Published September 8, 2020

Welcome to the Thunderdome: Winners and Losers Under the 2021 Medicare Physician Fee Schedule Proposed Rule

“We want to buy health, not healthcare.” 

The economics of fee-for-service reimbursement are straightforward: if we pay providers on a per-click basis, we’ll likely get more clicks—and costs will continue to rise.

By comparison, value-based payments incentivize medical specialists (including primary care providers) to spend more time managing their patients’ conditions, driving down demand for more expensive healthcare services by slowing disease progression and reducing complications.

It has been long realized that the transition to value-based payments would produce winners and losers, and those on the losing end would have to adapt to new market realities. In the decade since the passage of the Affordable Care Act, however, this transition has moved at a snail’s pace.

Nearly all providers now participating in alternative payment models (APMs) have gone there willingly, hoping to stay ahead of the curve. As a result, the “losers”—including many proceduralists—have yet to feel much pain.

The 2021 Medicare Physician Fee Schedule Proposed Rule (the “Proposed Rule”) delivers a first punch, and it may prove to be a doozy.

Medicare Physician Fee Schedule Basics

Highly summarized, the Medicare Physician Fee Schedule sets the payment rate for each service by multiplying the RVUs assigned to that service by a standard conversion factor.[1]

CPT Code Brief Description Assigned RVUs

(Non-Facility)

2020 Conversion Factor 2020 Payment Rate
99213 Expanded office/outpatient visit for evaluation and management of established patient 2.11 $36.09 $76.15

 

Due to legislative budget neutrality requirements,[2] if the RVUs for certain services are adjusted upward, one must (1) adjust the RVUs for other services downward, and/or (2) reduce the amount of the standard conversion factor.

Last year, CMS increased the RVUs for the office/outpatient evaluation and management (E/M) codes (CPT©[3] 99202 – 99215) effective January 1, 2021, recognizing these services “are generally more complex and require additional resources for most clinicians.”[4]

CMS also approved a new single add-on code, GPC1X, to compensate providers for the work associated with visits that are part of comprehensive primary care and/or that are part of ongoing care related to a patient’s chronic condition.[5]

2021 Winners and Losers

Given outpatient E/M visits comprise approximately 20% of allowed charges for Medicare Physician Fee Schedule services,[6] the impact of these changes is significant. Specifically, CMS proposes to reduce the standard conversion factor applied to all services by more than 10% or $3.83, from the current $36.09 to $32.26 in 2021. By comparison, the change in the conversion factor from 2019 to 2020 was $0.05.

The impact of these changes would vary significantly by specialty. As CMS explains:

Within the E/M visits represented in these percentages, there is a wide variation in the volume and level of E/M visits billed by different specialties. According to Medicare claims data, E/M visits are furnished by nearly all specialties, but represent a greater share of total allowed charges for physicians and other practitioners who do not routinely furnish procedural interventions or diagnostic tests.

Medical specialists will see significant increases in Medicare reimbursement, while hospital-based physicians and proceduralists will see nearly as dramatic reductions.[7]

Biggest Winners Medicare Reimbursement Increase Biggest Losers Medicare Reimbursement Decrease
Endocrinology 17% Radiology -11%
Rheumatology 16% Cardiac Surgery -10%
Hematology/Oncology 14% Interventional Radiology -9%
Family Practice 13% Pathology -9%
Allergy/Immunology 9% Anesthesiology -8%
OB/GYN 8% Critical Care -8%
Psychiatry 8% General Surgery -7%

 

Assuming CMS’ proposal is finalized, and based on its analysis, practitioners in 18 specialties would see a 2% or more increase in Medicare reimbursement, while those in 34 specialties would receive a 2% or more reduction. Practitioners in 5 specialties (cardiology, clinical psychologist, clinical social worker, podiatry, pulmonary disease) would see a 0 to 1% change in their reimbursement in 2021.

By comparison, in 2020, the highest increase by specialty was 4% (clinical social worker), and the greatest reduction was 4% for ophthalmology. Only 9 specialties saw more than a 1% change (up or down).

CMS’ value-based strategy drove its decision last year to increase fee-for-service reimbursement for medical specialists by increasing the RVUs for the services they provide. Now faced with paying for those increases in 2021 absent any “new money,” CMS’ only option was to cut reimbursement for all other services, negatively impacting proceduralists and hospital-based physicians.

In prior years, minor RVU adjustments have benefitted a handful of specialties and negatively impacted a few others. Never before has CMS taken from one class of specialties (proceduralists) and given to another (medical specialists). Now, going forward, it is likely CMS will continue to reallocate Medicare dollars in its quest to buy health instead of healthcare.

The question remains how medical specialists and proceduralists—and the hospitals that employ or contract with them for services—will respond to this changing reality.

Independent Physicians

For independent physicians, these proposed changes to Medicare reimbursement would directly impact their bottom line, the extent to which will depend on payer mix and payer contracts. Keep in mind that changes to Medicare payments also impact payments from other payers that utilize reference pricing (e.g., fee schedules based on 150% of current year Medicare payments).

With additional reimbursement, medical specialists could expand their capacity to engage with high-risk and rising-risk patients,[8] thus improving their ability to successfully participate in value-based payment models. Under these models, medical specialists are directly rewarded for driving down healthcare costs, in the form of performance-based payments, shared savings, or per-member-per-month payments.

In the face of declining fee-for-service reimbursement, proceduralists and hospital-based physicians would have three non-exclusive options: (1) grow market share (i.e., perform more of the same procedures or expand the types of procedures performed), (2) reduce expenses, or (3) pursue value-based payments.

The third option may seem challenging, but those proceduralists who can demonstrate value (i.e., adherence to evidence-based practices, better outcomes, lower complication and readmission rates, lower post-acute costs) will be included in provider networks participating in value-based contracts. These networks, in turn, will reward proceduralists financially for their contribution to reducing total cost of care. Such rewards may include performance-based payments or participation in shared savings or per-member-per-month payments.

Hospitals That Employ or Contract With Physicians

The impact on physicians employed by hospitals or compensated under professional services arrangements (PSAs) is more complicated. Today, most employment contracts and PSAs tie compensation to productivity, using personally performed work RVUs as the measure of productivity.

Under such an agreement, a physician’s total work RVUs in a specified time period is multiplied by a conversion factor (referred to as the “contracted conversion factor”), the amount of which is specified in the agreement. In most cases, this contracted conversion factor is based on historical benchmark survey data for compensation per work RVU for the physician’s specialty.

This compensation model has found favor in recent years for three primary reasons: (1) it incentivizes physicians to achieve or maintain targeted productivity levels; (2) the resulting compensation can be defended as consistent with fair market value; and (3) it is relatively easy to measure and administer.

In recognition of the transition to value-based payment models, more hospitals are incorporating quality measures into employment agreements and PSAs. In most cases, a percentage of compensation—rarely more than 20%—is placed at risk based on the physician’s performance on those measures.

Because the contracted conversion factor is specified in the physician employment agreement or PSA, it will not change if CMS’ proposal is finalized; the hospital would remain obligated to compensate physicians based on contracted terms. However, there will be a material impact on the resulting compensation due to the work RVU changes.

In the case of a medical specialist, the same amount of work now will produce more work RVUs, given the increase in the RVUs for office/outpatient E/M codes and the new add-on code, GPC1X.  As a result, the hospital will pay the physician more compensation for the same amount of work.

At the same time, the hospital will receive increased Medicare reimbursement for the physician’s services. The hospital’s incremental financial loss, therefore, is limited to the amount the contracted conversion factor exceeds the actual reimbursement per work RVU the hospital receives.

It’s a different story for proceduralists and hospital-based physicians. These physicians would see some increase in their total wRVUs due to an increase in the RVUs for office/outpatient E/M codes, but far less than medical specialists who provide these services more regularly. Otherwise, proceduralists’ compensation would not be dramatically impacted, as their work RVUs will marginally increase, and their contracted conversion factor will remain the same.

The hospital, however, would receive lower Medicare reimbursement in 2021 than it did when the same services were performed in 2020; the same would be true for commercial contracts with fee schedules tied to current Medicare rates.

Some hospital employment agreements and/or PSAs include provisions permitting changes to the contracted conversion factor to maintain fair market value compensation. Depending on the contract’s language and the specific facts and circumstances, a hospital may need to revisit existing physician compensation arrangements.

This will not be without challenges, however. For example, the benchmark survey data to which this compensation conversion factor is often tied will not fully reflect these impacts for another 2-3 years, given normal timing lags in survey data and the varied rate with which contract modifications occur. It may be 2023 (based on 2022 data) before benchmark surveys have stabilized from the impact.

Hospital-owned physician practices already struggling with narrow or negative operating margins will continue to struggle and potentially see greater losses without cost mitigation. Therefore, documentation surrounding commercial reasonableness would also need to be reexamined.

Regardless of their ability to make immediate compensation adjustments, hospitals should be considering alternatives to straight productivity-based compensation for proceduralists.  Specifically, hospitals should identify ways in which to incentivize proceduralists and hospital-based physicians to work closely with medical specialists to better manage those high-risk and rising-risk patients who require interventions. By improving these patients’ outcomes, proceduralists can make important contributions to the hospital’s success under value-based models.

Additionally, a hospital should consider compensation models that incentivize proceduralists to manage expenses, such as gainsharing arrangements. To date, most gainsharing arrangements have been limited to a handful of proceduralists (e.g., orthopedic surgeons). There remain significant opportunities to partner with other proceduralists to reduce operating costs, better positioning a hospital to withstand declining volumes in the face of value-based care.

The Proposed Rule, if finalized, will create winners and losers in terms of future Medicare reimbursement. Rather than entering the Thunderdome, it’s now up to medical specialists, proceduralists, hospital-based physicians, and hospitals to make everyone—including patients—winners under new payment models.

PYA has extensive experience in physician compensation planning and strategy, fair market value compensation/commercial reasonableness, and value-based payment models. For more information regarding these matters, contact a PYA executive below at (800) 270-9629.

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Disclaimer: To the best of our knowledge, this information is correct at the time of publication. Given that the 2021 MPFS is not finalized, please be aware that some or all of this information may change or not apply when it is finalized.

[1] As CMS explains, the “fee schedule pricing amounts are adjusted to reflect the variation in practice costs from area to area. A geographic practice cost index (GPCI) has been established for every Medicare payment locality for each of the three components of a procedure’s relative value unit (i.e., the RVUs for work, practice expense, and malpractice). The GPCIs are applied in the calculation of a fee schedule payment amount by multiplying the RVU for each component times the GPCI for that component.”

[2] These requirements are detailed in 42 U.S.C. 1395w–4(c)(2)(B)(ii)(II).

[3] Current Procedural Terminology (CPT®) is a registered trademark of the American Medical Association.

[4] Finalized Policy, Payment, and Quality Provisions Changes to the Medicare Physician Fee Schedule for Calendar Year 2020 (Nov. 1, 2020), available at https://www.cms.gov/newsroom/fact-sheets/finalized-policy-payment-and-quality-provisions-changes-medicare-physician-fee-schedule-calendar.

[5] The new code is billed as an “add-on” to an E/M service. A physician or non-physician practitioner in any specialty may bill the code. CMS has not associated any specific time requirements with the code and has not provided specific documentation requirements.

[6] 85 CFR 50,121 (Aug. 17, 2020).

[7] This table is derived from Table 90 in the 2021 Medicare Physician Fee Schedule Proposed Rule (85 CFR 50,375-76). As CMS explains, “The percentages in Table 90 are based upon aggregate estimated PFS allowed charges summed across all services furnished by physicians, practitioners, and suppliers within a specialty to arrive at the total allowed charges for the specialty, and compared to the same summed total from the previous calendar year. Therefore, they are averages, and may not necessarily be representative of what is happening to the particular services furnished by a single practitioner within a given specialty.”

[8] Rising risk describes patients who will transition to high-risk without intervention.

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