Physician Reimbursement: From Fee-for-Service to MACRA, MIPS and APMs

In 1880, the average daily cost of keeping a patient in New York’s St. John’s Hospital was 80 cents, or about $14 in today’s money. Healthcare was cheap, and the remuneration that physicians and hospitals earned was correspondingly minimal. The average annual salary for a house physician at St. John’s that year was $300, while the hospital’s total annual budget was $4689.(1)

In the 20th century, however, the picture changed as it became necessary for hospitals to bear the cost of maintaining sterile conditions, purchasing more sophisticated equipment, and maintaining more highly trained clinical staffs. The cost of hospital stays rose accordingly. In response to publication of The Flexner Report in 1910, which cast a highly critical eye on U.S. medical education, the number of U.S. medical schools dropped from 162 in 1906 to 85 in 1919. Physician-to-population ratios also declined, from 157 per 100,000 population in 1900 to 125 per 100,000 population in 1930.(2) With the advent of more complex physician training and a reduction of competition among doctors, physician fees also rose. Soon consumers began to feel the financial pinch of paying physicians and hospitals more for care, and talk of health insurance began.

In a “back to the future” moment, national health insurance was incorporated into the Progressive Party’s presidential platform as early as 1912, and in 1927, “the inability to pay the cost of modern scientific medicine” was the first item on the agenda at the American Medical Association (AMA) convention.(2)

Nevertheless, patients continued to pay directly for medical care. In 1929, medical expenditures in the United States (as estimated by the AMA) were $3.6 billion, or 4% of the GDP(2) (today they are about $3 trillion, or 18% of the GDP, an 83000% increase). Of this, patients paid 80.6% (Table 1).

Third-Party Payers and “Original Sin”

Eventually, the alternative to direct payments for care became third-party payments, made through private insurance plans such as Blue Cross and Blue Shield; employer-sponsored insurance, pioneered by Kaiser Steel and other large employers who were strapped for labor during World War II; and the government, via Medicare and Medicaid. By 1958, 75% of Americans had thirty-party health insurance, a number that stands at 89% today.(2)

The Blues and, subsequently, Medicare and Medicaid instituted the “pay as you go” model of reimbursement for individual policy holders, which, from a cost perspective, can be viewed as the healthcare system’s “original sin.” Unlike home insurance, where home owners are paid a lump sum by insurance companies in the event of a disaster and then pay contractors to rebuild their homes, third parties paid the physician or the hospital directly, not the insured patient. All services were paid for, even routine, easily affordable services. There were no deductibles and no copays.

Predictably, the effect of this fee-for-service model has been to increase utilization and hence costs, as neither the patient nor the provider has a stake in limiting services or expenses. If home insurance paid for routine upgrades such as new curtains to replace faded ones, or new appliances to replace old ones, the effect on utilization and costs would no doubt be similar.

The history of healthcare since the post-Medicare cost curve rise has largely been the story of efforts to somehow rein in or otherwise reshape the fee-for-service model. These efforts include prospective payments, Diagnostic Related Groups (DRGs), capitation/managed care, CPT codes, the Resource-Based Relative Value Scale (RBRVS), the Physician Quality Reporting System (PQRS), the Group Practice Reporting Option (GPRO), Value-Based Purchasing (VBP), Recovery Audit Contractors (RACs), bundled payments, and the Sustainable Growth Rate (SGR) formula.

MACRA Means Physicians Must Make a Choice

On April 16, 2015, another major step occurred in the evolution of fee-for-service reimbursement. The Medicare Access and CHIP Reauthorization Act (MACRA) repealed the SGR mechanism of Medicare payments to physicians. In doing so, it made the fee-for-service model less attractive in an attempt to move physicians to a fee-for-value model.

Under the new model, Medicare payments to physicians will increase by 0.5% a year from July 2015 to December 2018. In January 2019, a new replacement Medicare formula will require physicians to pick from two ways to participate in Medicare’s payment system:

1. Merit-Based Incentive Payment System (MIPS). MIPS combines PQRS, the Value-Based Modifier, and Meaningful Use into one larger program that gives doctors a quality score. If their scores are above the average, their reimbursement rates will go up; if they are at the average, there will be no adjustment; and if below the average, Medicare payment will be cut.

2. Alternative Payment Models (APMs). APMs require a group of physicians to band together and take a lump sum of money to care for a group of patients. If they can provide the care for less—and hit certain quality metrics—they get to keep some of the leftover cash. The hope is that these models will persuade physicians to be vigilant against wasteful care, since they will have a financial incentive to spend less than their lump sum amount. Physicians who are eligible and who choose to participate in a qualifying APM will receive a 5% bonus each year from 2019 through 2024 on top of all their other Medicare payments. Beginning in 2026, they will qualify for a 0.75% increase in their payments each year. APMs must place material financial risk for monetary losses on physicians and other clinicians, use quality measures comparable to MIPS, and use certified electronic health record (EHR) technology.

The law requires that the Centers for Medicare & Medicaid Services report on the number of doctors dropping out of Medicare.

Under both payment models, physicians will still be provided with a fee-for-service payment based on the Physician Fee Schedule (PFS). From 2020 to 2025, existing Medicare fee-for-service rates will remain at 2019 levels with no updates. By retaining a fee-for-service component it is hoped that physicians will remain productive, as they will continue to be rewarded for volume of patients seen or volume of work done as measured by relative value units (RVUs). Realizing that these payment systems may not appeal to some physicians, the law requires that CMS report on the number of doctors dropping out of Medicare.

Payment Scores Under MIPS

The MIPS program will assess physicians in four categories. Physicians will receive a score of 0 to 100, according to their performance in each of the four categories:

• Quality of their care (30%);

• EHR Meaningful Use (25%);

• Use of healthcare resources (30%); and

• Activities undertaken to improve clinical practice (15%).

Medicare will compare a physician’s composite score with a performance threshold that will be the mean of the scores for all clinicians subject to MIPS. Clinicians who score above this threshold will receive bonuses funded by the penalties imposed on physicians who fall below the threshold. Physicians at the threshold will receive no payment adjustment. Scores will be publicly available through “Physician Compare.” Adoption of telehealth and remote patient monitoring by physicians participating in MIPS are specifically named as potential score-boosters. From 2020 to 2025 Medicare fee-for-service rates will remain at 2019 levels with no updates; it is these scores, therefore, that will determine the total amount physicians participating in MIPS earn from Medicare payments.

MIPS scores will impact physician Medicare payments as follows:

• ±4% in 2019;

• ±7% in 2020; and

• ±9% in 2021.

An additional incentive payment for “superstars” will be available, capped at an aggregate amount of $500 million for each of the years 2018 through 2023.

Low MIPS scores could undermine the financial viability of many practices.

Hypothetically, in 2021 a MIPS participating physician could receive a $100 fee-for-service payment for treating a particular Medicare patient. With a high MIPS score, that payment could increase to $109. With an average MIPS score it would remain $100. With a poor MIPS score it could decrease to $91. Given current profit margins for many physician practices, low MIPS scores could undermine the financial viability of many practices.

What Is an Alternative Payment Model?

If a physician or healthcare organization chooses to opt out of MIPS and participate in an APM, they have another choice to make—which type of APM? Participation in Accountable Care Organizations (ACOs), a Patient-Centered Medical Home (PCMH), or a bundled payment model will qualify as an APM under MACRA.

Accountable Care Organizations

One way physicians can participate in an ACO is through the Medicare Shared Savings Program (MSSP). Like other ACO models, the MSSP rewards ACOs that keep increases in healthcare costs low while meeting performance standards on quality of care. To become part of the program, eligible providers can create or participate in an ACO.

Participants must meet quality performance measures from four domains: patient/caregiver experience; preventive health; care coordination/patient safety; and at-risk populations. Much like MIPS, providers must meet a threshold (at least the 30th percentile) to be eligible for the shared savings. Paying for performance will be phased in over subsequent years.

Patient-Centered Medical Home

Another option for an APM is the PCMH model. Research from the Patient-Centered Primary Care Collaborative indicates that PCMHs reduce visits to the emergency department by 57% and readmissions by 29%. In addition, a 57% reduction in cost provides evidence that PCMHs may prove to be extremely effective.

However, experts say that the PCMH model requires significant upfront investment, and costs for continued support can be very expensive as well. The time, effort, and spending it takes to produce a substantial return may signify that the model is not as universally applicable as may be desired.

Bundled Payments

Beginning in 2012, the ACA-founded Medicare and Medicaid Innovation Center established Bundled Payments for Care Improvement to assess the ability of a variety of payment models to improve patient care and lower costs to Medicare. Participation has been voluntary, and the models ultimately lead to a prospectively determined payment for all hospital, physician and other clinician services for an episode of care.

What Will Physicians Do?

How will physicians react to these changes? Will they align with larger entities, try to maintain their status as independent practice owners, retire, or pursue some other course?

Given the complexities of payment models such as MIPS, it is likely that even more physicians will embrace employment and join APMs, which virtually by definition must be large, integrated entities employing physicians.

Physicians may choose to circumvent third-party payers and practice on a direct-pay/concierge basis.

About 28% of physicians (~225,000 doctors) are 60 years old or older, and partly in response to new payment models, many of these doctors, who grew up in the fee-for-service era, can be expected to retire as soon as they have the means to do so. Other physicians may choose to circumvent third-party payers and practice on a direct-pay/concierge basis. A growing number also can be expected to forego full-time practice and work on a temporary (“locum tenens”) basis, accept nonclinical roles, or switch to part-time practice. The types of physicians medical groups and hospitals seek also may change, from entrepreneurial, high revenue–generating, solo-minded physicians who are typically favored in the fee-for-service model, to collaborative, resource-minded physicians likely to succeed in value-based models.

The reality is that reimbursement in healthcare is dramatically more convoluted and arcane than in almost any other sector of the economy, in which professionals or businesses generally determine their price, submit a bill to the recipient of the goods or services provided, and are paid by the recipient the amount they invoiced. The ability of practice managers and physicians to understand and adapt to pending reimbursement changes will largely determine their professional satisfaction and success.

References

1. Crossen C. When hospitals were places only the poor could afford to enter. The Wall Street Journal. March 3, 2004; www.wsj.com/articles/SB107826755202744576 .

2. Gorman L. The history of health care costs and health insurance. Wisconsin Policy Research Institute Report. 2006;19(10):1-31; www.wpri.org/WPRI-Files/Special-Reports/Reports-Documents/Vol19no10.pdf .