Managing the Transition to Transformation: The Strategic Implications of MACRA

On April 27, the Centers for Medicare and Medicaid Services (CMS) unveiled the much-anticipated (and, for some, feared) proposal to implement the physician payment reforms required under the Medicare Access to Care and CHIP Reauthorization Act of 2015 (MACRA). These reforms, once implemented, will profoundly change how and how much Medicare pays physicians for services furnished to program beneficiaries by substantially linking such payments to performance and incentivizing physicians to participate in alternative payment models. Moreover, while not expressly intended by Congress or CMS, these changes also are likely to cause a dramatic increase in physician-physician consolidation and physician-hospital consolidation and alignment.

Under the Merit-Based Incentive Payment System (MIPS) established in MACRA, and now described in detail by CMS in draft regulations, Medicare payments to physicians will be adjusted based on each physician’s performance in four performance categories: Quality, Resource Utilization, Clinical Practice Improvement Activities and Advancing Care Information. Medicare payments can be increased or decreased by as much as 9 percent once the program is fully implemented. If certain requirements are met, physicians can participate in an alternative payment model (APM), instead of MIPS, and receive a 5 percent payment bonus for doing so. Initially, status as an APM will be determined by reference to Medicare payments only. However, after a transition period, an entity can qualify for APM status based either on its Medicare participation or on its Medicare participation and its contracting in the commercial market. A more complete description of MACRA can be found here.

While Medicare payments to physicians will not be affected until 2019, the performance and reporting obligations that will determine payments in 2019 begin next year—on January 1, 2017. Consequently, health systems and independent physicians nationwide are racing to understand the new MACRA requirements, to estimate as best they can their likely effects, and to identify pathways to success in this new regime. By CMS’s own analysis, 78 percent of physicians in groups of less than 10 practitioners subject to MIPS (because they cannot or choose not to participate in an APM) are likely to see their Medicare payments negatively adjusted upon implementation of the new payment scheme (see, Table 64, Medicare Program; Merit-Based Incentive Payment System and Alternative Payment Model Incentive Under the Physician Fee Schedule, and Criteria for Physician-Focused Payment Models; Proposed Rule, 81 Fed. Reg. 28,162, 28,375 [May 9, 2016]). CMS’s estimate most likely is based on the expectation that physicians who do not figure out success strategies will subject themselves to a downward reimbursement spiral where Medicare payments deteriorate because of poor performance, and deteriorating payments beget further poor performance.

While MACRA grabbed headlines as a “fix” to the sustainable growth rate formula for Medicare payments to physicians, and the annually compounding problem it had become, MACRA will also create powerful incentives that will accelerate the reshaping of the physician services market. It will encourage physicians to consolidate into larger groups, enter into arrangements with physician specialty management companies, or, most likely, become employed by or otherwise contractually aligned with health systems. Some physicians may choose to reduce their Medicare volumes (to take advantage of a low-volume exception) or opt out of Medicare altogether. Physician organizations will need to be of a certain size to permit access to increasingly expensive information technology and other care management infrastructure, which are necessary to support the data reporting and other incremental costs associated with MIPS. However, thriving, not just surviving, under MIPS will require substantial investments in information technology and other care management infrastructure that will be beyond the capacity of all but the largest physician organizations. Avoiding MIPS altogether and seizing the opportunities presented by APMs will require even greater size, scale and resources.

Hospitals and health systems, physician specialty management companies and large, sophisticated multi-specialty group practices that make the investments now that will be needed to thrive under MACRA will be able to take advantage of the market disruption that MACRA will create, especially in the sole practitioner and small group practice portion of the physician services market. In particular, MACRA presents a once-in-a-generation strategic opportunity for physician growth and alignment for those systems, management companies and large group practices that can create physician employment and/or alignment models that: (1) offer relief from the direct burdens of MIPS compliance; (2) offer the opportunity for enhanced payments under MIPS; and/or (3) offer an APM as a superior alternative to MIPS. The further challenge will be doing this in a manner that is realistic and practical, but still sensitive to the concerns of physicians who are being driven to reluctantly give up traditional private practice.

In our view, a winning strategy for success under MACRA, and payment transformation from fee-for-service (FFS) payments to value-based payments or APMs generally, should include offering a range of options under which physicians and physician groups can effectively and efficiently align with your organization. Such options might include:

• Direct employment;
• Leased or contracted employment under a “foundation” model that enables a physician to act as a day-to-day employee of the system, but is based on a contractual, not employment, relationship and allows physicians to remain in control of individual physician compensation;
• The opportunity to join as an employee, leased employee or independent practice an APM entity sponsored by the system (in many cases, this would be a Next Generation Accountable Care Organization or a Track 2 or Track 3 Medicare Shared Savings Program ACO, though there are other options);
• The opportunity to join as an independent practice a clinically-integrated network (CIN) that contracts in the commercial payor market and takes responsibility for many of the burdens associated with independent practice (e.g., MIPS compliance); or
• The opportunity to buy services from a system-sponsored management services organization (MSO) that provides practice management support to independent practices.

In addition to creating these options, systems will need to educate the physicians in their market about the transformative impacts of MACRA. This is not an entirely new value proposition. Physicians have been leaving small group practices for larger group practices and system employment for years for many similar reasons (e.g., better and/or more secure salary and benefits, relief from the administrative and regulatory burdens of independent practice, better clinical support, etc.). MACRA will dramatically and quickly accelerate this trend.

While our thesis is that MACRA presents an opportunity to sophisticated and forward-looking players in the market, there is no doubt that MACRA presents many challenges as well, especially to hospital systems. The most notable of these challenges is that as “value” becomes the basis for physician services reimbursement, the success of the physician enterprise will increasingly be at odds with the success of the hospital enterprise, because “value,” in the form of cost-effectiveness, will be delivered by keeping patients healthy and out of the hospital. This is not a new problem for hospitals in commercial markets already in the midst of the transition from FFS payments to value-based models and other APMs, but it will intensify their problems. For hospitals still in primarily FFS markets, MACRA will present a new and significant challenge. As Medicare and commercial payers shift to value-based and other alternative payment models, systems will need to redesign their operations and reduce costs accordingly. While that work must happen, systems should not lose sight of the fact that MACRA presents a significant opportunity to create greater alignment with physicians, and a risk of losing this opportunity to their competitors. The brave new world of MACRA will create further impetus for the creation of hospital and physician systems that are fully integrated—clinically, operationally and financially.