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2017-08-31

Part 4: The Financial Implications of MACRA

Part 4 of the Successful Health and Wellness MACRA article series discusses the financial implications of the legislation

In Part 2 and Part 3, we explored several strategic decisions an organization could make in response to the legislation. These strategic decisions made in response to MACRA have significant financial implications for hospitals and physicians.  Because MACRA applies the Quality Payment Program (QPP) (MIPS or Advanced APMs participation) at the Tax Identification Number (TIN) level, hospitals should engage in meaningful conversations with their affiliated physicians, as well as those physicians who potentially could be affiliated, to assess their readiness to bear risk at the individual practice level or at the hospital organization level.[i] MACRA was created to increase the quality of care while decreasing or slowing the growth of costs. This transition to value-based care will require hospitals to look at the startup and operating investments needed to be successful under an ACO-like structure, and to determine whether they have the cash available or debt coverage capacity to finance these investments.

Determining a method to finance these investments is a critical step as the costs to the organization are significant. The startup investment to form a value-based care entity, such as an ACO, is estimated to be between $11.6 million and $26.1 million.[ii] On top of the initial investment, an estimated $1.6 million of annual operating funds are necessary to maintain the value-based activities that will generate shared savings in an Advanced APM, or to qualify as an exceptional performer in the MIPS program. Through a combination of startup investments and operating expenses, a newly formed value-based care entity can expect to spend between $13.2 million and $27.7 million during the first year of MACRA implementation.[iii]

To support these investments, a hospital must evaluate if they have the cash on hand to finance the necessary investments, or if they will need to finance them with debt. Either method will have implications on a hospital’s financial position. In addition to the upfront investment in necessary infrastructure, CMS requires that organizations guarantee their ability to pay back potential downside losses in Advanced APM models. To guarantee this payment, CMS requires proof of one of three options: cash, a line of credit, or bond financing. Before joining or creating an ACO-like, value-based care structure, especially an Advanced APM, hospitals and their physicians will need to clearly identify which financing method best suits their organization.

The financial considerations of MARCA are not limited to the initial and ongoing investments required to form Advanced APMs and other alignment models. A provider must also understand the financial impact that a positive or negative payment adjustment will have on their individual financial position. This is explored further in the following paragraph.

According to MGMA, total medical revenue per FTE physician can range from $850,149 to $1,228,365, on average.[iv] MGMA also estimates that Medicare makes up approximately 32 percent of a physician’s payor mix and accounts for $272,048 to $393,077 of total medical revenue per physician. This translates to a possible positive or negative payment adjustment per physician of $10,882 to $15,723 under MIPS.[v]  In Advanced APM models, quality reporting requirements are subject to the design of the specific program. For instance, MSSP Tracks 2 and 3 require providers submit data on 33 established quality measures to the ACO entity, which then submits the data to CMS through the CMS Web Interface.  Through active participation in an Advanced APM, demonstrated through reporting quality measures in a timely and accurate manner, providers are awarded a 5 percent lump sum bonus payment in addition to shared savings that are generated as a result of APM performance. Again, assuming that Medicare accounts for an average of $278,048 to $393,077 in medical revenue per physician, the five percent lump sum bonus would amount to $13,602 to $19,654 per physician.

MACRA also forces hospitals to consider the cost of employing or otherwise affiliating with providers. In employment scenarios, hospitals can expect to lose $150,000 to $200,000 per physician during the first three years of employment, with a portion of these losses being offset through success under shared savings Advanced APM arrangements.[vi] Despite the early losses incurred by the hospital in a physician acquisition strategy, employing physicians gives the hospital a higher degree of influence over referrals to its specialists in the long run.[vii] This strategy also gives the hospital more control over the compensation structure of providers, while allowing the hospital to align physician incentives with the strategic vision of the organization. Under MACRA, this could include performance on the selected MIPS quality measures or performance in managing the total cost of care in an Advanced APM.

The added level of control over physician compensation structure has proven to be financially advantageous for organizations. Take for example Geisinger Health System, where employed physician compensation models are set to pay physicians a base salary of 80 percent of their total expected compensation.  The other 20 percent is paid in two installments each year and is tied to individual physician performance on specialty-specific measures that reflect the cost and quality goals of the organization.  The results under this compensation structure have been positive, as Geisinger has increased clinical service revenue by over ten percent annually since 2002 and has made improvements in quality and efficiency at a faster rate than non-employed physicians in the Geisinger Health Plan network.

By participating in Advanced APMs, hospitals and their physician networks take on an additional layer of financial risk by assuming responsibility for repaying shared losses when poor performance occurs. In the analysis demonstrated below, the MSSP was used as an indicator of the maximum additional financial risk hospitals and their aligned physician networks assume when agreeing to participate in risk arrangements involving shared losses. Table 1 demonstrates the average total cost of care benchmark for all MSSP ACOs in performance year 2015. The total loss sharing limits in year one of MSSP Track 2 and Track 3 were then applied to the benchmark to demonstrate the financial responsibility of the organization in the worst case performance scenario.

Table 1[viii]

MSSP Track 2 MSSP Track 3
Average Total Benchmark Expenditure $ 186,983,867 $ 186,983,867
Loss Sharing Limit (Year One)[ix] 5% 15%
Maximum Downside Risk $ 9,349,193 $ 28,047,580

As shown, participating in these Advanced APMs exposes a hospital and its aligned physicians to an estimated $9.3 million to $28.04 million in additional financial risk. In preparation for the worst case, hospitals must consider how they will cover the cost of the downside risk. As discussed earlier, this will require an evaluation of the organization’s cash position and debt coverage capacity.

While the long-term financial impact of ACOs and other physician alignment vehicles has yet to be determined, MACRA created a need to align more closely in some manner in order to actively pursue market share growth opportunities, stronger clinical integration, improved patient outcomes, and realize cost efficiencies. All strategic decisions in response to MACRA will require a financial investment from the participating organizations, so it is imperative that organizations understand their options and their associated costs.

[i] Hitchcock, Melinda, Davis-Jacobson, Doral. Transition to MACRA: Strategic Implications of the Quality Payment Program. Healthcare Financial Management Association. http://www.hfma.org/Content.aspx?id=48981 Published July 2016. Accessed November 25, 2016.

[ii] American Hospital Association. The Work Ahead: Activities and Costs to Develop an Accountable Care Organization. http://www.aha.org/presscenter/pressrel/2011/110513-pr-aco.shtml>. Published April 2011. Accessed October 30, 2016

[iii] National Association of ACOs. (2016). ACOs at a Crossroads: Cost, Risk and MACRA White

Paper. Available from www.naacos.com

[vi] Hospitals’ Race to Employ Physicians – The Logic Behind a Money-Losing Proposition,” Robert Kocher, M.D., and Nikhil R. Sahni, B.S., The New England Journal of Medicine, May 12, 2011, p. 1790. Accessed at: http://csimt.gov/wp-content/uploads/Hospital-employment-of-physicians.pdf

[vii] Hospitals’ Race to Employ Physicians – The Logic Behind a Money-Losing Proposition,” Robert Kocher, M.D., and Nikhil R. Sahni, B.S., The New England Journal of Medicine, May 12, 2011, p. 1790. Accessed at: http://csimt.gov/wp-content/uploads/Hospital-employment-of-physicians.pdf

[viii] Centers for Medicare and Medicaid Services. MSSP 2015 Performance Data Set. CMS Research, Statistics, Data, and Systems. Accessed at: https://data.cms.gov/ACO/Medicare-Shared-Savings-Program-Accountable-Care-O/x8va-z7cu>

 

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