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April 8, 2017

Could MACRA hurt hospital revenue by $250 billion? Our thoughts on a new study.

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    Read Advisory Board's take on this story.

    Under MACRA, Medicare spending through 2030 could fall by up to $106 billion on physician services and by up to $250 billion on hospital services, according to a study published in Health Affairs.

    MACRA details

    MACRA was signed into law in April 2015 and created the Quality Payment Program (QPP). Under the program, eligible professionals can choose from two payment tracks:

    • The Advanced Alternative Payment Model (Advanced APM) track, for clinicians who take on a significant portfolio of Advanced APMs, which include risk-based ACO models; or
    • The Merit-based Incentive Payment System (MIPS), for providers who are reimbursed largely through quality adjusted fee-for-service payments.

    Study details

    For the study, researchers at the RAND Corporation projected Medicare spending between 2015 and 2030 under three MACRA scenarios with different assumptions (low, medium, high) about financial incentives under APMs. They also made assumptions about physician participation in APMs based on those financial incentives.

    Under the low- financial incentive scenario, the researchers assumed that all APM incentives would resemble patient-centered medical homes. Under the high financial incentive scenario, the researchers assumed all APM incentives would be structured similar to those under the Next Generation ACO model.

    The researchers then compared those scenarios with a baseline projection using policies prior to MACRA's implementation. The researchers wrote, "The pre-MACRA baseline represents a counterfactual in which Medicare payment policy for physicians would continue to be determined as it had in the years immediately preceding MACRA, including overrides of the sustainable growth rate formula."

    Physician payment projections

    MACRA sets out base payment rates under the Medicare Physician Fee Schedule, and clinicians can then earn bonuses and penalties on top of those base rates.

    The law will increase payment rates under the fee schedule by 0.5 percent annually between 2015 and 2019, freeze rates between 2020 and 2025, and then increase rates by 0.75 percent annually for Advanced APM Track participants and by 0.25 percent for MIPS participants.

    The researchers projected physician payment rates by 2030 would be:

    • 13 percent higher than in 2015 in the baseline scenario;
    • 8 percent higher than in 2015 for physicians in the Advanced APM track; and
    • 5 percent higher for physicians in the MIPS track.

    The researchers noted that physician payment rate increases are projected to be well below the rate of inflation for practice costs as measured by the Medicare Economic Index.  Starting in 2025, physician payment rates in both the Advanced APM and MIPS tracks "fall below the pre-MACRA baseline, although they are higher for APM participants than for MIPS participants," according to the study.

    However, the researchers also found that starting in 2025 "MACRA's effect on physician payments are highly dependent on the design of APMs." When compared with the pre-MARCA baseline, the researchers projected that decreases in Medicare spending on physician payments could range from about $35 billion under the low financial incentive scenario to about $106 billion under the high financial incentive scenario.

    Hospital spending projections

    According to the researchers, "The largest effects of MACRA may actually be on hospital revenue," though similar to physician payments, hospitals' Medicare payment changes would be influenced on the design of APMs.

    When compared with the pre-MACRA baseline, the researchers projected that Medicare spending on hospital services could range from a $32 billion increase under the low financial incentive scenario to a $250 billion decrease under the high financial incentive scenario.

    The researchers wrote that the payment declines under the high financial incentive scenario would be largely driven by physicians "responding to payment models in ways that reduce the use of hospital care, such as avoiding admissions and readmissions, reducing use of care in the hospital, and so forth."

    By contrast, the researchers wrote that the low financial incentive scenario could lead to increases in hospital revenue because under patient-centered medical home models physicians are not held at financial risk for hospital spending.

    Overall, the researchers stressed that their estimates "are subject to a high degree of uncertainty. Final regulations for MACRA could change" and "elements of MACRA such as the definition of APMs will also change over time."

    Researchers: How to make MACRA work

    The researchers concluded that MACRA could be successful if:

    • Providers, including individual physicians, " redesign their business models around value"; and
    • APMs are appropriately designed and implemented.

    "If these conditions are not met, then in coming years (2025 is a key year to watch), changes to Medicare payment policy will again be at the top of the federal health policy legislative agenda," the researchers concluded (MacDonald, FierceHealthcare, 4/5; Gale, Healthcare DIVE, 4/6; Hussey et al., Health Affairs, April 2017).

    Advisory Board's take

    By Eric Cragun and Yulan Egan

    The big takeaway from the study is that MACRA has the potential to significantly hit hospital revenues, depending on the extent of physician participation in the Advanced APM track.

    It's important to remember that these study results are projections, and that the authors themselves acknowledge a range of possible outcomes: They estimate Medicare spending between 2015 and 2030 on hospital services could decrease by up to $250 billion or increase by up to $32 billion.

    But the bottom line is this: It wouldn't be a surprise if MACRA reduces hospital revenue overall, since it was intended to reward participation in APMs that aim to reduce costs and improve quality.

    What that doesn't mean is that providers should avoid participating in APMs. Far from it—CMS has made it clear that it intends to increasingly tie payments to value over time. What it does mean is health systems need to take four steps now to make sure they're positioned to succeed. They should:

    1. Develop their own Medicare risk strategy, especially as it relates to a path to APM qualification. Given the threat to hospital revenue, health systems should want to be a part of the conversation and help control the pace of transformation in their market.

    2. Focus on physician alignment. If the overall size of the hospital pie is at risk of shrinking, health systems will want to ensure they maximize referrals to capture a larger share of the market. MACRA may open up new opportunities for partnership with physicians who have historically wanted to remain independent. Competitors (other hospitals, large physician groups, MSOs) will also recognize that there's an opportunity for partnership here, so it's important to move quickly and be proactive.

    3. Double down on cost reduction. If revenues are going to shrink, the best way to prepare is to improve your cost structure. That means going beyond the low-hanging fruit to focus on the harder elements of cost control such as care variation and fixed cost restructuring.

    4. Focus on revenue cycle performance. For example, hospitals will need to focus more on minimizing avoidable denials and underpayments while also improving their consumer-centric approach to collections. This will become especially important in commercial patient populations given the potential reduction in Medicare revenues.

    Physician groups also will need to become more cost-efficient to account for potential declines in Medicare payments.

    To learn more about providers can best position themselves for success under MACRA:

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