Percent of Medicare is not perfect, but it is the reference point the industry will continue to use.
Why I Love and Hate Percentage of Medicare
By David Gaines
Sometimes it informs. Sometimes it misleads. Here is why:
“Percent of Medicare” is a widely used benchmark in claims analysis, policy research, and commercial contracting. By analyzing payments against Medicare’s pricing algorithms for healthcare services, it’s one of the few benchmarks that gives people a common reference point in a world of messy, inconsistent pricing data. But living in this data every day — and pricing a large volume of claims using Medicare’s own logic — I’ve developed a genuine love–hate relationship with it.
Love
1. It is standard.
There is a published, transparent, widely adopted methodology behind it. Everyone uses the same CMS rules, Relative Value Units (RVUs), weights, schedules, and logic, so at least we are all speaking the same language.
2. It is well reasoned.
Or at least they try. RVUs, wage adjustments, practice expense, etc. all aim to approximate rational pricing instead of using arbitrary numbers.
Hate
1. Medicare prices vary from place to place (the denominator changes).
Things like local wage index differences mean “100 percent of Medicare” can swing 20%+ across markets. Medicare pays NYC physicians more than physicians in Pittsburgh.
Each hospital gets paid a different amount for inpatient care. A teaching hospital can receive 20%+ more for the same DRG than the community hospital down the street while both are paid “100 percent of Medicare”.
2. Medicare prices vary by site of care for equivalent services.
Many services can be paid under different Medicare fee schedules with meaningfully different base rates depending on where the service takes place. An ASC gets $10,000 for a knee replacement, and a hospital gets $14,000 for the same procedure. See chart below.
3. Medicare pricing logic is complicated.
Algorithms, multi-procedure discounting, packaging rules, status indicators, multiple fee schedules, and outlier logic make the Medicare price itself very complex to calculate. “Percent of Medicare” sounds simple as a concept, but it’s anchored to a pricing engine where even small mistakes can produce completely incorrect results.
4. Medicare pricing is a form of government price control.
When new technology or efficiency reduces a service cost by 30 to 50 percent, there is no real mechanism for early adopters or efficient providers to reprice quickly and win volume. Medicare updates slowly, and commercial contracts anchored to Medicare move with it. Efficiency is not rewarded with more volume.
In closing…
Percent of Medicare is not perfect, but it is the reference point the industry will continue to use. The key is understanding where it clarifies, where it distorts, and how to interpret it correctly rather than taking it at face value.
