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A 30 to 40 percent Medicare cut just hit the doctors who keep your local hospital running, and the policy meant to stop hospital monopolies is accelerating them instead. John Birkmeyer, president of the medical group at Sound Physicians and a former Dartmouth health services researcher, discusses the KevinMD article “Medicare practice expense cuts will hurt patients.” You’ll hear how CMS quietly slashed the practice expense portion of Medicare payments for the first time in 20 years, hitting independent hospitalists, ER doctors, and critical care groups with net cuts of 6 to 10 percent. You’ll learn why CMS aimed at hospital-owned practices but instead pulled the rug from under the independent groups already operating at 2 to 4 percent margins, why rural hospitals will struggle hardest to staff, and how the resulting consolidation drives up prices for every patient. You’ll also hear what CMS could fix in its 2027 rule and why physician advocacy now is the only correction available before more independent practices fold.
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Transcript
Kevin Pho: Hi, and welcome to the show. Subscribe at KevinMD.com/podcast. Today, we welcome John Birkmeyer. He’s a physician executive. Today’s KevinMD article is “Medicare practice expense cuts will hurt patients.” John, welcome to the show.
John Birkmeyer: Thanks for having me, Kevin.
Kevin Pho: All right. So why don’t we start by briefly sharing your story, and then jumping into why you decided to share this particular article on KevinMD?
John Birkmeyer: Well, sure. And I really appreciate the opportunity to explore some of these issues. But I’m president of the medical group at Sound Physicians. We’re a large multi-specialty inpatient medical group that is probably best known for its focus on value-based care. But my background, I’m a general surgeon.
I’m a health services researcher. I grew up professionally at Dartmouth in the Dartmouth Atlas of Health Care, and thus my own research expertise was historically in population-based studies of quality cost and really how to affect change on a scale. But I’ve been with Sound now for going on 10 years, and I’d left Dartmouth and then the University of Michigan because I really was interested in applying some of the things that I studied in the academic sector into the real world, but on a bigger scale.
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Kevin Pho: All right. Your article is about Medicare practice expense cuts. Tell us why you decided to share this article for those who didn’t get a chance to read it.
John Birkmeyer: I decided to share this for two reasons. Most parochially, for all of us as practicing physicians, this was a somewhat unexpected, really unprecedented cut in physician reimbursement aimed mainly at physicians practicing in the inpatient setting.
And obviously we can expound on all of the reasons why year-over-year cuts to physician reimbursement really is creating pressures, but ultimately creates access risk for patients. But why this one was different was not simply the effect of cuts, but it was the somewhat asymmetrical way in which they were doing, and some of the, I think, the unintended consequences in what these cuts will do relative to what I think CMS wanted to do.
And I say it’s asymmetric in part because the cuts cut a lot more deeply to physicians practicing in the inpatient setting, while a lot of those savings got passed over to the ambulatory care setting. Nothing wrong with that per se, except that the nature of the cuts had unintended and somewhat asymmetrical implications for different types of physician groups that work in hospitals, whether they’re hospitalists or they’re pathologists or they are radiologists.
The cuts were not simply the usual types of cuts that CMS makes, which is in the dollars per RVU. It’s in this other portion of physician reimbursement payments that often flies under radar, which is the practice expense piece. That’s usually about a third of total physician payments, and that’s what reimburses you for all of your overhead, for your secretarial staff, for billing, scheduling, all of the other things that are necessary to make your practice go.
CMS made the cuts intentionally because they were trying to discourage this year-over-year trend towards physicians acquiring or buying up inventory practices and pulling them into the hospital, because it allowed them to extract the arbitrage of much higher practice expenses that are usually associated with independent practices.
So they were rightly trying to avoid hospitals’ so-called double-dipping by having shared administrative staff and then getting this extra source of payment. What they didn’t appreciate was that a very high proportion of inpatient practices are not by physicians employed by the hospital, but by independent medical groups that really do have to support their secretaries, their nurses, other staff that make their practices go.
And by cutting those payments, it fundamentally pulled the rug out of sustainability of those practices and paradoxically accelerates the trend of independent practices moving over towards employment by hospitals.
Kevin Pho: Hmm. So give us a sense of the scope of those cuts, perhaps in terms of just broad percentages. How many fewer dollars, how many fewer percentages are we talking about for these practices affected by the cuts?
John Birkmeyer: So what we’re used to with CMS cuts is typically, depending on the year and how effective physician advocacy efforts are. The last five years, those cuts have ranged from 1 to 3 percent total.
This year, however, there was a 30 to 40 percent cut in the practice expense piece of reimbursement payments. And since practice expense payments are in turn about a third of total payments, the net effect, depending on specialty, was between a 6 and a 10 percent cut.
For your listeners that don’t practice in the inpatient setting, what they don’t appreciate is that after many, many years of cuts to CMS reimbursement rates, that current reimbursement comes nowhere near covering sort of the full cost of physician compensation.
So for many years, most inpatient practices have required some subsidy or allowance from the hospitals with whom they partner. But a net 6 or 10 percent cut in total payments on top of where they already were is sufficient to push practices who already work at margins of 2 or 3 or 4 percent to being underwater and having no choice but to roll up under their hospitals.
Kevin Pho: So it sounds like these cuts specifically are targeting private practices, independent practices, leaving them no choice to be bought by private equity, local hospital systems. Is that correct?
John Birkmeyer: I think that’s a fair summary. I don’t think that was the intent. I think the intent really had a different use case in mind. CMS was thinking of radiation oncologists, radiologists, pathologists that have large inventory sort of facility expenses that were used to getting very, very high practice expenses. But what they didn’t model through carefully was what this would mean for independent practices that really just run E&M-based services like hospitalists or emergency medicine docs.
Kevin Pho: Yeah. And I could also imagine it may disproportionately affect rural practices as well that serve underserved communities. Is that right?
John Birkmeyer: Well, to the extent that most inpatient practices, particularly in anesthesia, but certainly EM, critical care as well, are experiencing acute and chronic workforce shortages. The hospitals that struggle the most to staff their hospitals are those that are in rural or otherwise less desirable areas, from a demographic point of view. And anything that exacerbates the financial headwinds associated with hospitals or those physicians to be able to make ends meet just pushes a reliance on very expensive low-income tenants, or in some cases being unable to staff at all and having to close.
And obviously that’s a parallel crisis.
Kevin Pho: Now, from your perspective, are you seeing the downstream effects from this policy shift? And if so, what are just some concrete examples that you’ve seen already?
John Birkmeyer: Well, the payment shift has been in place for all of about four months. So I think that the net effect on practice sustainability is too early to tell. And obviously whatever changes that do occur will have to be interpreted in the context of ongoing trends towards closure of independent practices. But I’ll tell you anecdotally, the number of outreaches that we’ve gotten from much smaller medical practices than ours looking for help or looking for partnership because now they’re underwater is significantly up.
Kevin Pho: So tell us the impact this will have on patients specifically.
John Birkmeyer: Well, I think there’s two perspectives, access and cost. We’ve already touched, Kevin, on some of the potential access consequences of reimbursement headwinds to, like, rural and other underserved communities in being able to adequately recruit the inpatient specialists that they need, and that will play out, I think, in the long-term health of rural hospitals everywhere.
The subtler but arguably the more important implication of the unintended consequences of this policy is less on access, but it’s more on affordability.
I don’t need to tell you that the affordability of health care is probably in the top two or three list of general affordability concerns of Americans across the board. There’s probably several reasons that are driving why the cost of health care are moving a lot faster than inflation in general. But among them are trends towards market consolidation. Big, well-funded hospital-based health systems buying up local hospitals, local practices, and establishing local monopolies, which allow them to be more successful in their negotiations with payers, and ultimately to drive up prices.
Any policy, intended or otherwise, that has the net effect of consolidating health care such that every market is dominated by one or sometimes two mega systems is just going to drive up prices, and at the end of the day, we all pay for higher prices.
Kevin Pho: Now, is there a way for CMS, obviously you would want them to reverse the cuts, but is there a nuanced way where they can thread the needle and accomplish what they set out to accomplish without these unintended consequences that’s affecting independent practices? What are some plausible paths forward that CMS could take?
John Birkmeyer: I think the most precise surgical approach that CMS could do in accomplishing what it sought to achieve at the outset without unintended consequences would be to tailor adjustments to that practice expense piece of payment according to the employment status of the providers. Simply put, to have a different level of practice expense allocation to physicians who are employed by the hospital relative to physician groups that are independent and have independent practices that have to be supported.
Another approach, perhaps not as surgical, would be one where the practice expense cuts were specialty specific, and they were aimed at that subset of very high practice expense specialties that they were going after at the outset. And they didn’t undermine, among the lowest paid specialties that work in the hospital, like hospitalists.
Kevin Pho: Now, for those individual physicians who may be listening to you and this policy may be affecting them, what are some things they can do to help with the situation?
John Birkmeyer: Well, I think particularly for physicians that are independently employed and work in medical groups rather than for hospitals, I think the most important issue to emphasize is awareness and the importance of advocacy.
This practice expense issue was really the first time that this payment mechanism had been touched by CMS in 20 years, and I think it largely flew under the radar of our elected representatives everywhere. And in our own advocacy efforts, which obviously have been done in partnership with professional societies and other large medical groups like ours, it’s clear that the elected representatives and their staff, this was something that really they weren’t even aware of.
It was a payment cut whose magnitude I think flew under radar a little bit, and whose unintended consequences were really not fully thought through. So awareness, and if we’re lucky, when CMS reissues its proposed rule for calendar year ’27, they can either roll back or they can begin to recalibrate some of these cuts.
Kevin Pho: We’re talking to John Birkmeyer. He’s a physician executive, and today’s KevinMD article is “Medicare practice expense cuts will hurt patients.” John, let’s have some take-home messages that you want to leave with the KevinMD audience.
John Birkmeyer: No, I think we kind of emphasized what physicians who are concerned about this issue can do, but I just want to make a plug for the importance of independent medical groups in general. It’s not ideological. It’s really born out of my own belief that patients get better care at the hands of practices that are physician-led and where those physician partners have a sense of ownership in their clinical results and affordability and other aspects of their practice.
Kevin Pho: John, thank you so much for sharing your perspective and insight. Thanks again for coming on the show.
John Birkmeyer: Thanks for having me, Kevin.
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