5 Things You Need to Know About Inflation & the Future of Physician Compensation

Being a physician is a rewarding career, but it doesn’t leave much time for anything else. Between patient care, practice management, long hospital shifts, staying up to date on the latest treatment options, and carving out time for our families, it’s hard to find the energy to care about events outside our daily lives — such as what’s happening in the economy.

I feel your pain and I share your struggles, but here’s the problem: as a physician, you can’t afford to ignore what’s going on in the economy.

Why?

Because the complex nature of physician compensation models in America means economic trends like inflation have a direct negative impact on your income. If you’re not prepared for what’s coming, you can easily end up facing an effective pay cut of 15 - 20% or more.

I’ve written elsewhere about the looming physician compensation bubble, and how the current healthcare payment model is unsustainable. Not surprisingly, the topic resonated strongly with many people and it was (and still is) a popular article.

In this post, I want to expand on one of the topics from my original article and do a deep dive on what I believe is the biggest current threat to physician compensation — inflation. I’ll explain why the risk of inflation is high right now, how it uniquely (and negatively) affects physicians, and what you can do to get prepared and protect your income.

1. All Signs Point to Continued Inflation for the Foreseeable Future

Uncertainty is the only sure thing in the economy right now. It’s not an exaggeration to say the COVID-19 pandemic upended the entire world. No country and no industry escaped its effects. Governments around the world are still scrambling to figure out how to balance public health with the urgent need to get back to business and stimulate the economy.

Here in America, leaders have opted to print money at unprecedented rates and ramp up deficit spending to cover stimulus checks, enhanced unemployment benefits, and other programs designed to avert financial disaster.

So far the result is lots of new money floating around and driving high demand for all kinds of goods. Meanwhile, the pandemic continues to disrupt supply chains and millions of workers seem to have disappeared from the workforce. You know what that means — wages and prices are both going up and overall inflation has been hovering around 5% for the last several months.

Economists are split on what happens next, with some predicting inflation rates to slow or reverse as things get back to “normal” while others fear 5% is only the beginning of the increases we’ll see. The truth is no one really knows. Normal still seems a long way off, and I for one expect the combined effects of COVID-19 and government fiscal and monetary policy will lead to sustained and increasingly high inflation rates.

2. The Physician Compensation Model is Uniquely Vulnerable to the Negative Effects of Inflation 

You probably know the government is the largest single healthcare payer in America, but do you realize just how big their influence is? Federal and state governments control over 50% of healthcare funding in the US with programs including Medicare, Medicaid, CHIP, and more. And they have the authority to set the rates they pay for care regardless of the actual cost of the services provided.

For the last several years, healthcare costs increases have significantly outpaced overall economic growth rates as well as the meager Medicare rate increases legislated by Congress, meaning that government reimbursements for Medicare and Medicaid patient services cover only 60-90% of the actual cost of care.

Are you starting to see the problem here? Physician compensation, especially for physicians in private practice, is primarily dependent on a payer (the government) who has the authority to pay whatever rate they want with no consideration for actual costs or the laws of supply and demand. No other profession faces this unique set of circumstances or stands to lose more money as a result of inflation.

Sure, in normal times private practice physicians compensate for low government reimbursement rates by charging higher rates to private insurers, but that only works as long as inflation is low and yearly rate increases are moderate. The whole system falls apart when high inflation becomes a factor and health care costs skyrocket. The government won’t increase rates, and the gap between reimbursement rates and actual costs becomes too large for private insurers to cover. Something has to give in this unsustainable situation and, if you’re in private practice, one of the first things to go is your compensation.

3. Inflation + Pending Medicare Reimbursement Rate Cuts = Disastrous Impact on Physician Finance in 2022 

Most recent physician compensation reports show earnings approaching a plateau, with COVID-19 widely considered to be the major driver in flattening the wage curve. I already mentioned that no industry escaped the pandemic’s effects. In healthcare, many physicians faced pay cuts and even job loss as patients delayed elective procedures, hospitals cut subsidized specialties, and contract physicians found it impossible to meet productivity targets. The cuts were widespread, but most expected the pain to be temporary.

Unfortunately, that seems unlikely. Unless something changes drastically, the income loss caused by COVID-19 will seem like nothing compared to the combined impact of inflation and scheduled cuts to Medicare reimbursement in 2022.

As the CEO of the AMA detailed in his recent letter to Congress, physicians like you and me are facing a 9.75% pay cut on Jan 1. You read that right — 6% due to sequestration + 3.75% in expiring temporary Medicare payment increases = a 9.75% pay cut on Jan 1 — and that’s without even considering the effects of inflation.

Even 5% inflation combined with the pending government cuts results in an effective 15% decrease in physician compensation. Unless Congress steps up to the plate and acts to change things, 2022 is shaping up to be a very bad year for physician compensation. And let's be clear: Congress isn't going to do anything unless the rest of us band together to raise awareness of the problems. I'm a big believer in actively advocating to stop paycuts like these.

4. Physicians in private practice take the biggest hit, but high inflation is bad for everyone in healthcare.

The threat of a 15% pay cut is bad enough for the private practice physicians who will take the brunt of the cuts, but what if the worst happens and we see hyperinflation at rates of 15 or even 20%? It happened in the 1980s, and, if it happens again, everyone involved in healthcare — including patients — will suffer.

How?

I think I’ve made it pretty clear how inflation hurts self-employed physicians, but what about doctors employed by hospitals and large healthcare systems? Historically, employment has given physicians more stability and provided at least some ability to negotiate compensation based on supply and demand, but hospitals suffer when payment rates remain flat or decline.

As the gap between costs and reimbursement widens, there’s less money to go around and health care administrators have to make hard decisions to keep the system afloat. Physicians will have to accept cuts just like everyone else.

So how does high inflation hurt patients?

Let’s be honest — the current healthcare payment model is already hurting patients by driving more and more physicians out of patient care and into roles with less dependence on patient care revenue linked to Medicare payments. Unless something changes, higher inflation will only accelerate this trend and make it harder for patients to find the quality care they need.

5. You can’t prevent inflation, but you can get ready.

I’m afraid I’ve painted a pretty grim picture. I don’t like being so pessimistic, but inflation has serious repercussions for physician compensation, and I want you to be aware of what could be coming your way. 

It’s not all doom and gloom, though. I can’t tell you how to completely escape the negative effects of inflation, but I can leave you with three suggestions for how to minimize the impact and weather the storm.

It’s not enough to be skilled at patient care in a single specialty. You need to diversify your skills with multi-discipline expertise, advanced certifications, and graduate degrees in business, public health, or hospital administration. Look for opportunities to take on advisory roles, medical directorships, and other roles that increase your value without increasing your reliance on patient care revenue.

One way to protect your compensation is to explore innovative practice models that decrease or eliminate your dependence on government payments. Direct primary care is one example of an alternative model that’s increasingly popular with patients and physicians.

For most people, the things I’ve discussed in this article are a new revelation. They have no idea how doctors get paid or how precarious the healthcare system is. Awareness is the key to change. The more people know and care about an issue, the more likely change becomes.

Have questions? I would love to hear from you. Continue the conversation by leaving a comment below or sending me a message.