Medicare Payment Policy: The Basics

The mechanisms of payment for medical services are complicated and create predictable incentives. Physicians can benefit from understanding how hospitals, practices, employers, and payers understand payment, since this has a role in determining how certain patient care services are valued and prioritized. Type of hospital, location of service delivery, and a physician's relationship with the payer or provider entity can greatly impact the value of a physician's work. The landscape of payers is large, but Medicare payment has come to drive the behavior of many private payers. This article will outline the key components of Medicare and how they apply to physicians, hospitals, and ambulatory surgical centers to provide a basic structure for thinking about payment for medical services. This review of the fundamentals of Medicare payment will provide a framework for physicians to understand the financial incentives that underlie clinical and operational decisions in the healthcare system.

Pricing distortions in Medicare's physician fee schedule and patient satisfaction with care quality and access

Medicare adjusts its payments to physicians for geographic differences in the cost of operating a medical practice, but the method it uses is imprecise. We measure the inaccuracy in its geographic adjustment factors and categorize beneficiaries by whether they live where Medicare's formula is favorable or unfavorable to physicians. Then, using the 2001-2003 Medicare Current Beneficiary Survey, we examine whether differences in physician payment generosity, that is, whether favorable or unfavorable, influence the satisfaction ratings Medicare seniors assign to their quality of care and access to services. We find strong evidence that they do. Many beneficiaries live in payment-unfavorable areas and receive a less satisfying quality of care and less satisfying access to services than beneficiaries who live where payments are favorable to physicians.