Medical Economics

Will Inflation Eliminate Private Medical Practices?

When the inflation rate rises, different professions are affected differently. One of the most vulnerable is the private practice physician and the recent rise in inflation may just be enough to close many private practices and force those physicians to become hospital-employed.

In a previous post in 2019, I laid out the argument that all physicians should be afraid of inflation. At that time, inflation was just a hypothetical possibility – something that would likely happen at some time in the remote future. But now, inflation is a reality and it is causing financial pressures on physician practices.

Inflation results when there is an increase in the cost of goods. Some inflation is good and is a sign of strong consumer demand, growing worker income, and low unemployment rates. The ideal inflation rate is around 2% per year. But when the inflation rate is too high, consumers cannot afford to purchase the same amount of goods and services. As a result, in a free market, workers will demand higher wages in order to maintain a constant purchasing power. However, people on fixed incomes lose their purchasing power since their incomes cannot keep pace with inflation. Although retirees are the group of people who are most often mentioned as being harmed by high inflation, physicians in private practice are also essentially on fixed incomes.

Physician reimbursement is not a free market system. When inflation affects a restaurant, a grocery, or a retail store, that business can increase prices overnight in order to keep up with expenses. However, physicians cannot increase the amount that they get paid. Physician income from professional fees primarily comes from two sources: the government (through Medicare and Medicaid) and commercial health insurance companies. The U.S. Congress sets Medicare payments each year for every physician service. Commercial insurance companies negotiate contracts with physicians that typically set the fees for several years in the future. Most physicians will have a “fee schedule” that allows them to change their charged amount for any given service. The charged amount on the fee schedule for any given service is set at an price higher than their highest paying commercial insurance contract. However, for all practical purposes, no one pays the amount of the fee schedule since it only applies to uninsured patients and most of the uninsured negotiate reduced amounts on an individual basis because of financial hardship.

Medicare payments do not keep up with inflation

The amount that Medicare pays a physician for a given service or procedure depends on two things: (1) the Medicare conversion factor and (2) the Medicare RVU schedule. The conversion factor is the amount that Medicare pays a physician for each RVU. The RVU schedule is how many RVUs Medicare assigns to each physician service or procedure. Every November, Congress sets the conversion factor for the upcoming year and over the past 20 years, it has been essentially flat.

In 1998, the Medicare conversion factor was $36.69 per RVU and in 2022, the current conversion factor is $34.61. In other words, the conversion factor is 2 dollars less today than it was 24 year ago! However, the inflation rate has resulted in us now needing $67.22 in 2022 in order to purchase $36.69 worth of goods & services in 1998. The net effect is that in terms of purchasing power, 1 RVU is worth half as much today as it was in 1998.

The Medicare RVU schedule varies from year to year depending on what types of services Medicare wants to promote. Over the past two decades, Medicare has been tending toward emphasizing primary care and de-emphasizing procedure-based specialties. Therefore, Medicare has increased the RVUs for outpatient office visits and reduced the RVUs for procedures. However, neither office visit nor procedure reimbursement has kept up with inflation. The graph below compares the reimbursement for a level 4 new outpatient visit (CPT 99204) in Ohio from 2000 to 2022 compared to the effect of inflation during this same time period. During this time, a new outpatient visit lost 25% of its value due to inflation:

In order to increase the RVUs for outpatient visits, Medicare had to take those RVUs from other service and consequently, procedure reimbursement has lost even more value. Two common procedures performed by outpatient physicians are knee injections (CPT 20610) and EKGs (CPT 93000). Between 2000 and 2022, reimbursement for performing knee injection fell from $70.53 to $63.79. When adjusted for inflation, this represents a 49% loss of value.

EKGs lost even more value. Between 2000 and 2022, reimbursement for performing an EKG with interpretation fell from $27.63 to $13.91. When adjusted for inflation, this represents a 72% loss of value.

…and office expenses keep rising

At the same time that inflation has eroded the value of Medicare reimbursement, physician practice overhead expenses keep going up. Doctors have to pay more for office rent, utilities, and office staff salaries due to inflation. As a consequence, what many physicians take home at the end of the day in income for performing outpatient services has fallen.

As an example, in 2005, the average rent in the U.S. was $12.12 per square foot. By 2020, the average rent increased to $19.27 per square foot. In 2000, the average LPN annual income was $29,100 and by 2021, it had risen to $48,070. In 2000, the average RN annual income was $43,900 and by 2021, it had risen to $77,600.

So, what can the private practice physician do?

With inflation accelerating overhead expenses and with Medicare payments not keeping up with inflation, there are only a limited number of options for the private practice physician who depends on receipts from clinical practice to stay in business.

  1. Retire. For many older physicians, this is the most appealing option. However, that assumes that they have been able to save up enough in their retirement portfolio. Over the past several years, many physicians reduced their annual retirement saving contributions in order to pay their mounting office expenses in the setting of reduced or unchanged Medicare payments.
  2. Stop accepting uninsured patients. Currently 8.6% of Americans lack any form of health insurance. Most of these people are either unemployed or work in low-income jobs that do not provide health insurance. Many private practice physicians require payment in advance for patients without health insurance who seek healthcare and most of these patients do not have the money to pay for physician services.
  3. Stop accepting Medicaid and Medicare. Physicians can usually negotiate higher rates from commercial insurance companies than they get from Medicare. In theory, these negotiations could result in reimbursement that could keep up with inflation. However, given the large percentage of Americans who are covered by either Medicare (18.4%) or Medicaid (17.8%), this is impractical for most physicians, particularly older primary care physicians whose patient panels have aged as the physicians have aged. Currently, 15% of physicians do not accept new Medicare patients and 1% of non-pediatric physicians do not accept any Medicare patients (nearly half of the latter physicians are psychiatrists). Medicaid pays physicians even less than Medicare and currently, 29% of physicians do not accept new Medicaid patients.
  4. Concierge medicine. Concierge physicians charge patients a monthly or annual retainer fee in exchange for enhanced care such as immediate availability to office appointments and longer office visit times.. These physicians will typically have much smaller patient panel sizes than other primary care physicians – by some estimates approximately 1/7th the size. Because these fees are charged directly to the patient, most patients contracting with a concierge physicians are wealthy.
  5. Increase patient volumes. In medical practices, there is little room for increased production. There is a limit to the number of patients that a physician can safely see per hour and the prospect of working more hours per week is unpalatable given that the average physician already works an average of 52 hours per week. Although there can be some improvement in operational efficiency by optimizing patient throughput and improving electronic medical record utilization, most private medical practices have already instituted these measures.
  6. Join the Veteran’s Administration. The VA is attractive to many physicians in private practice, particularly older physicians. For those working in VA outpatient clinics, there is generally no weekends, no night call, and no overhead expense. VA physicians have an average salary of $230,000 per year and after 5 years of employment, are eligible for a retirement pension. As a result, many physicians in private practice can have a higher annual income and better retirement benefits by moving to the VA.
  7. Become hospital-employed. For many physicians in private practice, this is the only realistic option. Currently, 70% of physicians are employed by hospitals or corporate entities and the overwhelming majority of new physicians completing their training become employed by hospitals rather than enter private practice. The Stark law prevents hospitals from subsidizing private practice physician salaries. However, hospitals can subsidize salaries of those physicians who are employed by the hospital.

2022 is a very bad year for physicians in private practice

Over the past 2 years, the Medicare conversion rate fell from $36.09 per RVU for 2020 to $34.61 for 2022. In March 2022, the annual inflation rate reached 8.5%, the highest rate in 40 years. For many physicians in private practice who were barely getting by a year ago, this surge in the inflation rate combined with a reduction in this year’s Medicare conversion rate will be too much to financially bear.

In a free market economy, quality is the most important determinate of cost – the best chef commands the highest wage and the best architect commands the highest fee. Since the creation of Medicare in 1965, physician practices become less and less susceptible to free market forces. The inexperienced physician and the physician with 30 years of experience get paid exactly the same by Medicare. Similarly, the worst physician in the community gets paid by Medicare the same as the best physician. The recent increase in inflation will likely force many physicians away from private practice employment models and move medicine even further from a free market workforce. We are spectators to the extinction of the private medical practice.

April 18, 2022

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