Easy Solution to Relentless Medicare Fee Cuts to Providers: Utilize Buying Power on Pharma and Direct Those Dollars to Healthcare Providers
In 1979, Harvard Business School Professor Michael Porter first published his 5 Forces Model. This model enables organizations to understand more about the main competitive forces at work in their industry. As medical providers, the classic threat of “Buyer Power” is best evidenced by the annual release of the Medicare Physician Fee Schedule (PFS), which comes from the U.S. Department of Health and Human Services (HHS), through the Centers for Medicare & Medicaid Services (CMS).
CMS, and it isn’t even close, has the largest buying power of any insurer. In 2023, Medicare spending was estimated to be around $992 billion. It’s projected to reach over $1 trillion in the coming years, making it one of the largest federal expenditures, accounting for about 15% of the total federal budget. Medicare serves approximately 65 million people in the United States, including older adults aged 65 and over and younger individuals with disabilities and certain medical conditions.
CMS has drastically reduced payments to medical providers directly and indirectly. Their PFS is a direct hit and then Medicare Advantage reductions and other payors who tie their annual fee schedules to CMS’s add a compounding slashing effect. The total impact of the proposed 2025 PFS, including inflation, on physical therapists will be approximately a reduction of 13.93% (10.33% cumulative conversion factor cut + 3.6% inflation increase). This, of course, is on top of years of cuts to medical providers. The reason? Because they can- that is the impact of Porter’s Buying Power model.
For years, medical associations have contested the methodology of CMS’ PFS, yet there hasn’t been any progress on this so-called “doc fix.” CMS argues that they have no way to pay for any reform that increases the fee schedule. The solution is simple: All they have to do is obtain savings from other areas where they have buying power, namely pharma.
Ironically, instead of using its clout to obtain massive savings in drug costs, the US always pays more-this must make Michael Porter dizzy while all the medical providers suffer from this gross inequity between big pharma and folks who choose healthcare as a profession.
Recently, the U.S. made headlines by negotiating prices on the first ten high-cost drugs, a long overdue move. The lower prices will result in savings of $6 billion in 2026, the first year they take effect, Medicare said. Yet, despite this effort, the data shows we are still paying at least twice as much as other countries like Canada, Germany, and the UK, despite having one of the most enormous buying powers in the world. According to a recent report from Reuters, even after these negotiations, the U.S. is left footing an enormous bill compared to our international peers.
Why is this happening? Historically, the U.S. Medicare program has been restricted from negotiating directly with pharmaceutical companies, leaving us with sky-high drug costs that far exceed what’s paid elsewhere. While the new rules mark progress, they barely scratch what needs to be done. For example, countries like Australia, Japan, and France are leveraging their buying power to secure prices that are a fraction of what the U.S. pays.
Imagine if the Medicare program fully utilized its buying power as it does on providers to negotiate better prices across the board. This would make medications more affordable for patients and free up substantial funds that could be redirected to address the relentless Medicare cuts impacting providers. These savings could be more than enough to fund reimbursement rates tied to inflation, a move that would offer a much-needed reprieve to physical therapists and other medical providers who are trying to keep their practices afloat in an increasingly challenging financial environment.
We have the tools at our disposal. We could unlock significant savings beyond the handful of drugs currently being addressed by pushing for comprehensive drug price negotiations. Let’s advocate for more competent negotiations that align with the global standards seen in other developed nations. It’s time CMS leverages its buying power to benefit patients and the entire healthcare ecosystem, starting with protecting the livelihoods of providers who care for our aging population.
We don’t need a complicated formula or endless debate. We need action that forces the U.S. government to honestly negotiate like the global powerhouse it is. The savings are there; now, we must ensure they’re used where needed most.
@physicaltherapy
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