On April 16, President Obama signed into law the “Medicare Access and CHIP Reauthorization Act of 2015,” (“MACRA”) which repealed the Sustainable Growth Rate (“SGR”) payment formula used to limit annual updates to Medicare payment rates to physicians, and introduced a “merit-based” incentive payment program for physicians. MACRA also extended both Disproportionate Share Payments and the Children’s Health Insurance Payment Program. Finally, the Act narrows the Gainsharing prohibition in the Civil Money Penalty Law and directs the Secretary of Health & Human Services to report on additional gainsharing safe harbors that would reduce waste, increase efficiency and improve care.

The SGR Repeal and Medicare Provider Payment Modernization

Prior to the passage of MACRA, Medicare payments for physician services were made according to a fee schedule based on values assigned to a physician’s work (e.g., time, skill, intensity, etc.), overhead costs and malpractice expense for each service. The sustainable growth rate or “SGR” was created to limit Medicare expenditures for physician services if such payments exceeded an annual spending target. Beginning in 2002, Medicare expenditures on physician services began to exceed the spending targets, resulting in SGR-mandated reductions; however, with the exception of 2002, Congress enacted a series of laws to override the reductions to physician payments required by the SGR.

The passage of MACRA makes fundamental changes to the way Medicare payments to physicians are determined, how they are updated, and how they incentivize physicians. MACRA repeals the SGR methodology for determining annual updates for physician payments. It also introduces a new method for updating physician fees in the short term and on a longer term basis. MACRA transitions several Medicare incentive programs into the Merit-Based Incentive Payment System (“MIPS”) that allows physicians to earn incentive payments based on their performance. MACRA also creates a bonus structure for physicians that participate in Alternative Payment Models (“APM”).

Annual MPFS Payment Updates: For the first few years after the enactment of MACRA, the bill will set annual Medicare Physician Fee Schedule (“MPFS”) payments by statute. Beginning in July 1, 2015, physicians will receive a 0.5% update annually through December 31, 2019. For the next six years, from 2020 through 2025, the payment update will be 0%. Beginning in 2026, there will be two update factors, one for items and services furnished by a participant in a new APM (see below) and another for those who do not participate in an APM. The update factor for the APM participants would be 0.75%, and the update factor for those not participating in an APM would be 0.25%.

The Merit-Based Incentive Payment System: In addition to the annual MPFS payment updates discussed above, starting in 2019, the Merit-Based Incentive Payment System, or MIPS, will create a new incentive payment system by combining several current Medicare incentive programs into one, namely the Value-Based Modifier (“VBM”), the Meaningful Use Incentive Program (“EHR”), and the Physician Quality Reporting System. Under MIPS, physicians will be assessed based on their performance in four categories: quality; resource use (efficiency); meaningful use of EHR; and clinical practice improvement activities. A composite performance score will be calculated for each individual, which will be used to determine the amount of any incentive payment. Physicians will be eligible for incentive payments if they achieve high quality performance and continue to improve their performance annually, when compared to a base performance threshold. Providers falling below the base performance threshold will be subject to negative adjustments at increasing percentages. CMS is charged with the responsibility to refine the metrics used to determine whether an individual qualified for an incentive payment under MIPS. Significant questions remain as to how MIPS categories will be defined, particularly the metrics that will make up “quality” and “clinical practice improvement activities.” CMS will also be required to establish a process under which an individual could appeal the calculation of his or her MIPS incentive payment. The MIPS program would apply to physician payments for items and services furnished on or after January 1, 2019.

Alternative Payment Models: In addition to the MPFS payment updates and MIPS, which modifies but still fundamentally bases physician compensation on a fee-for-service model, MACRA promotes the development of new payment models that could eventually eclipse our traditional system of utilization-based payments. Eligible professionals will be paid a bonus for participating in a qualifying Alternative Payment Model, or APM, which includes programs developed by the Center for Medicaid and Medicare Innovation (such as a CMMI bundled payment or medical home initiative), a Medicare Shared Savings Program ACO or an approved federal demonstration project.

Beginning in 2019 through 2024, eligible professionals that participate in qualifying APMs will be excluded from the rate reductions that may be applied under MIPS. Eligible professionals will also receive a bonus based on the proportion of covered services that they furnished to Medicare beneficiaries through an eligible APM during the preceding year.

Other Payment Reform Measures: In addition to the SGR repeal, the adoption of MIPS and promotion of APMs, MACRA enacts several new provisions related to the modernization of physician payment issues. These issues include (but are not limited to):

  • Encouraging care management for individuals with chronic care needs (MACRA §103)
  • Empowering beneficiary choices through continued access to information on physician services (MACRA §104)
  • Expanding the availability of Medicare data (MACRA §105)
  • GAO studies on the use of telehealth services under federal programs (MACRA §106(c))

Medicare and Other Health Extenders

MACRA extended and contains additional health measures, called “extenders,” which have customarily been renewed by Congress each year during the SGR debate. The extensive list of existing measures includes twenty-one different extenders ranging from:

  • Extending the cap on outpatient therapy for Medicare Part B patients through December 31, 2017
  • Extending add-on payments for home health services furnished in rural areas and ambulance transports that originate in rural areas though January 1, 2018
  • Extending special Disproportionate Share payments for the Medicare-dependent hospitals program and Medicare payment increases for low-volume hospitals and special payments for the Medicare-dependent hospital program through October 1, 2017

Other health programs extended through 2017 include the maternal, infant, and childhood home visiting program, the abstinence-only education programs, the National Health Service Corps, and the Community Health Center program. MCARA permanently extends the Qualifying Individual (“QI”) program, which helps low-income seniors pay their Medicare premiums.

With most of the extenders set to expire in two to three years and an end to the annual SGR debate, it is unclear whether or not the extenders will last beyond 2017 and 2018.


The Children’s Health Insurance Program is a federal-state program that provides funding for millions of low-income children whose parents earn too much to qualify for Medicaid. MACRA provides two additional years of funding for CHIP, through 2017.


Some of the costs associated with MACRA will be offset, primarily through Medicare Beneficiary cost-sharing mechanisms. Starting in 2018, Medicare beneficiaries with incomes above $133,500 will pay more for their Medicare Part B and Part D premiums. It is estimated that this will affect 2% of total Medicare beneficiaries. Moreover, beginning in 2020, “first-dollar” supplemental Medicare insurance, “Medigap,” will no longer cover the Part B deductible for new beneficiaries. A number of additional offsets include restructuring the Medicaid DSH reductions and withholding Medicare payments to providers with tax delinquencies.

Gainsharing CMP and Miscellaneous Program Integrity Provisions

The so-call Gainsharing Civil Money Penalty (“CMP”) law prohibits hospitals from making payments to physicians that might have the effect of reducing or limiting services furnished to Medicare or Medicaid patients. Responding to industry concerns over the breadth of this prohibition, MACRA narrows the statutory language to prohibit only payments that might limit the furnishing of medically necessary services. Formerly, the statute prohibited such payments that might limit the furnishing of any services. This change in the language of the CMP law became effective on the date of the enactment of MACRA.

In addition, MACRA directs the Secretary of Health and Human Services, in consultation with the Inspector General, to undertake a study and report to Congress within 12 months on additional gainsharing safe harbors that would reduce waste, increase efficiency and improve care. The intent of the study and report is for the Secretary to identify gainsharing arrangements or other similar arrangements between physicians and hospitals that could trigger the imposition of civil monetary penalties, but in practice have the effects of improving care while reducing waste and increasing efficiency. The report to Congress will include the following:

  • Consideration of whether gainsharing provisions should apply to ownership interests, compensation arrangements, and other relationships;
  • A description of how the recommendations address accountability, transparency, and quality, including how best to limit inducements to stint on care, discharge patients prematurely, or otherwise reduce or limit medically necessary care; and
  • Consideration of whether a portion of any savings generated by gainsharing and other arrangements (as compared to an historic benchmark or other metric specified by the Secretary to determine the effect of delivery and payment system changes on Medicare expenditures) should accrue to the Medicare program.

The final section of MACRA contains several other Medicare policy provisions aimed at preventing fraud, including a provision requiring Medicare Administrative Contractors to establish outreach and education programs for improper payments. These programs should include information about the most common and expensive payment errors, and tips for avoiding such errors. MACRA also prohibits Social Security Numbers from appearing on Medicare cards, permits CMS to consider the use of smart card technology, and directs CMS to devise a program that would enhance and incentivize the reporting of Medicare fraud and abuse.


Although the reformed physician payment framework promoted by MACRA promises to provide a greater sense of short-term stability for providers, a number of questions remain. The industry will carefully monitor CMS’s development of performance indicators as the long term implications of the new “merit based” incentive payments remain unclear.