2025 Proposed Physician Payment Rule
Valuation Implications
The U.S. government is the largest payor of medical costs, through Medicare and Medicaid, and consequently has a strong influence on reimbursement to healthcare providers. The 2025 proposed fee changes are significant. This article focuses on the proposed fee changes and how these changes may affect valuations of healthcare practices.
The U.S. government is the largest payor of medical costs, through Medicare and Medicaid, and consequently has a strong influence on reimbursement to healthcare providers. The prevalence of these public payors in the healthcare marketplace often results in their acting as a price setter and being used as a benchmark for private reimbursement rates. Therefore, changes to Medicare and Medicaid payment rates are notable as they may indicate a shift in the greater healthcare reimbursement landscape.
Medicare pays for physician and other health professional services based on a list of services and their payment rates, i.e., the Medicare Physician Fee Schedule (MPFS). Under this fee schedule, the Centers for Medicare and Medicaid Services (CMS) determines the payment rate for each service based on various relative value units (RVUs): (1) the work required to provide the service (wRVUs); (2) the expenses related to maintaining a medical practice (PE RVUs); and (3) medical malpractice insurance costs (MP RVUs). Those payment rates are adjusted to account for variations in the input prices in different markets, but may also be adjusted based on provider characteristics, additional geographic designations, and other factors.[1] A conversion factor is then applied to those RVUs to become payment rates.
On July 10, 2024, CMS released its proposed MPFS for calendar year 2025, in which the agency proposes to decrease MPFS payment rates by 2.8%.[2] This decrease reflects: the expiration of the 0.00% conversion factor update under the Medicare Access and CHIP Reauthorization Act (MACRA); a 0.05% adjustment for budget neutrality; and a 2.93% statutory increase in payment for 2024.[3] This calculation results in a proposed MPFS conversion factor of $32.36, a $0.93 reduction from the 2024 conversion factor of $33.29.[4] If finalized as proposed, this will be the fifth straight year that the MPFS conversion factor has been decreased. As discussed further below, healthcare industry players and legislators alike are concerned that these ongoing cuts will render independent physician practices unsustainable, and are considering overhauling the way Medicare pays physicians.
In addition to payment rate changes, CMS proposes establishing coding and payments for a new set of Advanced Primary Care Management (APCM) services.[5] Physicians and non-physician practitioners (NPPs) who participate in advanced primary care models can begin billing for APCM services on January 1, 2025.[6] The services would include parts of existing care management and communication technology-based services, and reflect the essential parts of advanced primary care delivery, including chronic care management, transitional care management, and principal care management.[7] CMS anticipates that these new codes will “better recognize and describe advanced primary care services, encourage primary care practice transformation, help ensure that patients have access to high quality primary care services, and simplify billing and documentation requirements.”[8]
CMS also proposes adding several services to the Medicare Telehealth Services List.[9] Beginning 2025, CMS plans to allow interactive telecommunications, which includes two-way, real-time, audio-only communication tools, for any telehealth services provided to beneficiaries in their home.[10] Providers who are technically capable of using a telecommunications system may use this method if their patient does not consent or is not able to use video technology.[11] CMS also plans to continue permitting distant site practitioners to use the location where they are enrolled as a practitioner, rather than their home address, when providing telehealth services.[12] Further, CMS proposes extending the definition of direct supervision—which requires practitioners to be physically present for certain services—to include virtual presence, through real-time visual and audio communications.[13] CMS also intends to continue their policy of allowing teaching physicians to be virtually present for services furnished virtually from a teaching setting, through December 31, 2025.[14]
Other proposals CMS suggests for 2025 include, but are not limited to:
- Codifying the Inflation Reduction Act of 2022’s mandate that drug companies pay “inflation rebates” if they raise prices for certain Medicare Part B and D drugs faster than the rate of inflation;[15]
- Requesting feedback for a proposed model that would engage specialist providers in value-based care through the Merit-based Incentive Payment System’s (MIPS’s) Value Pathways;
- New payments and codes for caregiver training and support that could be provided via telehealth; and
- Flexibilities for opioid treatment programs, including allowing telehealth and audio-only visits for follow-up appointments.[16]
As noted above, stakeholders throughout the healthcare industry have expressed significant concerns about the MPFS’s continuing trend of physician payment cuts. The American Medical Association (AMA) called for a congressional response to the proposed rule.[17] The AMA noted that “rural physicians and those treating underserved populations see this CMS warning as another reminder of the painful challenges they face in keeping their practices open and providing care. It’s crucial that we ensure both continue.”[18] Similarly, the Medical Group Management Association (MGMA) is concerned about the likely impact of the proposed conversion factor reduction, maintaining that this reduction causes significant concern for medical groups, as Medicare reimbursement rates are starting to undermine physician practices’ sustainability.[19] MGMA called on Congress to “pass the Strengthening Medicare for Patients and Providers Act to implement an annual inflation-based physician payment update tied to the Medicare Economic Index, and modernize Medicare’s antiquated budget neutrality policies by enacting the Provider Reimbursement Stability Act.”[20]
The precursor to the current formula for updating Medicare payments, the Medicare Sustainable Growth Rate (SGR), was created by the Balanced Budget Act of 1993 to (1) ensure patient access to physician services and (2) predictably control federal spending on Medicare Part B.[21] Under the SGR formula, if physician costs exceeded target expenditures, payments would be cut.[22] The SGR formula indicated downward adjustments to the MPFS every year from 2002 onwards. However, in what became an invariable, annual response to intense pressure from providers and patient advocates, Congress consistently intervened and stepped in at the last moment to override the mandated decreases to the MPFS, typically replacing scheduled cuts with increases in payment. The SGR had many inefficiencies, such as: (1) making physician payments uncertain on a year-to-year basis; (2) disregarding group and individual performance; (3) distracting Congress from other legislative priorities; and (4) deferring actual improvements to the program.[23] In an effort to fix these problems and inefficiencies, CMS replaced the SGR formula in 2015 with scheduled updates to the MPFS.[24]
However, the last few years of threatened Medicare physician payment cuts, and subsequent congressional intervention (which interventions only ameliorated the payment cuts, and did not result in payment increases as it did with the SGR), are beginning to mirror the issues encountered with the SGR formula. MACRA was supposed to alleviate the issues encountered with the SGR, but it has largely failed to do so. As a result, a number of federal legislators have called for another overhaul of physician payment updates. Two bills are currently being considered by Congress:
- The Strengthening Medicare for Patients and Providers Act would tie annual physician payment updates to the Medicare Economic Index (MEI), an index that accounts for inflation, the costs of running a practice, increases in office rent, professional liability insurance premiums, and employee wages.[25]
- The Provider Reimbursement Stability Act would reform the MPFS budget neutrality policies by: (1) raising the budget neutrality threshold from $20 million to $53 million in 2025, and increasing the threshold every five years by the MEI, beginning in 2030; (2) requiring CMS to analyze utilization estimates compared to actual utilization by September 1st of each year; (3) mandating that CMS update the direct cost inputs for practice expense relative value units (RVUs) of staff wage rates, medical supplies, and equipment at least every five years; and (4) limiting the increases/decreases to the conversion factor by no more than 2.5% every year.[26]
While other reforms may still be necessary, these bills have gained bipartisan support on Capitol Hill, as well as support from the physician community.[27] However, it is unlikely that any bill will be passed in 2024 given the presidential election (a notoriously hard time to pass bipartisan legislation), likely delaying any wholesale changes to the MPFS for at least another year.
Valuation Implications
This proposed payment rule may have several implications for healthcare-related valuations (both of entities and compensation arrangements). The value paid in a healthcare transaction, whether it be for the acquisition of a healthcare business (or interest therein) or physician compensation arrangement is determined on the future economic benefits for the involved willing buyers. Therefore, employed valuation methodology must be forward-looking.
Reimbursement to many outpatient enterprises, including physician practices, is made under the MPFS. Any changes to the MPFS will have an impact on the future revenue of the enterprise. All other things being equal, changes to the MPFS (either actual or projected) that do not match actual or projected costs will result in less profits available for the buyer, and have a negative effect on the value of the enterprise.
Further, healthcare entities with physician compensation arrangements must be aware of the annual changes to the MPFS—not just to payment rates, but also to RVU weights and geographic adjustments—as those changes could impact Fair Market Value compensation.[28] For example, the 2021 MPFS final rule increased the wRVUs for common evaluation and management (E/M) office visits.[29] Consequently, physicians performing the same volume of E/M office visits in 2021 as they did in 2020 generated anywhere from 7.0% to 45.8% more wRVUs. The rebased RVU rates resulted in other providers potentially receiving much lower compensation, had their employers (largely hospitals) not taken measures to ensure physicians’ continued level of compensation, e.g., by freezing compensation at 2019 levels, continuing to utilize 2020 MPFS RVU weights, and other changes. Other MPFS changes that can impact Fair Market Value physician compensation include:
- MPFS payment rate changes, which often directly impact productivity-based physician compensation arrangements, as payments are tied to the generation of wRVUs;
- Addition of new care models and/or billing codes (such as the new APCM codes proposed for 2025), which can impact demand drivers for certain services or specialties;
- Changes to the geographic adjustments used to apply a national payment rate to a particular locality, which would likely most strongly impact providers in areas with a high cost of living;
- Reimbursement from commercial payors who, as noted above, often tie their own payment rate updates to that of Medicare.
The market approach, i.e., the utilization of compensation amounts paid in comparable agreements to establish the value of the subject arrangement, is the most common valuation methodology employed for the valuation of physician compensation arrangements. There are numerous surveys available that report physician compensation benchmarks. However, these surveys report compensation practices that occurred in the past. If the amount of reimbursement that the buyer, or employer, of the physician services will receive for the services acquired from the physician(s) is expected to change, consideration must be given to the impact of the reimbursement change on historical survey data for the applicability to future compensation arrangements.
This article was previously published by HCC, Health Capital Topics, Volume 17, Issue 7, July 2024, and is republished here by permission.
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[1]       “Physician and Other Health Professional Payment System” Medicare Payment Advisory Commission, Payment Basics, https://www.medpac.gov/wp-content/uploads/2022/10/MedPAC_Payment_Basics_23_Physician_FINAL_SEC.pdf (Accessed 7/30/24).
[2]       “Calendar Year (CY) 2025 Medicare Physician Fee Schedule Proposed Rule” Centers for Medicare and Medicaid Services, July 10, 2024, https://www.cms.gov/newsroom/fact-sheets/calendar-year-cy-2025-medicare-physician-fee-schedule-proposed-rule (Accessed 7/15/24).
[3]       “CMS issues CY 2025 physician fee schedule proposed rule” American Hospital Association, July 10, 2024, https://www.aha.org/news/headline/2024-07-10-cms-issues-cy-2025-physician-fee-schedule-proposed-rule#:~:text=The%20Centers%20for%20Medicare%20%26%20Medicaid,to%20%2433.29%20in%20CY%202024. (Accessed 7/15/24).
[4]       “Calendar Year (CY) 2025 Medicare Physician Fee Schedule Proposed Rule” Centers for Medicare and Medicaid Services, July 10, 2024, https://www.cms.gov/newsroom/fact-sheets/calendar-year-cy-2025-medicare-physician-fee-schedule-proposed-rule (Accessed 7/15/24).
[5] Â Â Â Â Ibid.
[6] Â Â Â Â Ibid.
[7] Â Â Â Â Ibid.
[8] Â Â Â Â Ibid.
[9] Â Â Â Â Ibid.
[10] Â Â Â Ibid.
[11] Â Â Â Ibid.
[12] Â Â Â Ibid.
[13] Â Â Â Ibid.
[14] Â Â Â Ibid.
[15] Â Â Â Ibid.
[16]     Ibid.; “CMS’ proposed 2.8% physician pay decrease for CY2025 earns quick condemnation from docs” By Dave Muoio, Emma Beavins, and Noah Tong, Fierce Healthcare, July 10, 2024, https://www.fiercehealthcare.com/providers/cms-proposed-28-physician-pay-decrease-fy2025-earns-quick-condemnation-docs (Accessed 7/15/24).
[17]     “Latest proposed cut—2.8%—shows need for Medicare pay reform” American Medical Association, July 10, 2024, https://www.ama-assn.org/practice-management/medicare-medicaid/latest-proposed-cut-28-shows-need-medicare-pay-reform#:~:text=%E2%80%9CThe%20death%20by%20a%20thousand,that%20we%20ensure%20both%20continue.%E2%80%9D (Accessed 7/15/24).
[18]Â Â Â Â Â Ibid.
[19]     “MGMA statement on proposed 2025 Medicare Physician Fee Schedule” By Anders Gilberg, Medical Group Management Association, July 10, 2024, https://www.mgma.com/press-statements/july-10-2024-mgma-statement-on-proposed-2025-medicare-physician-fee-schedule (Accessed 7/15/24).
[20]Â Â Â Â Â Ibid.
[21]     “A primer on Medicare physician payment reform and the SGR” By Keith Fontenot et al., Brookings, February 2, 2015, https://www.brookings.edu/articles/a-primer-on-medicare-physician-payment-reform-and-the-sgr/ (Accessed 7/15/24).
[22] Â Â Â Â Ibid.
[23] Â Â Â Â Ibid.
[24]     “MACRA (SGR Fix) Updates” American Academy of Allergy, Asthma, and Immunology, November 2016, https://www.aaaai.org/about/advocacy/regulatory-actions/sustainable-growth-rate-fix (Accessed 7/15/24); “MACRA, the Sustainable Growth Rate (SGR) Reform Bill, Signed into Law” By Miranda Franco, Holland and Knight, April 30, 2015, https://www.hklaw.com/en/insights/publications/2015/04/macra-the-sustainable-growth-rate-sgr-reform-bill (Accessed 7/15/24).
[25]    “Congress Passes Partial Fix to Medicare Physician Payment” American Academy of Ophthalmology, March 7, 2024, https://www.aao.org/advocacy/eye-on-advocacy-article/congress-poised-pass-partial-fix-medicare-payment (Accessed 7/19/24).Â
[26]     “Is Medicare Physician Fee Schedule Reform on the Horizon?” By Larry Buchson, M.D., November 1, 2023, https://bucshon.house.gov/news/documentsingle.aspx?DocumentID=4467 (Accessed 7/19/24).
[27]     “Congress Passes Partial Fix to Medicare Physician Payment” American Academy of Ophthalmology, March 7, 2024, https://www.aao.org/advocacy/eye-on-advocacy-article/congress-poised-pass-partial-fix-medicare-payment (Accessed 7/19/24).Â
[28] Â Â Â Â Fair Market Value is the standard of value typically sought in healthcare valuation engagements, due to various industry regulatory requirements.
[29]     “Navigating change: Implications of CMS’s 2021 Physician Fee Schedule” By Patty Bohney, et al., Healthcare Financial Management Association, February 19, 2021, https://www.hfma.org/cost-effectiveness-of-health/financial-sustainability/navigating-change-implications-of-cms-s-2021-physician-fee-sch/ (Accessed 8/1/24).
Todd A. Zigrang, MBA, MHA, FACHE, CVA, ASA, ABV, is president of Health Capital Consultants, where he focuses on the areas of valuation and financial analysis for hospitals and other healthcare enterprises. Mr. Zigrang has significant physician-integration and financial analysis experience, and has participated in the development of a physician-owned, multispecialty management service organization and networks involving a wide range of specialties, physician owned hospitals, as well as several limited liability companies for acquiring acute care and specialty hospitals, ASCs, and other ancillary facilities.
Mr. Zigrang can be contacted at (800) 394-8258 or by e-mail to tzigrang@healthcapital.com.
Jessica Bailey-Wheaton, Esq., is vice president and general counsel for Heath Capital Consultants, where she conducts project management and consulting services related to the impact of both federal and state regulations on healthcare exempt organization transactions, and provides research services necessary to support certified opinions of value related to the fair market value and commercial reasonableness of transactions related to healthcare enterprises, assets, and services.
Ms. Bailey-Wheaton can be contacted at (800) 394-8258 or by e-mail to jbailey@healthcapital.com.
