What’s the Value of Innovation? Part 2

Risk management in emerging healthcare payment models

Published: Wednesday, September 6, 2017 - 11:03

In part one of this series, I described the Centers for Medicare and Medicaid Services (CMS) Innovation Center and its mission to test innovative payment and delivery models, and to implement the Medicare Access and Children's Health Insurance Program (CHIP) Reauthorization Act (MACRA) Quality Payment Program (QPP).

The QPP is designed to help the U.S. Dept. of Health and Human Services (HHS) achieve its goal of tying half of Medicare fee-for-service payments to quality or value through Advanced Payment Models (APMs) by 2018. Advanced APMs, one of the two tracks of MACRA, allows physician practices to earn more by assuming some financial risk related to patients’ outcomes. Certain accountable care organizations (ACOs) in the Medicare Shared Savings Program (MSSP), including the new MSSP Track 1+ ACO, qualify as Advanced APMs.

Qualified participants (QPs) in Advanced APMs earn special incentives by assuming more than a nominal level of financial risk. As a result of new models and relaxed requirements, it is anticipated that the number of QPs will increase during the next few years. In fact, in its June 2017 MACRA-proposed rule, “CY 2018 Updates to the Quality Payment Program,” CMS estimates that approximately 180,000 to 245,000 eligible clinicians may become QPs for payment year 2020, based on Advanced APM participation in the 2018 performance year.

Despite waivers established by HHS to protect qualifying ACOs—including protections applicable to the federal Stark law, anti-kickback statute, and civil monetary penalties law—fair market value (FMV) is an important consideration for many ACOs. In addition to the valuation of the ACO and ownership interests, issues of FMV arise in the realm of physician compensation and, in some cases, participating provider distribution. This becomes particularly important when considering the fact that many ACOs include both hospital systems and physicians. While waiver protection may be available to the MSSP ACO, some factors may indicate the need for fair market value analysis, including a participating health system’s shared savings distributions to employed physicians. Where tax-exempt entities are involved, the IRS rules regarding reasonable compensation also apply. Furthermore, commercial ACOs are not covered by waivers; thus, when waivers are not available to the ACO, it should ensure fair market value in its physician arrangements.

The value of physician services to an ACO

In the world of value-based care, the value of a physician’s service to the ACO is not so much attributable to productivity as it is to the physician’s contribution to organizational success. Rather than assessing the work relative value unit (RVU) in terms of production or time spent, the fair market value calculus for value-based care depends more on producing higher quality care at lower cost.

As with the valuation of businesses and in the valuation of compensation arrangements, the cost, income, and market approaches are still to be considered; however, the specific valuation methodology under each approach for valuing value-based care is different than when valuing compensation in the fee-for-service environment. For example, reliance on traditional published survey methodology in applying the market approach is limited. This is in part because of a lag in capturing value-based compensation relative to quality and cost-of-care performance. Another factor, especially for primary care, is the size of the risk-adjusted patient panel. Methods that measure market reimbursement in value-based payer contracts prove to be effective in indicating value for providing high-quality, efficient care.

Merit-based distributions

Assuming the ACO is successful in generating savings and earns shared savings payments, these funds should be initially applied to the ACO’s operating expense obligations. From any surplus, market-based returns on equity investments are paid to investors, followed by reinvestment in the ACO’s infrastructure and, finally, provider distribution.

Some ACOs view these distributions as “profit” sharing models or fixed allocations, either of which can end in disaster. A fair framework for distributing shared savings is available to all ACOs and is an important step in achieving alignment. The true merit-based shared savings distribution model breaks down care management initiatives into elements that drive value, such as care coordination and transition management, and aligns distributions with the providers’ contributions in each value driver.

The ACO should pay close attention to the fairness of its distribution and compensation models, as well as situations when waivers do not apply. The fairness and valuation of financial arrangements in an ACO are complex undertakings, requiring the use of analysts experienced in the ACO environment. HORNE’s appraisers and analysts are keenly aware of the important distinctions and are experienced in developing compensation and shared savings models that help providers reach better alignment and appropriately reward value-based care.

About The Author

Greg Anderson

Greg Anderson is a partner in the healthcare practice group of HORNE LLP and concentrates his consulting on income distribution plans for physician group practices; design, implementation and fair market value studies related to hospital/physician employment and other compensation arrangements; and the valuation of medical practices, hospitals, diagnostic facilities, ambulatory surgery centers and other health care facilities. Anderson is a graduate of the University of Southern Mississippi. He is a certified public accountant accredited in business valuation and a certified valuation analyst.