The final 2013 physician fee schedule sets in motion a long march toward aligning physician and hospital incentives in the Medicare program.


With the final rule, published in the Nov. 16, 2012, Federal Register, the Centers for Medicare & Medicaid Services (CMS) launches the physician value modifier, its foray into mandatory value-based purchasing for qualifying physician groups. The modifier will adjust payments based on how physicians score on a composite of cost and quality measures. The value-based modifier was mandated under the Affordable Care Act (ACA), but the details were left up to CMS, which is why it is so important for healthcare finance leaders to pay close attention to all of CMS’s rules.

At first, the program will apply only to largepractices, so it will affect many hospital-owned physician practice groups. Regardless of whether a hospital-owned physician practice currently qualifies, it is important for hospital finance leaders to understand how the program is designed. The program has implications not only for physician revenue, but also for hospitals’ efforts to reduce cost and improve quality.

Key Provisions

Providers should review the final rule to understand which groups are eligible, which measures are collected, how patients are assigned to practices, and the impact that the modifier will have on payment.

Eligible professionals. Although CMS initially proposed applying the value modifier to groups of 25 or more eligible professionals, the final rule increased the minimum number of eligible professionals to 100.a CMS opted for the change to gain more experience administering the program before rolling it out more broadly. However, it is likely that CMS will expand the program in coming years as the ACA mandates that the modifier apply to all physicians in 2017.

Participants in the Medicare Shared Savings Program (MSSP), Pioneer ACO, or other, similar Center for Medicare and Medicaid Innovation programs will be excluded. Eligible groups will be identified by tax identification number based on a query of the Provider Enrollment, Chain and Ownership System (PECOS) on Oct. 15, 2013.

Measures. CMS will use measures collected in 2013 from one of the Physician Quality Reporting System (PQRS) Group Practice Reporting Option (GPRO) mechanisms to develop the value modifier to adjust 2015 payments. CMS has opted not to identify and evaluate physicians based on a standard set of PQRS measures, instead allowing physicians to select and report relevant measures.

The program will include outcome measures, to be collected via the PQRS administrative claims-based option and to include a composite of rates of potentially preventable hospital admissions for three chronic diseases (heart failure, chronic obstructive pulmonary disease, and diabetes), three primary-care-sensitive conditions (dehydration, urinary tract infections, and bacterial pneumonia), and rates of all-cause hospital readmissions.

The quality composite score will be organized into six domains (safer care, patient experience, care coordination, clinical care, population/community health, and efficiency) based on CMS’s National Quality Strategy. Each domain will be equally weighted. If a domain has no measures for a group of physicians, CMS will redistribute the weighting so that all of the domains with measures are equally weighted.

There also will be a cost composite. The composite will include five equally weighted domains based on total per capita Medicare spending, including Medicare Part A and B payments, for all attributed beneficiaries as well as total per-capita Medicare spending for attributed beneficiaries with one or more of four chronic diseases (coronary artery disease, chronic obstructive pulmonary disease, diabetes, and heart failure). The spending will be adjusted using CMS’s payment standardization methodology, which removes geographic differences and add-ons like Medicare indirect medical education and disproportionate share hospital adjustments. (The components of the cost domain also will be risk adjusted using the CMS hierarchical chronic conditions model with adjustments for end-stage renal disease status.)


Eye on Washington Exhibit

Attribution. Beneficiaries will be attributed to practices using the same method as the MSSP.

The two-step process first assigns beneficiaries to a practice based on where they receive the preponderance of their evaluation-and-management services from primary care physicians and then assigns any remaining, unassigned beneficiaries based on where they receive the preponderance of specialist-delivered evaluation and management services.

Financial impact. To apply the value modifier, CMS has created two categories of practices—essentially “non-PQRS reporters” and “PQRS reporters.” Nonreporters are practices that do not submit quality measures through one of the PQRS options in 2013. These practices, in addition to receiving the 1.5 percent reduction in payments for not reporting data, also incur a 1 percent value modifier reduction, which will fund bonus payments for high-quality, low-cost physician groups

Practices reporting to the PQRS have two options: They can elect to receive no value modifier adjustment, or they can pursue bonus payments if they opt for the quality-tiering method. 

The quality-tiering method is based on national benchmarks for cost and quality calculated from all PQRS-reporting physicians. The threshold for high or low performance against the benchmark is performance one standard deviation or greater for the cost and quality composites.

Because the value modifier is budget neutral, the size of the potential bonus pool in any given year is not known when the performance period starts (much like the hospital value-based purchasing program). However, CMS uses a performance multiplier to show how payments will be allocated based on performance. After determining the aggregate projected amount of the downward payment adjustments, CMS would calculate the payment adjustment factor (x). For example, if the adjustment factor were 0.75 percent of payments, a high-quality and low-cost practice would receive a 1.5 percent increase in its payments from CMS.b

Implications for Hospitals

The physician value modifier creates performance-based revenue risk for large physician practices—a high number of which are owned by hospitals. However, it also creates an opportunity to improve physician/hospital alignment, a common challenge identified in HFMA’s most recent value project report, The Value Journey: Organizational Road Maps for Value-Driven Health Care.

Hospitals’ and physicians’ interests overlap on the outcome, cost, and many of the PQRS process measures. Now is a good time for hospitals that employ physicians—even those too small to be subject to the modifier in 2015—to expand the role quality plays in physician compensation. Moreover, regardless of whether they employ physicians, hospitals should seize this opportunity to engage community physicians in quality improvement efforts. Even though the value modifier may not apply to them now, the day is coming when being a “negative outlier” will have financial consequences.

Chad Mulvany is a technical director in HFMA’s Washington, D.C., office, and a member of HFMA’s Virginia-Washington, D.C. Chapter (


a. CMS defines eligible professionals as any of the following: physicians, physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, certified nurse-midwives, clinical social workers, clinical psychologists, registered dietitians and nutrition professionals, physical and occupational therapists, qualified audiologists, and speech language pathologists.

b. The modifier is not applied to beneficiary cost sharing.

Publication Date: Friday, February 01, 2013

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