The way physicians are organized and reimbursed in the United States is undergoing a once-in-a-generation transformation from a fee-for-service system to alternative payment models (APMs), the goal of which is to reward cost savings and quality of care. Early-adopter physicians and hospitals have formed accountable care organizations (ACOs) that are paid under new public programs such as the Medicare Shared Savings Program and private programs such as the Alternative Quality Contract from Blue Cross Blue Shield of Massachusetts. The evolution of ACOs — some of them hospital-dominated, some physician-led — will probably shape local delivery systems for decades to come.1
These changes, catalyzed by the Affordable Care Act, are poised to accelerate. So far, APMs have largely been relegated to the most consolidated health care markets and to organizations managing capitated risk for Medicare Advantage patients. The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) creates strong incentives for the rest of the market to follow, by shifting many traditional Medicare fee-for-service patients into risk-based reimbursement. MACRA moves all physicians toward value-based payment, with either a performance-based payment adjustment of −9% to +27% in 2022 or a 5% lump-sum bonus for those participating in APMs such as ACOs in 2018. Whereas adoption of previous Medicare APMs has been slow, the 5% bonus helps practices cover startup costs and provides a stronger incentive for adoption. Moreover, even practices that choose the more limited pathway will find their pay tied to cost and resource utilization.
These APMs assign to organizations that employ primary care physicians (PCPs) accountability for achieving quality goals and saving money relative to benchmarks. As a result, PCPs must practice differently to reduce the total cost of care and improve its quality, invest in tools such as population health management software, and often add staff such as care coordinators. PCPs assume risk and incur costs in hopes of achieving economic windfalls later from shared-savings payments or low medical costs relative to Medicare Advantage capitated payments. Many organizations, particularly large physician-led groups focusing on Medicare Advantage, have demonstrated that large and recurring savings can be achieved.
Since sharing savings from beating benchmarks is predicated on reducing spending from somewhere in the health care value chain, these models create economic winners and losers. Future incomes for both PCPs and specialists depend on the “sources” and “uses” of savings: whose revenue is lost to create savings, who receives reduced expenses or proceeds, and who controls the flow of funds in these models.
Early experience suggests that the sources of savings will be reducing hospital days, emergency department visits, lengths of stay in skilled nursing facilities, referrals to specialists, and the intensity of diagnostic testing by specialists. Some of the medical conditions whose costs are most modifiable are congestive heart failure, chronic obstructive pulmonary disease, type 2 diabetes, back pain, and arthritis. Reductions in volume and treatment intensity will most affect hospitals, skilled nursing facilities, and specialists — particularly emergency medicine physicians, cardiologists, pulmonologists, endocrinologists, orthopedists, and radiologists.
Many hospitals are partially protecting themselves from losing revenue by acquiring physician groups or employing physicians to whom shared savings are paid. However, these payments often amount to only a portion of hospitals’ lost revenue — 50% in the case of the Medicare Shared Savings Program. Specialists stand to lose even more. Most earn incomes tied to the relative value units (RVUs) associated with the services they deliver. MACRA specifies the rate at which physician payments will increase, and the value of RVUs is unlikely to increase to offset the reduction in volume of specialist RVUs. The specialist supply is also unlikely to decrease: training programs have little incentive to reduce specialty training slots that are Medicare-funded, provide low-cost labor, support their teaching mission, and enhance the prestige of their brand. If these assumptions bear out, there will be fewer dollars to spread among the same number of specialists.
The magnitude of this change could be dramatic. Providers participating in Blue Cross Blue Shield’s Alternative Quality Contract generated 8.7% less spending on procedures, 10.9% less on imaging, and 9.7% less on tests.2 If such declines are replicated broadly, average incomes for some specialties could decrease by more than $35,000 per year (see table). In their first year, Medicare Pioneer ACOs used 3.5 to 5% fewer physician procedures, imaging services, and tests than did a control group.3 Increased health care utilization by an aging population amounts to only 2% more volume annually, according to a McKinsey and Company analysis, and therefore will not offset these declines.
The uses of savings will be divided between lower medical claims for payers and new revenue paid as shared savings to provider organizations that achieve savings. This potentially large magnitude of revenue gains for PCPs provides strong motivation. PCPs have an average annual income of $195,000 — significantly less than the specialist average of $284,000 — and account directly for a small percentage of health care costs. Yet they substantially influence the total cost of care through referrals and directing of their patients’ subsequent care.4 For example, a PCP could earn an extra $80,000 by achieving the savings rates attained in the fourth year of the Alternative Quality Contract program. This figure amounts to a 10% reduction in the total cost of care for a 1500-patient panel (assuming that payers keep half the savings and that physicians must use three fourths of their savings to pay for additional staff and tools).
APMs are designed to distribute savings to PCPs, reflecting the broader roles for primary care established by MACRA and the Affordable Care Act. Many large risk-bearing groups are led by PCPs; even in hospital-led groups, PCPs who can claim to have contributed to savings will expect a large share. We are already witnessing redistribution of savings to PCPs. Of the shared-savings distributions reported by ACOs under the Medicare Shared Savings Program, PCPs received 49%, specialists 11%, and hospitals 9%.5 (The remainder was used for infrastructure costs.)
As APMs move from experiments to widely adopted systems, determining how to distribute these savings will be challenging for multispecialty groups and health systems. We anticipate that the flow of funds will be fought over by PCPs and specialists and will be determined on the basis of the organizational structure, the relative power of PCPs and specialists, specialists’ strategic responses to demonstrate their value, and the organization’s conception of its mission.
Specialists will have to decide whether to play defense or offense in responding to these changes. Those who focus on defense will continue to invest in the fee-for-service playbook: achieve objectively measurable clinical excellence within their specialty and consolidate into larger groups for negotiation leverage with commercial payers. For a while, they may successfully maintain incomes that way, particularly if they have strong institutional affiliations and reputations that translate into patient self-referrals and make them essential to commercial payers’ provider networks.
Other specialists will go on the offense, aiming to differentiate themselves on the basis of their ability to reduce costs of care. They could do so by limiting unnecessary consults and tests, practicing in lower-intensity facilities, prescribing lower-cost medications, and preventing avoidable hospitalizations. In some cases, specialists will be better positioned than PCPs to perform cost-reducing functions, particularly for management of complex diseases and medications. A strong offense will also involve greater financial integration with PCPs — specialists might become partners in ACOs or negotiate bundled rates for managing episodes of care. PCPs, for their part, may lock in referrals with high-value specialists and share with them the savings they help create.
As health care reimbursement shifts from fee-for-service to risk-based payments, PCPs are well positioned economically and strategically. Their incomes are likely to grow substantially over the next decade, at the expense of hospitals and specialists. Specialists who fail to expand their role and develop the capabilities and relationships to drive value improvement will face a threat to their incomes and practices.
From Venrock, Palo Alto (R.K.), the Schaeffer Center for Health Policy and Economics, University of Southern California, Los Angeles (R.K.), and Stanford University School of Medicine (R.K.) and Stanford Graduate School of Business (A.C.), Stanford — all in California; and the John F. Kennedy School of Government, Harvard University, Cambridge, MA (A.C.).
1. Kocher R, Sahni NR. Physicians versus hospitals as leaders of accountable care organizations. N Engl J Med 2010; 363: 2579-82.
2. Song Z, Rose S, Safran DG, Landon BE, Day MP, Chernew ME. Changes in health care spending and quality 4 years into global payment. N Engl J Med 2014; 371: 1704-14.
3. Nyweide DJ, Lee W, Cuerdon TT, et al. Association of Pioneer Accountable Care Organizations vs traditional Medicare fee for service with spending, utilization, and patient experience. JAMA 2015; 313: 2152-61.
4. Peckham C. Medscape physician compensation report 2015. Medscape. April 21, 2015 (http://www.medscape.com/features/slideshow/compensation/2015/public/overview).
5. Schulz J, DeCamp M, Berkowitz SA. Medicare Shared Savings Program: public reporting and shared savings distributions. Am J Manag Care 2015; 21: 546-53.
This Perspective article originally appeared in The New England Journal of Medicine.