Because Medicare pays for a large share of health care throughout the country, its size and market power can help it to lead payment reforms in the rest of the health care system. Its use of financial incentives for reaching performance targets can, in effect, set standards that private payers may adopt. However, statutory requirements for the Medicare program limit the types of changes that CMS can implement. For example, Medicare must pay for health care delivered by any eligible physician willing to accept Medicare payment and follow Medicare requirements, and must pay uniform Medicare rates to all physicians. Therefore, unlike private health care purchasers, CMS cannot exclude poor-performing providers from participating in the program and cannot negotiate different reimbursement rates with different providers. In recent years, in response to legislation, HHS has taken steps to transition Medicare physicians from a fee-for-service system in which only the volume of services is rewarded, to one in which value—as measured by the quality and the efficiency with which that care is delivered—also determines payment. CMS has worked with physician groups in designing and implementing the following physician initiatives, among others. Physician Quality Reporting System (PQRS). PQRS collects physician-reported data on quality measures for covered services furnished to beneficiaries. CMS provides an incentive payment to physicians who satisfactorily report quality data. The agency announced that, in 2013, physicians who do not satisfactorily meet PQRS submission requirements will have their fee schedule amount reduced by 1.5 percent for services furnished in 2015. Value Modifier Program. PPACA directed HHS to establish a Value Modifier to adjust Medicare payments to some physicians in 2015 and to all physicians in 2017 on the basis of the quality and cost of care provided. To develop the Value Modifier, CMS plans to use performance information on quality and cost metrics derived from Medicare claims and data submitted under PQRS. Because the Value Modifier program must be budget neutral, upward adjustments will depend on the total sum of negative adjustments in a given year. Shared Savings Program. CMS has finalized rules under which physicians, hospitals, and other health care providers may work together to better coordinate care for Medicare beneficiaries through an ACO. While individual physicians continue to be paid under the Medicare fee schedule, the agency plans to develop a benchmark for each ACO against which its performance is measured to assess whether it qualifies to receive shared savings or in some cases be held accountable for losses. Comprehensive Primary Care Initiative and Multi-Payer Advanced Primary Care Practice. Eligible primary care practices may receive shared savings rewards under some of CMS’s demonstrations related to operating a PCMH. Under the Comprehensive Primary Care Initiative, CMS intends to pay 500 primary care practices in seven markets for improved and comprehensive care management, and after 2 years offer them the chance to share in any savings they generate. For the Multi-Payer Advanced Primary Care Practice demonstration, CMS intends to award payment incentives through existing PCMH initiatives that are currently being conducted by states to make medical home practices more broadly available. Physician Compare Website. This Internet tool serves as a directory for beneficiaries, allowing them to search for a physician by specialty, location, hospital affiliation, and other factors. The profile pages also indicate if a physician satisfactorily participated in the PQRS. PPACA requires that CMS make quality and patient experience measures publicly available on the website by January 1, 2013. Publishing comparable performance results can encourage physicians to improve their performance in order to attract more beneficiaries. These legislated changes, along with market forces, have potential implications for the way many physicians practice. For example, emerging delivery models such as ACOs may lead physicians to join larger groups, more closely align with hospitals, and take on financial risk for managing patient care. Although many physicians who serve Medicare beneficiaries work in small practices, more are increasingly employed by hospitals and health care systems. As of 2008, nearly one-third of U.S. physicians worked in solo or 2-physician practices, 15 percent worked in groups of 3 to 5 physicians, 19 percent worked in practices of 6 to 50 physicians, and 13 percent practiced in hospital settings. However, a 2011 study found that physicians are increasingly selling their practices or seeking employment directly with healthcare systems, and hospitals are aggressively acquiring physician practices to remain competitive. We identified several common themes among private entities with physician payment initiatives in our study. These included the importance of focusing on physician groups rather than individual physicians, the desire for a standardized performance measurement set, the use of absolute performance and improvement targets, the timely distribution of incentive payments, an emphasis on care coordination to improve quality and efficiency, and the use of other strategies to improve quality and efficiency. For the most part, physician organizations familiar with these themes expressed their support. Private entities in our study generally based incentive payments on the performance of physician groups rather than individual physicians largely because of methodological issues and the importance of reinforcing group-wide accountability. Most of the private entities we spoke with pointed out that individual-level measurement often does not generate sufficient performance data to produce credible results. For instance, for a condition-specific performance metric, a physician may see too few patients with the relevant condition to be measured reliably. Integrated Healthcare Association (IHA) noted that using physician organizations as the unit of analysis in the California Pay-for-Performance (CA P4P) program helps to overcome small sample sizes that impede valid measurement of efficiency at the individual physician level, although sometimes even sample sizes at the physician organization level may not be adequate. A representative at Blue Cross Blue Shield of Michigan (BCBS MI) stated that this methodological issue is especially relevant when measuring performance in specialty care practices. Because subspecialists may provide distinct services within their specialties, they can look like outliers when compared with their specialty peers at the individual level. Several private entities told us that group-level measurement also promotes group-wide accountability. For example, representatives at Dean Clinic said that measuring performance at the group level allows each of its clinical divisions to leverage each physician’s strengths, and keeps them engaged in performance improvement. In addition, BCBS MI believes that group-level measurement and payment may prevent physicians with particularly complex patients from being resistant to participating in the initiative. Because many primary care physicians work in small, independent practices, CareFirst BlueCross BlueShield (CareFirst) PCMH program has developed a strategy for including them in its initiative. CareFirst physicians do not need to be a part of a formal medical group to participate in the program. Rather, they may organize voluntary, “virtual” panels for the purpose of performance measurement and incentive payments. Established physician groups may also participate, provided that they form subgroups of between 5 and 15 physicians—the panel size requirement for participation. As an incentive to join the program, CareFirst increases the fees paid under its physician fee schedule by 12 percentage points. It offers additional financial incentives to physician panels for bringing care costs within a budget target and for improving quality on a variety of metrics. CareFirst representatives believe that the primary care physician is in the best position to comprehensively understand a patient’s needs—in particular, the needs of chronically ill patients—but that no one physician has a large enough patient pool for reliable performance measurement. They said that not only does panel formation allow for reliable performance measurement, but it also provides a structure for peer pressure given that all physicians in a panel have an economic stake in high performance. Many of the private entities we spoke with were also consistent in their view that it is the responsibility of physician group management to drive individual physician performance improvement. Therefore, they not only provide physician groups with feedback reports at the group level, but most also provide supporting data at the individual physician level that can be used to generate individualized physician feedback reports. For example, under the Alternative Quality Contract (AQC), Blue Cross Blue Shield of Massachusetts (BCBS MA) sends performance data and reports in electronic format to each physician group’s central leadership, who are Similarly, responsible for sharing the results with individual physicians.under the Physician Group Incentive Program (PGIP), BCBS MI expects physician organizations to create appropriate reports at the practice unit and individual physician level to identify areas for improvement, as well as to track performance over time and guide focused system-transformation and performance improvement interventions. Some entities noted that peer pressure and competition within an organization can provide an incentive for physicians to improve their relative performance. For example, Rocky Mountain Health Plans shares relative performance data on resource use with certain physicians to facilitate communication about clinical quality and cost. Also, Dean Clinic representatives mentioned that reporting performance at the individual level within each specialty division instills peer pressure, which can help facilitate the improvement process. Furthermore, many private entities we spoke with said that physician groups have complete discretion over how their incentive payments are used and therefore may not distribute their entire incentive payments to frontline physicians. For example, BCBS MI reported that, in general, physician groups distribute roughly one quarter of PGIP incentive payments directly to front-line physicians, and invest the remainder in systems improvements that benefit the practices and the physician group. Several other private entities also stated that physician group managers use their incentive payments for shared practice improvements, such as investing in new or additional information-technology capabilities, hiring case managers, and rewarding nonphysician staff. A BCBS MA representative noted that physician groups undertake these types of shared practice investments to help make the improvements in care quality and efficiency called for in the AQC. Physician organizations in our review agreed that measurement at the physician group level for incentive pay is statistically more accurate than measurement at the individual physician level. They noted that one physician is unlikely to have a patient population large enough for statistical reliability, making it difficult for private entities to validate individual physician-level data. They also said that attributing patients to one physician for measurement purposes is difficult because physicians often work as a team to provide care. On the other hand, they noted that physician groups are likely to have the patient sample sizes needed to ensure accurate calculations and minimize the attribution problem.