Medicare Physician Compensation

History of the Medicare Economic Index (MEI)

The Medicare Economic Index (MEI) is a measure of practice cost inflation that was developed in 1975 as a way to estimate annual changes in physicians’ operating costs and earnings levels. Today, I review a timeline of how Medicare has paid physicians over time and also describe some adjustments CMS makes to the MEI to either improve its accuracy or reduce its growth (depending on who you talk to).


  • 1965. Medicare is established.
  • 1965-1974.  Medicare pays physicians based on the physician’s actual charges. Although payments were subject to Medicare carriers’ determinations of a “reasonable” charge, there was no set fee schedule or benchmark that limited payment rates.
  • 1975. The Medicare Economic Index is instituted to set a fixed fee schedule, based on 1973 prices.  MEI was planned to limit annual fee increases to increases in the costs of producing physician services and increases in general earnings levels.
  • 1984-1991.  Annual Congressional action was required to set Medicare physician fee increases, because policymakers were concerned that prices were rising too quickly.
  • 1992. The Resource Based Relative Value Scale (RBRVS) system is instituted. Physician payments were to be updated annually based on the MEI, plus the application of an adjustment factor (the Medicare Volume Performance Standard CMS [MVPS], predecessor of the Sustainable Growth Rate formula) designed to counteract increases in the volume of services being delivered per beneficiary.
  • 1998. The Sustainable Growth Rate (SGR) system replaced the MVPS as the mechanism to ensure Medicare physician spending did not exceed expenditure targets.
  • 2002. Productivity offset changed from being based on labor productivity to multi-factor productivity.


The SGR uses a targeted growth rate based on gross domestic product growth, price changes, and changes in Medicare enrollment and benefits. The MEI is used in the target calculation to determine the price component of the SGR. The MEI is also the baseline for each year’s payment update calculation. Payment updates are equivalent to the MEI multiplied by an “adjustment factor” that reflects how spending compares to the SGR targets.

Productivity Adjustments to Physician Payments

Medicare also adjusts payments based on assumed increases in physician productivity. “The rationale for applying a productivity adjustment to the MEI is that productivity gains are captured as part of the index itself (i.e., through wage and benefit components, which tend to increase as productivity increases), and they are reflected in the units of service (i.e., Relative Value Units [RVUs]) that physicians bill (i.e., as productivity increases, physicians produce more RVUs). Applying a productivity offset to the MEI when calculating Medicare payment updates “nets out” price increases associated with productivity gains that would otherwise be double counted (i.e., counted once in the MEI, and once in the number of RVUs produced).”

The productivity offsets were originally based on labor productivity, but –due to strong advocacy by the AMA and the Medicare Payment Advisory Commission (MedPAC), CMS now uses a 10-year moving average of multi-factor productivity. The MFP is based on general economic productivity, not productivity specific to the health care field or physician in particular.



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