Value-Based Tsunami Creates Winners and Losers

Historic Announcement

Despite all of the politics around the Affordable Care Act (ACA), the need for healthcare payment reform has bipartisan support.

Right now, the American health-care system is largely fee-for-service (FFS) where doctors get paid a set amount for each episode of care, whether that’s an annual physical or a knee replacement. Whether or not they act on it, the payment structure gives many doctors a financial incentive to overtreat patients.

Bundled payments and accountable care organizations (ACOs), which came out of the ACA, move away from fee-for-service payment so that providers are paid better when they deliver a bundle of successful health outcomes, such as when a complicated surgery goes well and has fewer hospital readmissions and hospital-related infections. In other words, these are approaches that pay for quality and value.

On January 29, HHS Secretary Burwell announced a major initiative calling for 30% of Medicare payments to be value-based by 2016. And the Administration wants to tie 50% of payments to quality or value by 2018.

Realistic Targets?

HHS Secretary Burwell is promoting three large themes for the government’s healthcare programs – Better Care, Smarter Spending, and Healthier People. And to succeed in these, HHS boiled its approach down to three tactics – Payment Reform, Care Delivery Transformation, and Information Sharing/Data Transparency.

In order to move the needle on these lofty initiatives, HHS needs to think and act big.  The January announcement focused on Medicare payment reform, leveraging Medicare’s heavy purchasing power to drive alternative payment models (APM) by a defined date.

To date, Medicare ACO and bundled payment savings have been minimal. However, should the trends continue, the savings could become meaningful overtime.

In addition, the quality of healthcare under these new value-based programs has not fallen off a cliff.

On the cost side, for some perspective, in 2014 Medicare fee-for-service payments were $362 Billion. That year, Medicare’s combined total savings from ACO-based programs was $417 Million, or roughly one tenth of one percent of such payments.

But the combined impact of several value-based initiatives — including Partnership for Patients, ACOs, Quality Improvement Organizations, and others — has helped reduce hospital readmissions in Medicare by nearly 8% – translating into 150,000 fewer readmissions between January 2012 and December 2013.  More importantly, HHS contends the quality improvements have saved 50,000 lives and $12 Billion in health spending from 2010 to 2013.

The bottom line is that the combined effects of value-based payment programs are starting to show results.  And as long as the data are supportive, HHS will continue to push these models to continue the unprecedented slowdown in health care spending.

Doc Fix: A Big Boost for Value

Then, on April 16, the President signed a law that ends the almost two decades of Medicare physician pay patches. The overwhelmingly bipartisan bill passed 92 – 8 in the Senate and 392 – 37 in the House.

The rare bipartisan accomplishment repeals the old Medicare payment formula, called the Sustainable Growth Rate (SGR), and replaces it with a new, value-based model.

With the passage of Medicare Access and CHIP Reauthorization Act of 2015, there will be an approach focused on rewarding high-performing providers while supporting alternative payment models such as ACOs and patient-centered medical homes.

That is – tying payment to quality and value.

The replacement Medicare formula lets doctors pick from two ways to participate in that payment scheme: Option one is the alternative payment model and Option two is the merit-based incentive payment system.

Pay will be increased 0.5 percent annually through 2019. However, it will tie more Medicare payments to quality measures that include clinical care, patient safety and care coordination.

Then, physician pay will remain at the 2019 level through 2025, and high-performing providers and providers participating in alternative payment models (or “APMs”) will have the opportunity for additional payments.

To accelerate the move from volume-based to value-based payment, a merit-based incentive payment system (MIPS) will be established beginning in 2019. The MIPS will replace three previous incentive programs with a combined value-based payment program that assesses the performance of each eligible provider based on quality, resource use, clinical practice improvement activities, and meaningful use of certified electronic health record technology. Bonuses could be as high as 4% in 2019 and 9% in 2024.

Winners and Losers

Among physicians, the winners are larger physician practices that are meaningful users of electronic health records. The legislation could also spur the acceleration of physicians increasingly becoming employed by hospitals and larger systems.

Individual physicians and small groups are likely the losers, as they may not be well-resourced, and therefore less technologically sophisticated when it comes to reporting on quality and proving their value.

Health IT vendors are also likely winners, over the longer-term, given the amount of quality reporting and government interaction required for bonus pay.

A smaller loser may, over time, be health plans, as hospitals can negotiate more favorable payment rates with insurers (with additional employed physicians).

Medical devices and drugs administered in the physician office setting (injectable Part B treatments, physician fee schedule) may be curtailed, but not to the extent that the reductions are meaningful.

Device makers have been forced to think about reduced use for some time, given the pressure from ACOs and bundled payments – that is, providers are incentivized to use lower cost technology at the expense of newer, potentially more effective technology that could be “better” for the patient, longer term.


Physician payment reform does not take place for four years, and there are some major question marks about the implementation of the law.

The legislation calls for CMS to draft a plan on the development of quality measures by Jan 1, 2016. Physician specialty societies will largely create the measures, and the devil will be in the details.

Between now and 2019, there will have to be more guidance and discussion about what the actual alternative payment models are. All we really know is that they are risk-bearing entities, but what counts as an APM is unclear.

A lot will hinge on how future Administrations implement the new law.

Value-Based Pay is Here to Stay

Despite the uncertainties with the new physician payment system, value-based payments are a step in the right direction for the Medicare system overall. Along with bundled payments and ACOs, the new MIPS and APMs (explained above) will mean that wasteful care will be avoided over time, with the physician being accountable for patient outcomes. These same approaches are taking hold in the private insurance sectors, with an increasing expectation that healthcare costs will be reduced and quality improved regardless of the type of payer.

With government initiatives in Medicare, Medicaid and Exchanges as major catalysts, delivery system reform is here to stay.


Ipsita Smolinski is Managing Director for Capitol Street, a healthcare research and consulting firm in Washington, DC.

Morning Consult