Navigating physician payment models

What you need to know to stay solvent and continue offering new services to your patients

Every day, we hear and read about health care and proposed physician payment “reform.” Value-based purchasing, accountable care and bundled payments are just a few examples. With headlines such as these, we are left to think, “Here come more administrative burdens and lower fees for delivering health care.”

Close to half of physicians are employed by hospitals,1 but those who remain independent need to know how to continue delivering high-quality health care while remaining financially solvent and understanding the various sources of payment that may be available.

This article is not an exhaustive review of alternative payment models (APMs), which are widely available in health policy and medical specialty society literature.2 Instead, we will share insights on how you should think about the multiple payment models and how they affect new treatment options in your practice, starting with:


This is the model we are all most familiar with. Keep in mind the fee can actually be for a bundle of services (for example, to include a 90-day global period following surgery).

The downside of this arrangement is that costs of providing care may be more of a function of volume than value. Does the system incentivize more costly procedures over less costly ones? Does it promote delivery of unnecessary care?

Keep in mind that many of the evolving payment models are rooted in the idea that we are trying to “fix” FFS medicine.3


This is still a version of FFS — it’s just now an individual health-care provider accepts payment for a larger, all-inclusive bundle. Diagnosis related groups (DRGs) are examples of a large bundle for an inpatient hospital episode. Other examples include:

  • Annual cost of managing chronic disease (eg, diabetes primary care) vs. per episode/item
  • All physicians services paid under a single bundle when there is co-management
  • Physicians and hospital care paid under a single bundle (eg, orthopedic payment bundles for hospital and physician services)4

While drugs (retail pharmacy and physician administered “buy and bill”) have largely been excluded from many of these bundles, don’t expect that to remain the case forever. Dialysis and oncology are just a few examples of specialties where “capitated”-type agreements now include prescription drugs.5,6


According to the AMA, “under a pay-for-performance approach, the payer compensates physicians according to an evaluation of physician performance on defined metrics, typically as a potential bonus on top of the physician’s FFS compensation. The bonus is not paid per transaction but, rather, at a defined time period (eg, quarterly or annually). The payer bases its evaluation on its data for that physician. Most commonly, the evaluation is based on administrative or claims data and certain defined quality measures, or on a cost of care summary.

“Patient satisfaction data is also used to measure access as well as communication effectiveness. Physicians who meet the payer’s targets may receive a pay-for-performance bonus payment.”7

As we all know, this is really a double-edged sword. Think EMR and meaningful use, and that’s all we need to say: Re-admission penalties, MACRA and on and on. 

What you need to know about these different payment models, especially the ones geared towards “fixing” FFS medicine is that they are focused on the past — creating bundles based on actuarial data, penalizing past behaviors, etc.

What they are not good at doing is predicting the future and accommodating changes in practice patterns and innovation. For example, medical management of patients with diabetes and macular degeneration has transformed in the last 12 years or so, and technology continues to be promising in corneal diseases, geographic atrophy and the like.

So always be cautious when entering into these agreements and how they may or may not accommodate changes to the standard of care.


This type of arrangement is often referred to as concierge care, whereby no third-party payers or insurance companies are involved whatsoever. According to the American College of Physicians, a direct patient contracting model is one in which a patient contracts directly with a physician, clinician or practice to pay directly out of pocket for some or all medical services that are provided by the clinician or practice.8

This last concept of bypassing third-party payers altogether may seem to be a radical approach to running the business side of your practice. Instead, we believe that more and more practices need to embrace hybrid approaches, whereby insurance is likely to pay for many services but patients may be responsible as well, whether that is through high up-front annual deductibles or services that are not covered by insurance, for which direct patient billing and collections are appropriate.


In many cases, patients may pay out of pocket for a service due to:

  • High deductibles or co-insurance for a given service, upwards of $13,300 for a family in 20179
  • Services that are not a covered benefit under the patient’s plan (eg, premium IOLs)10
  • Services that are deemed investigational and experimental (I&E)11

Figure 1. 2016 Medicare Category III CPT Code claims analysis.13

The practice of “balance billing” and promoting services as patient self pay, especially under federal programs and managed care contracting arrangements, is complex; always make sure to be thorough in understanding contractual and compliance issues that may apply.

That last item in the list above, situations where services are deemed I&E, is not well understood by physicians. For example, for a long time obesity surgery was considered I&E until longer-term studies demonstrated safety and long-term efficacy (in other words, durability). Until insurance coverage became widely available, patients generally had to pay out of pocket for the entire procedure, and health-care providers could collect from patients.

AMA CPT category III codes, according to the AMA, are “a set of temporary codes that allow data collection for emerging technologies, services, procedures and service paradigms.”12 Payers often consider services described as a category III code as I&E and, thus, non-covered despite FDA approval or clearance.

We analyzed the Medicare Physician Supplier Procedure Summary (PSPS) Master File database to determine the volume of category III codes billed to the Medicare program in 2016 and found that:

  1. In 2016, 449 unique category III codes representing more than 9 million claims were billed by physicians across specialties to the Medicare FFS Part B program
  2. Submitted charges for these category III codes totaled nearly $147 million.
  3. Of the unique claims and codes, 282 unique codes (63% of all unique codes) were denied < 50% of the time, and 167 unique codes (37% of all unique codes) were denied > 50% of the time (page 41)

As discussed before, when claims are denied as not medically necessary or I&E, providers have provisions that may allow them to bill patients when appropriate disclosures are applied.13

Amidst all the doom and gloom, we believe additional opportunities for physicians to evolve and grow their practices do exist — if we understand and embrace alternative payment models. OM

Key takeaways

  1. When faced with contracts and other novel third-party payer arrangements, make sure you understand the scope of the agreement, especially regarding things you can control and those you cannot.
  2. The trend is that payments will fall over time, regardless of the payer. Plan accordingly as you think about the “life cycle” of a procedure as it becomes more widely available.
  3. New services sometimes may not fall within defined benefits, and you want to consider the implications for your business and whether to offer them to your patients.
  4. Some new services may involve hybrid scenarios — that is, some payers cover, and some do not. You want to evaluate whether to offer the service and how to make sure you and your patients understand payers’ coverage policies so that you and your patients make the most informed decisions.


  1. Physicians Advocacy Institute. Updated Physician Practice Acquisition Update. March 2018. . Accessed Oct. 26, 2018.
  2. American Medical Association. Medicare alternative payment models. . Accessed Oct. 26, 2018.
  3. Frist B, Schroeder S. Changing The Way Physicians Are Paid: Report Of The National Commission On Physician Payment Reform. Health Affairs. March 4, 2013. Accessed Oct. 26, 2018.
  4. Centers for Medicare & Medicaid Services. Bundled Payments for Care Improvement (BPCI) Initiative: General Information. . Accessed Oct. 26, 2018.
  5. Centers for Medicare & Medicaid Services. End Stage Renal Disease (ESRD) Prospective Payment System (PPS). . Accessed Oct. 26, 2018.
  6. LaPoine J. Bundled payments with drug costs threaten cancer care quality. RevCycle Intelligence. . Accessed Oct. 26, 2018.
  7. American Medical Association. Evaluating pay-for-performance contracts. . Accessed Oct. 31, 2018.
  8. American College of Physicians. Direct Patient Contracting. . Accessed Oct. 26, 2018.
  9. High Deductible Health Plan (HDHP). . Accessed Oct. 26, 2018.
  10. American Society of Cataract and Refractive Surgery. Guidelines for billing Medicare beneficiaries when using the femtosecond laser. . Accessed Nov. 12, 2018.
  11. Medicare Advance Written Notices of Noncoverage. . Accessed Oct. 26, 2018.
  12. CPT Category III Codes. American Medical Association. . Accessed Oct. 26, 2018.
  13. CMS. Medicare PSPS 2016. Physician/Supplier Procedure Summary. . Accessed Oct. 31, 2018.

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