This Health Affairs-Robert Wood Johnson Foundation policy brief describes the key issues  for implementing the new Medicare physician payment system under the 2015 Medicare Access and Children’s Health Insurance Program (CHIP) Reauthorization Act (MACRA).

In 2014, Medicare paid physicians and other clinicians nearly $138 billion, 22 percent of total Medicare spending. Prior to MACRA’s enactment, physicians were paid based on a fee formula first created in 1989 called the resource-based relative value scale. This scale was based on a complex formula that calculates the amount of physician work required to perform each medical service, factoring in the cost of overhead and malpractice insurance. There were thousands of codes for such medical services maintained by the Centers for Medicare and Medicaid Services (CMS). However, physician groups heavily influenced the fee schedule through the American Medical Association’s Relative Value Scale Update Committee (RUC), which updated the calculations of relative value. The RUC has been dominated by representatives of medical specialty societies. Critics noted the conflicts of interest created through the RUC and that the entire relative value system favored procedure-based specialty care, while undervaluing primary and preventive care.

In 1997, Congress tried to rein in physician-driven costs by creating the Sustainable Growth Rate (SGR) for Medicare payments. The SGR formula set an annual budget target for physician payment based on a number of factors, including that it not exceed the growth in gross domestic product. If Medicare expenditures exceeded the target, fees would be cut in the following year so that overall physician payment would be limited to the target amount. If spending was below the target, fees would be increased in the following year to meet the target amount. In 2002, the SGR formula would have reduced physician payments by 5 percent and so Congress began its retreat from using the formula with a one-year reprieve. That turned into twelve consecutive years of not implementing the SGR formula, eventually accumulating more than $100 billion in physician payments that should have been implemented but were postponed (by 2014, this would have resulted in a 21.2 percent reduction in physician fees).

With the intervening passage of the Affordable Care Act in 2010 as well as other legislation and administrative actions that have increasingly focused on the outcomes of physician performance, Congress finally replaced the SGR with MACRA last year. Under MACRA, Medicare physicians will receive an annual fee increase of 0.5 percent from 2016 to 2019.

From 2020 to 2025, Medicare physicians will no longer receive annual fee increases. The only way to receive additional Medicare payments will be for physicians to participate in one of two newly designed payment mechanisms, either the Merit Incentive Payment System (MIPS) or the Alternative Payment Model (APM). Both base payment on performance and quality metrics and participation in efforts to improve care and restrain cost growth, and will include penalties as well as the potential bonus payments. Physicians who join a CMS-approved APM will get an annual 5 percent increase in their fees from 2019 to 2024. And, starting in 2026, physicians in APMs will receive an annual across-the-board fee increase of 0.75 percent. Beginning in 2026, physicians participating in MIPS will only get a 0.25 percent annual increase.

The Merit Incentive Payment System will consolidate and integrate many existing programs, including the Physician Quality Reporting System, Physician Value-Based Payment Modifier, and Electronic Health Record (EHR) Incentive Program and will require quality measures reporting, use of certified EHRs, and additional pay-for-performance bonuses. MIPS payments will be based on the quality of care (30 percent), resource use (30 percent), meaningful use of certified EHRs (25 percent), and clinical practice improvement activities (15 percent). Maximum bonuses and penalties will be 4 percent in 2019, 5 percent in 2020, 7 percent in 2021, and 9 percent in 2022 and beyond. With no annual increases available between 2020 and 2025 through the MIPS, there is a strong financial incentive for every physician to seek to qualify for the the MIPS bonus payments as soon as possible.

The MACRA legislation specifically names both patient-centered medical homes and accountable care organizations (ACOs) as APMs but does not fully define either of those models.  There are currently over 400 CMS-recognized ACOs serving 8 million Medicare beneficiaries. Presumably other CMS-administered APMs such as bundled payments and its recently announced Comprehensive Primary Care Plus initiative also would be recognized. Payments tied to performance through an APM must be at least 25 percent of a physician’s Medicare revenue in 2019, increasing to 75 percent in 2022. By definition, physicians participating in APMs such as ACOs will be eligible for additional payments through shared savings.

With so much at stake and yet to be defined, CMS has begun a regulatory development and  implementation process with numerous opportunities for public comment and engagement. CMS has established a Health Care Payment Learning and Action Network, with multiple work groups developing and publishing frameworks and design concepts.

Some of the critical questions to be answered include:

  • What specific quality measures will be used in the MIPS, and whether they will be aligned with measures used in APMs
  • The use of patient experience surveys and patient-reported outcomes as quality measures
  • The degree and methodology for risk adjustment based on patient mix and health status
  • The level of downside financial risk (potential for penalties) that must be assumed by physicians, with many commentators noting how few of the Medicare ACOs have assumed downside risk options
  • Whether and how Medicare Advantage plans, which now cover one in five Medicare beneficiaries, can be APM entities, when global capitation is one way to control costs (although not necessarily improve quality)
  • How clinical practice improvement activities will be defined and credited (the legislation also authorizes funding for technical assistance, which must be developed and implemented)

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