How Medicare fee-for-service is like a 1965 Ford Mustang

Since its inception in 1965, the Medicare program has paid physicians based on how many visits and procedures they billed. The more services they billed, the more they earned. This system, called fee-for-service (FFS), has been revised many times over the years, most notably when payments began being based on resource-based relative value units in 1992. But at its core, Medicare has continued to pay physicians a set amount for each billable service.

FFS has been heartily criticized over the years for fueling higher costs, because the more services that are billed, the more Medicare spends. It's also been criticized for undervaluing primary and cognitive care and overvaluing procedures. Physicians in specialties with highly compensated procedures that can be billed frequently usually earn substantially more than their primary care colleagues, who are limited to billing for a few dozen lower-paid evaluation and management codes, compared to the thousands of procedural codes available to other specialists.

FFS compensation to primary care physicians is also limited by the fact that they can't increase volume beyond the number of patients they can squeeze into their busy days. Most recently, FFS has been criticized for being agnostic on the value of care provided, that is, its quality and effectiveness, because it doesn't consider outcomes, only whether the service was billed and documented properly.

FFS has had remarkable staying power and continues to be how most physicians are paid by Medicare and, for that matter, many other payers as well. Yet like most things that are a half-century old, Medicare FFS is facing demands that it be modernized, if not traded in altogether.

Think of Medicare FFS as being like a 1965 Ford Mustang, which was powerful, stylish, and fast but by today's standards would be considered unsafe (no seat belts and air bags or emissions controls) and inefficient (guzzling gas by the gallons). Just as the automobile industry has had to modernize its cars to make them safer and more efficient, Medicare is now being asked to modernize how it pays physicians by paying based on value, not volume.

This was the message sent when the Senate, on a 92-8 vote on April 14, joined the House of Representatives in passing a bill to repeal the Medicare sustainable growth rate (SGR) formula, which has resulted in scheduled cuts in payments to physicians every year since 1992, most recently a 21% cut that had gone into effect on April 1. Under the legislation, Medicare will greatly accelerate what heretofore has been a gradual movement away from pure FFS to paying physicians based on the quality, effectiveness, and efficiency of their care.

It's not that FFS will be entirely sidelined by the bill. Many physicians would continue to be paid a set amount per procedure code, but a growing proportion of their payments will be based on value. And to be clear, this wouldn't be the first time that Medicare has experimented with paying physicians in part based on value. Physicians have been reporting on quality measures for quite some time now, under an alphabet soup of separate Medicare reporting programs: the Physician Quality Reporting System (PQRS), Meaningful Use, e-prescribing, and the Value-Based Payment Modifier Program, all of which have resulted in positive or negative annual adjustments to physician payments based on the reporting rules associated with each program.

Under the new legislation, these programs will be combined into a single Merit-based Incentive Payment System (MIPS). Under MIPS, a growing proportion of physicians' FFS payments would be subjected to upward and downward adjustments based on how well physicians do on measures of quality, practice improvement, and use of electronic health records. Beginning in 2019, MIPS would set by statute a maximum range of positive/negative value-based adjustments to FFS payments, which would increase in stages, from plus/minus 4% in 2019 to 5% in 2020 to 7% in 2021 to 9% in 2022.

Also starting in 2019, physicians could choose to participate in a qualified alternative payment model (APM) instead of MIPS, which would make them eligible to receive 5% annual FFS bonus payments over a 6-year period, plus give them the opportunity to earn additional payments based on the incentive/payment methodology that applies to their particular APM.

For instance, physicians in risk-bearing accountable care organizations could share in the savings from reducing preventable hospital admissions or readmissions on top of the 5% annual FFS increases. Physicians in advanced patient-centered medical homes might qualify for risk-adjusted care coordination payments, plus the 5% FFS APM bonus, if they can demonstrate quality improvements or lower costs.

Finally, the legislation stabilizes Medicare payments during a 4.5-year transition to MIPS and APM, eliminating the 21% SGR cut and all future SGR cuts and replacing them with small positive annual updates of 0.5%. It also cancels the current PQRS and Meaningful Use penalties for 2019, putting those dollars back into the physician payment system.

Physicians reading this may ask, “Well, it's great that the SGR appears to finally be going away, but do we really want the new MIPS and APM? Won't they just result in more reporting hassles? Will the measures measure the right things? Who picks them? Will physicians with more complex patients, or who treat an underserved population, be unfairly penalized? Will any of the APMs work for smaller practices?”

All of these are good and legitimate questions, yet the answer isn't to cling to a 1965-era FFS system that seems so out of synch with today's insistence that all sectors of the economy demonstrate value for the dollars spent. Rather, the answer is to modernize FFS so that it results in greater value without the unintended side effects, while also offering alternative payment models for those who want to move even farther away from traditional FFS. Now that the SGR is dead and buried, the next stage of ACP advocacy must be to ensure that value-based payment truly lives up to the promise of bringing greater value—to patients, to the taxpayers who fund Medicare, and, let's not forget, to physicians.