Medicare doctors are set to receive a modest pay increase next year.
When Congress enacted President Trump’s “One Big Beautiful Bill Act of 2025,” they included a one-time 2.5 percent pay hike for Medicare physicians, effective January 2026.
Following that, the Center for Medicare and Medicaid Services (CMS), the agency that runs the Medicare program, issued an 910-page rule incorporating further regulatory changes to the Medicare physician fee schedule.
On top of the 2.5 percent statutory pay increase, CMS has proposed changes in base payment rate (the “conversion factor”) that would result in a 3.62 percent total pay increase from the 2025 Medicare rate. The “conversion factor,” expressed as an annual dollar amount, applies to all Medicare physicians’ specialties.
Different specialties will experience different rates annually according to the program’s payment formulas. For physicians who participate in a Medicare “alternative payment model” (APM), a model to incentivize “value-based” care, the projected payment increase is set to equal 3.83 percent next year.
Welcome Changes
Even though this is a modest pay adjustment, the Trump Medicare payment changes represent a sharp reversal from the Biden policy.
In 2024, the Biden administration imposed a 2.83 percent physician pay cut for 2025. In previous years, CMS also proposed Medicare physician payment reductions that Congress subsequently either blocked or modified.
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But while the Trump administration’s measures are more than welcome, there is much more to be done. Specifically, Congress and the White House should work together to permanently fix the broken Medicare physician payment system.
The reason?
The system is a bureaucratic behemoth—a complex administrative payment program that often pays too much or too little, and which is largely insulated from real market forces and broader changes in the economic environment.
The system is inherently flawed and relatively inflexible. It’s a source of chronic frustration for independent medical practitioners, who must not only cope with excessive paperwork and reporting requirements but also try to adapt to rapidly advancing medical technologies and health care financing changes.
This is especially frustrating for entrepreneurial practitioners, who envision great potential for new patient care options (like highly personalized medical care) and who would like to take advantage of breakthroughs in care delivery.
And no matter how meticulous, technocratic tinkering with the Medicare payment formulas holds limited promise for only marginal improvements.
Bureaucratic Complexity
Medicare’s administrative payment formula encompasses three elements: the relative value assigned to the work of a specific medical specialty; the medical practice expense of the specialty; and an estimate of the specialty’s professional liability insurance. These components are then geographically adjusted to determine the annual payment rate for the medical specialty. They are further adjusted based on whether a physician participates in the program’s alternative payment models (APMs) or the “merit-based incentive payment system.”
At its adoption in 1989, Congressional leaders and their academic allies marketed the new fee schedule as a “scientific” method to secure the “objective” value of medical treatments and procedures. That was, and is, sheer nonsense.
In fact, the “scientific” enterprise of Medicare payment setting has been politicized internally by successive presidential administrations and influenced externally by powerful interest groups.
To determine the “value” of a physician’s work, for example, CMS relies on data provided by the American Medical Association. Annually, the AMA’s Relative Value Scale Update Committee (RUC) estimates the value of physician work in the various specialties for the thousands of codes used in Medicare payment.
In its explanation for this year’s changes, CMS acknowledges the weakness of this process:
Only a small portion of the total codes are considered for re-evaluation annually, and CMS relies primarily on subjective information from surveys that have low response rates, with respondents who may have inherent conflicts of interest (since their responses are used in setting their payment rates). Research over time has demonstrated that the time assumptions built into the valuation of many PFS services are, as a result, very likely overinflated.
To correct for this flaw in determining the “value” of work, CMS now proposes to create an “efficiency adjustment.” The plan is to value medical work based on the past five years of data from the Medicare Economic Index (MEI)—the index that measures practice costs—allowing for a move away from survey data and toward reliance on more empirical research.
This reflects the more typical approach to central planning, which almost always relies on past data to shape current and future policy decisions.
Next Steps
In their version of the “Big Beautiful Bill,” the House of Representatives tried and failed to provide a longer-term solution to provide stability in Medicare reimbursement and ensure patient access to care.
Under the original House reconciliation bill, the 2026 “conversion factor” for all medical specialties would have increased by 75 percent of the annual percentage increase in the annual MEI, the standard measure of medical inflation. For the years following that, the increase would have been 10 percent of the secretary’s estimate of the percentage MEI increase for that year.
The AMA “strongly” supported that provision, but the Senate did not incorporate it into its version of the bill.
Meanwhile, Medicare doctors face a grim future. According to the Medicare trustees’ report, in 2011, Medicare physician payment was 82 percent of prevailing private rates; in 2023, it fell to 71percent; and this year it is estimated at just 64 percent.
Thus, the trustees say, “Absent a change in the delivery system or level of update by subsequent legislation, … [we] expect access to Medicare-participating physicians to become a significant issue in the long-term.”
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There is no shortage of solutions. The Heritage Foundation and others have outlined a rich menu of market-based reforms that would significantly improve the Medicare physician payment system—including an annual update based on the most accurate measure of inflation (Chained—CPI).
If Congress and the White House want to maintain and annually tweak this bureaucratic regime of central planning and price controls, fine. But they should also provide a variety of “off-ramps” for doctors and patients to secure better, faster, personalized, high-quality care.
Just two examples:
First, Congress could create special accounts in both traditional Medicare and Medicare Advantage to allow patients to pay doctors directly (with a card) for “direct primary care” services.
This would give the patients a high degree of independence and flexibility in controlling their Medicare dollars, enabling them to develop a traditional relationship with personal physicians without all the hassle of claims submissions.
Second, Congress could repeal the bizarre and unprecedented 1997 statutory restrictions on Medicare private contracting. Such a repeal would allow doctors and Medicare patients to enter into private agreements without being forced to submit claims to Medicare—allowing patients and doctors to retain privacy, obtain highly specialized care, etc.
If British doctors and patients can go outside of the National Health Service—the grandaddy of socialized medicine—and enter into private agreements, why should Americans not enjoy the same personal freedom?
Ultimately, Medicare should be modernized so that it’s no longer “provider-centric” but “patient-centric.” It should be updated to make it a flexible program that fosters innovation in care delivery and allows patients to control both the dollars and the decisions.
