The Centers for Medicare & Medicaid Services (CMS) recently released the payment rates for physician groups participating in the first round of the Value Based Payment Modifier Program (“VBPM Program”); physicians and health systems alike should take note of the possible reimbursement declines forecasted by the results.

Under the Affordable Care Act (implemented in Section 1848(p) of the Social Security Act), CMS is required to establish and apply a Value-Based Payment Modifier (“VM”) to adjust the amounts paid to physicians under the Medicare Part B physician fee schedule based on the quality and cost of care provided to Medicare beneficiaries. The VPBM Program is intended, much like the existing bundled payment systems and Accountable Care Organizations (ACOs), to implement a physician reimbursement structure that rewards physicians more for the quality of the care than the volume of care provided (the number of procedures performed by a physician or group). The existing fee for service system, by paying physicians per procedure performed, incentivizes physicians to perform as many procedures as possible, with less regard for the anticipated outcome. The VPBM Program alters this calculus by incorporating a multiplier that adjusts total payments a physician receives by their batting average –or average quality and cost scores for a given reporting period.

At its most simple, the VM is a payment modifier (or adjustment factor) that will be set for each physician or physician group (operating under a common tax ID) based on their previously reported Physician Quality Reporting System (PQRS) data. If CMS maintains the method used for FY2015, PQRS data reported in a designated prior year (performance period) will be used to calculate the VM for a physician or group. Specifically, CMS will assign a “composite quality score” and “composite cost score” to a given physician/physician group based on their PQRS data. CMS will then compare the provider’s composite scores to their peers to rank them into 1 of 6 tiers. Each tier will be assigned a modifier (value-based payment multiplier), and for a given calendar year, the provider’s reimbursement rate will be adjusted by that modifier. That is, the physician/physician group will be paid an amount equal to the procedure’s physician fee schedule rate multiplied by the modifier. Physicians face either an upward, neutral or downward adjustment in payment rates based on the quality tier they fall in. High performing providers (high quality/low cost performers falling in the upper three tiers) are rewarded with a positive VM multiplier and increased payment rates. While, low performing providers (low quality/high cost performers falling in the three lower tiers) face a negative VM multiplier that reduces their payment rates for the year.

The Affordable Care Act does not designate how much the modifier must adjust payments, but it does require all payment adjustments to be budget neutral. Consequently, the system constructs a zero sum game for physicians or a bell curve reimbursement structure. High performers may only be rewarded in amounts equal to the lower performers’ payment reductions (or penalties).

CMS is phasing in the VM system gradually, starting in CY2015 with physician groups of a 100 or more eligible professionals reporting under a single tax ID and expanding to all physicians by 2017. Physician practices of 10 or more eligible professionals will be subject to the VBPM Program next year (CY2016), with all physicians subject to it in the year after (CY2017).

For CY2015, the Quality Tiering structure described above was optional for physician groups of 100 or more eligible professionals, and 127 Physician groups elected this option, using 2013 PQRS data to establish the quality tiers and value modifiers. Ultimately, none of the groups qualified for the highest tier (or highest positive multiplier). Only 14 groups received a positive bump in reimbursement at all; while, 11 incurred negative multipliers (between -0.5% to -1%). In total, 81 groups qualified for a neutral adjustment (or no adjustment), and 21 groups had insufficient PQRS data reported to be ranked.

Physicians and health systems (who are increasingly employing physicians) should take note of this new reimbursement paradigm. Although the CY2015 results show limited financial impact for most physicians, the program, at its core, is a cost containment system. Consequently, physicians may face larger negative adjustments in the future. Further, even those physicians that earn neutral scores must absorb the costs of the PQRS reporting system and implementing quality initiatives. Finally, CMS is free to sharply increase the VM multiplier beyond the 1% adjustments seen to-date.

Physicians and hospitals should closely monitor the VPBM Program as it develops, the PQRS data they are reporting, and the overall quality and cost of care provided today—as today’s actions could dramatically alter tomorrow’s profits . . . for both physician practices and their health system employers.