Medicare reports on the 2015 Physician Value-Based Payment Modifier

The September 2014 edition of this column discussed Medicare's Physician Value-Based Payment Modifier (VBPM), which awards or penalizes physicians in group or solo practices for quality and cost of care. The first wave of related physician fee schedule adjustments began this year for groups of 100 clinicians or more, and Medicare recently released its eye-opening 2015 VBPM report.

CMS issued a final rule on Oct. 1, 2014, changing the implementation rules slightly, but the VBPM will still apply to all group and solo practices beginning January 1, 2017. VBPM applies only to traditional Medicare payments. Groups who participate in other Medicare reimbursement models (for example, the Comprehensive Care Initiative or the Shared Savings Program) are not subject to VBPM. The VBPM program employs a 2-year look-back, so the 2015 VBPM is based on participation in and results from Medicare's Physician Quality Reporting System (PQRS) in 2013.

Photo by Thinkstock
Photo by Thinkstock

If a group did not participate in PQRS during 2013, an automatic 2.5% penalty (1% for VBPM and 1.5% for PQRS nonparticipation) was applied to its 2015 physician fee schedule with no opportunity for any VBPM award. Likewise, the 2017 VBPM will depend on PQRS participation in 2015, and nonparticipation will result in an automatic 6% penalty. If a group does successfully report to PQRS, it will not be penalized and may elect to be excluded from the VBPM awards and penalties, the quality-tiering nonparticipation option.

2015 VBPM results

Of the 1,278 groups of 100 or more, 268 were covered under other Medicare reimbursement models. There were 319 groups that did not report PQRS measures during 2013 and were therefore penalized 2.5% of traditional Medicare fees. Six hundred ninety-one groups reported to PQRS and avoided the 2.5% penalty, but 564 did not elect the quality/cost VBPM option and so received no penalties and no rewards. Of the remaining 127 groups, 21 had inadequate data to validate quality and costs and were excluded without penalty, leaving 106 groups to compete for the VBPM funds.

The 2015 VBPM awards and penalties are illustrated in the Table. Eleven groups in the lowest-performing tiers of lower quality/higher costs were penalized 0.5% to 1.0% of their 2015 professional fee schedule. Eighty-one groups in the mid-range tier received no adjustment. Fourteen groups in the highest-performing tiers received an award of 4.89% for 2015, but no groups qualified for the maximum high-quality/low-cost award of 9.78%. These 14 groups would also have been eligible for an additional 4.89% if the average beneficiary risk score of their patient population was in the top 25th percentile nationwide, but none of them qualified.

The x factor

The surprising outcome of the 2015 VPBM is the huge potential reward in the top performance tiers, ranging up to 14.67%, even though no group actually qualified for more than 4.89% in 2015. The reason for this unexpected result is the so-called “x factor” applied to the best-performing groups. The VBPM formula must be revenue-neutral: The amount of penalties must equal the reward payments.

All VBPM penalties are distributed to the top tier in rewards of 1.0x% to 2.0x%, with x being derived from all available penalty funds. These funds include not only the 0.5% to 1.0% VBPM penalty for low-performing tiers but also the 1% VBPM penalty assessed against all groups not participating in the PQRS system. The 319 groups not participating in PQRS during 2013 were penalized a total of almost $11 million in 2015 professional fees, all of which is distributed to the 14 groups in the top VBPM tiers. These 14 groups reaped the benefit of the income lost by 319 other groups due to their nonparticipation.

Following complex payment projections, the 2015 x factor is 4.89. The x-factor amount will surely decrease going forward as a greater number and percentage of practices participate and the program eventually includes all solo and group practices, but it will never be less than 1.0.

Reaping the rewards

How does a group win a VBPM reward? Of course, PQRS participation is a basic requirement. The VBPM in 2017 depends on PQRS participation in 2015. If you didn't participate in 2014, you will be automatically penalized in 2016.

The next step is to ensure the best quality of care and keep costs low. Limit low-yield diagnostic testing or perhaps testing that won't change management decisions. Consider costly consultations carefully. Take an appropriate, reasonable approach to therapeutic choices. For example, does a high-cost drug or treatment really have significant advantages over a less costly alternative?

Quality of care often seems somewhat subjective: “Quality is in the eye of the beholder.” But whether we like it or not, thousands of objective criteria have been assigned to outcome and performance measures, with or without clinical validity to quantify our clinical performance. It certainly helps to employ evidence-based and professional consensus guidelines to meet some of these expectations, but perhaps the most crucial factor in the analysis of quality data is severity (or risk) adjustment.

Almost every measure of quality is severity-adjusted based on the number and severity of conditions in a given patient population. Sicker patients with greater comorbidity have higher rates of adverse outcomes; healthier patients with fewer illnesses would be expected to have low rates of adverse outcomes.

So how is this severity of illness measured? It is all based on the diagnostic codes submitted on claim forms to Medicare and to other payers. But do the codes assigned actually reflect how sick the patient really is? Often they do not, because coding rules can be inconsistent with clinical practice and physician documentation terminology is insufficient to allow assignment of the correct code.


Medicare's VBPM will have a growing impact on physician fees, putting groups in competition for health care dollars based on analyses of the quality and cost of the health care they provide. The number and impact of such pay-for-performance programs are growing rapidly. Winners and losers will be determined not only by the actual cost and quality of care provided but also by the severity adjustment applied to those outcome measures. To be successful, physicians must demonstrate responsible stewardship of health care resources, adopt clinical practices based on evidence and consensus guidelines, and employ precise clinical documentation terminology that translates into the correct codes to fully and completely describe patients' severity of illness.