Robert Hall

Why Physical Therapists Should Set Payment Rates as a Dollar Figure Rather Than a Percentage of Medicare Rates

The State Payment Advocacy Resource Consortium (SPARC) has started discussing the importance of delinking private contract payment rates from Medicare payment rates. For physical therapists who do not negotiate cash rates directly with their patients, negotiating fixed payment rates in contracts with insurance companies can improve the practice’s bottom line. Currently, many insurance contracts set reimbursement rates based on a percentage of Medicare rates, which might seem convenient but carries risks that can harm a practice’s financial stability. PTs should strongly consider negotiating and setting payment rates as fixed dollar amounts rather than tying them to fluctuating Medicare reimbursement rates.

Setting payment rates at a specific dollar figure may be a better financial strategy for physical therapists. We will examine the unpredictability of Medicare rates, the risk of declining reimbursements, the complexity of tracking percentage-based rates, and the advantages of financial stability that come with fixed dollar amounts.

The Problem with Tying Rates to Medicare Percentages

Medicare payment rates are subject to frequent adjustments due to changes in federal policy, budget pressures, and annual CMS payment rule updates. The Centers for Medicare & Medicaid Services (CMS) revises its payment schedules annually, and these changes have continued to  lead to cuts in payment rates for physical therapy services. In recent years, Medicare has implemented multiple cuts to physical therapy reimbursement rates, leading to lower payments for services. If a PT has contracted with an insurance company for 110% of Medicare rates, but Medicare rates decrease by 2.8%, private payment automatically decreases as well. This lack of control over future reimbursement levels creates financial uncertainty for PT practices.

By negotiating a fixed dollar amount per service, PTs can ensure that they receive a stable, predictable payment regardless of Medicare's fluctuations. When payments are tied to a percentage of Medicare, physical therapists risk experiencing a steady decline in reimbursement rates over the years. If Medicare rates drop, private insurance payment drops accordingly, making it difficult for PTs to maintain profitability. In contrast, if a PT secures a fixed dollar rate in a contract, that rate remains unchanged even if Medicare reduces its payment levels. Over time, this protects against gradual erosion of revenue and allows for more sustainable business operations.

Insurance companies often structure contracts based on Medicare percentages to avoid direct negotiations over price increases. By linking reimbursement rates to Medicare, insurers guarantee that their payment obligations automatically adjust downward whenever Medicare reduces payments. For PTs, this means that any federal budget cuts to Medicare directly impact private insurance reimbursements without any renegotiation. In effect, insurance companies offload their pricing decisions onto Medicare, avoiding accountability for setting fair rates. Negotiating a fixed dollar amount ensures that private insurers cannot automatically pass Medicare cuts onto PTs without a renegotiation process. This gives PTs more leverage in maintaining fair compensation for their services.

The Advantages of Fixed Dollar Amounts

One of the biggest advantages of setting a fixed dollar rate is financial predictability. PTs can forecast their revenue more accurately, allowing for better budgeting, investment in staff and equipment, and long-term planning. Conversely, if payment rates fluctuate due to Medicare changes, it becomes difficult to project annual revenue. Fixed payment amounts eliminate this uncertainty, making it easier to plan for expenses such as salaries, rent, and supplies.

In addition, contracts based on Medicare percentages require constant tracking of Medicare fee schedule updates to determine the actual payment rate. This creates administrative burdens for PTs who must ensure they are billing correctly according to the latest Medicare changes. Contracts that specify a fixed dollar amount per service eliminate this complexity. PTs and billing staff can rely on a consistent, straightforward payment structure without needing to adjust claims based on ever-changing Medicare rates. When PTs accept contracts based on Medicare percentages, they surrender pricing power to Medicare’s policies. This makes it difficult to negotiate higher rates in the future because insurers can always point to Medicare rates as a reference point. By setting a fixed dollar amount, PTs establish a concrete value for their services. Over time, they can negotiate for rate increases based on inflation, cost of living adjustments, or the value of their services, rather than being locked into Medicare’s rate trends.

Medicare rates have faced multiple reductions in recent years. If PTs are locked into a contract that pays 110% of Medicare, they may initially receive a reasonable rate, but any future Medicare cuts will erode that payment. By negotiating a flat rate, PTs insulate themselves from these reductions. Even if Medicare payments decline, the contracted rate remains the same, providing financial protection. When negotiating contracts, PTs should consider:

  1. Research Fair Market Rates: Before proposing fixed rates, PTs should research standard reimbursement rates for their region and services. This ensures that the fixed amount they negotiate is competitive and fair.
     

  2. Advocate for Stability: Emphasize to insurers that fixed rates provide mutual benefits, including financial predictability for both parties and reduced administrative complexity.
     

  3. Highlight Service Quality: PTs should position themselves as high-value providers who deserve stable, fair compensation based on expertise, outcomes, and patient satisfaction.
     

  4. Push for Periodic Rate Adjustments: Fixed rates should include provisions for periodic renegotiation or inflation adjustments to keep pace with rising costs.
     

  5. Be Prepared to Walk Away: If an insurer insists on a percentage-based structure, PTs should assess whether the contract is financially viable. In some cases, declining an unfavorable contract is better than accepting unpredictable and potentially declining reimbursement rates.
     

For physical therapists, setting payment rates as a fixed dollar amount rather than a percentage of Medicare rates is a smarter financial strategy. It provides stability, predictability, and protection from Medicare cuts, while also simplifying contract management and improving negotiating power.

While insurers may push for Medicare-based pricing models to protect their own financial interests, PTs must advocate for their own sustainability by insisting on fixed payment structures. By taking control of their reimbursement rates, physical therapists can ensure long-term financial health and continued high-quality patient care.