For years, physicians who care for Medicare patients have faced a basic financial problem. In short, the cost of providing care keeps going up — but Medicare physician payments haven’t reliably kept pace.

To see just how bad this problem is, one only needs to look at the contrast between physician and hospital payments. Medicare’s in-patient hospital payment system receives annual updates. These updates account for changes in the prices of goods and services hospitals use. For example, for fiscal year 2027, CMS calculated the hospital update using a 3.2% “market basket” increase, reduced by a productivity adjustment.

In contrast, the Medicare Physician Fee Schedule is subject to statutory budget neutrality requirements. This means that certain increases in spending for some physician services must be offset by reductions elsewhere. Making matters worse is the fact that physician payments have historically lacked the consistent inflation adjustments applied to other Medicare payment systems.

All of this means that physicians are met with higher prices for goods and services, and less money paid to them in return. According to MedPAC, the Medicare Economic Index, which measures changes in physicians’ practice costs, increased by 56% from 2000 to 2024. Over that same time period, the physician fee schedule updates increased by only 14%.

In this article, we’re going to discuss how this system came to be — and what is being done to change it.

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Not A New Problem

In 1997, Congress created the Medicare Sustainable Growth Rate (SGR) as part of the Balanced Budget Act of 1997. This was created to control growth in Medicare spending on physician services. 

How it was supposed to work was simple. When the actual spending exceeded prescribed targets, the formula called for reductions in the physician payment conversion factor.

That said, it did not work this way in practice. Congress repeatedly stepped in to prevent those reductions from taking effect — and over time, those deterred cuts compounded, eventually producing threatened reductions of over 20%.

The SGR was eventually scrapped in 2015. However, this did not eliminate the broader challenge of keeping physician reimbursement aligned with the growing cost of running a medical practice. 

In the recent past, Congress has typically passed year-by-year, one-time fixes to the Medicare physician payment problem. For example, for 2026, Congress provided a one-time 2.5% increase in Medicare physician payments. Combined with other changes, CMS finalized conversion-factor increases of 3.77% for qualifying Alternative Payment Model participants and 3.26% for other clinicians. But the statutory 2.5% increase applies only to 2026. As we previously discussed, even the 2026 rule leaves unresolved longer-term questions about practice expenses, budget neutrality and payment predictability. 

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Moving Beyond Short Term Fixes

Momentum is building in the policy world to create a more long-term, sustainable system. The bipartisan Provider Reimbursement Stability Act of 2026 has been introduced in both chambers of Congress. Each version seeks to abandon the yearly-incease trend and create a long-term solution through modernizing the current system.

Among the most important provisions in the legislation are changes to Medicare’s budget-neutrality threshold. The House bill would increase the threshold from $20 million to $54.3 million beginning in 2027 and start to periodically index it to the MEI in 2032. The Senate version would raise it to $57.64 million beginning in 2028, with five-year MEI adjustments beginning in 2033. 

While a final bill may look substantially different from both current versions, both approaches would give CMS more room to update individual service values without automatically triggering cuts elsewhere to offset payments.

The legislation also seeks to take on another issue with the current system: inaccurate utilization assumptions. CMS sometimes estimates how frequently a new or revised service will be used when making calculations. The bills establish a mechanism to compare those assumptions with actual claims data. If the discrepancy is sufficiently large, the conversion factor can be corrected.

The bills would also require CMS to update direct costs used to calculate practice-expense RVUS, including clinical staff wages, medical supplies, and equipment. This would need to be done, at minimum, every five years. Finally, the legislation would limit budget-neutrality-driven year-over-year changes in the conversion factor to 2.5% in either direction. This would reduce the dramatic swings that can make financial planning difficult for practices.

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Support For Reform Is Broad 

Various physician organizations have rallied behind the proposal. The American College of Physicians has voiced support for MPFS reform, and the Alliance of Specialty Medicine, which represents more than 100,000 specialists and surgeons, have endorsed the legislation. EDPMA supported H.R. 8163 during our June Hill Day and plans to support the Senate legislation as well.

Temporary payment increases have repeatedly prevented crises. However, this history should make it clear that Medicare physicians need something more reliable. They need a payment system that is predictable and that changes to reflect actual practice costs. The Provider Reimbursement Stability Act represents an important step toward getting there.