Productivity Adjustment in the Medicare Physician Fee Schedule Update

This article reviews the history of the productivity adjustment in the fee schedule and the literature on measuring productivity in health care. Measuring physician-specific productivity is challenging, a principal reason why the actual update formula uses an economywide measure of productivity change. A number of the challenges, including adjusting for quality, the use of administered prices, and the steady addition of new codes is described. This article also shows productivity changes varied widely across manufacturing industries, so that the use of an average across the economy or even across service industries could have substantial error for physician services.