Physician Reimbursement and Participation in Medicaid

Presentation by Peter Cunningham, Ph.D., Senior Fellow, Center for Studying Health System Change

Presented to the Medicaid and CHIP Payment and Access Commission (MACPAC), September 23, 2010, Washington, D.C.

The Medicaid Reimbursement Challenge

Medicaid physician reimbursement represents one of the most persistent and consequential policy issues in American health care. States possess broad discretion in establishing Medicaid payment rates, and every state employs fixed fee schedules to compensate physicians for services rendered to Medicaid beneficiaries. The methodologies used to construct these fee schedules, however, vary enormously across states, producing a patchwork of payment levels that bear no consistent relationship to the actual costs of delivering care. This variability in rate-setting approaches has generated wide disparities in physician compensation for identical services depending on where a physician practices and which state's Medicaid program is reimbursing the claim.

Throughout the history of the Medicaid program, low fee levels have served as a primary contributor to limited physician participation. Medicaid reimbursement rates constitute the principal mechanism through which states have attempted to attract and retain physician participation in the program. Paradoxically, these same fees have frequently been among the earliest targets when states confront budget pressures and seek areas for expenditure reduction. This creates a recurring cycle in which states raise fees to expand physician access, only to reduce them when fiscal constraints tighten, thereby undermining the access gains they had previously achieved.

Medicaid Fee Levels Compared with Medicare

The magnitude of the gap between Medicaid and Medicare payment levels is substantial and has been well documented. As of 2008, Medicaid fee-for-service reimbursement for a standard 15-minute office visit with an established patient stood at $38, compared with $60 under Medicare fee-for-service -- a difference of more than 35 percent. For emergency department visits, Medicaid paid $44 versus Medicare's $59. A 45-minute hospital visit with a new patient commanded $39 under Medicaid compared with $63 from Medicare. These figures illustrate the systematic undervaluation of physician services within the Medicaid program relative to the already-modest Medicare fee schedule.

Expressed as a percentage of Medicare rates, Medicaid fees at the national average level stood at 72 percent across all services in 2008, up from 62 percent a decade earlier in 1998. Primary care services fared worse, with Medicaid fees reaching only 66 percent of Medicare levels in 2008 compared with 56 percent in 1998. Other service categories registered at 73 percent of Medicare in 2008, up from 68 percent in 1998. While these figures indicate meaningful improvement over the decade, Medicaid rates remained substantially below Medicare benchmarks across every service category and time period examined.

Substantial Geographic Variation in Medicaid Fees

National averages mask dramatic interstate variation in Medicaid payment levels. As of 2008, Medicaid fees as a proportion of Medicare rates ranged from less than 60 percent in certain states -- predominantly in the Southeast and parts of the Northeast -- to 100 percent or above in several Western and Northern Plains states including Alaska, Montana, North Dakota, Wyoming, Idaho, and New Mexico. This geographic distribution does not follow a simple regional pattern. States with the highest Medicaid-to-Medicare fee ratios tend to be those with smaller populations, lower overall costs of living, and fewer physicians per capita, while many of the most populous states with the greatest numbers of Medicaid beneficiaries pay rates well below the national average.

The pace of Medicaid fee increases between 2003 and 2008 also varied considerably by state. Some states, including Louisiana, Pennsylvania, Montana, North Dakota, and several New England states, implemented fee increases of 35 percent or more during this five-year span. Others, particularly states in the West and Southeast, raised their fees by less than 10 percent, barely keeping pace with medical cost inflation and in some cases falling further behind. These divergent trajectories reflect the varying fiscal capacities and political priorities of individual state governments as they attempted to balance Medicaid spending against competing budgetary demands.

Physician Willingness to Accept Medicaid Patients

The consequences of low Medicaid reimbursement are most visibly manifested in physician acceptance patterns. Data from the 2008 Health Tracking Household Survey reveal stark differences in physicians' willingness to accept new patients based on insurance type. Only 53 percent of physicians reported accepting all or most new Medicaid patients, while 28 percent accepted no new Medicaid patients at all. These figures contrast sharply with acceptance rates for privately insured individuals, where 87 percent of physicians accepted all or most new patients and a mere 4 percent turned away all private-pay patients. Medicare fell between these two poles, with 74 percent of physicians accepting all or most new Medicare patients and 14 percent declining all new Medicare enrollees.

Acceptance of new Medicaid patients also varies meaningfully across medical specialties. As of 2008, pediatricians and physicians in medical subspecialties registered the highest rates of Medicaid patient acceptance at 65 percent each, followed by surgical specialties at 55 percent and obstetrics-gynecology at 50 percent. Family practice physicians accepted new Medicaid patients at a rate of 44 percent, internal medicine specialists at 40 percent, and psychiatrists at the lowest rate of just 42 percent. These specialty-level differences reflect a combination of factors including the composition of each specialty's patient mix, the relative generosity of Medicaid payment for different service types, and the availability of alternative revenue sources.

Why Physicians Decline Medicaid Participation

When physicians who limited or declined Medicaid participation were asked to identify their reasons, low reimbursement dominated the list at 84 percent. Administrative burden ranked second at 70 percent, reflecting physician frustration with the paperwork, prior authorization requirements, and bureaucratic processes associated with Medicaid billing. Delayed payment was cited by 65 percent of non-participating physicians, pointing to cash flow challenges that disproportionately affect smaller practices with limited financial reserves. The clinical burden associated with Medicaid patients -- who tend to have more complex health needs, greater social service requirements, and higher rates of missed appointments -- was identified by 52 percent of respondents. Finally, 44 percent of physicians who declined Medicaid patients cited an already-full practice as their reason, suggesting that in at least some markets the issue is not unwillingness to serve Medicaid enrollees per se but rather a general scarcity of physician capacity.

Factors Beyond Payment That Shape Physician Participation

While fee levels receive the most attention in policy discussions, several other physician and practice characteristics demonstrate strong associations with Medicaid participation rates. Younger physicians are more likely to accept Medicaid patients than their more established colleagues. Physicians practicing in larger group settings participate at higher rates than those in solo or small-group arrangements. Employed physicians show greater willingness to accept Medicaid patients compared with practice owners, possibly because employed physicians have less direct exposure to the financial consequences of low reimbursement. International medical graduates participate at higher rates than U.S.-trained physicians, and physicians in rural locations accept Medicaid at higher rates than those practicing in large metropolitan areas.

Research examining the relationship between state-level variation in Medicaid fees and Medicaid enrollee access to care and service utilization has produced surprisingly weak findings. This suggests that the connection between fee levels and actual patient access is mediated by numerous intervening factors and is not as direct or mechanistic as is commonly assumed in policy debates. In certain geographic areas, the fundamental constraint on Medicaid beneficiary access may be an inadequate overall supply of physicians rather than low Medicaid payment rates specifically. Raising fees in a physician-shortage area will not create new providers where none exist, though it may help retain those who are present.

Related Resources

For additional HSC research on Medicaid and physician access, visit the HSC archives at hschange.com