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  • Valuation of Alternative Payment Models

    2017 PYA (Pershing Yoakley & Associates, PC).

    No portion of this white paper may be used or duplicated by any person or entity for any purpose without the express written permission of PYA.

  • 2 | Valuation of Alternative Payment Models 2017 PYA (Pershing Yoakley & Associates, PC).

    I. Introduction: The Intersection of New Payment Models and the Fraud and Abuse Laws

    With the goal of improving healthcare quality and patient outcomes while reducing total costs of care, payers now are promoting alternative payment models, or APMs, which compensate providers based on the value of the care they deliver, rather than the volume of services they perform. This transition from fee-for-service payments to value-based reimbursement, however, presents many challenges for providers, including compliance concerns.

    As directed under Section 512(b) of the Medicare Access and CHIP Reauthorization Act, the Centers for Medicare & Medicaid Services (CMS) recently issued a report to Congress on the impact of the current fraud and abuse laws on providers willingness and ability to participate in APMs. CMS concluded these laws may serve as an impediment to robust, innovative programs that align providers by using financial incentives to achieve quality standards, generate cost savings, and reduce waste.

    To encourage provider participation in Medicare APMs, CMS and the Office of Inspector General (OIG) have promulgated specific waivers of the fraud and abuse laws as part of Medicare shared savings and episodic payment programs. Generally speaking, these waivers insulate from challenge financial arrangements among model participants, provided specific requirements are satisfied. Those requirements vary by program, and strict compliance is required to invoke waiver protection. In broad terms, the waivers require the following: (1) the terms of the financial arrangement are memorialized in writing prior to the relevant performance period, and (2) the arrangement is structured in a manner that promotes the APMs underlying purposes (i.e., improving healthcare quality and outcomes and lowering costs).

  • Valuation of Alternative Payment Models | 3 2017 PYA (Pershing Yoakley & Associates, PC).

    Unless and until these laws change, however, financial arrangements among providers under APMs outside of waiver protections must be structured to comply with the Anti-Kickback Statute and the Stark Law. This includes demonstrating that any payment made to a physician participating in an APM is consistent with fair market value.

    Even if a financial arrangement is protected under a Medicare APM waiver, demonstrating fair market value may be prudent for three reasons: (1) the waivers remain untested, and thus some degree of risk remains; (2) the agencies may revise the waivers at any time; and (3) if one or more of the parties is a not-for-profit entity, that entity may be at risk under tax-exempt organization regulations if the financial arrangement is not commercially reasonable.

    With fee-for-service reimbursement, valuation has been the means by which providers have proven payments represent fair compensation for the volume of work performed, and not rewards for patient referrals. Under APMs, however, patient referrals are less of a prized commodity; instead, providers will assign more value to quality and efficiency in care delivery. Regulators focus on improper care, poor quality of care, and patient steerage (also known as lemon dropping and cherry picking). These new and different concerns necessitate new and different measures to evaluate and guard against improper utilization of resources and demonstrate fair market value.

    The requirements of the aforementioned Medicare APM waivers provide a starting point with regard to those measures. The more the APM and associated financial arrangements in question are structured in a manner similar to governmental programs and their associated waivers, the better the argument that payments made under those models are incentives and rewards for physicians and other providers to deliver high-quality, efficient care, and not to influence referrals.

    While a starting point, the Medicare APM waivers are only one tool available to those evaluating the fair market value of financial arrangements relating to APMs. In the following sections, we describe how different APMs work and analyze how to demonstrate value within each model.

    I N C E N T I V E S

  • 4 | Valuation of Alternative Payment Models 2017 PYA (Pershing Yoakley & Associates, PC).

    II. APM Categories

    From the least to the most dramatic shift from fee-for-service reimbursement, there are four general categories of APMs: (1) pay-for-performance arrangements (i.e., defined bonuses or adjustments to fee-for-service payments based on providers performance on quality and efficiency metrics); (2) shared savings arrangements; (3) episodic payments (also known as bundled payments); and (4) global budgets. While each APM that falls under a specific category operates differently, those APMs share common characteristics with regard to incentives and degrees of risk.

    Rewards the achievement of specified performance standards

    Incentive: Upward or downward adjustments to fee-for-service payments based on scores on objective performance measures

    Structure: Model co-exists with fee-for-service

    Examples: Hospital Value-Based Purchasing Program; Hospital Readmissions Reduction Program; Hospital-Acquired Condition Reduction Program; Physician Value Modifier Program; Medicare Quality Payment Program

    Pay-for-Performance (P4P)

    Rewards providers for working together to reduce payers total cost of care for a defined population

    Incentive: Portion of the realized savings, in addition to fee-for-service payments

    Structure: One- or two-sided models, depending on risk tolerance

    Examples: Medicare Shared Savings Program, Next Generation ACOsShared Savings Arrangements

    Rewards coordination and efficiency among all providers within a specific episode of care

    Incentive: Retention of overage of payment if costs are managed below target

    Structure: Single payment rate for all services furnished during an identified episode of care, prospective or retrospective models, depending on risk tolerance

    Examples: Bundled Payment for Care Improvement; Episodic Payment ModelsEpisodic Payments

    Rewards provider network for managing a defined patient population within a specified budget

    Incentive: Reduction in unnecessary and avoidable services to remain within budget

    Structure: Advance payment for provider network to assume full responsibility for defined population

    Examples: Comprehensive ESRD Care Model; Direct Primary Care; Provider-Sponsored Medicare Advantage Plans

    Global Budgets

  • Valuation of Alternative Payment Models | 5 2017 PYA (Pershing Yoakley & Associates, PC).

    III. Key Principles of APM Valuation

    A. P4P Payments

    In many instances, a provider receives P4P payments directly from a payer based on the individual providers scores on pre-determined performance measures. Other arrangements involve payments to a group practice, health system, or provider network for distribution to participating providers. The manner in which such funds are distributed to those providers may be subject to challenge if the formula or payments are not consistent with fair market value or commercially reasonable.

    At present, there is little market data or consistent practice concerning such distributions of P4P payments to individual providers. Absent such benchmarks, one must consider other approaches to valuing these incentive payments.

    The traditional method of measuring a providers time and effort to produce a certain result makes little sense in allocation of P4P payments. Adherence to clinical guidelines may result in a physician expending less time and effort, as several guidelines address overutilization of services. In other cases, the incentivized behaviors will require more work and resources for achievement. Importantly, physicians may be expending additional effort not readily measured by hours or work relative value units (wRVUs), such as patient engagement, communication and coordination with other providers, or efficient management of clinical and administrative staff.

    One key factor in valuing P4P compensation is determining whether the measures for the compensation are appropriate and legitimate. For measures to be appropriate, they must require meaningful levels of achievement, and in many cases, improvement over historical levels, to justify the payment to an individual physician. One should also consider whether there is a reasonable relationship between the behavior that the group practice, health system, or provider network desires to incentivize and the value of the P4P payment made to physicians. If there is not, one can argue that the payment received by an individual physician serves another purpose, such as influencing referrals.

    The criteria for receiving remuneration and the potential amount of the P4P payment must be communicated to the physician in advance of his or her providing the services to which the payment relates. Simply put, the offer of a reward does not create an incentive to behave in a certain way if the physician is not aware of the award prior to the performance period.

  • 6 | Valuation of Alternative Payment Models 2017 PYA (Pershing Yoakley & Associates, PC).

    B. Shared Savings Distributions

    Shared savings prog


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