Update on the Evolution of U.S. Healthcare Reimbursement

Introduction 

In 2018, health spending in the U.S. was $3.6 trillion (17.7% of gross domestic product [GDP]) with a projection to reach nearly $6.0 trillion by year 2027 (one-fifth of GDP). Medicare spending accounted for 20.2 percent of total health spending (705.9 billion dollars) in 2017.¹ 

Fee-for-service (FFS), in which providers are reimbursed for quantity of services, is a major contributor to healthcare spending.^2,3 The FFS rewards, which are not linked to healthcare outcomes, might yield little or no benefit and even harm to the patients, despite getting more services. 

To ensure that the yearly increase in the expense per Medicare beneficiary does not exceed the growth in GDP, the U.S. government passed the Sustained Growth Rate (SGR) in 1997, authorizing strict caps on Medicare’s compensation to physicians. It replaced the Medicare Volume Performance Standard (MVPS), which CMS used previously in an attempt to control cost.⁴ With SGR, the Centers for Medicare and Medicaid Services (CMS) sent a yearly report to the payment advisory commission, which advised the U.S. Congress on the previous year’s total and target expenditure. SGR used a monetary conversion factor to change the payment to physicians for the next year in order to match the target. Updated on March 1st every year, the physician fee schedule was adjusted and suspended regularly by Congress, which eventually led to its permanent repeal in 2015.^5,6 The Medicare Access and Children’s Health Insurance Program (CHIP) Reauthorization Act of 2015 (MACRA)⁷ replaced it with the Quality Payment Program (QPP), which focuses not only on rewarding healthcare providers who provide cost-effective and high-quality care, but also on holding them responsible for the consequences of their healthcare decisions.⁸ Its goal is to accomplish an economically viable and patient-centered healthcare system by transitioning from fee-for-service to payments for quality care. 

MACRA 

MACRA’s QPP comprises of two tracks, the Merit-based Incentive Payment System (MIPS) and Advanced Alternative Payment Model (Advanced APM). Both tracks, despite differences in requirements, are comparable in evaluating providers on cost and quality. Due to the rigorous requirements in Advanced APMs, 91% of the providers enrolled in MIPS in 2017.⁹ Providers can participate as an individual or as a group of providers within the same tax identification number. Reporting as a group has the benefit of softening the effect of high-cost and low-quality outliers. To protect the provider and group of providers with a low volume of Medicare patients, CMS only permits enrollment of physicians who meet Medicare volume and cost threshold for MACRA eligibility. It also allows small groups with less than 10 physicians to report as a virtual group, which entails group level reporting without a formal merger as a single financial body. Once formed, a virtual group cannot exit for the duration of the performance period. 

Merit-Based Incentive Payment System 

With most of the Medicare providers enrolling in MIPS, this constitutes the core of MACRA. Providers or a group of providers who bill Medicare Part B for more than $90,000 and provide care for more than 200 Medicare Part B patients can participate in MIPS. Those who do not meet the qualification criteria may choose not to participate in the QPP. Providers are compared to their peers by compiling 100-point performance scores that are weighed across four categories: quality, cost, improvement activities, and promoting interoperability. The weights of these categories vary every year; for example, the cost category weight will increase from 0% in 2017 to 30% by year 2022. In a three-year performance cycle, providers submit their data in a performance year, followed by a feedback year, and then a payment year when the net positive or negative payment adjustments are made to the claims submitted two years after the performance year. 

For the quality metric, providers are required to select and report six specialty-specific quality measures. One of these measures must evaluate an outcome or be designated high priority if an outcome measure is not available. 

Cost measures have two categories: “all-cost” and “episode-based” measures. The all-cost measure holds providers responsible for all the Medicare Parts A and B spending within a period of time, regardless of the clinical reason or the provider responsible for the service. An episode-based measure holds the provider responsible for their service only. Both of these measures, by holding providers responsible for charges billed by other providers, encourages effective care transition and coordination along with fair use of medical resources such as referrals. 

The cost and quality categories complement each other and encourage cost-effective care. Without this balancing act, a patient would either be overtreated resulting in high-cost care, or denied of necessary medical services. Providers are not required to submit data for cost measures; CMS determines it by using claims filed.¹⁰

All cost measures include Medicare Spending Per Beneficiary (MSPB) and Total Per Capita Cost for All Attributed Beneficiaries (TPCC).¹¹ The MSPB allocates all Medicare Parts A and B expenditure from 3 days before an index hospitalization to 30 days after discharge to the clinician billing the majority of Part B claims during the index hospitalization. The TPCC allocates all Medicare Parts A and B expenditure in the entire year to the clinician billing the majority of the outpatient medical services for the year. Since TPCC is meant to estimate the cost of primary care providers that bill the majority of medical services, CMS has excluded certain specialties from this measure. Providers are compared to their peers after risk-adjusting costs for clinical and patient characteristics. The episode-based cost measure emphasizes expenditure, which is clinically pertinent to the episode and adequately within the attributed provider’s influence. Here, providers are compared to their peers after risk-adjusting episode cost. 

Lack of consistency in expenditure is often related to complications (eg, readmission to the hospital). These measures are meant to enhance care coordination and prevent complications. The success of these measures depends on vigorous risk-adjustment to guarantee that the providers caring for these sicker patients at increased risk of complications are not penalized. Otherwise, this could lead to adverse outcomes such as providers selecting only low-risk patients, resulting in difficulty for high-risk patients to get quality care. 

The other two MIPS categories assess providers on their organization practices. The promoting interoperability category involves incorporating an electronic health record, including e-prescribing, enabling patient access, sending summaries of care, etc. The improvement activity score grades participation in improvement activities. 

The MIPS final score is used to adjust payments to providers. In its initial stages, MIPS is currently focused on participation rather than performance, but with the increased weight of cost category over the next few years, it is easy to predict that the focus will change towards performance, with more providers getting negative adjustments. Negative payment adjustments of 4% in 2019 are projected to increase to 9% in 2020. 

Advanced APMs

With the goal to transition from volume-based to value-based care, the Advanced APM rewards the high-value care that exceeds the requirements set by MIPS. In exchange for meeting these rigorous requirements, CMS gives Advanced APMs a 5% lump-sum incentive, and they are also exempt from the MIPS reporting requirements and payment adjustment. In order to achieve these targets, most Advanced APMs focus on comprehensive care and care coordination. For Advanced APMs, CMS not only incorporated previous payment models established by the CMS Innovation Center, which focused on primary care and multispecialty groups through accountable care organizations (ACOs), but also created new models covering a wide range of specialties and diseases. 

The core of the Advanced APM is to take a more than nominal financial risk. CMS determines each provider’s estimated savings or losses to Medicare, but calculates the difference between the provider’s observed cost and risk-adjusted expected cost. Risk-adjusted cost is calculated using data from Medicare Parts A and B. 

In one-sided risk models, providers receive a portion of Medicare savings, but suffer no penalty from Medicare losses. In two-sided risk models, providers must pay back a percentage of any losses as well as share the savings. CMS compels Advanced APMs to take on an increasing amount of two-sided risk over time. 

Providers who are unable to meet financial risk requirements are known as regular APMs. Although regular APMs that take a one-sided risk are eligible for shared savings, they are not exempt from MIPS and do not receive the 5% lump-sum bonus. 

In addition to financial risk, APMs must also meet an array of quality measures. These measures, unlike MIPS, are dictated by CMS and cannot be elected. CMS also ensures that the providers do not withhold necessary care to maximize shared savings by requiring them to surrender any shared savings if they do not meet minimum quality requirements. 

The performance of Advanced APMs has been positive. In 2017, approximately 60% of the Medicare ACOs generated $1.1 billion in savings, and CMS shared $780 million in savings with ACOs.¹² While these savings are small in relation to the overall Medicare spending, there are indicators that suggest more savings due to its effect on fee-for-service Medicare expenditure.^13,14 In addition to achieving higher average performance rates compared to fee-for-service, The National Association of ACOs reported that ACOs saved CMS more than $1.84 billion from 2013 to 2015.^13,15

Accountable Care Organizations 

ACOs are groups of doctors, healthcare providers, and hospitals that form a voluntary partnership to provide coordinated high-quality care to their Medicare patients along with the sensible use of healthcare resources. The Medicare Shared Savings Program (MSSP), an alternative payment model, aims to lower the healthcare expenditure of Medicare patients by encouraging ACOs to capitalize on high-quality and efficient healthcare services. For ACOs to participate in one of the three tracks under MSSP, they must provide services to at least 5,000 Medicare patients for a minimum of three years. Depending on the track, ACOs not only participate in the monetary savings (bonuses when they keep the cost down, meet quality benchmarks, and keep patients healthy), but also undertake the downside risk if the targets of reducing medical expenditure are not met.

Primary Cares Initiative

In April 2019, CMS announced the Primary Cares Initiative (PCI), a set of new payment models to help primary care providers transition to performance-based risk. PCI is a set of five payment model options under two paths: Primary Care First (PCF) and Direct Contracting (DC). 

Primary Care First  

The PCF option includes a multi-payer system that creates opportunities for practices ready to assume more financial risk through payments based on utilization outcomes. PCF offers three options for participation: the PCF general model, PCF high-need-populations model, or a combined PCF general and high-need-population model. Comprehensive Primary Care Plus (CPC+) is a national multi-payer transformation model that aims to strengthen primary care. It offers two tracks: One for practices building capabilities and the second for those who are already delivering advanced primary care. CPC+ practices are ineligible to participate in the first year of the program, but will be able to apply next year for a January 2022 start.¹⁶ 

Direct Contracting

Direct Contracting is a set of three voluntary payment models (Global, Professional, and Geographic) aimed at cutting down on expenditure while preserving quality of care for Medicare FFS beneficiaries. The goal of the payment model options is to transform risk-sharing arrangements in Medicare FFS, broaden participation in CMS Innovation Center models, empower beneficiaries, and reduce provider burden.¹⁷

The Global option offers a higher risk-sharing model (100% shared savings/losses with CMS) by allowing providers to bear the full financial risk for patient costs; payment options include Primary Care Capitation or Total Care Capitation. The Professional option is a lower risk model (50% shared savings/shared losses with CMS) that allows providers to share the risk with CMS, and provides Primary Care Capitation equal to 7 percent of the total cost of care for enhanced primary care services.¹⁷ The Geographic option offers an opportunity to assume risk for the total cost of care for Medicare FFS beneficiaries in a defined target region.

In evolution from the previous ACO models, Direct Contracting (Professional and Global models) demands the use of capitated payments. It offers two types: Primary Care Capitation, which is available to Direct Contracting Entities (DCEs) participating in the Global or Professional risk model, and Total Care Capitation, which is available only to DCEs participating in the Global risk model. In both of these capitation models, expenditures for the DCE’s aligned beneficiaries will be compared to the DCE’s benchmark to calculate savings and losses. CMS will make a per-beneficiary-per month payment to the DCE, which will then pay to its contracted providers. In capitated payment models, providers will still submit claims to CMS, but the agency will zero out those claims and will not make any FFS payments to the physician; in non-capitated services, FFS will be made to the providers.¹⁸ 

To help ensure that the choice and access to beneficiaries are protected while improving the quality of care, CMS will link a percentage of the benchmark to performance on quality of care while monitoring that the access to care is not adversely affected as a result of the model. It also stresses voluntary alignment, enabling beneficiaries to choose the healthcare provider of their choice.¹⁷ 

Payment model options available under DC not only incorporate initiatives involving ACOs (such as MSSP and Next Generation Accountable Care Organization [NGACO] models), but also advanced approaches from Medicare Advantage (MA) and private sector risk-sharing arrangements.¹⁷ These new options offer a broad range of organizations to participate with CMS in assessing these novel risk-sharing strategies to manage Medicare FFS expenditure, and produce value-based and high-quality care. CMS not only expects that the current NGACO and MSSP participants will be interested in the DC payment models, but also seeks to attract organizations who are new to Medicare FFS. This includes providers and groups who are currently only in an MA program or a Medicaid Managed Care Organization (MCO) that are willing to take on responsibility for Medicare FFS spending for their dually eligible members. Geographic Population-Based-Payment (PBP) may attract organizations who are interested in both making formal arrangements with healthcare providers and being accountable for an entire population in a target region. 

DC’s three payment models are not only anticipated to attract a wide range of physician groups, but through its flexible risk-sharing and payment models that incorporate patient risk factors, they are also anticipated to promote greater accuracy of payments and provider accountability for achieving health outcomes. 

DC also seeks to create a competitive environment based on regional payment neutrality, in which organizations endure appropriate risks while the population-based benchmarks are applied impartially across all model participants in the same market. Competition is expected to flourish as organizations providing better quality and service are financially rewarded, and attract a greater number of beneficiaries while being held to a standard of continuous improvement.

Under Direct Contracting, there will be three types of DCEs: (1) Standard DCEs, which include organizations with experience serving traditional Medicare beneficiaries; (2) New Entrant DCEs, which include organizations that have not traditionally provided services to the Medicare FFS population; and (3) High Needs Population DCEs, which include organizations that serve traditional Medicare beneficiaries with complex needs.¹⁷ 

The CMS Innovation Center released the Request for Application (RFA) for the Direct Contracting Global and Professional Risk models on November 25, 2019. The Geographic model is on a longer development timeline. CMS is seeking public input through a Request for Information (RFI), and has not indicated any application date for this model yet. Beginning in 2020, an optional implementation period for the Global and Professional models will begin, which will enable participants to align beneficiaries with no change in payment. Five performance years for the payment models will follow, beginning in 2021.¹⁷ The National Association of ACOs, which is expected to take a lead role in implementing these new payment models, has hinted not to participate in the program due to the lack of information on cost and financial methodology.¹⁹

Direct Contracting will be counted as an Advanced APM for QPP purposes, and participants will be eligible to receive a 5% bonus payment in its first performance year (2021).²⁰ The implementation period performance is not eligible for Advanced APM treatment.

Current Thinking

Although there was a lag in accepting value-based care, larger health systems are increasingly adapting to the new reality. Fee-for-service is still around in limited ways. A recent DataGen survey of 102 healthcare executives found that 62% plan to enter into a value-based care payment model or expand their existing value-based initiatives in the next two years.²¹ As value-based care becomes the leading healthcare revenue model, incentives for physicians will necessarily change as well. Although many health systems, including ACOs, are still using relative value units (RVUs) as a metric for physician compensation, this is inadequate and possibly counterproductive for success in the value-based care environment. Many health systems are taking up these challenges, and the array of success stories is encouraging.

Disclosures: The authors have no conflicts of interest to report regarding the content herein.

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