture one of them up, the patient will still bleed to death. Treating inflation is no different – you have to treat the underlying causes. Some of these treatments are relatively easy but others can be too politically painful to realistically implement.

Treating alterations in demand for goods and services:

  1. Eliminate COVID relief spending. Much of this has already occurred but many state and local governments still have unspent federal COVID relief funds and they are looking for things to spend that money on. Unspent funds should be returned to the Federal government to prevent further cash injection into the economy.
  2. Increase interest rates. The Federal Reserve is already addressing this by progressively increasing the federal fund rate. The downstream effect is rising mortgage rates and car loan rates that in turn reduce demand for new house construction and automobiles.
  3. Raise income taxes. This is probably the single most effective way for the federal government to cool off inflation. It takes money out of worker’s pockets and thus reduces their demand for goods and services. However, increased taxes is viewed as a politically nuclear option and no elected official wants to go on record for voting for higher taxes. Even politicians who lean to the left usually only want to increase taxes on the wealthy. However, selectively increasing taxes on the wealthy can increase federal government revenues but has less effect on inflation. The wealthy tend to spend their extra income on investments and luxury goods but to really cool off inflation, one must decrease the demand for everyday goods. For that reason, for tax increases to be effective in reducing inflation, everyone would have to pay higher taxes, not just the wealthy.
  4. Eliminate loan forgiveness programs. Unfortunately, once you promise people money, it is exceptionally difficult to then take it away – it would be political suicide. Nevertheless, even lowering the income threshold for loan forgiveness eligibility would effectively take cash out of the economy.
  5. Decrease federal spending. Much of the huge spike in federal spending from 2020 – 2022 was on COVID programs such as vaccines, medications, and testing. The public health advocate in me wants to continue free access to vaccines and tests but to reduce inflation, it is better to start asking Americans to pay for these goods and services themselves. Belt-tightening inside the Washington Beltway is never popular but to fight inflation, federal spending should be limited to only those programs and federal departments that are vital to keep the country running safely.

Treating alterations in supply of goods and services:

  1. Improve supply chain disruptions. Many of the COVID supply chain issues have been resolving over the past year as the country has gotten back to work. However, transportation bottlenecks still exist in some areas and union strikes could cause additional transportation disruptions in the near future.
  2. Re-set consumer buying patterns. The free market is already doing this to an extent. Computer sales are falling as people return to the office after working from home. Netflix subscriptions are falling. Home sales are decreasing due to a combination of people no longer fleeing to the safety of the suburbs to avoid COVID, no longer needing more space to work from home, and no longer being able to buy houses with rock-bottom mortgage rates.
  3. Temper COVID rebound spending. The government can’t just tell people to stop buying stuff. But fortunately, the combination of a year of high inflation plus a year of spending down COVID-related household cash reserves has already tempered America’s recent buying spree.
  4. End the war in Ukraine. This one is not under the United States’ control but until the war ends, normalization of trade relations with Russia as well as resumption of Ukrainian agricultural and manufactured goods exports will continue to cause international inflationary pressure. In addition, Western countries, including the U.S., are spending much cash on military items with the downstream effect of that cash going into military production worker wages.
  5. Lift foreign import tariffs. There are compelling political reasons to continue some tariffs but from an economic standpoint, the more inexpensive goods we get into the country, the better from an inflation standpoint. First, increased imports reduce the cash supply by getting U.S. cash out of the country and thus out of circulation in the U.S. economy. Second, increased imports keep the cost of American-made goods lower by increasing competition.
  6. Increase the unemployment rate. It would be politically poisonous to simply eliminate jobs but if the unemployment rate increases, circulating cash is taken out of the economy as the supply of workers drops. In addition, employers would no longer have to keep increasing wages to attract workers. However, an alternative strategy could be more palatable, namely, increase the number of workers by increasing foreign immigration. We currently have too many foreigners trying to get into our country illegally in order to find employment and escape unsafe living conditions. By legalizing the presence of many of these undocumented foreigners, we can increase our workforce, particularly for lower wage jobs and farm work jobs. Our immigration problem and our low unemployment problem are the solutions to each other.

Treating alterations in inflation expectation:

  1. Politicians as psychologists. Changing the psychology of an entire country is hard, but not impossible. This is where the charisma of individual leaders can have an impact. Another ways by having agreement between the political parties. Getting Republicans and Democrats to come together on  anything is hard anytime but even more so in an election year. During election years, it is far too easy for both parties to point the blame for inflation on each other. It is far to easy for a political party to say “Elect us because the other guys are going to make inflation worse”. Nevertheless, consensus on legislation portrayed as being inflation-reducing can send a powerful psychological signal that can help Americans of both parties.
  2. Just do something. In medicine, doctors often prescribe antibiotics for bronchitis and sinusitis even though they know that the infection is most likely viral and the antibiotics won’t do anything. But it is the patients’ expectation that something is being done to cure their disease. If Americans see no-one doing anything to reduce inflation, their expectation will be that it is just going to keep on going until someone does something. Thus far, the public face on inflation control has been the Federal Reserve and to give the Fed credit, they have made aggressive interest rate increases. But ideally, there should also be executive branch action and legislative branch action to fight inflation so that our country’s perception is that war is being fought and will soon be won.

It really is like a disease

Admittedly, I am neither an economist nor a politician. But as a doctor, I see so many similarities between inflation and disease. In fact, inflation can be seen as a disease of the country’s economy. And just like most diseases, you can’t just treat the symptoms and hope that it goes away on its own, you have to treat the causes of the disease, preferably all of the causes.

October 19, 2022