April 15, 2015

Saying Farewell to the Sustainable Growth Rate: Are Physicians Better Off Now?

Arnold & Porter Advisory

On April 14, the Senate passed H.R. 2, the "Medicare Access and CHIP Reauthorization Act of 2015," which had passed the House on March 26 and is now on its way to the President's desk. HR 2 permanently repeals the long-maligned Sustainable Growth Rate (SGR) payment formula that has helped govern how Medicare pays physicians.

This new law replaces the SGR with a small, stable payment update, builds on current pay-for-performance programs, and accelerates adoption of alternative payment models (APMs). These changes will cost the federal government and taxpayers US$175 billion over the next decade, according to the Congressional Budget Office.1 On the surface, it seems obvious that physicians and other stakeholders in the healthcare industry will be better off. But a careful analysis shows that physicians' economic incentives will be vastly different in the future, with important implications for makers of medical technology. Physicians are gatekeepers to medical technology -- they prescribe drugs, order laboratory and imaging tests, and recommend surgical procedures. Over time, the changes in Medicare's payment system could cause physicians to prescribe different or fewer drugs or order fewer laboratory and imaging tests.

The most recent government estimates of future healthcare spending are at a historic low after years of increases.2 Policymakers have used a variety of methods to address concerns about over-use of medical technologies, including the "misvalued codes" initiative, increased public transparency of Medicare's payments to physicians for specific services, and the implementation of the Sunshine Act. Other recent policy changes, including the implementation of appropriateness criteria for imaging services, and a shift of payment for laboratory services to a market-based system, will also put downward pressure on Medicare's spending for many of the services that physicians order.

This Advisory describes why the SGR was created, how Medicare's procedures of paying physicians will change in the future, and how those changes will affect physicians' incentives to use medical technology.

History of SGR Overrides

The SGR story is one of the tensions between reigning in healthcare costs and how to apply the fiscal prudence necessary to do so. In theory, the SGR was a fiscally responsible policy designed to allow Medicare's payments to physicians to increase over time but not to rise too fast. Established in the Balanced Budget Act of 1997, the formula allows for growth in payments year-over-year by including factors for increases in the prices of inputs, such as medical equipment and supplies, and growth in Medicare's enrollment. The formula also factors in growth in the volume of services, based on growth in per-capita gross domestic product (GDP).

The rationale for setting GDP as the target is that if the economy grows, then payments can increase. But if the economy contracts -- as in the financial markets' crash in the early 2000s -- the SGR formula produces negative payment updates. Since then, the volume and intensity of physician services have grown much faster than the overall economy, widening the funding gap each year. Compensating for the payment cuts became an annual (or more frequent) exercise for Congress.

By accepting the argument of physicians that it was unfair to penalize them for a sputtering economy when other healthcare providers were not similarly affected, policymakers rejected the fiscal restraint that the SGR was designed to maintain.

Long-Term Economic Outlook

From 2000 to 2012, Medicare's payment rate for physician services increased by a total of nine percent. But spending per beneficiary increased by 72 percent over that period, and certain physician services

accounted for most of the increase in spending. The volume of tests grew by 90 percent, and the volume of imaging grew by 73 percent. By comparison, the volume of physician office visits grew by 34 percent.3

The chart below displays total healthcare spending in the US as a percent of GDP. In 1965, the year Medicare began, healthcare spending was 5 percent of the economy. By 1985, it had doubled -- to 10 percent of the GDP -- and stands just under 18 percent in 2015. In comparison, healthcare spending (as a share of GDP) in other developed countries ranges from a low of about 9% in the United Kingdom, Iceland, and Norway to about 12% in Austria, France, and the Netherlands.4

The Centers for Medicare and Medicaid Services (CMS) currently projects that as a share of GDP, healthcare spending will remain just under 18% for the next five years, and grow to 19.3% by 2023. The Medicare Payment Advisory Commission (MedPAC) notes that in the future, "the pharmaceutical pipeline is shifting toward greater numbers of biologic products and specialty drugs, many of which have few therapeutic substitutes and high prices. This will put additional upward pressure on program spending…."5

US National Health Spending Chart

Alternative Payment Models

The Department of Health and Human Services (HHS) recently set a goal of tying 30% of fee-for-service (FFS) Medicare payments to quality or value through APMs by the end of 2016, growing to 50% by 2018. The APMs could include, for example, bundled payment initiatives or accountable care organizations (ACOs). These projections may be optimistic; the Brookings Institution has noted that becoming an ACO is "often cumbersome and uncertain" and that "[t]here is not a "one size fits all" model for an ACO; organizations have both different starting points and different opportunities to transform care based on their current capabilities."6 Further, the impact on spending of achieving of this goal is unclear, based on recently announced results from the Medicare Shared Savings Program, in which most ACOs improved quality, but did not reduce costs.7

Even if ACOs do not proliferate, other changes to Medicare's payment system for physicians will affect physicians' behavior. Physicians who do not perform well on Medicare's quality and efficiency measures will see payment rates reduced, and those penalties grow larger over time. Thus, physicians will want to identify ways to increase efficiency and reduce their risk by, for example, consolidating into larger group practices that have invested in electronic health records (EHRs) and have the capability of reporting quality measures at the practice group level rather than at the individual physician level.

New Physician Payment System: Stability and New Incentives

From July 2015 to 2018, Medicare's base payment rate will increase by 0.5% each year - a small, predictable update. Starting in 2019, Title I of H.R. 2 establishes a two-track system for Medicare's payments to physicians.

In the first, physicians must meet goals for providing high-quality and low-cost care in order to obtain 100% of Medicare's annual update to payment rates. Over time, Medicare's payment penalties increase, incentivizing lower-performing physicians to improve. The Act creates the Merit-Based Incentive Payment System (MIPS), which combines the current pay-for-performance programs into a single payment system.8 It combines and builds on the infrastructure of three prior incentive programs, the Physician Quality Reporting System (PQRS), the Value Modifier (VM), and Meaningful Use (MU) programs. These programs will sunset at the end of 2018. The Act also attempts to address some physicians' concerns about appropriate measurement, attribution, and administrative burden.

The second track provides an alternative route to higher payments starting in 2019 and ending with 2024. It provides physicians and other eligible professionals a 5% annual bonus if they met the standards for "qualifying" participants in APMs, which require that a significant share of a physician's revenues comes from an APM that takes on risk of financial losses, follows a quality measurement program, and uses certified EHR. Eligible professionals are not considered to be "MIPS-eligible professionals" if they are in a "qualifying APM" or a "partially qualifying APM."9

For 2026 and future years, there will be different annual updates to the conversion factor used in setting payment rates under the Medicare physician fee schedule. For providers paid through qualifying APMs, payment rates will be increased each year by 0.75%. Payment rates for other providers will be increased each year by 0.25%.

The tables below compare the new payment parameters with those that would have existed under prior law. The second line of the table shows the annual updates to the conversion factor will be under H.R. 2, but performance of individual physicians under the incentive programs can result in their payments being increased or decreased from that base (and failure to report under PQRS can decrease payments).

First Decade Following Enactment of H.R.2 (Rest of 2015 to 2025)

  2015 2016 2017 2018 2019 2020 2021 2022+
Updates to Conversion Factor
Prior Law (using SGR) -21.2% Cut on April 1 Cuts of 25% or More Cuts of 25% or More Cuts of 25% or More Cuts of 25% or More Cuts of 25% or More Cuts of 25% or More Cuts of 25% or More
HR 2

0% from Jan 1 to June 30

0.5% from Jul 1 to Dec 31

0.5% 0.5% 0.5% 0.5% 0.0% 0.0% 0.0%
Pay-for-Performance Bonus / Penalty Adjustment
+ VM
+ MU Penalties
-4.5% -6.0% -9.0% -10% or More -11% or More -11% or More -11% or More -11% or More
MIPS Penalties


(Same as prior law)


(Same as prior law)


(Same as prior law)

-10% or More

(Same as prior law)


(extra bonus possible)


(extra bonus possible)


(extra bonus possible)


(extra bonus in 2022-2024)

Second Decade Following Enactment of H.R.2 (2026 And Future Years)

  MIPS Participants Qualifying APM Participants
Updates to Conversion Factor 0.25% 0.75%
Pay-for-Performance Bonus / Penalty Adjustment May continue after 2024 No additional bonus payments available after 2024

As shown in the tables, policymakers are relying on bonus payments (and different conversion factors starting in 2026) to incentivize participation in APMs.

The extent to which these efforts will succeed in slowing future growth of Medicare spending depends on a variety of factors, including the trade-offs facing physicians as healthcare delivery models continue to change. The Physician Fee Schedule reforms do not change the underlying basis for valuing physician services. While the AMA-RVU Update Committee (RUC) has been criticized in recent years, its role in determining the relative values of physician services is unchanged by H.R. 2.10

Further, payments to professionals paid under the PFS include payments for certain medical technologies that are provided in physician offices, including physician-administered drugs, imaging, pathology services, and laboratory tests, etc. (Drugs are not paid under the PFS but at 106% of Average Sales Price. Their payments will not change under MIPs but could change under APMs.) At the margin, Medicare's payments for medical technologies may be higher than they would under other payment systems, to the extent that payments are influenced by behaviors such as increasing the volume of tests ordered or choosing higher-cost drugs rather than lower-cost alternatives. Over time, the Act may mitigate such incentives, but it does not eliminate the linkage between use of medical technology and physicians' incomes.

Quality Measurement in the MIPS

The PQRS program is designed to pay physicians more if they satisfy certain quality reporting requirements. Those incentive payments started at 1.5% in 2007 and 2008, rose to 2.0% in 2009 and 2010, and have declined since then to 1.0% in 2011, and 0.5% in 2012, 2013, and 2014. No PQRS bonuses are available in 2015 or future years.

Starting in 2015, the PQRS program is phasing in penalties for physicians who fail to report on the quality measures. Large multispecialty group practices that did not participate in PQRS in 2013 are receiving a 1.5% payment cut in 2015. The penalties will apply to smaller groups and to individual physicians in future years.

Bonus and penalty payments are significantly lagged. In 2015, physicians are receiving payment penalties based upon their reporting in 2013. H.R. 2 includes provisions to shorten this lag and give physicians more immediate feedback on their performance.

Under H.R. 2, every year, the Secretary will publish a list of quality measures used to assess providers in MIPS. Measures must be "evidence based." Before a new quality measure is added to an annual final list, "the Secretary shall submit for publication in applicable specialty-appropriate peer reviewed journals such measure and the method for developing and selecting such measure," consult relevant professional organizations and other stakeholders, and go through rulemaking.

Quality measures used by a qualified clinical data registry are not subject to the notice-and-comment, peer review, or evidence-based focus requirements but are subject to a requirement to seek input from stakeholders. Existing quality measures11 also are not subject to the notice-and-comment or peer review requirements and are presumptively included among the quality measures.

The Secretary, with stakeholder input, must develop and publish a plan for the development of quality measures for use in the MIPS and in APMs, and post a draft plan on the CMS website by January 1, 2016. The plan will describe how measures from the private sector and integrated delivery systems could be used in Medicare and "how clinical best practices and clinical practice guidelines should be used" in developing quality measures.

In developing the draft plan, the Secretary must prioritize: (1) outcome measures; (2) patient experience measures; (3) care coordination measures; and (4) "measures of appropriate use of services, including measures of over use." Starting May 1, 2017, and annually thereafter, the Secretary must report on the progress made in developing quality measures, including descriptions of the measures in development, a timeline for their completion, and plans for future quality measures. CMS can use up to US$15 million per year in 2015 to 2019 to fund measure development.

Resource Use Measurement in the MIPS

The VM is designed to give physicians incentives to provide high quality and efficient care. The method for calculating the VM examines the quality and cost of services provided during an "episode of care," a defined set of services provided to a patient with specific healthcare conditions over a period of time. Under prior law, CMS was required to penalize physicians in 2017 based on the quality and cost of services they provide in 2015.

Physicians have repeatedly expressed concerns that the episodes of care must be appropriately structured to account for differences in the acuity of patients served, so that physicians are not penalized simply because a patient they treated was sicker than another patient. Concern about risk adjustment is not new and has been a subject of ongoing debate between CMS and providers paid under all of Medicare's prospective payment systems -- hospitals, nursing homes, home health agencies, etc.

The Secretary is required to post a draft list of care episodes and obtain public comment, but is not required to use notice-and-comment rulemaking. Within 180 days of enactment, HHS must post on the CMS website a list of episode groups. During a comment period, stakeholders can propose additional episode groups, as well as specific clinical criteria and patient characteristics to classify patients into "care episode groups" and "patient condition groups." The Secretary must establish care episode groups and patient condition groups that are designed to account for 50% or more of Part A and B expenditures, and assign codes to the groups. Within 270 days of the end of the comment period, the Secretary must post an "operational list" of the care episode and patient condition codes on the CMS website. The codes will be updated annually in the Physician Fee Schedule regulations.

In measuring resource use, the Secretary "shall use per patient total allowed charges for all services under Part A and [Part B] (and, if the Secretary determines appropriate, Part D) . . . by care episode codes and by patient condition codes." The Act precludes administrative or judicial review of the care episode and patient condition groups and codes, patient relationship categories and codes, and measurement of resource use.

Meaningful Use and the MIPS

The Meaningful Use (MU) program is designed to give eligible physicians (EPs), hospitals, and critical access hospitals (CAH) incentives to adopt and meaningfully use certified electronic health records technology (CEHRT). Under prior law, CMS was authorized to provide incentive payments to providers that are meaningful users and also mandated payment reductions for providers that are not meaningful users under the Medicare program starting on January 1, 2015 for EPs.

Today, providers are complying with different stages of meaningful use. Each stage (Stage 1 and Stage 2) has its own set of requirements that must be met in order to demonstrate meaningful use. The requirements become more rigorous as EPs and eligible hospitals proceed through the stages. In March 2015, CMS published its Stage 3 Proposed Rule. The Stage 3 Proposed Rule proposes that all providers will use the same set of Stage 3 meaningful use requirements starting in 2018, regardless of the previous stages of participation, and report those requirements for the entire calendar year under the Medicare program.

The Stage 3 Proposed Rule proposes a single set of eight objectives and associated measures in the following areas: (1) protect patient health information; (2) electronic prescribing (eRx); (3) clinical decision support (CDS); (4) computerized provider order entry (CPOE); (5) patient electronic access to health information; (6) coordination of care through patient engagement; (7) health information exchange (HIE); and (8) public health and clinical data registry reporting.  All of the measures for the first five objectives are required. For Objectives 6 and 7, providers are required to attest to (1) using all three measures and (2) successfully meeting two out of the three measures. For Objective 8, EPs must attest to three of the measures numbered one through five. Eligible hospitals and CAHs must attest to four out of the six measures.

H.R.2 sunsets the current MU program and makes use of CEHRT one factor in the combined value-based incentive system with significant payment adjustments in 2019, as discussed in more detail below. Furthermore, H.R.2 will require providers attesting under the MU program to demonstrate that they have not "knowingly and willfully taken action . . . to limit or restrict the compatibility or interoperability of the certified EHR technology." This new requirement will be effective within one year of enactment.

H.R.2 declares it a national objective to achieve widespread interoperability between meaningful EHR users and other clinicians and healthcare providers. No later than July 1, 2016, the Secretary is required to meet with stakeholders to develop measures to determine interoperability. If the Secretary determines that the goal has not been met, she is required to report to Congress no later than December 31, 2019. The Secretary's report must identify barriers to such objective and make recommendations to achieve that objective. Such recommendations may include payment adjustments for not being meaningful users under the Medicare program and criteria for decertifying CEHRT products.

New Category: Clinical Practice Improvement Activities

The new law creates a fourth category for assessing physician performance, called clinical practice improvement activities (CPIAs.) A CPIA is defined as an "activity that relevant eligible professional organizations and other relevant stakeholders identify as improving clinical practice or care delivery and that the Secretary determines, when effectively executed, is likely to result in improved outcomes." The Secretary must solicit recommendations from stakeholders to identify such activities.

Certain activities automatically increase a physician's CPIA score. Physicians in patient-centered medical homes or comparable specialty practices receive the highest CPIA scores. Those in APMs receive a minimum score of 50% of that amount. Therefore physicians have some incentive to participate in APMs even if their participation level is not high enough to make them "qualifying APM participants" (a category discussed below that receives 5% APM bonuses rather than MIPS incentives).

Combining the PQRS, VM, MU, and CPIA Into a Composite Score

H.R. 2 eliminates the penalties that would otherwise apply in the PQRS, VM, and MU programs. Instead, physicians' individual performance on quality, cost, and MU will be used, along with the CPIAs, to determine a single composite score ranging from 0 to 100. The categories are weighted, combining quality (30%), resource use (30%), clinical practice improvement activities (15%), and EHR meaningful use (25%).12

Each physician's composite score will be compared to a performance threshold that consists of the mean or median of the composite performance scores for all participants during a prior period of time.

All physicians who achieve a composite score above the performance threshold are eligible for positive incentive payments.

The higher a physician's composite score, the higher the "rate adjustment factor."  The rate adjustment factor is up to 4% in 2019, 5% in 2020, 7% in 2021, and 9% in 2022 and thereafter. This means that in 2019, a physician who receives a composite performance score of 100 gets a 4% adjustment, and a physician who receives a score of 0 gets a -4% adjustment. Subject to the availability of funds, the Secretary may reward exceptional performance. The aggregate additional incentive payments will be capped at US$500 million for each year from 2019 through 2024.

Scores for outcome measures that are used in the resource use or quality performance categories are to be risk-adjusted, taking into account several HHS studies that will assess appropriate adjustments to quality measures, resource use measures, and other measures, and apply those adjustments to the performance scores and payments in the MIPS.

Scores for quality and resource use must (if sufficient data is available) take into account a physician's improvement over time after the first year of the MIPS. Scores for clinical practice improvement activities and meaningful use of certified EHR technology may take such improvement into consideration.

The Secretary must make available physicians' MIPS composite performance scores and their performance in each category of MIPS on CMS' "Physician Compare" Internet website and must, if feasible, include on the website the names of physicians in eligible APMs.

Beginning July 1, 2017, the Secretary must provide confidential, timely feedback to physicians on their performance under the quality and resource use categories and may make available confidential feedback regarding the other performance categories. Beginning July 1, 2018, the Secretary must make information available to MIPS-eligible professionals about items and services furnished to the patients they treat by other suppliers and providers.

Technical assistance will be available to help smaller practices (15 or fewer professionals) improve MIPS performance or transition to APMs, with priority given to rural and underserved areas. US$20 million is provided for implementation from 2016 to 2020.

Incentives for Physicians to Join Alternative Payment Models

The Act adds a new SSA § 1833(z), "Incentive Payments for Participation in Eligible Alternative Payment Models." An APM includes: "a model" under SSA § 1115A (establishing CMMI, the Center for Medicare and Medicaid Innovation within CMS), except a health care innovation award;13 the Medicare Shared Savings Program (MSSP); a demonstration project under SSA § 1866C ("Health Care Quality Demonstration Program"); or a demonstration "required by federal law" (potentially this could include gainsharing demonstrations).14

Bonus payments to "qualifying APM participants" (discussed below) are actually tied to the degree to which they furnish services through an "eligible APM." An "eligible APM" is an APM that: (1) uses certified EHR technology; (2) pays for covered professional services based on quality measures "comparable to" those used under the MIPS; and (3) is either a model in which "one or more entities bear financial risk for monetary losses that are in excess of a nominal amount" 15 or is a CMMI medical home Phase II "expansion model."

Starting in 2019 and "ending with 2024," physicians and other eligible professionals who are "qualifying APM participants" receive a bonus "equal to 5 percent of the estimated aggregate payment amounts for . . . covered professional services16 under [Medicare Part B] for the preceding year." The base for determining the bonus is the total payment for all professional services furnished under Part B, whether furnished under an APM or under the MIPS regime.

The 5% bonus for qualifying APM participants runs from 2019-2024; it appears there is no preferential payment for qualifying APM participants in 2025; and then beginning in 2026, there is a preferential "qualifying APM conversion factor" (1% vs 0.5% for the "non qualifying APM conversion factor"). Qualifying eligible APM participants are not MIPS participants, and thus could not receive MIPS incentive payments as well as a 5% APM-participation bonus.

A "qualifying APM participant" derives at least a threshold percentage of his or her annual professional services payments from services furnished under eligible APMs or APM-like models.17 (These percentage payment threshold requirements pertain to payments over "the most recent period," which may be less than a year.) Starting in 2019, at least 25% of the physician's payments for Medicare Part B services must come from services attributable to eligible APM participation. The threshold percentages increase to 75% (taking into account participation in APM-like models of other payors) for 2023 and later years.

The Act precludes administrative or judicial review of CMS' decisions on whether one is a "qualifying APM participant" or a "eligible APM." determination that a physician is a qualifying APM participant; a determination that an APM is an "eligible APM"; or a determination of the amount of the 5% APM incentive payment (including any estimation used to calculate the 5%).

The Act establishes a new committee called the Payment Model Technical Advisory Committee (TAC) to advise the Secretary on "physician-focused payment models." The committee is composed of 11 members with expertise in "physician-focused payment models and related delivery of care" and up to 5 members may be "providers of services or suppliers" or their representatives.

Priorities and Funding for Measure Development

CMS has worked with the American Medical Association (AMA), physician associations representing primary care physicians and specialists, and the National Quality Forum (NQF) to develop hundreds of quality measures, with reporting requirements that depend on whether measures are reported via EHRs or administrative claims. The options for individual physicians to report PQRS measures vary depending on their scope of practice and practice size (and change annually), and their ability to gain bonuses and avoid penalties depends not only on one's own behavior but on that of other physicians in one's practice group.

The measure development process has been criticized by some who have argued that measure development is an unfunded mandate on organized medicine, that the measures do not accurately reflect the quality of care, and that the process for developing them is too slow. To address these concerns, Congress created a Qualified Clinical Data Registry (QCDR) which can be used to report quality measures.18 A QCDR must include data from multiple payers and give to participants timely performance data on transparent data elements, but the measures do not have to be endorsed by the NQF, streamlining the process of developing measures.

The Secretary, with stakeholder input, must develop and publish a plan for the development of quality measures for use in the MIPS and in APMs.  The Secretary must post a draft plan on the CMS website by January 1, 2016, finalizing it by May 1. The draft plan must take into account how measures from the private sector and integrated delivery systems could be used in Medicare and "how clinical best practices and clinical practice guidelines should be used" in developing quality measures.

In developing the draft plan, the Secretary must prioritize: (1) outcome measures; (2) patient experience measures (3) care coordination measures; and (4) "measures of appropriate use of services, including measures of over use." The Secretary also must consider whether measures to be developed under these arrangements would be electronically specified and consider clinical practice guidelines (where they exist).

By May 1, 2017, and annually thereafter, the Secretary must report on the progress made in developing quality measures, including the number of measures developed, descriptions of the measures under development, a timeline for completion of such measures, and information on quality areas being considered for future measure development.

The funding for carrying out these activities will be US$15 million annually for fiscal years 2015 through 2019 (to be transferred from the Part B trust fund). This funding will remain available through fiscal year 2022.

Payment for Chronic Care Management Services

In order to encourage the management of care for individuals with chronic conditions, the Secretary shall "make payment (as the Secretary determines to be appropriate)" for chronic care management services furnished beginning January 1, 2015, in effect making permanent reimbursement for the care management code that was established starting in 2015. To prevent duplicative payments, only one professional or group practice will receive payment for these services provided to an individual. CMS cannot require that providers perform an annual wellness visit or an initial preventive physical as a prerequisite and must conduct an education and outreach campaign to inform healthcare providers and beneficiaries of the benefits of chronic care management services, focusing on "encouraging participation by underserved rural populations and racial and ethnic minority populations."

Public Reporting of Physician Performance Data

The legislation also requires the Secretary to continue, on an annual basis, reporting data on Medicare's payments to individual physicians, and to integrate the data with the Physician Compare website beginning in 2016. The information must at a minimum include data on the volume of services provided, submitted charges and payments, and a unique identifier for each physician or eligible professional. The data must be searchable by physician specialty, location, and types of services.

Section 105 of the Act permits "qualified entities"19 beginning July 1, 2016, to provide Medicare claims data and non-public analyses to new authorized users, including providers, suppliers, employers, health insurance issuers, medical societies and hospital associations, subject to certain privacy rules. Those entities may share the data for non-public uses, including creating quality and patient care improvement programs, but not for marketing purposes. Data use agreements will specify the privacy and security requirements that apply to the data, including any prohibitions on using such data to link to individually identifiable sources of information. If individually identified, providers shall have opportunity to appeal and correct errors under the process afforded to them under the existing QE data appeals process.20 The Act also provides for CMPs for breaches of data use agreements, but they appear only to be applicable to QEs.

The Secretary also is required, beginning July 1, 2016, to provide Medicare (and possibly Medicaid and CHIP) claims data to qualified clinical data registries, for a fee. This provision will allow the linking of registry data with clinical outcomes data. Public reporting of the findings is permissible so long as a provider or supplier has an opportunity to appeal and correct errors.

Providers Opting Out of Medicare

Under prior law, health care providers could opt-out of Medicare for a two-year period. The Act establishes an "indefinite, continuous automatic extension of opt-out election" for those providers, which only stops if they notify the Secretary 30 days before the end of the current opt-out period. Beginning February 1, 2016, the number and characteristics (e.g., specialty, geographic distribution, etc.) of those providers shall be posted on an HHS website.


The Act requires the Secretary and the Inspector General to report to Congress within 6 months of enactment recommending narrow and targeted legislative changes to existing fraud and abuse laws to permit gainsharing between physicians and hospitals that improve care and efficiency. The report is to discuss ownership interests, compensation arrangements, and whether a portion of any savings should accrue to Medicare. The report must discuss accountability, transparency and quality to limit inducements to stint on care.  The Act eliminates civil money penalties for inducements to physicians who limit services that are not medically necessary.

Goals for Interoperability

The Act declares it a national objective to achieve "widespread interoperability" of EHRs by the end of 2018. It defines "widespread interoperability" and, if the Secretary determines that goal has not been met, requires a report to Congress that identifies barriers and recommendations to interoperability, including adjusting Medicare payments and decertifying EHR technology products. It amends the Social Security Act to prohibit EHR professionals and EHR hospitals from deliberately blocking information sharing with other EHR vendor products, and the Secretary must report to Congress on mechanisms to assist providers in comparing and selecting certified EHR technologies. It also requires a GAO report on barriers to expanded use of telemedicine and remote patient monitoring.

Limits on Liability

The legislation prohibits using "implementation of any guideline or other standard under any Federal health care provision" to establish the standard of care or duty of care owed by a health care professional to a patient in any medical malpractice or medical product liability action or claim, including relating to a health care provider's prescription or provision of a drug. However, it does not preempt any state or common law governing medical professional or medical product liability actions or claims.

Title II-Medicare and Other Health Extenders

Title II extends several Medicare and public health programs that are set to expire on various dates starting in March 2015. Many of those have been recurring items in the annual (or more frequent) legislation needed to fix the SGR formula. Most recently, the Protecting Access to Medicare Act of 2014 (PAMA) included a package of temporary extenders.

Consistent with PAMA and other prior SGR legislation, H.R. 2 temporarily extends (until 2017 or 2018) the following programs: the geographic practice cost index (GPCI) floor; the therapy cap exceptions process; the ambulance add-on payment; the payment adjustment for low-volume hospitals; the Medicare dependent hospital program; the authority for Special Needs Plans (SNPs) in Medicare Advantage; funding for the National Quality Forum to develop quality measures; add-on payments for home health services provided in rural areas; and special programs that provide services to individuals with Type I diabetes, Native Americans, and families of children with disabilities. Other programs being extended promote abstinence, prevent teen pregnancy and HIV infection, train of low-income individuals for healthcare jobs, and fund home visiting programs for mothers, infants and children.

H.R. 2 makes permanent two programs that assist low-income individuals with healthcare costs. Section 211 permanently extends the Qualifying Individual (QI) program, which assists low-income Medicare beneficiaries with incomes between 120 percent and 135 percent of the federal poverty level (currently from US$14,124 to US$15,890 per year) in paying their Medicare Part B premiums. According to the Congressional Budget Office (CBO), the QI program will increase Medicare spending by US$14.6 billion over the next decade. Section 212 makes permanent the transitional medical assistance (TMA) program, which allows low-income families to maintain their Medicaid coverage for up to one year as they transition from welfare to work.

Section 221 extends, through fiscal year 2017, the Affordable Care Act's additional funding for Community Health Centers (CHC) and National Health Service Corps (NHSC), increasing federal spending by US$8.0 billion over the next ten years. This section also continues funding for residency training in community-based primary care settings.

H.R. 2 does not extend the one-year delay in implementation of ICD-1021 in the United States that was included in PAMA, meaning that the Congress has most probably foregone its opportunity to intervene again. Implementation of ICD-10 is set to start on October 1, 2015. 

Title III-2-Year Extension of the Children's Health Insurance Program (CHIP)

Title III of H.R. 2 funds CHIP for another two years. CHIP covers more than 8 million children and pregnant women whose families have incomes above Medicaid eligibility levels. The federal government pays a higher matching rate for CHIP (the federal share averages 70% under CHIP vs. 57% for Medicaid),22 and states have more flexibility in the design of CHIP benefits and cost-sharing. The ACA extended funding for CHIP until September 30, 2015, and requires states to maintain the levels of eligibility for Medicaid and CHIP that were in place in March 2010 through September 30, 2019. While some in Congress argued for extending CHIP funding for the full four years, H.R. 2's funding of CHIP expires on September 30, 2017.

This provision preserves, through FY 2017, the qualifying states option. That program increases the state CHIP allotments for states that had provided coverage to CHIP-eligible children prior to the enactment of CHIP in 1997. It also maintains, through FY 2017, the CHIP Contingency Fund, which is available to states if they experience a funding shortfall. (Unlike Medicaid, CHIP's funding is capped.) It also extends grants currently available under CHIP to enable states to address barriers to enrollment.

Finally, it extends the Express Lane eligibility program, which permits states to rely on findings from designated Express Lane programs, such as the federal School Lunch, Head Start, and WIC programs, to facilitate those children's enrollment in CHIP.

Title IV-Offsets

The Act includes spending decreases (affecting primarily hospitals and post-acute care providers) and increases in premiums paid by high-income Medicare beneficiaries that are estimated to total US$73 billion over 10 years. (These provisions partially offset the Act's estimated costs; the Act is estimated to increase the deficit by US$141 billion over 10 years.)  Offsets do not directly affect the pharmaceutical industry.

Beginning in 2020, Sec. 401 limits Medigap plan coverage of beneficiary cost-sharing for newly eligible Medicare beneficiaries to amounts above the Part B deductible (currently US$147/month). Two Medigap plans currently provide "first dollar" coverage, which induces beneficiaries to use more services than they otherwise would. The provision does not affect beneficiaries who are enrolled in Medicare Advantage plans or buy Medigap insurance in certain states.

Beginning in 2018, beneficiaries with modified adjusted gross incomes (MAGIs) between US$133,501 and US$160,000 will pay for 65% of their premiums and those with MAGIs above US$160,000 will pay 80%. (Until 2018, those thresholds are 50% for US$100,000 to US$150,000, 65% for US$150,000 to US$200,000, and 80% for US$200,000 and above.) Starting in 2020, the income thresholds will be indexed to grow at the same rate as the consumer price index (CPI). Together, CBO estimates that this provision and Sec. 401 will save US$34.3 billion -- almost half of the US$73 billion in total offsets included in H.R. 2.

Title IV also cuts Medicare payments to hospitals and post-acute care providers. It replaces a scheduled 2018 increase in hospital payment rates of 3.2% with annual increases of 0.5% per year from 2018 to 2023 (saving US$15.1 billion). It also caps at 1% the annual updates to Medicare's payment rates for certain providers of post-acute-care and long-term-care services in 2018 (saving US$15.4 billion).

Section 413 permits the IRS to recoup up to 100 percent of federal payments to Medicare providers that have unpaid taxes. Prior law limited such levies to 30 percent.

The Act also changes state allotments for Medicaid disproportionate share hospital (DSH) payments such that allotments will be higher in the next few years, and lower in later years, when compared to the schedule of payments in current law.

The Act makes permanent a transitional medical assistance provision that requires states to continue Medicaid coverage for certain families whose incomes increase above the Medicaid eligibility level. According to CBO, the increased costs for Medicaid will be more than offset by savings for exchanges and employers, saving the federal government net US$2.8 billion.

Title V: Protecting the Integrity of Medicare and Miscellaneous

Title V includes several provisions that aim to prevent fraud and reduce improper Medicare payments. It prohibits inclusion of beneficiaries' Social Security numbers on their Medicare cards to reduce identity theft. It requires CMS to deploy information technology, such as implementing "smart cards" and sending Medicare statements to newly eligible beneficiaries electronically rather than by mail. Further, CMS must ensure that Medicare does not pay for services for deceased individuals, and that valid provider National Provider Identifiers (NPIs) appear on pharmacy claims to receive payment. H.R. 2 also extends the contract term for Medicare Administrative Contractors (MACs) from 5 to 10 years, but requires CMS to increase transparency around MAC performance.

H.R. 2 also adds a requirement for MACs to establish an "improper payment outreach and education program" under which recovery audit contractors (RACs) will share with MACs information on improper payments that were made to providers in the region. A providers will receive from its local MAC a list of the most frequent and expensive payment errors it made in the past quarter and instructions for preventing them.23 In establishing the improper payment outreach programs, MACs will prioritize items and services that are most frequent, most costly, clearly inadvertent administrative errors, and those "due to clear misapplication or misinterpretation of Medicare policies."

One area of potential future enforcement action with this "misinterpretation of Medicare policies" authority is further scrutiny of payments for those off-label uses of drugs and biologics that are not covered.  Further, the MolDx program, which makes coverage decisions for Medicare on molecular diagnostic tests, recently finalized a local coverage determination that identifies several uses of immunohistochemistry testing that are not reasonable and necessary for use as companion diagnostics in the selection of oncology drugs and biologics.24

Other provisions of the Act respond to advocacy from stakeholders. H.R. 2 extends, through September 30, 2015, the MACs' "probe and educate" program to assess provider understanding and compliance with the "two-midnight rule," on a pre-payment basis. It also extends the PAMA prohibition on post-payment RAC audits for certain dates of service. Because the two-midnights rule affects inpatient/outpatient status, this provision may have implications for the availability of 340B discounts, which are limited to outpatient covered drugs.

The Act also reverses CMS' decision to eliminate global 10- and 90-day surgical packages (under which only same-day, related services would have been be bundled.) Starting in 2017, it requires CMS to begin collecting data for valuing surgical services from new sources; starting in 2019, CMS must use the new data to value surgical services on the Medicare physician fee schedule. (Changes in relative value units for surgical services  (RVUs) will affect payment rates for other services.)

Beginning on or before January 1, 2019 (but no earlier than January 1, 2017), the Secretary will require that bidders in the competitive acquisition program for durable medical equipment demonstrate that they are state licensed, as required in the states in which they do business, and to post a surety bond of US$50,000 to US$100,000 for each geographic area for which they intend to submit a bid. If a bidder's bid is at or below the median bid, is offered a contract, and does not agree to sign it, the Secretary will collect the surety bond.

The Act also requires the Secretary to publish guidance clarifying how the "Common Rule" for human subjects participating in medical research will apply to clinical data registries used for quality improvement. Finally, the Act expands the prior authorization process for "repetitive scheduled non-emergent ambulance transports" from the current CMS Innovation Center project in three states to a national program starting in 2017, and establishes a prior authorization program for chiropractors whose billing patterns are outside the normal range.

  1. This figure is CBO's estimate of Title I of the new law, "SGR Repeal and Medicare Provider Payment Modernization." It is dated March 25, 2015, as H.R. 2 was under consideration by the House.

  2. Available here.

  3. Medicare Payment Advisory Commission. "Health Care Spending and the Medicare Program: A Data Book," June 2014.

  4. World Bank.

  5. Ibid.

  6. Available here.

  7. Available here.

  8. New Social Security Act (SSA) § 1848(q).

  9. Generally these provisions apply to "eligible professionals" (a somewhat broader group than physicians) but for brevity this summary often refers to "physicians" as a shorthand. Initially, MIPS will apply to doctors of medicine; osteopathy; dental surgery or medicine; podiatric medicine; optometry; chiropractors; physicians assistants; nurse practitioners; clinical nurse specialists; and certified registered nurse anesthetists.

  10. Available here.

  11. Under 42 U.S.C. § 1395w-4(k) and (m).

  12. The weights can be adjusted in the first two years and  of the MIPS, and the weight for MU can be reduced (from 25% to 15%) if the Secretary determines that 75% of eligible professionals are meaningful EHR users.

  13. This appears to include a CMMI Phase I "testing" model or a Phase II "expansion" model.

  14. Note that under these authorities, CMS could include Part D drugs or drug costs in APMs (for example, CMMI's authority to test and expand models extends to Part D).

  15. The requirement that one or more entities "bear financial risk for monetary losses … in excess of a nominal amount" is not entirely clear; it could mean that one or more entities must bear a non-trivial level of financial risk, or that they must bear financial risk for any losses exceeding a stated loss amount considered nominal.

  16. "Covered professional services" has the meaning given in SSA § 1848(k)(3)(A) (p. 97), i.e., "services for which payment is made under, or is based on, the fee schedule established under this section and which are furnished by an eligible professional."

  17. The Act also includes an alternative standard to be a "qualifying APM participant" that is based on volume of patients rather than payments.

  18. Sec. 601(b) of the "American Taxpayer Relief Act of 2012" (P.L. 112-240).

  19. The ACA authorized creation of the qualified entity program under SSA section 1874(e) to expand availability of Medicare data to outside users.  A "qualified entity" is "a public or private entity that-(A) is qualified (as determined by the Secretary) to use claims data to evaluate the performance of providers of services and suppliers on measures of quality, efficiency, effectiveness, and resource use; and (B) agrees to meet the requirements described in paragraph (4) and meets such other requirements as the Secretary may specify, such as ensuring security of data."

  20. We note that this process may be limited to identifying only "errors" in the data and not allow for any appeal beyond correcting such errors.  Also, under 42 CFR 401.717 the qualified entity is supposed to give the provider or supplier 60 days advance notice of the data to be released and then to release the data after 60 days, even if the provider/supplier has requested a correction in the meantime and a correction has not occurred.

  21. The ICD-9 code sets used to report medical diagnoses and inpatient procedures will be replaced by ICD-10 code sets on October 1, 2015. ICD-10 consists of two parts, 1) ICD-10-CM diagnosis coding which is for use in all U.S. health care settings and 2) ICD-10-PCS inpatient procedure coding which is for use in U.S. hospital settings.


  23. This provision explicitly authorizes in statute tactics that some MACs have begun using to educate physicians about the volume of diagnostic tests they perform and the frequency with which they use "special stains."

  24. See "MolDX: Special Histochemical Stains and Immunohistochemical Stains (L35693)," available at

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