• Gauging the Financial Impact of MIPS

    By Tom S. Lee May 16, 2017

    Leaders of healthcare organizations should recognize that the financial impacts of MIPS scores can amount to millions of dollars—and will significantly grow over the next several years.

    Despite uncertainties in the healthcare ecosystem created by last year’s presidential election, value-based payment programs are here to stay. For many healthcare leaders, however, the financial implications and mechanics of value-based payment programs, including those that comprise the Merit-based Incentive Payment System (MIPS), remain elusive and poorly understood.

    MIPS was legislated by Congress as part of the highly bipartisan Medicare Access and CHIP Reauthorization Act of 2015 (MACRA). For the 2017 performance year, CMS will calculate and publish MIPS performance scores for more than 400,000 Medicare clinicians. Each clinician will receive a score out of a possible 100 points, based on three performance categories: quality (60 percent), advancing care information (25 percent), and clinical improvement activities (15 percent). Cost will also be analyzed as a performance category but will have a 0 percent weight in 2017 before accounting for 10 percent of the score in 2018.

    The financial impacts of these scores can amount to millions of dollars per organization and will significantly grow over the course of the next several years. Penalties assessed for poor performance or noncompliance will be used to fund incentive payments for high performers, so the “winners” effectively will be paid by the “losers.” Notably, because there essentially is no MIPS point value at which a clinician will receive a neutral payment adjustment, everyone will be a winner or a loser and every MIPS point will have an impact financially.

    Healthcare leaders need to develop a detailed understanding of the MIPS payment adjustment rules to fully appreciate the impact of this program on their Medicare Part B payments. Looking at the cumulative financial impacts over a four-year period, many organizations will find that the gap between potential penalties and potential incentives can add up to an extremely significant competitive advantage or disadvantage. 

    MIPS Payment Adjustments: The Basics

    There are two parts to the MIPS payment adjustment: a base incentive or penalty and an exceptional-performance bonus. The base incentive is calculated based on clinicians’ MIPS score and how it compares to a performance threshold annually calculated by CMS. This threshold score marks the dividing line between those receiving a penalty and those receiving an incentive. MIPS scores that exceed a higher threshold qualify for an additional boost to payment via the exceptional-performance bonus.

    The chart below illustrates the impact of the MIPS score on payment. In this chart, the assessed penalty or incentive (expressed as a percentage of Part B payment) is represented by the line extending from the bottom-left corner of the chart up to the top-right. As illustrated, clinicians with MIPS point scores that are less than 25 percent of the performance threshold will receive the maximum penalty. For those reaching the exceptional-performance bonus threshold, there is a payment jump of 0.5 percent of Part B, which continues to scale up in an accelerated manner to the maximum bonus for the year.

    MIPS Financial Impact_Exhibit 3

    For the 2017 and 2018 performance years, CMS has discretion to set the performance and the exceptional-performance-bonus threshold scores to arbitrary values. For 2017, CMS has set the performance threshold to an artificially low value of 3—to make avoiding a penalty relatively easy—and the threshold for exceptional performance to 70. Starting with the 2019 performance year, the performance threshold will be equal to the historical mean or median, and the exceptional-performance threshold will be the 25th percentile of historical scores for clinicians above the performance threshold.

    The maximum penalty will be -4% of Part B payments for the 2017 performance year, escalating to -9% by 2020. Given that many provider organizations have single-digit Part B margins, potential MIPS penalties threaten financial sustainability.

    All incentives and penalties will be applied to Part B claims in the second calendar year after the respective performance year, so the 2017 performance year will impact revenue in 2019.

    Calculating the Potential MIPS Financial Impact

    The exhibit below shows the maximum possible total incentives and penalties for the first four years of the program for a hypothetical organization with 100 clinicians and $100,000 in Part B payments per clinician. The table also calculates the average percentages of the incentives and penalties over those years, along with average payments and the total potential variation in Part B dollars. 

    MIPS Financial Impact_Exhibit 1

    Note that the 2017 maximum possible base incentive shown in the exhibit, 0.856 percent, and the maximum exceptional-performance bonus, 1.523 percent, reflect CMS’s estimates for that performance year. As the performance threshold increases each year, more clinicians will fall below it and be penalized, increasing both the total amount of penalties and the base-incentive pool funded by those penalties. For performance years after 2017, the table above uses assumed values for the maximum incentives, which may increase or decrease when CMS publishes performance thresholds and maximum-incentive estimates for each respective year. 

    In the exhibit below, we show how the maximum base incentive increases in proportion to a “budget-neutrality adjustment factor (X)” for Medicare. This factor is calculated by CMS for each performance year to ensure that the national base-incentive pool is equal to the amount of national penalties assessed. As the number of penalized clinicians increases, “X” increases and, thereby, the maximum incentive increases. 

    The maximum base incentive is 4 percent times “X” for the 2017 performance year and increases to a maximum of 9 percent times “X” for 2020. CMS caps “X” at 3, whereas the table, conservatively, assumes that “X” does not exceed 1.

    The exhibit below also shows how the payment adjustment changes for an assumed set of MIPS points. For instance, if an organization has 200 eligible clinicians, then the total payment adjustment would be $570,189 x (200 eligible clinicians / 100 eligible clinicians) = $570,189 x 2 = $1.14M. Under ranges of reasonable assumptions, it is hard to avoid the fact that the potential financial impacts of MIPS scale quickly to significant amounts. 

    MIPS Financial Impact_Exhibit 2

    High Stakes

    Understanding the financial mechanics of MIPS is crucial for healthcare leaders seeking to develop successful strategic planning and accurate revenue forecasts. For most organizations, the numbers here represent a very large potential impact on margins that are already thin.

    MIPS will have long-term impacts on forecasting, public reputation, and potential M&A activity. Organizational leaders should take the time to understand the program and dedicate the resources necessary to ensuring strong performance on MIPS scores in 2017 and beyond.


    Tom S. Lee, PhD, is CEO and founder, SA Ignite, Chicago.

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