Physician groups with at least 200 physicians were eligible to apply for the PGP Demonstration and 10 were selected by CMS. (See table 1.) CMS’s technical review panel evaluated each applicant based on its organizational structure, operational feasibility, geographic location, and demonstration implementation strategy. Collectively, the 10 participating physician groups are all multispecialty practices comprising more than 6,000 physicians who provide care for more than 220,000 Medicare FFS beneficiaries. While all the participants have at least 200 physicians, group practice size varies widely, ranging from 232 to 1,291 physicians. Except for the Marshfield Clinic, all participants identified themselves as integrated delivery systems that include, in addition to their group practice, other health care entities such as hospitals, surgical centers, or laboratories. Nearly all of the participants have nonprofit tax status, except for the Everett Clinic and the Integrated Resources for the Middlesex Area (IRMA), which are for profit. Overall, a majority of the 10 participants are located in small cities and serve either predominantly rural or suburban areas. These participants provide care over wide geographic areas by using satellite physician group office locations, ranging from 10 to 65 physician group office locations. Under the PGP Demonstration’s design, participating physician groups are eligible to earn annual cost-savings bonuses for generating Medicare program savings. Participants that received cost-savings bonuses were also eligible to receive additional bonuses for meeting certain quality targets. Both the cost-savings and quality bonuses are in addition to payments physicians receive under Medicare FFS. There are three main steps in CMS’s bonus payment methodology to determine which participants are awarded bonus payments and the amount of these bonuses: (1) determination of eligibility for performance bonus payments, (2) determination of the size of the bonus pool, and (3) determination of actual bonus payments earned. (See fig. 1.) For the first step of the bonus payment methodology, to determine eligibility for receiving bonus payments, participating physician groups had to generate savings greater than 2 percent of their target expenditure amounts, relative to a comparison group of beneficiaries intended to have similar characteristics. CMS stated that the purpose of the 2 percent savings threshold was to further account for the possibility of random fluctuations in expenditures rather than actual savings. CMS also stated that it used separate comparison groups for each of the participants to distinguish the effect of the demonstration’s incentive payments from trends among Medicare beneficiaries unrelated to the demonstration. Operationally, Medicare beneficiaries were assigned to the comparison groups or to the participating physician groups retrospectively at the conclusion of each performance year, using Medicare claims data sent to CMS by providers following the delivery of care. As a part of the process of selecting beneficiaries for each comparison group that were similar to those served by the participating physician group they were being compared with, CMS ensured that beneficiaries (1) resided in the same geographic service areas as the beneficiaries assigned to the corresponding physician group; (2) had received at least one office or outpatient service, referred to as an evaluation and management (E&M) service, in that performance year; and (3) had not received any E&M services from the corresponding physician group that year or had been assigned to the participant’s group of beneficiaries in any previous performance year. For step two, determining the size of the bonus pools, participating physician groups that generated savings beyond the 2 percent threshold were eligible to receive up to 80 percent of those savings as potential bonuses. The remaining 20 percent, and all other savings not awarded to the participants, were retained by the Medicare program. In the third step, the determination of actual bonus amounts earned, eligible participating physician groups could receive up to the full amount available in their bonus pools as cost-savings bonuses and quality-of-care bonuses. Specifically, for PY1, 70 percent of the bonus pool was awarded as a cost-savings bonus to participants who met the 2 percent cost-savings threshold, and up to 30 percent of the bonus pool could have been awarded as a quality-of-care bonus, for those who met the cost-savings threshold. The quality-of-care bonus was awarded to participants that met or exceeded various quality-of-care targets within an area of clinical focus selected by CMS, in collaboration with other organizations and the participating physician groups. In PY1, CMS focused on diabetes management, and required participants to meet targets on a set of 10 diabetes measures, including whether a beneficiary received an eye exam or foot exam. To meet the quality-of-care target for each of the diabetes measures, a participant had to either improve its performance by a certain amount relative to its baseline performance or meet a national set of performance measures, referred to as HEDIS® measures, established by the National Committee for Quality Assurance (NCQA). Participants could also receive a prorated share of the quality-of-care bonus, based on success meeting some, but not all, of the quality-of-care targets. While the bonus payment methodology will remain the same throughout the demonstration, CMS added other quality-of-care measures and increased the relative significance of the quality-of-care measures in PY2 and PY3. In PY2, quality-of-care measures pertaining to CHF and coronary artery disease (CAD) were added to the existing diabetes measures. In PY3, quality-of-care measures pertaining to the management of hypertension and screening for breast and colorectal cancer were added to the existing diabetes, CHF, and CAD measures. The proportion of the bonus pool dedicated to meeting the quality-of-care targets—30 percent in PY1—also increased in each performance year. For PY2, the potential quality-of-care bonus increased to 40 percent of the potential bonus pool, and the proportion of the bonus pool that will be paid as a cost-savings bonus decreased to 60 percent. For PY3, the cost-savings and quality-of- care bonuses each will constitute 50 percent of the total bonus paid. In July 2007, CMS reported that in PY1, 2 of the 10 participating physician groups earned bonuses for achieving cost-saving and quality-of-care targets, while all 10 participants achieved 7 or more of the 10 quality-of- care targets. The Marshfield Clinic and the University of Michigan Faculty Group Practice received performance bonus payments of approximately $4.6 million and $2.8 million, respectively, in PY1. The Marshfield Clinic generated approximately $6 million in Medicare savings in PY1, above the 2 percent threshold established by CMS. Of this $6 million bonus pool, the Medicare program retained approximately $1.2 million, and Marshfield Clinic earned $3.4 million for the cost-savings component of the bonus and $1.2 million for meeting 9 of the 10 quality-of-care targets. The University of Michigan Faculty Group Practice generated approximately $3.5 million in savings in PY1 above the 2 percent threshold. Medicare retained approximately $700,000 and the University of Michigan Faculty Group Practice earned nearly $2 million for the cost-savings component of the bonus, and just over $800,000 for meeting 9 of the 10 quality-of-care targets. Of the remaining eight participating physician groups that did not earn cost-savings bonuses in PY1, all performed well in meeting the quality-of- care targets. Specifically, all eight of these participants achieved 7 or more of the 10 quality-of-care targets, with two participants meeting all 10 quality-of-care targets and two others achieving 9 of the targets. In addition, six of the participants came close to achieving the 2 percent threshold for the cost-savings component of the performance bonus payment in PY1. These six groups reduced their Medicare spending growth rates compared to their comparison group, but not beyond the 2 percent threshold. (See fig. 2.) While the number of pay-for-performance programs—programs in which a portion of a provider’s payment is based on their performance against defined measures—has increased in recent years, this growth has occurred largely in the private sector by commercial health plans. MedVantage reported that 107 pay-for-performance programs were in place as of November 2005, up from 84 the year before. Of these 107 pay-for-performance programs, 21 were public sector programs, of which 10 were Medicare programs. Currently, CMS has 5 programs, including the PGP Demonstration, that are demonstrations testing alternative physician payment methods. (See table 2.) Among these 5 physician pay-for-performance demonstrations, 4, including the PGP Demonstration, test physician pay-for-performance methods by offering incentives to physicians for meeting clinical performance standards, while 1 focuses on aligning financial incentives between hospitals and physicians. The PGP Demonstration was the first of CMS’s Medicare demonstrations to test physician pay-for-performance. Participants in CMS’s Medicare Health Care Quality Demonstration, projected to begin in 2008, may elect to use this overall design and bonus payment methodology from the PGP Demonstration. Among CMS’s other pay-for- performance demonstrations that are not physician related, is the Premier Hospital Quality Incentive Demonstration, a hospital-specific pay-for- performance demonstration for more than 260 hospitals in the Premier Inc., system. Under this demonstration, CMS provides bonus payments for hospitals with the highest levels of performance in five clinical conditions, including acute myocardial infarction. A recent study examining this demonstration concluded that among hospitals receiving performance bonuses, patients did not have a significant improvement in quality-of-care of care or outcomes for acute myocardial infarction. The participating physician groups implemented care coordination programs to achieve cost savings and improved their management processes to meet quality improvement targets CMS set for particular diabetes measures in PY1. More specifically, management process improvements included enhancing information technology (IT) systems, incorporating more team-based approaches, and improving administrative processes.