Among the many questions facing physicians in the wake of healthcare reform—how will they get paid? PYA Principal David McMillan recently addressed this question at the PKF Healthcare Fly-In with “Current Reform Initiatives and Their Impact on Physician Compensation.”

1. Current Reform Initiatives and
Their Impact on Physician
Compensation
November 13, 2013
David McMillan, CPA
New Orleans, Louisiana

2. Speaker Biography
David W. McMillan, CPA
PYA Principal
David McMillan provides financial and strategic services to
the Firm's healthcare clients. David's areas of
concentration are: feasibility studies for various healthcare
entities; mergers, acquisitions, and affiliations among
providers; strategic planning and forecasting, clinical
integration services; and valuations and operational
analysis.

3. 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

4. Healthcare Reform
Initiatives Overview

5. The Push Towards Quality and Lower Cost
Rebuilding
Primary Care
Workforce
Expanding
Authority to
Bundle
Payments
Encouraging
Integrated
Health
Systems
Increasing
Medicaid
Payments to
Primary Care
Physicians
Linking
Payment to
Quality
Outcomes

6. The Train Has Left the Station…
Medicaid
demonstration project
– fee-for-service to
global fee
2010
Healthcare reform
begins with
consumer-focused
initiatives (i.e.,
focused on
insurance reform)
Center for
Medicare and
Medicaid
Innovation –
explore models of
payment based on
quality
2011
Physician quality
reporting –
Physician Compare
website
Hospital
readmissions –
Reduction in
payments to
hospitals for
preventive
readmissions
2012
ACO program
launch – shared
savings
Hospital valuebased purchasing
program
Bundled payment
initiatives
Medicare –
Medicaid parity
2013
Value-based
purchasing –
physician payments
phased in 2015 to
2017

7. Value-Based Payment
Modifier

8. The Future is Now
• Pay for volume
• No quality
measured
Value- Based
Payment
• Quality per click
• Process
improvement
Fee For
Service
THEN
• Quality
outcomes of
episodes
• Whole system
improvement
Care
Coordination
NOW
FUTURE

9. Calculation of Value-Based Payment Modifier
in CY 2015
Groups of Physicians with 100 or more
Eligible Professionals
PQRS Participation (Groups that selfnominate/register for PQRS as a group and
report at least one measure, or elect PQRS
Administrative Claims)
Elect QualityTiering Calculation
Upward, downward, or no
adjustment based on quality-tiering
Non-PQRS Participation (Groups that do not selfnominate/register for PQRS as a group and do not
report at least one measure)
No Election
0.0%
(no adjustment)
Source: Summary of 2015 Physician Value-based Payment Modifier Policies
-1.0%
(downward adjustment)

10. 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

11. Tiered Value-Based Payment Modifier
Quality/Cost
Low Cost
Average Cost
High Cost
High Quality
+2.0X
+1.0X
+0.0%
Medium
Quality
+1.0X
+0.0%
-0.5%
Low Quality
+0.0%
-0.5%
-1.0%

12. Quality Incentives

13. Quality Incentive Compensation
Overview – Arrangements by which hospitals compensate physicians for
Overview – Arrangements by which hospitals compensate physicians
the achievement of certain pre-defined quality indicators
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
 Risk reduction
 Patient satisfaction
 Quality-related educational activities
 Specialty-specific outcomes measures

14. Co-Management Model
Hospital
Hospital
Pays
for:
• Base management fees
• Incentive Compensation
(limited) Including:
- Quality
- Operational
Efficiency
$
Hospital
Physicians
Management
Company/
LLC/Committee
Service Contract
to Manage Hospital’s
Service Line at-risk for
Quality and
Operational Goals
Physicians

15. OIG Opinion No. 12-22
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:
Employee
Satisfaction –
5%
Patient
Satisfaction –
5%
Quality of Care
– 30%
Cost Reduction
– 60%

16. Areas of Concern Noted by the OIG
Stinting on
Patient
Care
Payments
to Induce
Patient
Referrals
“Cherry
Picking”
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.”

17. Keys to Compliance
Civil
Monetary
Penalty
• 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.
AntiCompensation is not variable with number of patients treated.
Kickback
Hospital operates only cardiac cath lab within 50-mile radius
and the group does not provide cath lab services elsewhere.
Statute
Specificity of measures ensure that pay is for quality
improvement, not referrals.
Three-year term
Self referral law (Stark Law) falls outside of OIG’s jurisdiction. As such, the opinion does
not discuss whether the arrangement implicates this law.

18. 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.”

19. Medicare-Medicaid
Parity

20. 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

21. Overview of Initiative
States estimated to receive $8.5 billion in 2013 and $6.1 billion in 2014 to fund
Medicaid parity payments.
final regulation implementing
November 1, • CMS issuesMedicaid services at Medicare
payment of
2012
levels for 2013 and 2014
March 31,
2013
Nationally,
average
Medicaid
payments are
approximately
66% of
Medicare
rates.
• Deadline for states to submit a
state plan amendment
July 1,
2013
• According to CMS, ¼ of
states had implemented
the temporary payment
increase

22. 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

23. 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.

24. Impact on Physician Compensation
Hospitalist Subsidy Example
Hospitalist Services Agreement
Financial Assistance Calculation
Low
High
REVENUE
Professional Collections 1
$
60,450
265,460
325,910
2,932,360
TOTAL EXPENSES
56,250
60,450
265,460
325,910
Other Expenses:
Liability Insurance5
Office Overhead6
Total Other Expenses
2,300,000
368,000
2,668,000
54,450
Medical Director Compensation4
2,300,000
2,200,000
352,000
2,552,000
EXPENSES
Physician Compensation and Benefits:
Physician Base Compensation2
Physician Benefits 3
Total Physician Compensation and Benefits
2,100,000 $
3,050,160
Estimated Net Income Before Subsidy (Loss)
$
(832,360) $
(750,160)
Subsidy, rounded
Medicaid Parity Offset 7
Revised Subsidy
$
$
$
(830,000) $
180,000 $
(650,000) $
(750,000)
197,143
(552,857)

25. Impact on Physician Compensation
Hospitalist Subsidy Example (continued)
1
Represents average of median (low) and mean (high) national survey data for collections per physician
FTE multiplied by 10 FTE physicians to provide coverage.
2
Calculation is based on 10 FTEs to provide coverage and average of median and mean survey
compensation data for clinical compensation.
3
Benefits are calculated at 16% of compensation expense based upon PYA experience and information
from the 2012 MGMA Cost Survey and the 2012 AMGA Medical Group Compensation and Financial
Survey . No material variation in benefits is expected between low and high range.
4
Calculation is based upon one physician providing services 450 hours annually at a fair market
value rate ranging from $121 to $125 per hour.
5
Based upon the average of the 2012 MGMA Cost Survey median professional liability insurance
expense per full-time equivalent physician for physicians specializing in internal medicine and the 2012
AMGA Medical Group Compensation and Financial Survey median professional liability insurance
expense per full-time equivalent physician for physicians specializing in hospital medicine. PYA utilized
10 FTE physicians based upon an analysis of historical encounter trending.
6
Estimated overhead expenses at $26,546 per FTE physician per 2012 AMGA Medical Group
Compensation and Financial Survey .
7
Medicaid parity offset is based on the following broad assumptions for illustrative purposes only:
Medicaid revenue approximates 20% of the professional collections and was initially collected at a
rate of approximately 70% that of Medicare.

26. Rise in Insured and
Access to Primary Care

27. Effects of the PPACA on Primary Care
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.
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

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

29. Demand on the Rise
“Demand for
Family
Physicians
Fuels Salary,
Compensation
Increase,
Survey Finds”
Rise in
Compensation
• 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
Drivers of Pay
additional demand for services.
Increase
Supply
• 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.

30. Accountable Care
Organizations and Bundled
Payments

31. 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.

32. Medicare ACO in a Nutshell
(“Shared Savings Program”)
ACO providers
ACO operations
Beneficiary assignment
Performance
requirements
Shared savings payment
Regulatory waivers
• Mandatory - Sufficient PCPs to care for at least 5,000 beneficiaries
• Optional - Other Medicare-enrolled providers
• Legal entity, governing body, management structure, medical director
• Meet patient-centeredness, evidence-based medicine, coordination,
and cost-effectiveness goals & measures
• Patients assigned by CMS based on PCP TIN
• Patients retain freedom of choice
•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)
• 1-sided – 50% shared savings
• 2-sided – 60% shared savings, at risk for 2% over benchmark
• Waiver from requirements of Stark Law, Anti-Kickback Statute, and
Gainsharing CMP, Antitrust

33. Medicare ACO:
How You Get Paid
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.
Actual
•
Savings
ACO participant receives same
Medicare Part A and Part B FFS
payments.
Benchmark
•
MSR
$ACO
$CMS

34. Funds Sharing Challenges
Based on equity?
Return of withhold
Based on revenue?
Sharing of bonuses
Utilization targets?
Funding of losses
Some other way?

35. One-sided model-MSSP
Not responsible
for losses
initially
• 1st two years, upside only
• 3rd year, must convert to two-sided model
• Subject to 25% withhold
Key issues:
• MSR set using historical expenses
• Benchmark adjusted annually
• Bonuses limited to 50% savings off the MSR, capped at
7.5%

36. Two-sided model-MSSP
On the hook for
losses
immediately
• Eligible for a larger percent of savings
• Exposure to 40% of losses
• Subject to 25% withhold
Key issues:
• MSR set using historical expenses
• Benchmark adjusted annually
• Bonuses limited to 60% after savings exceed 2%,
capped at 10%
• Losses capped at 5%, 7.5% and 10%

37. Shared Savings Models-MSSP
One-Sided Model
(performance years 1 & 2)
Two-Sided Model
Sharing Rate (assuming
maximum performance on
quality measures)
Up to 50%
Up to 60%
FQHC/RHC Participation
Incentives
Up to 2.5 percentage points
Up to 5 percentage points
Maximum Sharing Cap
Payments capped at 7.5% of
ACO's benchmark
Payments capped at 10% of
ACO's benchmark
Shared Losses Cap
N/A
Year 1 - 5%
Year 2 - 7.5%
Year 3 - 10%

38. Considerations for Primary Care
Critical to the success of
an ACO or bundled
payment initiative
Will likely be a shortage
by 2014 – even more so
than currently
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

39. Bundled Payments for Care Improvement
Initiative
Five-year
initiative
launched
January 31,
2013
Private
payers
already
using
bundled
payments
Based on Medicare ACE
Demonstration Project –
free-range ACO
Pricing based on
discount of payer’s
historic total cost
Single payment for
defined group of services
within specified episode
of care
Gain-sharing incentives

40. Bundled Payment Initiative Pilot
MODEL
MODEL 1
MODEL 2
MODEL 3
• Inpatient hospital and physician
• Post-acute care services
services
Types of Services
• Related readmissions
• Related post-acute care services
Included in
All inpatient hospital services
• Other services defined in
• Related readmissions
Bundle
the bundle
• Other services defined in the
bundle
MODEL 4
• Inpatient hospital and
physician services
• Related readmissions
To be proposed by applicant
To be proposed by
applicant; subject to
minimum discount of 3%;
larger discount for MSDRGs in ACE
Demonstration
• Acute care hospital: IPPS
payment less predetermined discount
Payment from
• Physician: Traditional fee
CMS to Providers
schedule payment (not
included in episode or
subject to discount)
Traditional fee-for-service
Traditional fee-for-service
payment to all providers and
payment to all providers and
suppliers, subject to
suppliers, subject to reconciliation
reconciliation with
with predetermined target price
predetermined target price
Prospectively established
bundled payment to
admitting hospital;
hospitals distribute
payments from bundled
payment
All Hospital IQR measures
Quality Measures and additional measures to
be proposed by applicants
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
Expected
Discount
Provided to
Medicare
To be proposed by applicant;
To be proposed by applicant;
CMS requires minimum discount
CMS requires minimum
of 3% for 30-89 days postdiscounts increasing from 0%
discharge episode; 2% for 90
in first 6 mos. to 2% in Year 3
days or longer episode

41. Bundled Payments - So, How’s it Working
So Far?
Case Study from DataGen and New York-Presbyterian Hospital Addresses Key
Success Factors for the Bundled Payment Care Initiative
Understanding
data is critical
to success
Determination
of episodes
that offer the
greatest
opportunity
Engaging
physicians
Influencing
utilization of
post-acute
care services
Source: New Case Study Examines Key Success Factors for Medicare Bundled Payment Initiative. Yahoo! Finance. September 4, 2013.
Patient
Engagement

42. Key Implications for
Valuations

43. Common Types of Physician Alignment
Strategies
Hospitalist
Strategies
Physician
Practice
Acquisitions
(“Buy and
Employ”
Transactions)
Quality
Incentives
Physician
Alignment
Transactions
Direct
Employment
Call Pay
Arrangements
Clinical
Co-Management
Agreements

44. Physician Alignment Vehicles
More Common
Physician Employment
Medical
Directorships
Physician
Leasing
Agreement
Physician
Services
Agreement
Real Estate JV
Co-Management
Equipment JV
More Integration
Less Integration
Physician Advisory
Council
EMR
Quality
PHO
Shared Savings
Less Common

45. Navigating the Regulatory Environment
STARK LAW
Prohibited self-referrals
for Medicare and
Medicaid patients.
ANTI-KICKBACK
Knowingly and willful
STATUTE
offers, payments, or
receipts for referrals.
IRS-NFP
IRC Section 501(c) 3
REQUIREMENTS
requirements
100
m
Road
Menu

46. Compliance Issues Regarding HospitalPhysician Financial Relationships
COMMERCIAL
REASONABLENESS
FAIR MARKET
VALUE
SENSE
CENTS
Overall
Arrangement
“WHY?”
Scope
Range of
Dollars Only
Key Question
“HOW
MUCH?”

47. Contact Information
David McMillan, CPA
Principal
(865) 673-0844 ext 120
dmcmillan@pyapc.com