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October 9, 2025 – Several recent Regs & Eggs blog posts have focused on comments that stakeholders submitted on two major Medicare payment proposed rules: the calendar year (CY) 2026 Physician Fee Schedule (PFS) proposed rule and the CY 2026 Outpatient Prospective Payment System (OPPS) proposed rule. Payment rates in both the PFS and OPPS have stagnated in recent years, and therefore it is no surprise that many commenters expressed concern about the trajectory of Medicare payment updates. However, while Medicare payment rates in Medicare fee-for-service (i.e., Traditional Medicare) have decreased, overall Medicare spending has accelerated in recent years and is projected to grow steadily in the decade ahead. To help me discuss this paradox and what it may mean for healthcare stakeholders and policymakers, I’m bringing in colleague Parashar Patel.
Medicare fee-for-service payment rates under the PFS have struggled to keep pace with inflation. According to the American Medical Association (AMA), between 2001 and 2025, Medicare physician pay remained virtually flat even though the cost of running a medical practice increased 59%. Adjusted for inflation in practice costs, Medicare physician pay declined 33% from 2001 to 2025. Despite higher proposed conversion factor updates in the CY 2026 PFS proposed rule, the efficiency adjustment and indirect practice expense reduction would result in even deeper payment reductions. In fact, McDermott+ found that for many procedures, the Medicare proposed payment rates for 2026 (despite the higher conversion factor updates) are lower than they were in 2022.
While hospital rates under the OPPS and inpatient prospective payment system have been increasing each year (roughly 2.5% a year over the last 25 years according to the AMA), they haven’t kept up with inflation. Hospitals are struggling to keep up with rising costs, and the proposals from the Centers for Medicare & Medicaid Services (CMS) in the OPPS proposed rule, including the site neutral and “site neutral lite” policies (the elimination of the inpatient only list and the expansion of the ambulatory surgical center covered list), could have significant financial implications.
Now let’s look a bit further into the future at the expected trends that might increase pressure on policymakers to reduce spending growth.
Despite the lower payment rate growth, overall Medicare spending has increased and is expected to continue growing at a rapid pace. The Medicare Payment Advisory Commission (MedPAC) explored Medicare spending trends during its September 2025 public meeting and estimated that Medicare spending will grow from $1 trillion in 2023 to $2 trillion by 2031 or 2033.
So, what’s expected to be the major driver of this increase? Aging baby boomers are expected to account for some of the increase. However, beneficiary demographics may not be a major driver because seniors are expected to be healthier than in the past. Another significant driver may be the volume and intensity of services. Intensity includes new technology.
Interestingly, total spending for Part A services (inpatient and facility care) is growing at a slower rate than in the past, while spending for Part B services (outpatient care) is growing faster. This trend is occurring in part because more care is being shifted from inpatient to outpatient settings. Because Part B is funded by beneficiary premiums, cost-sharing, and general revenue, future spending growth will put financial pressure on the federal government and beneficiaries to cover the cost.
MedPAC also found that horizontal mergers and vertical acquisitions are becoming more prevalent, leading to higher prices but unclear effects on access and quality of care. The healthcare workforce is changing, with the greatest growth in home health and personal care aides and high turnover among nursing home staff– which could also impact overall Medicare spending as more care is being delivered by different types of providers.
Rising Medicare spending may continue to put pressure on policymakers, including Congress and CMS, to develop cost-cutting approaches, despite the fact that Medicare payment rates have already been squeezed. Medicare actuaries project that Medicare payment rates will not drive future growth in Medicare spending. In fact, they project that payment rates will grow slower than inflation. Thus, policymakers may have to look for other solutions to control costs in Medicare fee-for-service.
So what other options do policymakers have?
These policy options could have wide-ranging impacts on providers and Medicare beneficiaries and raise important questions:
As alluded to earlier, the continued shifted to outpatient care could impact beneficiary cost-sharing and result in a rise in Part B premiums. The median 2024 annual income per beneficiary was $43,000 according to MedPAC, so some stakeholders have questioned whether Medicare beneficiaries will be able to afford these higher costs. Another question stakeholders have raised is whether higher beneficiary cost-sharing will drive down demand for elective and even urgent care.
It is also important to consider what could happen next as Medicare Part B premiums rise. If Medicare Part B premiums become too high, will policymakers be ok with having a larger share of general revenues covering the cost of Medicare? Will they cut spending in other areas or raise taxes to make up the difference, or will they become more comfortable with larger budget deficits?
We know it seems that we have more questions than answers at this point, but this paradox between lower payment rates in Medicare fee-for-service and higher overall Medicare spending could lead to the adoption of other spending controls that would have profound implications on the healthcare sector. All healthcare stakeholders should be prepared for these potential policies, and policymakers may want to consider the many ways each option could affect providers, patients, taxpayers, and other stakeholders.
Until next week, this is Jeffrey (and Parashar) saying, enjoy reading regs with your eggs.
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