United States: With SGR Repealed, Replacement Policy Creates New Priorities

Last Updated: April 21 2015
Article by Thomas S. Crane and Andrew J. Shin

On April 16, 2015, President Obama signed into law, the "Medicare Access and CHIP Reauthorization Act of 2015" (MACRA), ending annual temporary patches and massive lobbying efforts since the late 1990s to prevent significant reimbursement cuts for physicians serving Medicare beneficiaries caused by the so-called Sustainable Growth Rate (SGR) formula.  At the end, 392 Members of the U.S. House of Representatives and 92 Members of the U.S. Senate voted in favor of permanently replacing the Sustainable SGR formula in favor of a new system touted as promoting quality over volume.

MACRA also contains several provisions affecting reimbursement to other Medicare providers, program integrity, and fraud and abuse, as well as a mix of other important provisions including extension of the Children's Health Insurance Program (CHIP).  We will address these provisions in subsequent blog posts.

From the SGR "Patch" to MACRA

Health policy experts have long called for an end to the annual, or even sometime monthly, ritual of "patching" the SGR to avoid reimbursement cuts triggered by unsustainable growth in Medicare spending.  While lawmakers were concerned about the unsustainability of the Medicare program due to costs that outpaced other economic indicators virtually every year, the notion of significantly cutting physician pay put legislators in an untenable situation, especially as the potential "fiscal cliff" increased well into double digit cuts.

The inevitability of Congressional intervention to hold physicians harmless from a SGR cut rose to new heights in 2013 during the annual rate-setting exercise for Medicare Advantage plans.  The Office of the Actuary at the Centers for Medicare and Medicaid Services (CMS) was overruled amidst intense lobbying, including from senior members of the Senate, prior to the publishing the FY 2014 Medicare Advantage rule.  The Actuary's office had taken the position that the Medicare Advantage rates should be set on the premise that a SGR cut was actually taking place because the law mandated an automatic cut and Congress had not yet stepped in to patch it.  In essence, any decision that relied on the assumption of the SGR cut actually taking place was now a matter of academics and not reality.

Although the SGR is now in the history books, it's safe to assume that new tensions will arise as the need to control growth in Medicare spending continues amidst a rapidly evolving health care industry.  Akin to how the ACA acted as a catalyst to nationalize certain payment and delivery reform trends, MACRA is likely to accelerate the current movement in health care towards value-based systems.  Thus, stakeholders and policymakers are likely to focus even more on the evolution of payment and delivery reform initiatives due to their increasing relevance and scale.

The New Landscape for Medicare Cost Containment

The SGR tied Medicare physician spending to Gross Domestic Product growth in the overall economy, providing a benchmark that was supported at the time by health care economists.  In reality, however, this measure had little to do with costs and quality in the health care system, and was not sustainable.  MACRA replaces the SGR with a combination of automatic increases for physicians and incentives for them to participate in a variety of pay-for-performance programs and alternative payment models (e.g. medical homes and accountable care organizations).

Between 2015 and 2019, physicians in the Medicare program will receive an annual update of 0.5 percent.  The base reimbursement rate will then hold steady at 2019 levels through 2025, while giving physicians the ability to supplement their reimbursement through payment adjustments in the newly created "Merit-Based Incentive Payment System" (MIPS) and participation in alternative payment models (APMs).  Finally, starting in 2026 and beyond, physicians who receive a significant share of their revenues through an APM are eligible for one percent annual increases as opposed to 0.5 percent updates for those not participating in APMs.

New Reimbursement Pathways
2015 – 2019  0.5% annual update
2019 – 2025 0% annual update (MIPS) Negative payment adjustment capped at 4% – 9% (depending on year) for lowest performers.  Positive payment adjustment capped at 3x the respective cut amount for that year for highest performers. (APMs) Automatic 5% annual bonus for participation in qualifying APMs (exempt from MIPS and some EHR "meaningful use" requirements).
2026 - 0.5% annual update (APMs) 1% annual update (in lieu of 0.5% update)

One way to view the new future for Medicare physician cost containment efforts is that it better aligns with existing initiatives to control costs within the context of improving quality.  For example, from 2019 until 2025, reimbursement rates are held constant with no automatic increases or decreases.  This leaves most physicians with two choices: 1) be subject to payment adjustments through MIPS, or 2) participate in qualifying APMs.

MIPS aims to streamline three incentive programs: 1) the Physician Quality Reporting System (PQRS); 2) the Value-Based Modifier (VBM); and 3) Meaningful Use for electronic health records.  Assessments that eventually make up a physician's composite score will be based on four categories: 1) quality; 2) resource use; 3) meaningful use of electronic health records; and 4) clinical practice improvement activities.

Those physicians with a composite score in the bottom quartile, as compared with a predetermined performance threshold (based on average of last year's MIPS scores), will receive reimbursement cuts up to the cap set for each year (4% in 2019, 5% in 2020, 7% in 2021, and 9% in 2022).  Negative and positive payment adjustments will be ratcheted up or down in a proportional manner for those scores closer to the threshold.

For physicians with a composite score above the threshold, they will receive a positive payment adjustment up to a maximum of three times the annual cap for the negative adjustments.  Additionally, physicians receiving the top 75% of all scores above the threshold will receive an additional positive payment adjustment, allocated using a linear distribution formula.  In essence, this allows for a greater number of physicians to be eligible for incentive payments, even if the vast majority of them are above the threshold score.

Alternative Payment Models

Aside from MIPS, physicians will also have the ability to participate in APMs, such as bundled payments and accountable care organizations, with incentive payments starting in 2019.  Physicians who receive a significant share of their revenues through an APM that involves risk of financial losses (two-sided risk) and a quality measurement component will receive a 5% bonus each year from 2019-2024.  Especially relevant for primary care physicians, medical homes will be exempted from downside financial risk requirements if proven to be effective in lowering costs/improving quality in the Medicare population (most medical home models do not have downside risk arrangements but rather utilize blended payments that provide bonus payments on top of fee-for-service payments).

Further, participation in APMs exempts physicians from having to participate in MIPS and most EHR meaningful use requirements.  Finally, the legislation directs the Secretary of Health and Human Services to review APMs against relevant specialty professionals, professionals in small practices, and those that align with private and state-based payer initiatives in order to create a diversity of options for providers, especially those who may not fit perfectly into existing APMs. These initiatives align with many existing models being tested through the CMS Innovation Center.  Stakeholders are likely to focus their attention on the Innovation Center even more over the coming year in an attempt to shape the next iteration of APMs developed to handle the influx of physicians seeking to participate in the program.

Indeed, looking ahead to 2025, physicians lose the bonus payment opportunity and instead revert to a 1% increase if they participate in a qualifying APM or a 0.5% increase if they do not.  For those not participating in APMs, many health policy experts believe that new programs, akin to MIPS, will be developed to put further pressure on physicians to show quality improvement.  This makes the next couple of years vitally important as stakeholders position themselves to choose one track or another.

Preparing for 2019 and the Start of APM Incentive Payments

Any stakeholder seeking to develop a new APM through the CMS Innovation Center will have to propose general parameters of what the delivery/payment structure will look like. This will involve the collection of data, garnering of industry support, and convincing policymakers that the model will reduce costs while improving, or at least maintaining, quality.  Then, CMS will have to do its own analysis and develop a potential solicitation open to a wide swath of applicants.

Following a solicitation, CMS will have to work to approve applicants and develop implementation parameters.  All this could take as little as a year for narrower models or up to several years for larger ones.  Thus, stakeholders wishing to develop or modify APMs to prepare for 2019 have limited time to choose their path, especially if they want to test various models prior to the time when APM incentive payments become available.

So while the lobbying and intense focus on the SGR may become a distant memory in the weeks and months to come, the health policy community can be sure that new priorities and battles are likely to come.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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