Current Reform Initiatives and Their Impact on Physician Compensation

November 14, 2013Carol W. Carden, CPA/ABV, ASA,CFENew Orleans, Louisiana

Carol Carden is a Principal with Pershing Yoakley & Associates, P.C., and provides business valuation and related consulting services to a wide variety of business organizations, primarily in the healthcare industry. Ms. Carden’s primary areas of expertise are in finance, valuation, managed care and revenue cycle operations for healthcare organizations. She has performed appraisals of businesses and securities for a wide variety of purposes such as mergers, acquisitions, joint ventures, management service agreements and other intangible assets.

In addition to being a Certified Public Accountant, she has also earned the Accredited in Business Valuation (ABV) credential from the American Institute of Certified Public Accountants, the Accredited Senior Appraiser (ASA) credential from the American Society of Appraisers and the Certified Fraud Examiner (CFE) credential from the Association of Certified Fraud Examiners. She is the Chair of the Executive Committee for Forensic and Valuation Services and the former Chair of the Business Valuation Committee for the AICPA, was Chair of the 2010 National AICPA Business Valuation Conference and was on the planning committee for the 2011 AICPA National Healthcare Conference.

Speaker Biography

Agenda

Healthcare Reform Initiatives Overview

Regulatory Considerations

Value-Based Payment Modifier

Quality Incentives

Medicare-Medicaid Parity

Rise in Insured and Increased Access to Primary Care

Accountable Care Organizations and Bundled Payments

Healthcare Reform Initiatives Overview

Road100m

Menu

STARK LAWProhibited self-referrals for Medicare and Medicaid patients.

ANTI-KICKBACK STATUTEKnowingly and willful

offers, payments, or receipts for referrals.

IRS-NFP REQUIREMENTSIRC Section 501(c) 3 requirements

Navigating the Regulatory Environment

FAIR MARKET VALUE

COMMERCIAL REASONABLENESS

Overall Arrangement

“WHY?”

SENSE CENTS

Range of Dollars Only

“HOW MUCH?”

Scope

Key Question

Compliance Issues Regarding Hospital-Physician Financial Relationships

The Push Towards Quality and Lower Cost

Rebuilding Primary Care

Workforce

Increasing Medicaid

Payments to Primary Care Physicians

Linking Payment to

Quality Outcomes

Encouraging Integrated

Health Systems

Expanding Authority to

Bundle Payments

The Train Has Left the Station…

Healthcare reform begins with consumer-focused initiatives (i.e., focused on insurance reform)

Medicaid demonstration project – fee-for-service to global fee

Physician quality reporting – Physician Compare website

Center for Medicare and Medicaid Innovation – explore models of payment based on quality

Hospital readmissions – Reduction in payments to hospitals for preventive readmissions

ACO program launch – Shared savings

Hospital value-based purchasing program

Bundled payment initiatives

Medicare – Medicaid parity

Value-based purchasing – physician payments phased in 2015 to 2017

2010 2011 2012 2013

Value-Based Payment Modifier

• Pay for volume• No quality

measured

Fee For Service

• Quality per click• Process

improvement

Value- Based Payment • Quality

outcomes of episodes

• Whole system improvement

Care Coordination

THEN NOW FUTURE

The Future is Now

Calculation of Value-Based Payment Modifier in CY 2015

Source: Summary of 2015 Physician Value-based Payment Modifier Policies

Groups of Physicians with 100 or more Eligible Professionals

PQRS Participation (Groups that self-

nominate/register for PQRS as a group and report at least one measure, or elect PQRS

Administrative Claims)

Non-PQRS Participation (Groups that do not self-

nominate/register for PQRS as a group and do not report at least one measure)

Upward, downward, or no adjustment based on quality-tiering

0.0%

(no adjustment) -1.0%

(downward adjustment)

Elect Quality-Tiering Calculation No Election

PQRS – History

2007 and 2008

PQRI introduced 74 Measures 1.5% Lump incentive

2009 and 2010

2.0% Incentive payment

Group Reporting option established

Remove electronic prescription

measures

2011 1.0% Incentive for reporting

Individual Measures increased

2012 0.5% Incentive for reporting Incentive Changes

2013 0.5% Incentive for reporting

Reporting year for 1.5% payment

adjustment in 2015

2014 0.5% Incentive for reporting

Reporting year for 2.0% payment

adjustment in 2016

Tiered Value-Based Payment Modifier

Both upside reward and downside risk

Focused on outliers in quality and cost

Composite scores for cost and quality

Three tiers – High, Average, and Low

Additional upward adjustment for care of sickest patients

Sum of upward adjustments will be offset by downward adjustments

The CurveP

ER

FO

RM

AN

CE

TIME

First CurveFee-for-ServiceQuality Not RewardedPay for VolumeFragmented CareAcute Hospital FocusStand Alone Providers Thrive

Second CurveValue Payment

Continuity of Care RequiredSystems of Care

Providers at Risk for PaymentIT Centric

Physician Alignment

Straddle

Revenue DropsMinimal Reward for Quality

Volume Decreases

No Decisive Payment ChangePay for Volume Continues

High Cost IT InfrastructurePhysicians in Disarray

Quality Incentives

Quality Incentive Compensation

Overview – Arrangements by which hospitals compensate physicians for the achievement of certain pre-defined quality indicators

Increasingly common arrangements

Quickly becoming components of (or even fully characterizing) many physician-hospital alignment arrangements

Example factors generally considered when evaluating quality incentives: Core measures Patient satisfaction Specialty specific outcomes measures

Risk reduction Quality related educational activities

Overview – Arrangements by which hospitals compensate physicians for the achievement of certain pre-defined quality indicators

Management Company/

LLC/Committee

Hospital Physicians

•Base management fees• Incentive Compensation (limited) Including:

- Quality

- Operational

Efficiency

Hospital Pays for:

$

PhysiciansHospital

Service Contract to Manage Hospital’s Service Line at Risk

for Quality and Operational Goals

Co-Management Model

OIG Opinion No. 12-22

Employee Satisfaction –

5%

Patient Satisfaction –

5%

Quality of Care – 30%

Cost Reduction – 60%

Cardiac catheterization clinical co-management arrangement between a hospital and a cardiology group. The group received a fixed fee and a performance-based fee that was “at risk” based on the achievement of pre-determined metrics. Performance fee based on the following:

Areas of Concern Noted by the OIG

“Cherry Picking”

Stinting on Patient Care

Payments to Induce Patient

Referrals

Unfair Competition

The OIG states that “hospital cost-savings programs, in general, and the arrangement in particular, may implicate at least three Federal legal authorities: the civil monetary penalty, the anti-kickback statute and the physician self-referral law.”

Keys to Compliance

Self referral law (Stark Law) falls outside of OIG’s jurisdiction. As such, the opinion does not discuss whether the arrangement implicates this law.

CivilMonetaryPenalty

Anti-KickbackStatute

• Cost-savings component implicates the CMP; however, sanctions not sought due to the following safeguards:- Patient care is monitored through third-party utilization review

and internal committee and board review- Benchmarks are structured so that physicians have flexibility to

use cost-effective clinically appropriate materials- Term is limited to three years and is subject to a cap

• Sanctions not imposed for the following reasons:- FMV compensation and management responsibilities are

robust- Compensation is not variable with number of patients treated- Hospital operates only cardiac cath lab within 50 mile radius

and the group does not provide cath lab services elsewhere- Specificity of measures ensure that pay is for quality

improvement, not referrals- Three year term

Keys to Compliance

• OIG states that, if the agreement is renewed, then reviewing and rebasing quality metrics is essential.

– “We would expect that quality improvement and cost saving measures under the Agreement would be subject to adjustment over time, to avoid payment for improvements achieved in prior years and to provide incentives for additional improvements in the future. Continuing compensation for conduct that has come to represent the accepted standard of care could, depending on the circumstances, implicate the anti-kickback statute.”

Medicare-Medicaid Parity

New Primacy of Primary Care

• Enhanced Medicare payments­ For 2011-15, Medicare pays 10% bonus for:

o PC services furnished by PC practitioners

o Professional component of surgical procedure performed in HPSA

• Enhanced Medicaid payments ­ Payment rates to PC physicians increased in 2013 and 2014 to 100% of

Medicare rates

• Significant new funding for community health centers

• Increase PC workforce by 16,000 by 2016

­ Expand National Health Services Corps

­ Other scholarships, loan repayment, and workforce training programs

Overview of Initiative

November 1, 2012

• CMS issues final regulation implementing payment of Medicaid services at Medicare levels for 2013 and 2014

March 31, 2013

• Deadline for states to submit a state plan amendment

July 1,2013

• According to CMS, ¼ of states had implemented the temporary payment increase

States estimated to receive $8.5 billion in 2013 and $6.1 billion in 2014 to fund Medicaid parity payments.

Nationally, average Medicaid

payments are approximately

66% of Medicare

rates.

Estimated Medicaid Rate Increases by State

Approximately 73% overall increase in Medicaid

rates.

Source: http://medialib.aafp.org/content/dam/AAFP/images/ann/2013-7/Medicaid-Fee-Hike-Map.png

Who Does it Impact?

• Eligibility requirements include:– Medicaid fee-for-service and managed care payments

for primary care services delivered by a family practice, internal medicine or pediatric medicine physician

– Self-attestation regarding board certification in above-mentioned specialties

– If not board certified, then the physician must self-attest that at least 60% of Medicaid codes billed are Evaluation & Management codes and vaccine administration codes

– Also applies to certain related subspecialties outlined in the regulations

Impact on Physician CompensationHospitalist Subsidy Example

Low HighREVENUE

Professional Collections 2,100,000$ 2,300,000$

EXPENSESPhysician Compensation and Benefits:

Physician Base Compensation 2,200,000 2,300,000 Physician Benefits 352,000 368,000

Total Physician Compensation and Benefits 2,552,000 2,668,000

Medical Director Compensation 54,450 56,250

Other Expenses:Liability Insurance 60,450 60,450 Office Overhead 265,460 265,460

Total Other Expenses 325,910 325,910

TOTAL EXPENSES 2,932,360 3,050,160

Estimated Net Income Before Subsidy (Loss) (832,360)$ (750,160)$

Subsidy, rounded (830,000)$ (750,000)$

Medicaid Parity Offset 180,000$ 197,143$ Revised Subsidy, rounded (650,000)$ (553,000)$

Hospitalist Services AgreementFinancial Assistance Calculation

Rise in Insured and Access to Primary Care

Effects of the PPACA on Primary Care

Source: Abraham, Jean Marie, Hofer, Adam N. and Moscovice, Ira. Expansion of Coverage under the Patient Protection and Affordable Care Act and Primary Care Utilization. The Milibank Quarterly. Vol. 89, No.1. 2011

Enactment of provisions of the PPACA are expected to increase the number of covered individuals by 32

million.

By 2019, primary care visits are predicted to increase between 15.07 million to 24.26 million.

Assuming stable levels of physicians’ productivity, the increased demand

would require between 4,307 to 6,940 primary care physicians.

Decline in Uninsured

Source: http://kff.org/report-section/state-and-local-coverage-changes-under-full-implementation-of-the-affordable-care-act-report/

Demand on the Rise

• Median first year compensation for family practice physician (without OB) increased $7,000 between 2011 and 2012

• Median compensation for all primary care physicians increased $5,000 between 2011 and 2012

• Increases due in large part to rise of ACOs and integrated delivery systems that require the services of primary care physician

• Healthcare reform extending coverage to more people has created additional demand for services

• According to the Merritt Hawkins 2013 Review of Physician and Advance Practitioners Recruiting Incentives, family practice and internal medicine physicians are the most highly recruited specialties

Source: Demand for Family Physicians Fuels Salary, Compensation Increase, Survey finds. American Academy of Family Physicians. July 9, 2013.

Rise in Compensation

Drivers of Pay Increase

Supply

“Demand for Family Physicians Fuels Salary, Compensation Increase, Survey Finds”

Accountable Care Organizations and Bundled Payments

ACO – Where are they now?

Nine of the original 27 organizations are leaving the Pioneer ACO program; seven of the nine will join the MSSP.

As of January 2013, 250 ACOs provided care to four million beneficiaries (27 ACOs at initiation).

Based on a white paper released by Premier healthcare alliance, only 21% of commercial payers offer upside savings arrangements.

Medicare ACO in a Nutshell(“Shared Savings Program”)

• Mandatory - Sufficient PCPs to care for at least 5,000 beneficiaries• Optional - Other Medicare enrolled providersACO providers

• Legal entity, governing body, management structure, medical director• Meet patient-centeredness, evidence-based medicine, coordination,

and cost-effectiveness goals & measuresACO operations

• Patients assigned by CMS based on PCP TIN• Patients retain freedom of choiceBeneficiary assignment

•Receive shared savings payments if meet certain performance standards on 33 quality measures (or pay back Medicare); more demanding over time

•Minimum Savings Rate (MSR)

Performance requirements

• 1-sided – 50% shared savings• 2-sided – 60% shared savings, at risk for 2% over benchmarkShared savings payment

• Waiver from requirements of Stark Law, Anti-Kickback Statute, and Gainsharing CMP, AntitrustRegulatory waivers

• ACO participant receives same Medicare Part A and Part B FFS payments

• ACO is eligible for annual payment based on Medicare savings

– Savings = difference between Medicare’s projected total expenditures for ACO’s assigned beneficiaries (“benchmark”) and actual total expenditures

– Must be above Min Sav. Rt.

• Savings are based on FFS payments to all providers, including non-ACO providers.

Medicare ACO:How You Get Paid

Ben

chm

ark

Act

ual

Sav

ings $ACO

$CMS

MSR

Based on equity?

Based on revenue?

Utilization targets?

Some other way?

Return of withhold

Sharing of bonuses

Funding of losses

Return of withhold

Sharing of bonuses

Funding of losses

Funds Sharing Challenges

Shared Savings Models-MSSP

One-Sided Model (performance years 1 & 2)

Sharing Rate (assuming maximum performance on quality measures)

Up to 50%

FQHC/RHC Participation Incentives Up to 2.5 percentage points

Maximum Sharing Cap Payments capped at 7.5% of ACO's benchmark

Shared Losses Cap N/A

Considerations for Primary Care

Care delivery will likely shift to

mid-level practitioners changing the cost

structure of practices

Work relative value unit assignments likely to increase over the next

few years

Critical to the success of an ACO or bundled payment initiative

Will likely be a shortage by 2014 – even more so

than currently

Five-year initiative launched

January 31, 2013

Private payers already using

bundled payments

Bundled Payments for Care Improvement Initiative

Based on Medicare ACE Demonstration Project –

free range ACO

Single payment for defined group of services within specified episode

of care

Pricing based on discount of payer’s historic total cost

Gain-sharing incentives

Bundled Payment Initiative PilotMODEL MODEL 2 MODEL 3 MODEL 4

Types of Services Included in Bundle

• Inpatient hospital and physician services

• Related post-acute care services• Related readmissions• Other services defined in the bundle

• Post-acute care services• Related readmissions• Other services defined in the

bundle

• Inpatient hospital and physician services

• Related readmissions

Expected Discount Provided to Medicare

To be proposed by applicant; CMS requires minimum discount of 3% for 30-89 days post-discharge episode; 2% for 90 days or longer episode

To be proposed by applicant

To be proposed by applicant; subject to minimum discount of 3%; larger discount for MS-DRGs in ACE Demonstration

Payment from CMS to Providers

Traditional fee-for-service payment to all providers and suppliers, subject to reconciliation with predetermined target price

Traditional fee-for-service payment to all providers and suppliers, subject to reconciliation with predetermined target price

Prospectively established bundled payment to admitting hospital; hospitals distribute payments from bundled payment

Quality Measures To be proposed by applicants, but CMS will ultimately establish a standardized set of measures that will be aligned to the greatest extent possible with measures in other CMS programs

Bundled Payments - So, How’s it Working So Far?

Understanding data is critical

to success

Determination of episodes that offer the

greatest opportunity

Engaging physicians

Influencing utilization of post-acute

care services

Patient Engagement

Case Study from DataGen and New York-Presbyterian Hospital Addresses Key Success Factors for the Bundled Payment Care Initiative

Source: New Case Study Examines Key Success Factors for Medicare Bundled Payment Initiative. Yahoo! Finance. September 4, 2013.

Key Implications for Valuations

Physician Alignment

Transactions

Hospitalist Strategies

Quality Incentives

Call Pay Arrangements

Clinical

Co-Management Agreements

Direct Employment

Physician Practice

Acquisitions (“Buy and Employ”

Transactions)

Common Types of Physician Alignment Strategies

More IntegrationLess Integration

More Common

Less Common

Equipment JV

EMR

Co-Management

Medical Directorships

Shared Savings

Real Estate JV

Physician Advisory Council

PHO

Quality

Physician Services

Agreement

Physician Leasing

Agreement

Physician Employment

Physician Alignment Vehicles

Impact on valuations

We will be living in the “straddle” for several years

Benchmark compensation data will take 2 – 3 years to catch-up to changes in the industry and will, therefore, not be as meaningful

As appraisers, the “art” part of our analysis will become more prominent and we will have to develop new approaches and be prepared to defend them

Contact Information

Carol Carden, CPA/ABV, ASA, CFEPrincipal

(865) 673-0844 ext 213ccarden@pyapc.com