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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.

Implications

 

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

By James Allen, MD

I am a Professor Emeritus of Internal Medicine at the Ohio State University and former Medical Director of Ohio State University East Hospital