MACRA and MIPS in Physician Practice Valuations

MACRA/MIPS: On April 27, 2016, the Centers for Medicare & Medicaid Services (CMS) released proposed rules related to legislative changes to Medicare Part B reimbursement, the Medicare Access and CHIP Re-authorization Act of 2015 (MACRA). MACRA repealed the sustainable growth rate (SGR) formula and replaced it with a new value-based reimbursement system, which consolidates several existing reporting and payment incentive programs.

MACRA establishes two paths for Medicare reimbursement for providers: the Merit Incentive Payment System (MIPS), which is a modified fee-for-service model, and Alternative Payment Models (APMs), which are payment models that reduce costs of care and/or support other value-based models. Most physicians are expected to enter the MIPS pathway in the beginning.

MIPS is a modified fee-for-service payment system, with adjustments for scoring in four different categories, including the following:

  • Quality Reporting (previously known as PQRS)
  • Resource Use (previously known as Value-Based Payment Modifier or VBM)
  • Advancing Care Information (previously known as Meaningful Use)
  • Clinical Practice Improvement Activities (new)

MIPS will begin in January 2019 and is based upon performance via a two year look back (i.e., 2017). Each category above has its own measures which are weighted to determine a composite MIPS. CMS is intending to set a payment threshold so that 50 percent of eligible clinicians receive a favorable payment adjustment and 50 percent receive a negative adjustment. Payment adjustments are +/- 4% in 2019, 5% in 2020, 7% in 2021, and 9% in 2022. Exceptional performers are eligible to earn up to 10% additional bonus.

Impact On Physician Practice Valuations and Physician Compensation: The complexity and uncertainty posted by MACRA/MIPS are expected to accelerate integration between physician practices and health systems. MACRA’s value-based payment system will also require additional considerations to be applied in physician practice and physician compensation valuations.

There are three generally accepted approaches for valuing a practice, including the Income Approach, the Market Approach, and the Asset-Based Approach. Amongst the three approaches, the income approach is widely used, as it takes into consideration the specific facts and circumstances surrounding the subject company and values the business based upon the future cash flows it is expected to generate, without considering the benefits to be brought in by the buyer (i.e., buyer synergies). The income approach is frequently relied upon to value medical practices that have a significant amount of ancillary services.

With the advent of MACRA and MIPS, forecasting a physician practice’s revenues becomes more complicated because the Medicare payments will become more heavily tied to quality and value, which are not reflected in the practice’s historical revenue performance.

Moreover, due to the budget-neutral nature of the favorable and negative reimbursement adjustments under MIPS, it becomes imperative that the valuator considers various qualitative factors influencing the subject practice’s composite score and how it compares to the peers. For example, in 2019 penalties for these pay-for-performance programs would have been 5%for Meaningful Use, 2% for PQRS, and potentially 4% or more for VBM, which can have a significant impact on a practice’s revenue if it does not meet the composite score threshold.

On the other hand, the valuator should consider the overhead required to support the administrative requirements set forth by MACRA/MIPS. Examples of such overhead include personnel and IT-related expenses and expenditure associated with data collection and analytics/reporting for MIPS. Although these expenses are not reported in historical financial statements, the valuator should appropriately project the additional expenses if the IT and operational infrastructure are not in place.

The sweeping shift toward value-based Medicare reimbursement may also call for adjustments in existing and future physician compensation strategies in both private practice and hospital-employment settings, as well as professional service agreements (PSAs). Appropriate incentive for quality and efficient care may be considered, within the fair market value limitations.

Although it has not yet been fully defined, the introduction of MACRA is expected to bring challenges and opportunities to healthcare providers and the health delivery system. Coker’s dedicated valuation experts stay abreast of the development and are ready to provide guidance and consultative assistance in MACRA-related business and physician compensation valuation matters.

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