The many ways in which healthcare reform affects the healthcare industry are still playing out. Undoubtedly, a question for physicians and the hospitals that employ many of them is “how will physician compensation be affected?” PYA Principal Carol Carden recently spoke at the 2013 AICPA Healthcare Industry Conference, where she addressed this question with her presentation, “Current Reform Initiatives and Their Impact on Physician Compensation.”

1. Current Reform Initiatives and
Their Impact on Physician
Compensation
November 14, 2013
Carol W. Carden, CPA/ABV, ASA,CFE
New Orleans, Louisiana

2. Speaker Biography
Carol Carden is a Principal with Pershing Yoakley & Associates, P.C., and provides
business valuation and related consulting services to a wide variety of business
organizations, primarily in the healthcare industry. Ms. Carden’s primary areas of
expertise are in finance, valuation, managed care and revenue cycle operations for
healthcare organizations. She has performed appraisals of businesses and securities
for a wide variety of purposes such as mergers, acquisitions, joint
ventures, management service agreements and other intangible assets.
In addition to being a Certified Public Accountant, she has also earned the Accredited in
Business Valuation (ABV) credential from the American Institute of Certified Public
Accountants, the Accredited Senior Appraiser (ASA) credential from the American
Society of Appraisers and the Certified Fraud Examiner (CFE) credential from the
Association of Certified Fraud Examiners. She is the Chair of the Executive Committee
for Forensic and Valuation Services and the former Chair of the Business Valuation
Committee for the AICPA, was Chair of the 2010 National AICPA Business Valuation
Conference and was on the planning committee for the 2011 AICPA National Healthcare
Conference.

3. Agenda
Healthcare Reform Initiatives Overview
Regulatory Considerations
Value-Based Payment Modifier
Quality Incentives
Medicare-Medicaid Parity
Rise in Insured and Increased Access to Primary Care
Accountable Care Organizations and Bundled Payments

4. Healthcare Reform
Initiatives Overview

5. Navigating the Regulatory Environment
STARK LAW
Prohibited self-referrals
for Medicare and
Medicaid patients.
ANTI-KICKBACK
Knowingly and willful
STATUTE
offers, payments, or
receipts for referrals.
IRS-NFP
IRC Section 501(c) 3
REQUIREMENTS
requirements
100
m
Road
Menu

6. Compliance Issues Regarding HospitalPhysician Financial Relationships
COMMERCIAL
REASONABLENESS
FAIR MARKET
VALUE
SENSE
CENTS
Overall
Arrangement
“WHY?”
Scope
Range of
Dollars Only
Key Question
“HOW
MUCH?”

7. The Push Towards Quality and Lower Cost
Rebuilding
Primary Care
Workforce
Expanding
Authority to
Bundle
Payments
Encouraging
Integrated
Health
Systems
Increasing
Medicaid
Payments to
Primary Care
Physicians
Linking
Payment to
Quality
Outcomes

8. The Train Has Left the Station…
2010
Medicaid
demonstration project
– fee-for-service to
global fee
Healthcare reform
begins with
consumer-focused
initiatives (i.e.,
focused on
insurance reform)
2011
Center for Medicare
and Medicaid
Innovation – explore
models of payment
based on quality
Physician quality
reporting –
Physician Compare
website
2012
Hospital readmissions
– Reduction in
payments to hospitals
for preventive
readmissions
ACO program
launch – Shared
savings
Hospital valuebased purchasing
program
2013
Bundled payment
initiatives
Medicare –
Medicaid parity
Value-based
purchasing –
physician payments
phased in 2015 to
2017

9. Value-Based Payment
Modifier

10. The Future is Now
• Pay for volume
• No quality
measured
Value- Based
Payment
• Quality per click
• Process
improvement
Fee For
Service
THEN
• Quality
outcomes of
episodes
• Whole system
improvement
Care
Coordination
NOW
FUTURE

11. Calculation of Value-Based Payment Modifier
in CY 2015
Groups of Physicians with 100 or more
Eligible Professionals
PQRS Participation (Groups that selfnominate/register for PQRS as a group and
report at least one measure, or elect PQRS
Administrative Claims)
Elect QualityTiering Calculation
Upward, downward, or no
adjustment based on quality-tiering
Non-PQRS Participation (Groups that do not selfnominate/register for PQRS as a group and do not
report at least one measure)
No Election
0.0%
(no adjustment)
Source: Summary of 2015 Physician Value-based Payment Modifier Policies
-1.0%
(downward adjustment)

12. PQRS – History
2007 and
2008
PQRI introduced
74 Measures
1.5% Lump incentive
2009 and
2010
2.0% Incentive
payment
Group Reporting
option established
Remove electronic
prescription
measures
2011
1.0% Incentive for
reporting
Individual Measures
increased
2012
0.5% Incentive for
reporting
Incentive Changes
2013
0.5% Incentive for
reporting
Reporting year for
1.5% payment
adjustment in 2015
2014
0.5% Incentive for
reporting
Reporting year for
2.0% payment
adjustment in 2016

13. Tiered Value-Based Payment Modifier
Both upside reward and downside risk
Focused on outliers in quality and cost
Composite scores for cost and quality
Three tiers – High, Average, and Low
Additional upward adjustment for care of sickest patients
Sum of upward adjustments will be offset by downward adjustments

14. PERFORMANCE
The Curve
First Curve
Fee-for-Service
Quality Not Rewarded
Pay for Volume
Fragmented Care
Acute Hospital Focus
Stand Alone Providers Thrive
Straddle
Second Curve
Value Payment
Continuity of Care Required
Systems of Care
Providers at Risk for Payment
IT Centric
Physician Alignment
Revenue Drops
Minimal Reward for Quality
Volume Decreases
No Decisive Payment Change
Pay for Volume Continues
High Cost IT Infrastructure
Physicians in Disarray
TIME

15. Quality Incentives

16. Quality Incentive Compensation
Overview – Arrangements by which hospitals compensate physicians for
Overview – Arrangements by which hospitals compensate physicians
the achievement of certain pre-defined quality indicators
for the achievement of certain pre-defined quality indicators
Increasingly common arrangements
 Quickly becoming components of (or even fully characterizing)
many physician-hospital alignment arrangements
Example factors generally considered when evaluating quality incentives:
 Core measures
 Risk reduction
 Patient satisfaction
 Quality related educational activities
 Specialty specific outcomes measures

17. Co-Management Model
Hospital
Hospital
Pays
for:
• Base management fees
• Incentive Compensation
(limited) Including:
- Quality
- Operational
Efficiency
$
Hospital
Physicians
Management
Company/
LLC/Committee
Service Contract
to Manage Hospital’s
Service Line at Risk
for Quality and
Operational Goals
Physicians

18. OIG Opinion No. 12-22
Cardiac catheterization clinical co-management arrangement between a hospital and
a cardiology group. The group received a fixed fee and a performance-based fee
that was “at risk” based on the achievement of pre-determined metrics. Performance
fee based on the following:
Employee
Satisfaction –
5%
Patient
Satisfaction –
5%
Quality of Care
– 30%
Cost Reduction
– 60%

19. Areas of Concern Noted by the OIG
Stinting on
Patient
Care
Payments
to Induce
Patient
Referrals
“Cherry
Picking”
Unfair
Competition
The OIG states that “hospital cost-savings programs, in general, and the
arrangement in particular, may implicate at least three Federal legal authorities: the
civil monetary penalty, the anti-kickback statute and the physician self-referral law.”

20. Keys to Compliance
Civil
Monetary
Penalty
• Cost-savings component implicates the CMP; however, sanctions
not sought due to the following safeguards:
Patient care is monitored through third-party utilization review
and internal committee and board review
Benchmarks are structured so that physicians have flexibility to
use cost-effective clinically appropriate materials
Term is limited to three years and is subject to a cap
AntiKickback
Statute
• Sanctions not imposed for the following reasons:
FMV compensation and management responsibilities are robust
Compensation is not variable with number of patients treated
Hospital operates only cardiac cath lab within 50 mile radius and
the group does not provide cath lab services elsewhere
Specificity of measures ensure that pay is for quality
improvement, not referrals
Three year term
Self referral law (Stark Law) falls outside of OIG’s jurisdiction. As such, the opinion does
not discuss whether the arrangement implicates this law.

21. Keys to Compliance
• OIG states that, if the agreement is
renewed, then reviewing and rebasing quality
metrics is essential.
– “We would expect that quality improvement and
cost saving measures under the Agreement
would be subject to adjustment over time, to
avoid payment for improvements achieved in
prior years and to provide incentives for
additional improvements in the future.
Continuing compensation for conduct that has
come to represent the accepted standard of care
could, depending on the circumstances, implicate
the anti-kickback statute.”

22. Medicare-Medicaid
Parity

23. New Primacy of Primary Care
• Enhanced Medicare payments
- For 2011-15, Medicare pays 10% bonus for:
o PC services furnished by PC practitioners
o Professional component of surgical procedure performed in HPSA
• Enhanced Medicaid payments
- Payment rates to PC physicians increased in 2013 and 2014 to 100% of
Medicare rates
• Significant new funding for community health centers
• Increase PC workforce by 16,000 by 2016
- Expand National Health Services Corps
- Other scholarships, loan repayment, and workforce training programs

24. Overview of Initiative
States estimated to receive $8.5 billion in 2013 and $6.1 billion in 2014 to fund
Medicaid parity payments.
November
1, 2012
• CMS issues final regulation implementing
payment of Medicaid services at Medicare
levels for 2013 and 2014
March
31, 2013
Nationally, ave
rage Medicaid
payments are
approximately
66% of
Medicare
rates.
• Deadline for states to submit a
state plan amendment
July 1,
2013
• According to CMS, ¼ of
states had implemented
the temporary payment
increase

25. Estimated Medicaid Rate Increases by State
Approximately
73% overall
increase in
Medicaid
rates.
Source: http://medialib.aafp.org/content/dam/AAFP/images/ann/2013-7/Medicaid-Fee-Hike-Map.png

26. Who Does it Impact?
• Eligibility requirements include:
– Medicaid fee-for-service and managed care
payments for primary care services delivered by
a family practice, internal medicine or pediatric
medicine physician
– Self-attestation regarding board certification in
above-mentioned specialties
– If not board certified, then the physician must
self-attest that at least 60% of Medicaid codes
billed are Evaluation & Management codes and
vaccine administration codes
– Also applies to certain related subspecialties
outlined in the regulations

27. Impact on Physician Compensation
Hospitalist Subsidy Example
Hospitalist Services Agreement
Financial Assistance Calculation
Low
High
REVENUE
Professional Collections
$
60,450
265,460
325,910
2,932,360
TOTAL EXPENSES
56,250
60,450
265,460
325,910
Other Expenses:
Liability Insurance
Office Overhead
Total Other Expenses
2,300,000
368,000
2,668,000
54,450
Medical Director Compensation
2,300,000
2,200,000
352,000
2,552,000
EXPENSES
Physician Compensation and Benefits:
Physician Base Compensation
Physician Benefits
Total Physician Compensation and Benefits
2,100,000 $
3,050,160
Estimated Net Income Before Subsidy (Loss)
$
(832,360) $
(750,160)
Subsidy, rounded
Medicaid Parity Offset
Revised Subsidy, rounded
$
$
$
(830,000) $
180,000 $
(650,000) $
(750,000)
197,143
(553,000)

28. Rise in Insured and
Access to Primary Care

29. Effects of the PPACA on Primary Care
Enactment of provisions of the
PPACA are expected to increase the
number of covered individuals by 32
million.
By 2019, primary care visits are
predicted to increase between
15.07 million to 24.26 million.
Assuming stable levels of physicians’
productivity, the increased demand
would require between 4,307 to
6,940 primary care physicians.
Source: Abraham, Jean Marie, Hofer, Adam N. and Moscovice, Ira. Expansion of Coverage under the Patient Protection and Affordable Care Act and Primary
Care Utilization. The Milibank Quarterly. Vol. 89, No.1. 2011

30. Decline in Uninsured
Source: http://kff.org/report-section/state-and-local-coverage-changes-under-full-implementation-of-the-affordable-care-act-report/

31. Demand on the Rise
“Demand for Family Physicians Fuels
Salary, Compensation Increase, Survey Finds”
Rise in
Compensation
Drivers of Pay
Increase
• Median first year compensation for family practice physician (without
OB) increased $7,000 between 2011 and 2012
• Median compensation for all primary care physicians increased $5,000
between 2011 and 2012
• Increases due in large part to rise of ACOs and integrated delivery
systems that require the services of primary care physician
• Healthcare reform extending coverage to more people has created
additional demand for services
Supply
• According to the Merritt Hawkins 2013 Review of Physician and
Advance Practitioners Recruiting Incentives, family practice and
internal medicine physicians are the most highly recruited specialties
Source: Demand for Family Physicians Fuels Salary, Compensation Increase, Survey finds. American Academy of Family Physicians. July 9, 2013.

32. Accountable Care
Organizations and Bundled
Payments

33. ACO – Where are they now?
Nine of the original 27 organizations are leaving
the Pioneer ACO program; seven of the nine will
join the MSSP.
As of January 2013, 250 ACOs provided care to
four million beneficiaries (27 ACOs at initiation).
Based on a white paper released by Premier
healthcare alliance, only 21% of commercial
payers offer upside savings arrangements.

34. Medicare ACO in a Nutshell
(“Shared Savings Program”)
ACO providers
ACO operations
Beneficiary assignment
Performance
requirements
Shared savings payment
Regulatory waivers
• Mandatory - Sufficient PCPs to care for at least 5,000 beneficiaries
• Optional - Other Medicare enrolled providers
• Legal entity, governing body, management structure, medical director
• Meet patient-centeredness, evidence-based medicine, coordination,
and cost-effectiveness goals & measures
• Patients assigned by CMS based on PCP TIN
• Patients retain freedom of choice
•Receive shared savings payments if meet certain performance standards on
33 quality measures (or pay back Medicare); more demanding over time
•Minimum Savings Rate (MSR)
• 1-sided – 50% shared savings
• 2-sided – 60% shared savings, at risk for 2% over benchmark
• Waiver from requirements of Stark Law, Anti-Kickback Statute, and
Gainsharing CMP, Antitrust

35. Medicare ACO:
How You Get Paid
ACO is eligible for annual payment
based on Medicare savings
– Savings = difference between
Medicare’s projected total
expenditures for ACO’s assigned
beneficiaries (“benchmark”) and
actual total expenditures
– Must be above Min Sav. Rt.
•
Savings are based on FFS payments
to all providers, including non-ACO
providers.
Actual
•
Savings
ACO participant receives same
Medicare Part A and Part B FFS
payments
Benchmark
•
MSR
$ACO
$CMS

36. Funds Sharing Challenges
Based on equity?
Return of withhold
Based on revenue?
Sharing of bonuses
Utilization targets?
Funding of losses
Some other way?

37. Shared Savings Models-MSSP
One-Sided Model
(performance years 1 & 2)
Sharing Rate (assuming maximum performance
on quality measures)
FQHC/RHC Participation Incentives
Maximum Sharing Cap
Shared Losses Cap
Up to 50%
Up to 2.5 percentage points
Payments capped at 7.5% of ACO's benchmark
N/A

38. Considerations for Primary Care
Critical to the success of
an ACO or bundled
payment initiative
Will likely be a shortage
by 2014 – even more so
than currently
Care delivery will likely
shift to
mid-level practitioners
changing the cost
structure of practices
Work relative value unit
assignments likely to
increase over the next
few years

39. Bundled Payments for Care Improvement
Initiative
Five-year
initiative
launched
January
31, 2013
Private
payers
already
using
bundled
payments
Based on Medicare ACE
Demonstration Project –
free range ACO
Pricing based on
discount of payer’s
historic total cost
Single payment for
defined group of services
within specified episode
of care
Gain-sharing incentives

40. Bundled Payment Initiative Pilot
MODEL
MODEL 2
MODEL 3
Types of Services
Included in Bundle
• Inpatient hospital and physician
• Post-acute care services
services
• Related readmissions
• Related post-acute care services
• Other services defined in the
• Related readmissions
bundle
• Other services defined in the bundle
Expected Discount
Provided to
Medicare
To be proposed by applicant; CMS
requires minimum discount of 3% for
30-89 days post-discharge episode;
2% for 90 days or longer episode
MODEL 4
• Inpatient hospital and
physician services
• Related readmissions
To be proposed by applicant
To be proposed by applicant;
subject to minimum discount
of 3%; larger discount for MSDRGs in ACE Demonstration
Traditional fee-for-service
Traditional fee-for-service payment to
payment to all providers and
Payment from CMS all providers and suppliers, subject to
suppliers, subject to
to Providers
reconciliation with predetermined
reconciliation with
target price
predetermined target price
Prospectively established
bundled payment to admitting
hospital; hospitals distribute
payments from bundled
payment
Quality Measures
To be proposed by applicants, but CMS will ultimately establish a standardized set of measures that
will be aligned to the greatest extent possible with measures in other CMS programs

41. Bundled Payments - So, How’s it Working
So Far?
Case Study from DataGen and New York-Presbyterian Hospital Addresses Key
Success Factors for the Bundled Payment Care Initiative
Understanding
data is critical
to success
Determination
of episodes
that offer the
greatest
opportunity
Engaging
physicians
Influencing
utilization of
post-acute
care services
Source: New Case Study Examines Key Success Factors for Medicare Bundled Payment Initiative. Yahoo! Finance. September 4, 2013.
Patient
Engagement

42. Key Implications for
Valuations

43. Common Types of Physician Alignment
Strategies
Hospitalist
Strategies
Physician
Practice
Acquisitions
(“Buy and
Employ”
Transactions)
Quality
Incentives
Physician
Alignment
Transactions
Direct
Employment
Call Pay
Arrangements
Clinical
Co-Management
Agreements

44. Physician Alignment Vehicles
More Common
Physician Employment
Medical
Directorships
Physician
Leasing
Agreement
Physician
Services
Agreement
Real Estate JV
Co-Management
Equipment JV
More Integration
Less Integration
Physician Advisory
Council
EMR
Quality
PHO
Shared Savings
Less Common

45. Impact on valuations
We will be living in the “straddle” for several years
Benchmark compensation data will take 2 – 3
years to catch-up to changes in the industry and
will, therefore, not be as meaningful
As appraisers, the “art” part of our analysis will
become more prominent and we will have to
develop new approaches and be prepared to
defend them

46. Contact Information
Carol Carden, CPA/ABV, ASA, CFE
Principal
(865) 673-0844 ext 213
ccarden@pyapc.com