MACRA Considerations For Hospitals And Health Systems Acquiring Or Affiliating With A Physician Practice

In The News
October 16, 2017

The passage of the Medicare Access and CHIP Reauthorization Act of 20151 (“MACRA”), and implementing regulations promulgated in 2016,2 focused on reforming physician Medicare reimbursement with an eye towards incentivizing quality and cost savings. In the process, however, Congress and the Centers for Medicare & Medicaid Services (“CMS”) have created an interesting juncture in the health care landscape, as one of the real and lasting impacts of MACRA may well be the formation of new alignments between physicians and hospitals and health systems.

Under MACRA, a portion of physician payments is tied to goals such as reduced costs and improved quality, meaning that physician incentives now more closely track imperatives faced by hospitals and health systems in their march toward value-based health care (“VBC”). This new alignment could prove beneficial to physicians and hospitals and health systems alike, and may result in new partnerships through joint ventures, affiliations or employment opportunities. But what do hospitals and health systems need to know about MACRA and what should they be mindful of before acquiring or affiliating with physician practices? This article provides a basic overview of MACRA and discusses factors hospitals and health systems might consider in evaluating potential physician practice partners.

What is MACRA?

MACRA, enacted in 2015 with broad bipartisan support, repealed the unpopular Sustainable Growth Rate formula for setting the Medicare Part B physician fee schedule.3 In its place, there will be modest annual increases of 0.5% in the fee schedule through 2019, no change from 2020 through 2025, and then another modest annual increase of 0.25% or 0.75% beginning in 2026 based on physician participation in one of the two MACRA tracks, the Merit-based Incentive Payment System (“MIPS”) and the Advanced Alternative Payment Model (“Advanced APM”), described further below:4

  • MIPS: MIPS is the “default” track under MACRA, and includes physicians who do not participate in an Advanced APM. Under MIPS, Medicare Part B payments are based on physician performance in four domains: quality (replaces the Physician Quality Reporting System (“PQRS”)), advancing care information (replaces Meaningful Use), cost (replaces the Value-Based Modifier program), and improvement activities (a new domain that considers activities which support aims within healthcare like improving delivery, care coordination, engaging beneficiaries, population management, and health equity).5 Physicians may report their performance individually or as part of a group. Depending on performance, which is tied to a weighted average in these four domains, MIPS physicians will be subject to payment adjustments of up to 4% (positive or negative) from the baseline Medicare Part B fee schedule in CY 2019 based on performance in CY 2017.6 The payment adjustment threshold will be increased (positive or negative) to 5% in 2020, 7% for 2021, and 9% for 2022 and the following years.7 In other words, beginning in 2022, the potential spread in payment between the lowest-performing physicians and the highest-performing physicians could be up to 18%. An additional 10% bonus may be available to clinicians with exceptional performance,8 though CMS has indicated that payout of that bonus is unlikely.9

    Not all physicians are required to participate in MIPS. Physicians who are in their first year as a Medicare Part B participant are exempt, as are physicians reporting individually who have $30,000 or less in allowed Part B charges or 100 or fewer Medicare patients, or who are reporting as a group and who collectively satisfy these same low-volume thresholds. In June 2017, CMS issued a proposed rule that would increase the low-volume thresholds to $90,000 or less in Medicare Part B charges or 200 or fewer Medicare patients, likely further reducing the number of required MIPS participants. CMS projects that with these new thresholds, 37% of all Medicare Part B clinicians will be required to participate in MIPS.10
  • Advanced APMs: Advanced APMs are special alternative payment models designated by CMS that (i) require participants to use certified electronic health record (“eHR”) technology; (ii) provide payment based on quality measures comparable to MIPS quality metrics; and (iii) qualify as a Medical Home Model under CMS Innovation Center authority or require participating APM entities to bear more than a nominal amount of financial risk for monetary losses. Physicians who elect to participate in an Advanced APM forego MIPS reporting and reimbursement. Instead, such physicians are subject to the reporting, performance, and payment mechanisms underlying the specific Advanced APM in which they participate, and additionally receive an annual lump sum bonus of 5% of their Medicare Part B payments in 2019-2024.11

    At the time that the MACRA Final Rule was published, only 5% to 8% of physicians were projected to participate in Advanced APMs in 2017.12 Since that time, CMS has proposed to cancel three episode-based payment models that would have been considered Advanced APMs.13 Although CMS has indicated its intention to develop new voluntary bundled payment models in 2018 that would qualify as Advanced APMs, it remains to be seen how many physicians will be attracted to such voluntary programs. In sum, it appears likely that only a small percentage of physicians participating in the Quality Payment Program will do so through an Advanced APM track.

Why will MACRA Drive Physicians to Join Hospitals and Health Systems?

Hospitals and health systems offer physician practices resources such as information technology and administrative support. They also offer potentially more stable compensation as well as the opportunity to earn additional incentive payments that might be more challenging to obtain without hospital information systems, infrastructure support, access to Advanced APMs, and education.

Under MACRA, both MIPS and Advanced APMs will require that physicians invest significant financial and administrative resources and time to track and report performance. As an initial matter, physicians must purchase and maintain costly information systems, including eHR, in order to participate in MACRA. Physicians also face administrative and time burdens in collecting and reporting data to CMS. According to a 2016 survey of physicians, 74% said that performance reporting is burdensome, suggesting a window where hospitals and health systems could provide particular value to physician practices.14

Beyond financial and administrative considerations, MACRA is vastly complicated, requiring sophisticated analysis, education, and training. Reporting on measures, in particular under MIPS, is not a one-size-fits-all approach. Different physicians or physician groups could choose to report on widely different metrics, and there is an element of strategy in selecting those elements that will help a physician or practice stand out amongst its peers. In that regard, hospitals and health systems can offer to physicians the sophisticated data analytics that can help optimize reimbursement. 

Joining a hospital or health system will also give physicians a certain level of predictability in compensation that they may not have as independent practitioners. Most obviously, physicians employed by hospitals and health systems typically enjoy a base pay, which provides them with a minimal amount that they can expect to take home each year. However, even those physicians who merely affiliate with a hospital or health system will be attracted to the “risk pooling” that comes with reporting as part of a group and can help limit potential year-to-year fluctuations in Medicare reimbursement. Smaller physician practices in particular may be daunted by the potential downside risks associated with MIPS and with most Advanced APM models; employment by or affiliation with a hospital or health system can provide more financial certainty for physicians who are wary of the potential risks of practicing alone.

Finally, joining a hospital or health system may provide physicians with opportunities to receive gainsharing payments, particularly under certain Advanced APM arrangements. In addition to the revisions MACRA made to physician payments, MACRA also notably loosened gainsharing rules under the Civil Monetary Penalties (“CMP”) Law by specifying that only payments to physicians that induce reductions in medically necessary services are prohibited by the CMP Law.15 The amendment to the CMP Law provides important relief to hospitals and health systems that have been trying to implement gainsharing arrangements that are aligned with the goals of VBC, but have been wary of potential violations of existing law. This is another way in which MACRA may subtly drive physicians to join hospitals and health systems, as they seek out additional incentive payments that have been opened up by the CMP changes.

In sum, hospitals and health systems offer the value of support and stability to physicians who may be risk averse and may be unprepared to handle the challenges of MACRA alone. Although some physicians may succeed by forming larger groups, and others may be tempted to form “virtual” groups as outlined by CMS in June 2017,16 neither of these are likely to offer the certainty of compensation, resources, and the investment of time that hospitals and health systems can provide.

Why will MACRA Drive Hospitals and Health Systems to Acquire or Affiliate with Physician Practices?

MACRA’s alignment of physician and hospital and health system economic incentives means that physicians can bring value to hospitals and health systems by supporting their VBC initiatives. Physicians, as well as hospitals and health systems, will be focused on the VBC “triple aims” of cost, quality, and population health, driving both parties to engage in strategies that support these goals. For example, physicians participating in MACRA will likely be more invested in care management, following patients through the full continuum of care to ensure patients adhere to treatment protocols aimed at improving health outcomes and reducing costs. Physicians also may be more focused on ensuring that patients are treated in the most appropriate setting, managing low-acuity cases themselves, and referring to hospitals and health systems only when the patients’ conditions require the more complex care that hospitals and health systems are better positioned to provide. Additionally, aligned physicians will further hospital and health system goals associated with episode and population-based health. Hospitals and health systems will benefit from an expanded network of providers who are more focused on preventative care and care management, and who will be incentivized to refer patients to the most appropriate care setting.

What Qualities Will Hospitals and Health Systems Look for when Acquiring or Affiliating with Physician Practices?

Although many physician practices may be interested in joining hospitals and health systems in the coming years, certain practices will be more attractive targets than others. Fundamentally, hospitals and health systems should consider how committed potential physicians are to the triple aims, as those physicians that embrace such goals will be better positioned to succeed under MACRA and to advance institutional goals under VBC. The following additional factors also may be significant in evaluating physician practices:

  • Practices with care managers. These will be attractive targets, because they will be drivers of preventive care and care coordination that can help meet quality and cost savings targets. Primary care physicians are an obvious choice, but many other types of physicians will have experience in care management as well.
  • Large patient bases. Hospitals and health systems will increasingly seek to manage higher-acuity cases, leaving less severe cases to be managed by physicians in an outpatient setting. Thus, a physician practice with a larger patient base will have a larger pool of potential patients for treatment in the hospital and health system setting, and will bring more beneficiaries to participate in population health models.
  • Practices that already incorporate eHR. Practices that already have eHR or have familiarity with VBC models and reimbursement may be able to integrate with the acquirer’s systems more efficiently. They also may have a better understanding of good documentation and reporting practices and the importance of documentation in supporting claims and claim validation audits.
  • Average age of practice. Practices with more providers nearing retirement are less likely to have incentives to embrace new systems or invest in eHR. Paradoxically, to the extent that such practices have younger physicians, they also may be some of the best targets: younger physicians in the same practice will have much more need to embrace VBC over the long run, and may be eager to align with a hospital or health system that can contribute the capital and administrative management that MACRA requires. 
  • Social Determinants of Health. Hospitals and health systems might at first be wary of engaging physicians who support populations disproportionately challenged by social determinants of health, given the fact that multiple factors outside of a physician’s control may bear on cost and quality outcomes. However, hospitals and health systems should take comfort in the fact that CMS has indicated that in future years, it plans to adjust performance scores for physicians based on the impacts of social determinants of health.17 In the interim, CMS has proposed a bonus in the 2018 performance year for physicians who treat complex patients, in recognition of the particular challenges in caring for certain populations.18 In sum, hospitals and health systems that may be concerned about patient case mix should not be deterred, given that CMS has identified this as a priority and is working on fixes to help level the playing field.

What Performance Objectives Are Most Critical for Physician Success under MACRA?

The vast majority of physicians will participate in MIPS. As discussed above, under MIPS, physician compensation will be tied to a weighted score in four domains: quality, improvement activities, cost, and advancing care. The weighting shifts over time, but over the long run cost and quality together make up the greatest impact, collectively representing 60% of the weighted score.19

With respect to quality, a hospital or health system conducting diligence on a physician group may assess its historic performance on quality measures through Medicare’s “Physician Compare,” which tracked physician quality reporting and performance under PQRS. Previously, Medicare required that physicians report to PQRS to avoid a negative payment adjustment, but performance was not tied to payment.20 Many of the PQRS measures, such as breast cancer and colorectal cancer screening, are included in the MIPS quality category, so historic performance in these categories may provide hospitals and health systems with a benchmark for potential future performance.21 As of December 2016, approximately 175,000 individual clinicians have performance data collected through PQRS available for download.22

With respect to cost, a hospital or health system may review claims data to assess physician performance on the cost metric. CMS intends to provide scoring information during the 2017 transition year, even though cost is not yet a weighted component in the overall MIPS score.23 Practices with high cost benchmarks may be attractive because they provide greater room for improvement. Conversely, they could signal risks of systemic underperformance within the practice. Hospitals and health systems will need to consider the reasons why high cost benchmarks are so high, and whether the practice is in a position to improve under new management. Although cost will not be a critical score in early years of MACRA, its weighting will increase in subsequent years. Hospitals and health systems should thus begin to address cost now by structuring employment or affiliations with appropriate incentives, such as gainsharing, to ensure that employed physicians remain mindful of costs on a go-forward basis.

Focusing on physician performance on quality and cost measures is helpful not only for physicians that continue under the MIPS track, but also for those physicians who ultimately shift to an Advanced APM. Although the metrics for compensation under each Advanced APM is unique, they all contain an element of performance tied to quality and cost. Accordingly, practices that have typically succeeded in these metrics may be good predictors for future success, regardless of MACRA track.

What Other Questions Should Hospitals and Health Systems Be Asking Physician Practices?

Although historic performance can be a good way to value a physician practice, perhaps more important is whether the practice is open and willing to collaborate with hospitals or health systems to improve performance in the future. Even a practice that historically did not fare well could improve, providing long-term value to the hospital or health system, if physicians are willing to adapt to the new world under MACRA. Hospitals and health systems should thus consider posing the following questions, which may be useful in assessing the value of physicians’ practices:

  1. How committed are physicians to working with the hospital or health system to achieve success under MACRA, including using electronic health records and understanding documentation and reporting requirements?
  2. Are physicians amenable to utilizing hospital or health system-developed care protocols?
  3. Would physicians be willing to work with hospital or health system care coordinators to help triage cases as appropriate?
  4. Have physicians participated in an APM and/or are they willing to join an APM or Advanced APM in the future?
  5. Are physicians prepared to engage in hospital or health system training and education on a regular basis?
  6. How will physicians cooperate with the hospital or health system in identifying strategies to improve quality and reduce costs?
  7. How will physicians assist in tracking patients and providing community-based care?


The advent of MACRA, along with other VBC initiatives, will spur more physicians to seek closer ties with hospitals and health systems, and vice versa. Success under these new alliances will be more achievable if hospitals and health systems work with practices that meet specific strategic needs and can support the shift to population health. For their part, physicians who join hospitals and health systems must be prepared to collaborate with health systems to ensure that their performance meets metrics under MACRA, which will ultimately bring value to physicians, as well as hospitals and health systems.

1 Medicare Access and CHIP Reauthorization Act of 2015, Pub. L. No. 114-10, 129 Stat. 87.

2 81 Fed. Reg. 77008 (Nov. 4, 2016).

3 § 101, 129 Stat. at 89–90.

4Id. Beginning in 2026, clinicians are eligible for a 0.25% annual fee schedule increase if they are in the MIPS track, or a 0.75% increase if they are in the Advanced APM track.

5 81 Fed. Reg. 77015 (Nov. 4, 2016).

6 42 C.F.R. § 414.1405 (2017).

7 Id.

8 Id. at § 414.1380. CMS’s June 30, 2017 Update to the Quality Payment Program proposed rule seeks to establish a complex patient bonus and a small practice bonus. Under the proposal, clinicians or groups that submit data on at least one performance category during the 2018 performance year may receive a complex patient bonus based on the average Hierarchical Condition Category risk scores of the clinicians’ or groups’ beneficiaries, and groups that submit data on at least one performance category during the 2018 performance year and consist of 15 or fewer clinicians may receive the small practice bonus. A group or clinician qualifying for either bonus would receive points towards the MIPS final score, which is used to determine the additional 10% bonus for exceptional performance. Medicare Program; CY 2018 Updates to the Quality Payment Program, 82 Fed. Reg. 30,010, 30,138-40, 30,253 (proposed June 30, 2017) (to be codified at 42 C.F.R. pt. 414).

9 The Centers for Medicare & Medicaid Services, “The Merit-Based Incentive Payment System (MIPS),” (last accessed September 7, 2017).

10 82 Fed. Reg. 30,010, 30,235 (June 30, 2017).

11 42 C.F.R. § 414.1450.

12 81 Fed. Reg. 77,013–14 (November 4, 2016).

13 82 Fed. Reg. 39,310 (August 17, 2017).

14 Deloitte, “MACRA: Disrupting the health care system at every level,” (last accessed September 7, 2017).

15 Pub. L. No. 114-10 § 512(a). 

16 82 Fed. Reg. at 30,027–33.

17 81 Fed. Reg. at 77,131.

18 82 Fed. Reg. at 30,135.

19 Quality accounts for 60% of the overall score in performance year 2017, 50% in 2018, and 30% in 2019 and the subsequent performance years; cost makes up 0% of score in 2017, 10% in 2018, and 30% for 2019 and subsequent performance years. 81 Fed. Reg. at 77,541–44. The performance category weights may ultimately deviate slightly, pending finalization of the Proposed Rule published by CMS on June 30, 2017. The Proposed Rule would adjust the weights of the quality and cost categories for performance year 2018 to 60% and 0%, respectively. Medicare Program; CY 2018 Updates to the Quality Payment Program, 82 Fed. Reg. at 30,250–54. 

20, “Physician Quality Reporting System: Analysis and Payment,” (last accessed March 29, 2017).

21 81 Fed. Reg. at 77,104, 77,158.

22, “2015 Individual Clinician Measures Publicly Reported on Physician Compare in December 2016,” (last accessed March 29, 2017).

23 81 Fed. Reg. at 77,166.