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The Latest and Greatest in

Pay for Performance and ACOs

May 15, 2014

Partner at VMG Health. VMG Health solely provides transaction advisory and valuation services in

the healthcare industry.• Since 1995, offices in Dallas and Nashville.

• 90 professionals, over 1,200 valuation per year.

• Third party role: business valuations, real estate, fixed assets, fair value

Leads Professional Service Agreements Division. Previously in KPMG’s litigation department & finance professor, University

of North Texas. Published and presented over fifty times related to physician compensation

and fair market value. • April 2014 HFM Magazine “Evaluating The Fair Market Value of Pay for Performance”

• Finance Committee Attendance on major P4P initiatives

Jen Johnson, CFA

P4P Background

4

Affordable Care Act

Physicians and hospitals need to collaborate more than ever

Security – healthcare reform, changing reimbursement

Increased compensation: post employment or contracted arrangement

Better hospital-based reimbursement

Replace potential loss of ancillary earnings

Investment requirements for information technology

Participate in risk-based contracting, ACOs, quality initiatives

Why the Growth in Integration & P4P?

Hospitals critical success factors – shifting from production towards quality of clinical performance and efficiencies

1. Payments for Reporting (ie: PQRI)

2. Pay for Process

3. Pay for Outcomes

Standard process leading up to P4P payments

1. Recognized organization identifies quality metrics or average costs

2. Reporting measures is required, or costs are tracked

3. Benchmarking data is gathered

4. Payments for outcomes or savings is observed in market FMV can now be established

Common factors included in P4P arrangements Lowering costs without sacrificing quality

Quality outcomes payments– individual, services line level, entire population

Use of technology

Evolution of P4P payments

In late 2003, CMS and Premier Inc. launched the Hospital Quality Incentive Demonstration (HQID) for over 250 hospitals

Average composite quality score (CQS), an aggregate of all process and outcomes  measures within each clinical area, improved project-wide by 18.6% over  the project's six years (October 2003 through September 2009)

In 2008, the Robert Wood Johnson Foundation and California HealthCare

Foundation reported results of a national program that tested the use of

financial incentives to improve the quality of health care. Tested seven projects

across the nation that adjusted compensation based on performance scores –

hospitals and physicians. Notable findings:

Financial incentives motivate change

Alignment with physicians is a critical activity for quality outcomes

Public reporting is a strong catalyst for providers to improve care

History and Results of P4P

SAVINGS: 13 Gainsharing Opinions (2001-2008)

QUALITY: February 2012 – Committee on Ways and Means – 1 example

UnitedHealth Group discusses results of its Premium Designation Program (PD)

Results show over 50% decrease in some complication rates

SAVINGS & QUALITY

2013 Results 114 ACOs in the program - 54 of the ACOs saved money - of $126 million

2013 Greater New York Hospital Association - 100 hospitals desired to work with

participating physicians to account for the use of hospital resources. Physicians that

met hospital quality targets while lowering costs could be compensated a portion of

the savings.

There is a P4P market, but how much can be paid to physicians? It depends.

History and Results of P4P - examples

Third party payors

UnitedHealth Group – largest US health insurer by sales

2013 paid 21 different specialties based on quality

WellPoint – largest US health insurer by membership

Will increase primary care physician pay by 10% - coordinated care

Additional cost savings bonus of 20% to 30% of savings achieved

BCBS and Aetna

Growing P4P programs

Including payments for both cost savings and quality

Governmental Programs growing

State and Federal

MSSP, ACOs and bundled payments

Market Comparables for P4P Payments

ACA Provisions & P4P

CMS to play major role in developing P4P programs

“VBP” – quality and cost goals simultaneously Section 3001: Hospital Value Based Purchasing 2012

• Quality Outcomes payments• Efficiency measures in 2014• Must be reporting on Hospital Compare website for

at least 1 year• DRG reductions nationwide will fund• UP to 2% can be earned

Section 3006: Value Based Purchasing Skilled Nursing Facilities and Home Health

Section 3007: Value Based Payment Modifier under the Physician Fee Schedule

• Payment modifier for cost and quality• 2015 for larger groups• 2017 for all• Size of incentive not specified

ACA provisions continued…

Section 3008: Payment reduction for Hospital Acquired Conditions

Section 3021: Establishment of Center for Medicare and Medicaid Innovation within CMS, 3 of 18 models are P4P

• Appropriate criteria for diagnostic imaging orders• Payments for using patient decision support tools• Payments for using evidence based guidelines for

cancer care

Section 3022: Medicare Shared Savings Program• Promotes ACO development• Cost savings and quality must be met

Governmental programs – great roadmap for how much is acceptable to distribute to physicians. Consider 3rd party payors as well when defining the “P4P market”.

2014 RAND Report: Measuring Success in Health Care - Value Based Purchasing programs U.S. Department of Health and Human Services requested

study 129 VBP programs (91 P4P, 27 ACOs, 11 bundled

payments) Measures: clinical quality, cost, outcomes, experience Recommendations:

Set measurable goals, use national data Case-mix adjust outcomes measures, use broad set of

measures, identify overtreatment measures, monitor Evolve from narrow process measures to broader set

emphasizing outcomes Sponsor engage providers in design/implementation VBP sponsors should collect a common set of factors

to find best working program Need more information:

• HHS should develop a structured research agenda to address gaps in VBP knowledge base

• CMS should study private-sector programs, program design information not available

• Study changes and investments, experiences and challenges

P4P Arrangements

13

Physician Service Agreements – P4P

ACOs & IDNs

Bundled Payment models

Medical Directorships

Employment

Committee Meetings

Call Coverage

Co-management (fixed + variable)

PSA Model

We will be stuck between FFS and P4P for a while

May be a result of joint ventures, acquisitions, employment or independent contractor arrangements

Less risk for physicians

Traditional deals with P4P component

Clinical (% of base add-on)

Medical directorships (hourly rate differential)

Call coverage (portion at risk for outcomes)

Co-management of service line

More risk for physicians

ACO type models

Upside based on actual savings -> possibly downside

• ->Quality initiatives provide gate or extra upside

->Share gains/losses

Bundled Payments

Physician Risk & Arrangement Types with P4P

Hospital and physicians enter into an agreement where physicians are

jointly responsible with hospital for managing a defined service line

Various arrangement types exist in the market

Joint Ventures

Contractual arrangements

Payments contained in the agreement

Will vary based on services outlined

Should be linked to actual services and/or outcomes

Co-Management - The Basics

Fixed Fee + Variable Fee = Co-Management Fee Structure

Physician service related payments are justified by need for clinical expertise

Time dedicated to meetings designed to improve the overall quality of care for a

specific service line.

May also include

Medical Directorship

Non-physician services

Billing

Management/administration

Call coverage

The duties must not overlap with hospital staff

Probably not a typical management fee

Co-Management - Fixed Fee Overview

Quality outcomes drive payments - create payment tiers for incentives based on

various outcomes

Improvement and superior outcomes may warrant incentive payment

Obtain industry-recognized benchmark data for the quality metrics, (average or

median and top or 90th percentile)

Understand historical performance and who is responsible for developing and

implementing the strategy

Cost savings metrics

Administrative oversight to protect quality is essential

Measurement must be tied to physician’s input

Co-Management - Variable Fee Overview

The following payment allocations may be included within a clinical integration model

Bundled payment splits – understand who is providing what service

Quality and Shared Savings splits among ACO entity and hospital and physicians

FMV process - balanced approach for overall model should be assessed

Third party funded or from hospital

Infrastructure cost recovery

Buy-in or participation Fee

Time spent/effort – hourly rate paid

Split of savings – existence of minimum savings threshold

Split of quality - benchmarks utilized

Upside and downside risk

Care coordinator payments – ie: Nurse care manager

PMPM fee for management – consider acuity and NCQA

Clinical Integration payments - ACO/IDN models

FMV Guidance and Regulatory Tips

Hospital is at risk for relying on unsupportable valuations

Valuation methodology is as important as total compensation

No opinion shopping, carefully choose your valuation firm

Logic Test – Tuomey examples:

Do not pay fulltime benefits/malpractice premiums for part-time services

Physicians paid above the 75th percentile of market data should demonstrate

productivity consistent with other physicians in this percentile

Understand arrangements where the provider is not making money

Compensation for administrative duties should be based on significant duties

P4P – watch out for low hanging fruit and rebase annually

Case Law Growth and Take-Aways

1. Agreement terms must be understood and are sometimes unclear at valuation stage,

define:

What services will be provided?

How will parties be compensated?

2. Commercially Reasonable – gaining importance

Facility needs – check for overlap of services (numerous medical directors needed)

Operational assessment (quality metrics relevant for patient population)

3. There are no published standards for physician compensation valuations, P4P new

Appraisal firm should understand

Healthcare regulations

Valuation principles

Fair Market Value

Data considerations – competing hospital, extra caution

Valuation Starting Point

Based on the anti kickback statute, and other healthcare regulations and guidelines, any

transaction between hospitals and physicians must be at Fair Market Value.

IRS definition - “the amount at which property would change hands between a willing seller

and a willing buyer when the former is not under any compulsion to buy and the latter is not

under any compulsion to sell and when both have reasonable knowledge of the relevant

facts.”

Provides a conclusion which should not reflect consideration for value or volume of referrals.

Offer equal P4P opportunities to all providers

Do not tie P4P compensation to expected referrals

P4P comparables

Stick to regulatory guidance when it comes to paying for quality or shared savings

Governmental programs and third party payors are good market comparables

Fair Market Value Definition

Quality measures should be clearly and separately identified

Quality measures should utilize an objective methodology verifiable by credible medical evidence

Quality measures should be reasonably related to the hospital’s practice and consider patient population

Do not consider the value or volume of referrals. Consider an incentive program offered to all applicable providers

Incentive payments should consider the hospital’s historical baseline data and target levels developed by national benchmarks

Thresholds should exist where no payment will accrue and should be updated annually based on new baseline data.

Hospitals should monitor the incentive program to protect against the increase in patient fees and the reduction in patient care

Incentive payments should be set at FMV

Regulatory Guidance - Quality

Gainsharing Guidance – Favorable OIG Opinions Each member of the physician group should have medical staff privileges The arrangement should be administered by a program administrator, whose

compensation was not tied in any way to the incentive compensation. A program administrator should identify cost-savings metrics after reviewing historical

practices and understanding its medical appropriateness. The savings targets should be “re-based” at the end of each year in multi-year

arrangements. The hospital should calculate the cost savings separately for each group and for

each cost savings recommendation. The arrangement should include objective measures to monitor quality (i.e., CMS

Specification Manual for National Hospital Quality Measures). Incentive payments should be set at FMV

------------------------------------------------------------------------------------------------------- More complex factors should be considered for allocating savings associated with patient

population and bundled payments Responsibility for outcomes and savings Risk adjustment for patient population Responsibility for infrastructure costs (if applicable)

Caps are prudent and seen in demonstration projects

Regulatory Guidance – Shared Savings

Evolutionary Process, “Seen one, seen one”

Reported Data for making P4P decisions – provider and payor concerns

Inaccurate

Inconsistent, outlier treatment

Expensive/timely to aggregate and report

IT Infrastructure – other issues

Sharing and access

New software options

Connectivity of information among integrated parties

Common Challenges with P4P

Allocation of payment methodologies

Primary care versus specialists

Primary care – PMPM and allocation of shared savings

Specialists - service line co-management and bundled payments

Year 1 versus Year 2+

Care coordinators – needed?

Risk taking

Choosing Metrics - inconsistent among P4P programs

Common Topics in the Boardroom with P4P

Modest set of metrics – perhaps consistent with those found in both commercial ACOs and Medicare ACOs

Start small

Have a written agreement

Update and rebase metrics annually

Understand who is driving cost savings and quality

Have safeguards which prevent cherry picking and lemon dropping

Identify flow of funds allocation early on in process

Compliant P4P payment formula = Good Data + Logic + FMV guidance

P4P Program Starting Tips

Questions?

Jen Johnson, CFA Partner

jenj@vmghealth.com

214.369.4888