is the problem?

In economics, the law of marginal returns
states that at a certain threshold, additional inputs produce a decreasing
amount of outputs. Put quite simply, more is not always better. In the case of
US healthcare, this is astoundingly true. Place health care expenditures on the
x-axis and health outcomes on the y-axis, and what you get is a display of this
very principle. There has been inconclusive evidence that increased health care
spending actually increases health outcomes.1

Figure 1: Shows total expenditure per capita in 2010 vs life expectancy at
birth. Source: OECD 2010, “Health care systems: Getting more value for money”,
OECD Economics Department Policy Notes, No. 2.2

sometimes the benefit of healthcare spending is clear cut, such as when a
cancer therapy enables a patient to enter permanent remission, other times the
benefit is quite hazy, such as an extra dose of chemotherapy for a terminally
ill patient. In 2016, the US spent more money on health care per capita, $10,348,
than any other country.3 Unfortunately, despite the US’s high per
capita health care spending, it ranks poorly in infant mortality, obesity and
other quality metrics compared to the rest of the OECD.4 One of the
only outcomes the US ranks well in is number of MRI machines.

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is the source of the problem?

 One explanation is that the current system of
healthcare rewards volume, such as the number of MRIs ordered, regardless of the
actual health outcome. Fee-for-service (FFS) payment systems create a financial
incentive for physicians to order as many tests, perform as many procedures,
and provide as many services as possible. This generates a market failure in
healthcare, or more specifically, a principal agent problem. Physician and
patient goals are misaligned, with physicians seeking volume, whereas patients
are seeking quality healthcare that will improve their health. This is a
deep-rooted systematic problem with historical incentive structures that
produce overutilization, not an individual problem. Fee-for service payment
models negatively affect physicians, patients, and the entirety of the US

can be done?

promising value-based model known as MACRA (Medicare Access and CHIP Reauthorization
Act) has emerged and is already in stages of implementation. This paper will
examine the fee-for-service market failure, as well as value based care models,
and how they will realign physician and patient incentives.






is Fee-for-Service and why does it matter?

payment models have traditionally been the dominant form of payment in the US.
For each service or procedure, a physician receives payment regardless of
quality or outcome. This type of payment model has largely shaped the way in
which medicine is practiced in the US. In 1980, approximately half of all
physicians were compensated by fee-for-service and of the remaining half,
roughly 30 percent received a mixed form of compensation with incentives
similar to fee for service8. Another study shows that over 90% of
primary care practice revenue is generated through fee-for-service.6
A separate study showed that in 2013, nearly 95% of all provider visits used
fee for service payment methods.5

of Fee-for-Service on Healthcare Stakeholders

not all physicians enter medicine for the sake of financial wealth, financial
incentives do have an impact on their decision making process.  With the knowledge that volume will be the
driver of their compensation, physicians are more likely to prescribe or order
a test than not in the face of an unclear situation. Fee-for-service impacts
physicians in a very direct fashion, shaping the decision process and
utilization of resources for physicians. As a result of influencing physician
behavior, fee-for-service payment models have important implications for
patients. The danger in fee-for-service is not only the high costs associated
with this style of practicing, but also the potential negative effects on
patients of overutilization. The principal agent problem created by FFS causes
patients to be vulnerable to excessive and unnecessary medical services that are
costly and potentially harmful with no benefit. A study in 2006 found that
Medicare patients with alternative payment plans rather than the
fee-for-service payment plans had a shorter average length of stay and a lower
total cost per hospitalization.7 Although it is difficult to
ascertain that fee-for-service is the culprit, the dangerous incentive
structure created by FFS aligns with the result seen. Fee-for-service has the
potential to increase costs as well as cause harm through overutilization.




offered by the ACA:

have been attempts at implementing quality or value based payment models that seek
to uproot FFS payment models with varying success. The Affordable Care Act in
2010 introduced a number of elements into the US healthcare ecosystem that
attempted to move away from sheer volume of services, to more quality,
coordinated care.

Accountable Care Organization (ACO) was created by the ACA and are groups of
doctors, hospitals, and healthcare providers that give coordinated quality care
to Medicare beneficiaries. Under the ACA, each ACO manages a minimum of 5,000
beneficiaries. If ACOs are able to demonstrate certain quality benchmarks, they
are able to receive shared saving payments.9 Many of the patients
within ACOs are still under fee-for-service, but the overall ACO program
represents a shift towards quality and value of care. There are also ACO
programs for Medicaid and pediatric services.

Center for Medicaid and Medicare Innovation (CMMI) created by the ACA also
established a number of bundled payment programs that seek to pay physicians
for an episode of care. CMMI created the Medicare Bundled Payments for Care
Improvement Program, an initiative that pays providers a set payment per
patient episode.9 By paying per episode, bundled payment programs
eliminate the incentive to drive up volume of services as in FFS.

centered medical homes are primary care practices that meet certain certification
requirements. Much like an ACO, a patient centered medical home is a team based
model that seeks to provide coordinated care by having the primary care
physician lead the treatment model. A PCMH has five characteristics: comprehensive
care, patient-centered care, coordinated care, accessible services, and quality
and safety. It attempts to provide value through this coordination of care, and
bringing together.9

many of these care models have shown promise, especially in the realm of care
coordination, none of them have displaced fee-for service. Many of these
provisions were introduced with the ACA in 2010, and fee-for-service continues
to dominate.

offered by MACRA

of the most recent policies regarding physician payment is the Medicare Access
and CHIP Reauthorization Act of 2015 (MACRA), and it has been one of the
biggest shifts towards value seen in the US healthcare system.  MACRA repeals the long standing Sustainable
Growth Rate for Medicare reimbursement, requires that doctors pick either the
Merit-Based Incentive Payment System (MIPS) or a separate advanced alternative
payment model (APM) for Medicare payment, and seeks to reward providers based
on value.9 This requirement will begin in 2019, although many
organizations have already begun preparing for the shift it represents.


MIPS, providers are given a composite performance score that is based on 4
categories. These categories are quality, cost performance, clinical practice
improvement activities, and meaningful use of certified EHR technology or
advancing care.10 Initially in the 2017 performance year, quality
metrics will make up 60% of the composite score, improvement activities 15%,
and advancing care 25%. By the 2019 performance year which affects 2021
payments, that proportion will shift to 30% quality metrics, 30% cost
performance, 25% advancing care information, and 15% improvement activities. From
2017-2019, the weight of quality goes down and the weight of cost goes up.10
This score will determine whether providers will receive positive, neutral or negative
adjustments. This payment adjustment will depend on the year and start at 4% in
2019, then incrementally increase to 9% in 2022. So, if a provider is able to
score highly, the payment adjustment could award up to 9%, whereas a poor score
could result in a 9% penalty. MIPS seeks to encapsulate many of the value based
programs that used to exist for Medicare such as physician quality reporting
program, value based payment modifier and the Medicare EHR incentive program.10
Many physicians will still operate on fee-for-service, but will have added
incentive to perform on these separate quality measures. This helps to
alleviate the principal agent problem, through giving physicians financial
incentive to produce value
for patients, not just volume.

Figure shows how
payment adjustments will increase until 2022. Taken from CMS report on MACRA “Path
to Value”.10

although providers will still be paid through fee-for-service largely, MACRA
has the potential to drive practice significantly towards value as seen by the
plus or minus 9% that could impact revenue. MIPS will not apply to first year
Medicare Participation providers, providers in APM models, or providers below
the low volume threshold.10


payment models is the second pathway through MACRA, and providers who
participate in APMs will automatically receive a 5% payment bonus. Unlike MIPS,
APMs often offer a completely different model for payment that can potentially
shift away from fee for service. Although CMS estimates that most providers
will initially opt into MIPS, there exist APMs such as the bundled care payment
initiative, the Medicare Shared Savings Program, and Next Generation ACOs which
providers could choose to pursue in place of MIPS.10



Smaller practices will face
negative penalties the most under MACRA. CMS estimates that in year one of MACRA, 2019, 87% of
clinicians in solo practice will face negative payment adjustments through
MIPS. For groups with 10-24 clinical professionals, 59.4% are expected to face
negative payment adjustments. For groups of over 100 clinical professionals,
only 18.3% of groups are expected to receive negative payment adjustments.11

Figure taken
from CMS MACRA proposed rule.11 Shows how different practice size
provider groups will be impacted under MIPS.


Different specialties are
more likely than others to face negative penalties under MACRA. Based on CMS’s proposed rule of MACRA in
2016, different specialties face big differences in the percentage of
physicians that would receive a negative adjustment. In cardiology, 62.1% of
physicians would receive a positive adjustment, and in pediatrics, 79.3% of
specialties would receive a positive adjustment. On the other hand, 98.4% of
chiropractors would receive a negative adjustment, and 68.8% of psychiatrists
would receive a negative adjustment. The differences in adjustment are shown in
a self-generated graph below. 11

generated from data in the CMS MACRA Proposed rule document.11


Many physicians still have
a poor grasp of what MACRA entails.
A survey conducted jointly by KPMG and AMA in May of 2017 attempted to uncover
how physicians understood MACRA.­13 They surveyed 1,000 physicians
across different specialties. According to the survey, only about 51% of
physicians were even somewhat knowledgeable about MACRA. 90% of physicians also
felt that the MIPS requirements were slightly or very burdensome.13
Another survey for health solutions completed by Deloitte showed that nearly
80% of physicians preferred fee-for-service or salary based compensation
compared to value models. 79% of physicians disagree with tying compensation to
quality of care.12






has dominated the provider payment landscape for decades. As physician payment
models begin to transition from entirely fee-for-service, to value-based
adjustors, providers will need to re-evaluate the way they practice and what
data they collect to meet the demands of this new legislation. MACRA attempts
to tie fee-for-service payments in Medicare to quality or value, as an adjustor
but not as a replacement. Regardless, MACRA represents a significant transition
towards a value based model and seeks to create incentives to realign physician
and patient incentives.



of the inherent problems with MACRA lies in the sheer amount of information
reporting required by physicians. Of the four categories that determine the
modifier in MIPS, physicians need to report at least 6 quality measures,
including one outcome measure. The problem with using quality measures across
the US for the same hospitals is that hospitals simply experience variation on
so many levels that make this kind of competition unfair. Certain hospitals in
certain geographic, demographic or risk areas will inherently have different
base values for these kinds of quality and outcomes regardless of the quality
or value of care the provider actually gives. Given this, providers who
actually treat a healthier population will be rewarded as opposed to those that
may take on unhealthier patients. As an example, a very experienced and renown heart
surgeon may not perform strongly on many of these quality metrics, as he or she
might be dealing with some of the most complex and probabilistically
unfavorable patients. His or her low quality metrics in this case, are not a
representation of lack of quality care, but rather represent the initial patient
population. In this way, fee-for-service represents a seemingly purer form of
compensation, based on inputs rather than based on health outcomes. In this
case, there is a huge incentive to not treat the unhealthiest patients, as they
will potentially lead to worse quality metrics and hence a penalty in


as seen in the analysis of MACRA, different specialties have different likelihoods
of being penalized by MACRA. Different types of practitioners have different
risk pools of patients, have different levels of effectiveness in managing and
treating illness, and will hence have different levels of quality metrics.
Comparing outcomes in a field like oncology to a field such as dermatology
might give drastically different proportions of favorable outcomes. Accounting
for these differences also becomes paramount in a value based care model.


differences in the kinds of patients providers actually treat, the utilization
of data for the purpose of physician compensation also comes with limitations.
In any case where there is reporting of metrics there is potential for abuse or
gaining of the system. If provider groups are able to artificially inflate some
of their quality metrics through a) accepting only healthy populations or b)
providing care that specifically targets those numbers without actually
improving patient care, there is potential to take advantage of the value based
modifiers in place. Out of the 6 quality measures needed to be reported for
score calculation, there are usually close to 200 measures to choose from. A
certain provider that chooses 6 completely different quality measures from
another provider might result in entirely different score calculations not
because actual quality of care is different, but the quality measures
themselves inherently create differences.


than that, data is not always an accurate representation of the clinical
picture. Although many people become astounded with the potential of
“data-driven solutions” as an end all be all savior to all problems, the
reality is that data is filled with bias in initial collection, in how it is
reported, and what it actually represents. Despite the seemingly complex and
convoluted process and guidelines of MACRA, the determination of the MIPS
composite score seems overly simplistic, ignoring the existence of many of
these biases. But what can be done? Physicians need to understand the payment
model, and the more complex calculation of an adjustment is, the more difficult
it will be for information transparency. As seen in the analysis of MACRA
section, many providers do not even fully understand MACRA, and adding layers
of complexity would only serve to further widen this gap in understanding.  Complex models would be ignoring the fact that
physician comprehension is also a key factor in the success of these programs.
A balance must be struck between the complexity of the model and the extent to
which physicians can operate and understand these models. Physicians are
trained to understand the body, biological mechanisms, and clinical features,
not payment and statistics.



is clear that MACRA is a step in the right direction towards value-based care.
It provides direct incentives for physicians to provide value and quality not
just volume. MACRA aims to realign patient and physician incentives, and
eliminate the principal agent problem produced by fee-for-service, increasing
quality of care for patients. Despite its shortcomings, MACRA has real
potential to fix this market failure, and as MACRA begins to take effect, it
will be important to observe how this new value based legislation will affect
the US healthcare system.  


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