The Transition from Fee-for-Service to a Value-Based Payment System

March 1, 2016

Emily Richardson, M.D.,

Chief Quality Officer, Encompass Medical Partners

Fee-for-service has traditionally been the predominant physician payment method in the United States. This payment model rewards the volume of care delivered over the quality of that care. Medicare physician payments have historically been based on this fee-for-service payment model. Recent years have seen Medicare shift away from this payment model toward rewarding fiscal accountability and quality of care.

The passage of the 2006 Tax Relief and Healthcare Act, which established the Physician Quality Reporting System (PQRS), signaled an ideological change by creating a financial incentive to deliver quality care. PQRS metrics are physician-chosen, evidence-based measures designed to help providers assess their care.[i] By reporting PQRS measures to the Centers for Medicare and Medicaid Services (CMS), providers can quantify how often they are meeting a particular quality metric.

Initially, the PQRS offered financial incentives for participation in the program. However, in 2015 the program transitioned exclusively to payment adjustments which imposed financial penalties on eligible professionals (EPs) who failed to adequately report. Aligned with the evolution of the PQRS was the passage of Section 3007 of the Affordable Care Act. This mandated that, starting in 2015, CMS would begin to apply a Value Modifier under the Medicare Physician Fee Schedule (PFS).

The Value Modifier provides for both bonus payments and penalties under the PFS to physician groups and other EPs based on the quality and cost of care that they furnish to enrolled beneficiaries in the traditional Medicare Fee-for-Service program[ii]. The Value Modifier Program and PQRS are aligned in their measurement components to emphasize the importance of providing high quality care at low cost.

The End of ‘Doc Fix’

In 1997, Congress passed the Balanced Budget Act that created the Sustainable Growth Rate (SGR) formula. This legislation was designed to contain the growth rate of medical spending by tying provider payments to the inflation rate. Once passed, physicians lived with yearly threats of payment cuts from CMS. This cycle of threatened spending cuts ended permanently with the passage of the Medicare Access and CHIP Reauthorization Act (MACRA) in April of 2015. MACRA replaced the SGR with a modest yearly increase of 0.5% in the Medicare Physician Fee Schedule (MPFS) from 2016 to 2019.[iii] Through reforming the methods of payment to physicians, MACRA has great potential to encourage quality improvement in healthcare while decreasing waste and inefficiency, leading to increased value to patients. It provides a new framework for rewarding better care, not just more care.[iv]

While CMS had already indicated that there would be a shift away from the traditional fee-for-service model to a value-based payment system, the repeal of the SGR dramatically accelerates this trend. Under MACRA, the PQRS, Value Based Payment Modifiers (VBM), and Meaningful Use (MU) programs will be rolled into one program called the Merit-Based Incentive Payment System (MIPS).

The defining feature of MACRA is the reduction of healthcare spending[v]. CMS projects that over time MACRA will decrease healthcare spending more than had the SGR program continued.[vi] Additionally, the program is structured to be budget neutral. Payment bonuses for eligible professionals will be paid for by the penalties collected from others. Practices that are already working to measure, report, and improve their quality of care are in the best position to weather these changes.

Physician Compare

In the current era of Yelp and Google Reviews, the public’s demand for transparency is evident. CMS created the Physician Compare website to help consumers make informed choices by comparing the quality of care delivered from both individual providers and group practices enrolled in Medicare.

Data collected through PQRS is uploaded to the Physician Compare website. If a healthcare professional or group practice participates in one or more of the CMS Quality Programs, such as PQRS, the Physician Compare website will include a green check mark on the profile page. While only certain PQRS measures are currently available on Physician Compare, CMS indicates that this list will continue to grow, including the development of a star rating system to allow for consumers to easily compare providers.[vii]

Private Insurers Join the Trend

Private health insurers are embracing the trend toward accountable, quality-driven care. On February 16, 2016 CMS, along with major commercial health plans, announced the first set of core measures from the Core Quality Measures Collaborative. This collaborative supports multi-payer alignment on core measures primarily for physician groups. The new measures look at seven different areas, from primary care to treatment of patients with cancer or AIDS.  Reducing the complexity of measure requirements across entities allows for providers to focus on quality improvement across payers. Federal officials and insurance executives have indicated that they will continue to collaborate and develop ways of gauging doctors’ quality.[viii]

The transition from the fee-for-service reimbursement system is one of the greatest challenges health systems currently face. As healthcare continues its transition toward value-based payment methodologies and population health, the ability to illustrate quality of services to providers, hospitals, health systems and patients is paramount to future success.



[i] Physician Quality Reporting System. Centers for Medicare & Medicaid Services. Accessed February 18, 2016.

[ii] Value-Based Payment Modifier. Centers for Medicare & Medicaid Services. is the Value-Based Payment Modifier (Value Modifier) Accessed February 18, 2016.

[iii] H.R.2: Medicare Access and CHIP Reauthorization Act of 2015. Accessed on February 18, 2016.

[iv] The Merit-Based Incentive Payment System (MIPS) & Alternative Payment Models (APM). Centers for Medicare & Medicaid Services: Accessed February 18, 2016.

[v] “An Update on the Division of Professional Affairs MACRA Strategy: Quality Reporting and Contribution to Savings” by Stanley W. Stead, MD, MBA:

[vi] Spitalnic P. Estimated financial effects of the Medicare Access and CHIP Reauthorization Act of 2015 (H.R. 2) [letter]. CMS: Centers for Medicare & Medicaid Services website. April 9, 2015. Accessed May 13, 2015.

[vii] Physician Compare: Physician Quality Reporting System (PQRS). Physician Compare. Accessed on February 18, 2016.

[viii] “Federal Health Officials, Insurers Agree on How to Rate Doctors’ Quality.” Washington Post. Amy Goldstein. Accessed on February 18, 2016.


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