Medicare Physician Payment: Care Coordination Programs Used in	 
Demonstration Show Promise, but Wider Use of Payment Approach May
Be Limited (15-FEB-08, GAO-08-65).				 
                                                                 
Congress mandated in 2000 that the Centers for Medicare &	 
Medicaid Services (CMS) conduct the Physician Group Practice	 
(PGP) Demonstration to test a hybrid payment methodology for	 
physician groups that combines Medicare fee-for-service payments 
with new incentive payments. The 10 participants, with 200 or	 
more physicians each, may earn annual bonus incentive payments by
achieving cost savings and meeting quality targets set by CMS in 
the demonstration that began in April 2005. In July 2007, CMS	 
reported that in the first performance year (PY1), 2 participants
earned combined bonuses of approximately $7.4 million, and all 10
achieved most of the quality targets. Congress mandated that GAO 
evaluate the demonstration. GAO examined, for PY1, the programs  
used, whether the design was reasonable, and the potential	 
challenges in broadening the payment approach used in the	 
demonstration to other physician groups. To do so, GAO reviewed  
CMS documents, surveyed all 10 groups, and conducted interviews  
and site visits.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-65						        
    ACCNO:   A80833						        
  TITLE:     Medicare Physician Payment: Care Coordination Programs   
Used in Demonstration Show Promise, but Wider Use of Payment	 
Approach May Be Limited 					 
     DATE:   02/15/2008 
  SUBJECT:   Fee-for-service plans				 
	     Fees						 
	     Health care cost control				 
	     Health care costs					 
	     Health care programs				 
	     Health care reform 				 
	     Health policy					 
	     Medicaid						 
	     Medicare						 
	     Payments						 
	     Performance management				 
	     Performance measures				 
	     Physicians 					 
	     Program evaluation 				 
	     Program management 				 
	     Quality assurance					 
	     Quality control					 
	     Quality improvement				 
	     Strategic planning 				 
	     Total quality management				 
	     Medicaid Program					 
	     Medicare Program					 

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GAO-08-65

This is the accessible text file for GAO report number GAO-08-65 
entitled 'Medicare Physician Payment: Care Coordination Programs Used 
in Demonstration Show Promise, but Wider Use of Payment Approach May Be 
Limited' which was released on February 15, 2008.

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United States Government Accountability Office: 
GAO: 

Report to Congressional Committees: 

February 2008: 

Medicare Physician Payment: 

Care Coordination Programs Used in Demonstration Show Promise, but 
Wider Use of Payment Approach May Be Limited: 

GAO-08-65: 

GAO Highlights: 

Highlights of GAO-08-65, a report to congressional committees. 

Why GAO Did This Study: 

Congress mandated in 2000 that the Centers for Medicare & Medicaid 
Services (CMS) conduct the Physician Group Practice (PGP) Demonstration 
to test a hybrid payment methodology for physician groups that combines 
Medicare fee-for-service payments with new incentive payments. The 10 
participants, with 200 or more physicians each, may earn annual bonus 
incentive payments by achieving cost savings and meeting quality 
targets set by CMS in the demonstration that began in April 2005. In 
July 2007, CMS reported that in the first performance year (PY1), 2 
participants earned combined bonuses of approximately $7.4 million, and 
all 10 achieved most of the quality targets. Congress mandated that GAO 
evaluate the demonstration. GAO examined, for PY1, the programs used, 
whether the design was reasonable, and the potential challenges in 
broadening the payment approach used in the demonstration to other 
physician groups. To do so, GAO reviewed CMS documents, surveyed all 10 
groups, and conducted interviews and site visits. 

What GAO Found: 

All 10 participating physician groups implemented care coordination 
programs to generate cost savings for patients with certain conditions, 
such as congestive heart failure, and initiated processes to better 
identify and manage diabetes patients in PY1. However, only 2 of the 10 
participants earned a bonus payment in PY1 for achieving cost savings 
and meeting diabetes quality-of-care targets. The remaining 8 
participants met most of the quality targets, but did not achieve the 
required level of cost savings to earn a bonus. Many of the 
participantsï¿½ care coordination programs were not in place for all of 
PY1. 

CMSï¿½s design for the PGP Demonstration was generally a reasonable 
approach for rewarding participating physician groups for achieving 
cost-savings and quality-of-care targets, but created challenges. CMSï¿½s 
decision to use comparison groups, adjust for Medicare beneficiariesï¿½ 
health status, and include a quality component in the design helped 
ensure that bonus payments were attributable to demonstration-specific 
programs and that cost-savings were not achieved at the expense of 
quality. However, the design created challenges. For example, neither 
bonuses nor performance feedback for PY1 were given to participants 
until after the third performance year had begun. CMS provides 
participants with quarterly claims data sets, but most participants 
report they do not have the resources to analyze these data sets and 
generate summary reports on their progress and areas for improvement. 

Gap between Completion of First Performance Year and Expected Bonus 
Payments: 

[See PDF for image] 

This figure is an illustration of the Gap between Completion of First 
Performance Year and Expected Bonus Payments. The following data is 
depicted: 

Performance Year 1: April 1, 2005 - April 1, 2006; Number of months: 
12. 

Performance Year 2: April 1, 2006 - April 1, 2007; Number of months: 12 
(extended to 15, through July 1, 2007); April 2007: Cost-savings 
feedback for PY1; Mid-June 2007: Cost-savings and quality-of-care 
bonuses for PY1; July 2007: Bonus payments distributed for PY1. 

Performance Year 2: April 1, 2007 - April 1, 2008; Number of months: 
12. 

Source: GAO analysis of GMS data. 

Note: The 15-month period includes the typical 6-month period necessary 
for CMS to process a sufficient number of claims to meet its 98 percent 
complete claims threshold that it uses for analysis. 

[End of figure] 

The large relative size of the 10 participating physician groups (all 
had 200 or more physicians) compared with most U.S. physician practices 
(less than 1 percent had more than 150 physicians) gave the 
participants certain size-related advantages that may make broadening 
the payment approach used in the demonstration to other physician 
groups and non-group practices challenging. Their larger size provided 
the participants with three unique size-related advantages: 
institutional affiliations that allowed greater access to financial 
capital, access to and experience with using electronic health records 
systems, and prior experience with pay-for-performance programs. 

What GAO Recommends: 

CMS should provide participating physician groups with interim summary 
reports that estimate participantsï¿½ progress in achieving cost-savings 
and quality-of-care targets. CMS agreed with the intent of GAOï¿½s 
recommendation. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?gao-08-65]. For more information, contact 
Kathleen M. King at (202)512-7114 or [email protected]. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Participating Physician Groups Implemented Care Coordination Programs 
Designed to Achieve Cost Savings and Management Processes to Meet CMS- 
Set Diabetes Quality-of-Care Targets in PY1: 

CMS's PGP Demonstration Design Was Generally a Reasonable Approach, but 
Created Challenges: 

Participating Physician Groups Had Several Size-Related Advantages, 
Which May Pose Challenges in Broadening the Payment Approach Used in 
the Demonstration to More Participants: 

Conclusions: 

Recommendation for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: New and Expanded Programs Implemented by the 10 
Participating Physician Groups for the PGP Demonstration: 

Appendix III: Reported PGP Demonstration-Related Start-up and Operating 
Costs for New and Expanded Programs: 

Appendix IV: Comments from the Centers for Medicare & Medicaid 
Services: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Description of the Participating Physician Groups in the 
Physician Group Practice Demonstration: 

Table 2: CMS's Demonstrations Related to Physician Pay-for-Performance: 

Table 3: Percentage of FTEs Devoted to Largest New and Expanded Care 
Coordination Programs Implemented by PGP Demonstration Participants, 
PY1: 

Table 4: Management Processes Developed or Enhanced by Participating 
Physician Groups to Meet Diabetes Quality-of-Care Targets, PY1: 

Table 5: Range and Average of Initial Start-up and PY1 Operating 
Expenditures Reported by Participating Physician Groups, by Program 
Type and Order of Average Amount Spent, 2005: 

Figures: 

Figure 1: Illustration of CMS Bonus Payment Methodology for PGP 
Demonstration, Performance Year 1: 

Figure 2: Medicare Spending Growth Rate of Participating Physician 
Groups Relative to Their Comparison Group and the 2 Percent Threshold 
in PY1: 

Figure 3: Percentage of New and Expanded Programs Implemented by 
Participating Physician Groups: 

Figure 4: Gap between Completion of First Performance Year and 
Performance Feedback and Bonus Payments: 

Figure 5: Relative Proportion of Physician Practices in the United 
States, by Practice Size, 2005: 

Abbreviations: 

ASC: ambulatory surgical center: 

BIPA: Medicare, Medicaid, and SCHIP Benefits Improvement and Protection 
Act of 2000: 

CAD: coronary artery disease: 

CAH: critical access hospital: 

CHF: congestive heart failure: 

CMS: Centers for Medicare & Medicaid Services: 

COPD: chronic obstructive pulmonary disease: 

E&M: evaluation and management: 

EHR: electronic health record: 

FFS: fee-for-service: 

FTE: full-time equivalent: 

HCC: hierarchical condition category: 

HEDISï¿½: health plan employer data and information set: 

IRMA: Integrated Resources for the Middlesex Area: 

IT: information technology: 

IVR: interactive voice response: 

MedPAC: Medicare Payment Advisory Commission: 

MGMA: Medical Group Management Association: 

NCQA: National Committee for Quality Assurance: 

PGP: physician group practice: 

PY1: performance year one: 

PY2: performance year two: 

PY3: performance year three: 

[End of section] 

United States Government Accountability Office:
Washington, DC 20548: 

February 15, 2008: 

The Honorable Max Baucus: 
Chairman: 
The Honorable Charles E. Grassley: 
Ranking Member: 
Committee on Finance: 
United States Senate: 

The Honorable John D. Dingell: 
Chairman: 
The Honorable Joe Barton: 
Ranking Member: 
Committee on Energy and Commerce: 
House of Representatives: 

The Honorable Charles B. Rangel: 
Chairman: 
The Honorable Jim McCrery: 
Ranking Member: 
Committee on Ways and Means: 
House of Representatives: 

Medicare spending for physician services paid through Medicare's Part B 
fee-for-service (FFS) program grew rapidly from 2000 to 2006, 
increasing from $37 billion in 2000 to $58 billion in 2006, at an 
average annual growth rate of almost 8 percent, outpacing the national 
economy's annual average growth rate for that period of 5.2 
percent.[Footnote 1] Growth in Medicare spending for physician services 
has heightened congressional concerns about how physicians are 
reimbursed under the Medicare FFS payment system as well as the long- 
term fiscal sustainability of the Medicare program. The Medicare 
Payment Advisory Commission (MedPAC) and other experts believe that the 
method for paying physicians under the current Medicare FFS payment 
system is contributing to the rapid growth in Medicare 
expenditures,[Footnote 2] because the FFS payment system generally does 
not encourage physicians to make efficient use of resources, encourage 
coordination of physician services with services paid under the 
Medicare Part A program,[Footnote 3] or encourage improvements in 
quality of care. Some private sector insurers that pay physicians on an 
FFS basis have recently implemented payment systems, referred to as pay-
for-performance, in which a portion of a physician's or hospital's 
payment is based on meeting performance measures designed to improve 
the quality of care. Congress mandated in the Medicare, Medicaid, and 
SCHIP Benefits Improvement and Protection Act of 2000 (BIPA)[Footnote 
4] that the Centers for Medicare & Medicaid Services (CMS), the agency 
that oversees the Medicare program, conduct demonstrations to test 
incentive-based alternative payment methods for physicians reimbursed 
under Medicare FFS. The Physician Group Practice (PGP) Demonstration 
was the first of several physician pay-for-performance demonstrations 
CMS has implemented. In line with BIPA's mandate and the ongoing 
concerns about growth in Medicare spending for physician services, 
CMS's PGP Demonstration aims to encourage the coordination of Part A 
and Part B services, promote efficiency through investment in 
administrative processes, and reward physicians for improving health 
outcomes.[Footnote 5] 

CMS's PGP Demonstration tests a hybrid payment methodology that 
combines Medicare FFS payments with a bonus payment that participating 
physician groups can earn by demonstrating savings through better 
management of patient care and services and meeting quality-of-care 
performance targets. Performance for the demonstration is based on the 
success of the entire physician group practice, and not on the 
individual performance of any one physician. CMS stated that it chose 
to focus on large physician group practices because these organizations 
influence a significant amount of Medicare expenditures and have 
sufficient Medicare beneficiary volume to calculate Medicare savings or 
losses under the demonstration. CMS initially designed the PGP 
Demonstration for a 3-year period and recently, December 2007, 
continued the demonstration for a fourth performance year. CMS 
solicited participation from physician practices across the United 
States, and selected 10 physician group practices with at least 200 or 
more physicians that were multispecialty physician groups, which had 
the capacity to provide a variety of types of clinical 
services.[Footnote 6] The first year of the demonstration, referred to 
as performance year one (PY1), ran from April 1, 2005, through March 
31, 2006, and the fourth performance year will end on March 31, 
2009.[Footnote 7] 

In July 2007, CMS reported the results of PY1. As a result of their 
efforts, 2 of the 10 participating physician groups participating in 
the PGP Demonstration earned a performance bonus payment. Specifically, 
the Marshfield Clinic and the University of Michigan Faculty Group 
Practice earned bonuses of approximately $4.6 million and $2.8 million, 
respectively. As a part of the overall design of the demonstration, to 
obtain bonus payments, each participant had to generate cost savings to 
Medicare of more than 2 percent relative to a unique comparison group 
of Medicare beneficiaries intended to be similar to Medicare 
beneficiaries treated by that participant.[Footnote 8] Only 
participants that earned this cost-savings portion of the bonus also 
were eligible to increase their bonus payments if they met certain 
disease-specific, quality-of-care performance targets. CMS selected 10 
diabetes management measures as the quality-of-care performance 
targets, and in PY1, all 10 participants achieved 7 or more of CMS's 10 
quality-of-care targets. Performance year two (PY2) and performance 
year three (PY3) used the same bonus payment methodology, with two 
exceptions: (1) other disease-specific quality measures are phased in 
over time and (2) the share of any bonus earned by meeting quality 
targets increases each year. While the specific quality-of-care 
measures for each year were selected by CMS, each participating 
physician group had the latitude to determine what programs--such as 
patient care coordination and administrative processes--it would 
implement to both generate cost savings and meet the quality measures. 
No one savings or quality management program was required to be 
implemented uniformly. 

BIPA required us to report on the progress of the PGP Demonstration. As 
discussed with the committees of jurisdiction, in this report we 
examined for the first performance year of the demonstration: (1) what 
actions the participating physician groups took to achieve cost savings 
and meet the CMS-set, diabetes quality-of-care targets, (2) the extent 
to which the PGP Demonstration design was a reasonable approach to 
rewarding participating physician groups for cost-savings and quality 
performance, and (3) potential challenges involved in broadening the 
payment approach used in the demonstration from the 10 large 
participating physician groups to other physician groups and nongroup 
practices. 

To determine the programs used by the participating physician groups 
for the PGP Demonstration, we analyzed data we collected through 
written questionnaires and interviews. We supplemented this information 
by conducting site visits to 5 of the 10 locations.[Footnote 9] We 
included in our analysis new programs or expansions of existing 
programs created in response to the demonstration. To determine the 
extent to which the PGP Demonstration design was reasonable, we 
analyzed documents on the overall design and bonus payment methodology 
we obtained from CMS, analyzed data collected through the 
questionnaire, and used interviews we conducted with representatives of 
the participating physician groups and CMS. We also reviewed and 
analyzed CMS documents on the design of the PGP Demonstration. To 
determine the potential challenges involved in broadening the payment 
approach used in the demonstration to other physician practices, we 
compared selected characteristics of the 10 participating physician 
groups with all physician practices in the United States, and we also 
relied on interviews with the participating physician group practices, 
CMS officials, and relevant industry experts. In doing our work, we 
tested the reliability of the data and determined they were adequate 
for our purposes. We conducted this performance audit from May 2006 
through December 2007 in accordance with generally accepted government 
auditing standards. Those standards require that we plan and perform 
the audit to obtain sufficient, appropriate evidence to provide a 
reasonable basis for our findings and conclusions based on our audit 
objectives. We believe that the evidence obtained provides a reasonable 
basis for our findings and conclusions based on our audit objectives. 
For additional details of our scope and methodology, see appendix I. 

Results in Brief: 

To achieve cost savings in the PGP demonstration, all 10 participating 
physician groups implemented care coordination programs that focused on 
specific patient populations, such as those with congestive heart 
failure (CHF), that the participants believed were the most likely to 
generate cost savings. However, only 2 of the 10 participants earned a 
bonus payment in PY1 for achieving cost savings and meeting quality-of- 
care targets. The remaining 8 participants met 7 or more of CMS's 10 
quality-of-care targets in PY1, but were not eligible for bonus 
payments because they did not achieve the required level of cost 
savings. To meet the quality-of-care targets set by CMS for PY1 on 10 
diabetes measures, such as whether a beneficiary's blood pressure was 
at the recommended level, participants generally initiated processes to 
better identify patients with diabetes, improve documentation of 
diabetes-management-related exams and tests completed, and provide 
feedback to physicians on achievement of the targets. All 10 
participating physician groups reported that their care coordination 
programs were making progress in both achieving cost savings and 
providing broader benefits to their programs and communities because, 
for example, demonstration program initiatives were typically 
implemented for all patients in a physician's care regardless of 
whether they were part of the demonstration. Despite early positive 
indicators of cost savings, the full impact of programs implemented for 
the PGP Demonstration, particularly in care coordination, is largely 
unknown for a variety of reasons, including that many programs were not 
in place for all 12 months of the first performance year. 

CMS's design for the PGP Demonstration was generally a reasonable 
approach for rewarding physician groups in the demonstration for cost 
savings and quality performance, but created challenges. CMS's decision 
to use comparison groups and adjust for differences in health status 
among Medicare beneficiaries helped ensure that bonus payments 
reflected programs and incentives attributable to the demonstration. In 
addition, having a quality component of the design helped ensure that 
participating physician groups did not achieve cost savings at the 
expense of quality. However, the demonstration design created a 
particular challenge for CMS in providing timely performance feedback 
and bonus payments to the participating physician groups, which, if 
received, may have enabled them to improve their programs. 
Specifically, neither bonuses nor performance feedback for PY1 were 
given to participants until after PY3 began. While CMS has begun to 
provide each participant with a quarterly patient claims data set 
related to beneficiaries it served, most participants reported they did 
not have the necessary resources to analyze and use these data sets to 
determine their progress and areas for potential improvements. 
Participants also raised additional concerns about the demonstration's 
design, including the use of a uniform 2 percent savings threshold for 
all participants, which may have made earning a bonus more challenging 
for particular providers. CMS officials indicated that they planned to 
examine these issues as part of their evaluation at the conclusion of 
the PGP Demonstration. 

The large relative size of the 10 participating physician groups 
compared with most U.S. physician practices gave the participants 
certain size-related advantages that may make broadening the payment 
approach used in the demonstration to other physician groups and 
nongroup practices challenging. Whereas all physician groups 
participating in the demonstration had 200 or more physicians, less 
than 1 percent of all physician practices nationwide had more than 150 
physicians. In addition to the number of physicians, participants were 
larger in terms of their annual medical revenues and staff size. Their 
larger size provided the participating physician groups with three 
unique size-related advantages: institutional affiliations that allowed 
greater access to financial capital, access to and experience with 
using electronic health records (EHR) systems, and experience prior to 
the PGP Demonstration with pay-for-performance programs. For example, 8 
of the 10 participants had an EHR, which was essential to participants' 
ability to gather data and track progress in meeting quality-of-care 
targets; only about 24 percent of physician practices in the U.S. had a 
full or partial EHR in 2005. Most participating groups believed these 
three advantages were critical to achieving cost savings and improving 
quality. 

We recommend that the Administrator of CMS provide participating 
physician groups with interim summary reports that estimate their 
progress in achieving cost-savings and quality-of-care targets. In 
commenting on a draft of this report, CMS agreed with the intent of our 
recommendation. CMS stated that it was developing a new quarterly 
report and refined data set to aid physician groups in monitoring their 
performance, coordinating care, and improving quality. 

Background: 

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.[Footnote 10] 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.[Footnote 
11] 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. 

Table 1: Description of the Participating Physician Groups in the 
Physician Group Practice Demonstration: 

Participating physician group: Billings Clinic; 
Description of participants' affiliations and the geographic area 
served: A physician group practice that is part of an integrated 
delivery system, which includes a general hospital, a skilled nursing 
facility, and other facilities. The system also operates a private 
health insurance plan. Its geographic service area includes the city of 
Billings, Montana, south-central Montana, and northwestern Wyoming, a 
predominantly rural area; 
Number of physician group office locations: 10; 
Number of physicians in the physician group[A]: 232. 

Participating physician group: Dartmouth-Hitchcock Clinic; 
Description of participants' affiliations and the geographic area 
served: A faculty/community group practice that is a part of an 
integrated delivery system, which includes an academic medical center, 
an ambulatory surgical center (ASC), and a laboratory. Its geographic 
service area includes New Hampshire and eastern Vermont, a 
predominantly rural area with small cities; 
Number of physician group office locations: 35; 
Number of physicians in the physician group[A]: 907. 

Participating physician group: The Everett Clinic; 
Description of participants' affiliations and the geographic area 
served: A physician group practice that is a part of an integrated 
delivery system, which includes two ASCs, a radiology center, a 
laboratory, but no general hospital. Its geographic service area 
includes the city of Everett, Washington, and west-central Washington, 
a predominantly suburban area; 
Number of physician group office locations: 10; 
Number of physicians in the physician group[A]: 250. 

Participating physician group: Geisinger Health System; 
Description of participants' affiliations and the geographic area 
served: A physician group practice that is part of an integrated 
delivery system, which includes three general hospitals, a home health 
agency, two specialty hospitals, and other facilities. The system also 
operates a private health insurance plan. Its geographic service area 
includes central-northeast Pennsylvania, a predominantly rural area 
with small cities; 
Number of physician group office locations: 55; 
Number of physicians in the physician group[A]: 833. 

Participating physician group: Integrated Resources for the Middlesex 
Area; 
Description of participants' affiliations and the geographic area 
served: An independent practice association that provides management 
services to a network of physicians and physician groups that are part 
of an integrated delivery system. The system includes a general 
hospital, a home health agency, an ASC, and other facilities. Its 
geographic service area includes south-central Connecticut, a 
predominantly suburban area with small cities; 
Number of physician group office locations: 57; 
Number of physicians in the physician group[A]: 293. 

Participating physician group: Marshfield Clinic; 
Description of participants' affiliations and the geographic area 
served: A physician group practice without affiliations with other 
facilities, it operates a private health insurance plan. Its geographic 
service area includes the city of Marshfield, Wisconsin, and north-
central Wisconsin, a predominantly rural area; 
Number of physician group office locations: 41; 
Number of physicians in the physician group[A]: 1,039. 

Participating physician group: Novant Medical Group; 
Description of participants' affiliations and the geographic area 
served: A physician group practice that is part of an integrated 
delivery system, which includes two general hospitals, two skilled 
nursing facilities, and a laboratory. Its geographic service area 
includes the small urban area of Winston-Salem, North Carolina, and 
other parts of northwestern North Carolina, a predominantly rural area; 
Number of physician group office locations: 44; 
Number of physicians in the physician group[A]: 250. 

Participating physician group: Park Nicollet Health Services; 
Description of participants' affiliations and the geographic area 
served: A physician group practice that is part of an integrated 
delivery system, which includes two general hospitals and a home health 
agency.[B] Its geographic service area includes suburban areas adjacent 
to Minneapolis-St. Paul, Minnesota, and south-central Minnesota, a 
predominantly suburban area; 
Number of physician group office locations: 29; 
Number of physicians in the physician group[A]: 648. 

Participating physician group: St. John's Health System; 
Description of participants' affiliations and the geographic area 
served: A physician group practice that is part of an integrated 
delivery system, which includes six general hospitals, six home health 
agencies, an ASC, and other facilities. The system also operates a 
private health insurance plan. Its geographic service area includes the 
city of Springfield, Missouri, as well as south-central Missouri and 
northwest Arkansas, predominantly rural areas; 
Number of physician group office locations: 65; 
Number of physicians in the physician group[A]: 522. 

Participating physician group: University of Michigan Faculty Group 
Practice; 
Description of participants' affiliations and the geographic area 
served: A faculty group practice that is a part of an integrated 
delivery system, which includes an academic medical center, two other 
general hospitals, a home health agency, two ASCs, and other 
facilities. The system also operates a private health insurance plan. 
Its geographic service area includes the city of Ann Arbor, Michigan, 
and southeastern Michigan, a predominantly suburban area with small 
cities; 
Number of physician group office locations: 28; 
Number of physicians in the physician group[A]: 1,291. 

Source: GAO. 

[A] The number of physicians includes physicians and physician 
extenders--those who can bill Medicare as physicians, such as physician 
assistants. 

[B] Park Nicollet Health Services has full ownership of one general 
hospital and partial ownership of a second. 

[End of table] 

Demonstration Design, Including Bonus Payment Methodology: 

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.) 

Figure 1: Illustration of CMS Bonus Payment Methodology for PGP 
Demonstration, Performance Year 1: 

[See PDF for image] 

This figure includes both data describing the bonus payment methodology 
as well as graphical illustrations of the same. The following data is 
depicted: 

Step 1, Determination of eligibility for bonus payment: CMS determines 
whether a participating physician group is eligible for a demonstration 
bonus based on whether the participant generated annual Medicare 
savings greater than 2% of its target expenditures. 
-Medicare program savings generated by the participating physician 
group in excess of 2% of its target expenditure amount. 

Step 2, Determination of size of bonus pool: 80% is available as a 
bonus pool to the participating physician group; 20% is considered 
Medicare program savings. 

Step 3, Determination of actual bonus payment earned: Of the bonus pool 
of savings available: 70% is awarded as a cost-savings bonus; Up to 30% 
is awarded (for those who received the cost-savings bonus) to those who 
also meet diabetes quality targets for PY1. Any unearned portion is 
considered Medicare program savings. Total actual bonus payment = cost-
savings bonus (70% of bonus pool) received + quality bonus received (up 
to 30% of bonus pool). 

Source: GAO analysis of CMS data. 

Notes: CMS retained a share (25 percent) of the actual bonus earned by 
participating physician groups in Performance Year 1 to protect against 
any potential losses in future performance years. Spending increases in 
excess of 2 percent, relative to a comparison group of beneficiaries 
intended to have similar characteristics, of the spending target are 
carried forward as losses and deducted from any bonus earned in future 
years. The total actual bonus earned cannot be greater than 5 percent 
of the participating physician group's original spending target. If it 
is higher, it will be reduced to the 5 percent level. 

[End of figure] 

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;[Footnote 12] (2) had received at least 
one office or outpatient service, referred to as an evaluation and 
management (E&M) service, in that performance year;[Footnote 13] 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,[Footnote 14] 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.[Footnote 
15] 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.[Footnote 16] 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 HEDISï¿½ measures, 
established by the National Committee for Quality Assurance 
(NCQA).[Footnote 17] 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. 

Results from Performance Year 1: 

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.[Footnote 18] 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.[Footnote 
19] 

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.[Footnote 20] (See fig. 2): 

Figure 2: Medicare Spending Growth Rate of Participating Physician 
Groups Relative to Their Comparison Group and the 2 Percent Threshold 
in PY1: 

[See PDF for image] 

This figure is a bar graph depicting the Medicare Spending Growth Rate 
of Participating Physician Groups Relative to Their Comparison Group 
and the 2 Percent Threshold in PY1. The vertical axis of the graph 
represents difference in Medicare spending growth rate from -5 to +5, 
with -2 being the 2% threshold. The horizontal axis of the graph 
represents Physician group practice from 1 to 10. The following data is 
depicted: 

Physician group practice: 1; 
Difference in Medicare spending growth rate: -4.3. 

Physician group practice: 2; 
Difference in Medicare spending growth rate: -3.7. 

Physician group practice: 3; 
Difference in Medicare spending growth rate: -2.0. 

Physician group practice: 4; 
Difference in Medicare spending growth rate: -1.2. 

Physician group practice: 5; 
Difference in Medicare spending growth rate: -0.7. 

Physician group practice: 6; 
Difference in Medicare spending growth rate: -0.7. 

Physician group practice: 7; 
Difference in Medicare spending growth rate: -0.5. 

Physician group practice: 8. 
Difference in Medicare spending growth rate: -0.5. 

Physician group practice: 9; 
Difference in Medicare spending growth rate: 2.2. 

Physician group practice: 10; 
Difference in Medicare spending growth rate: 3.6. 

Source: CMS and RTI International. 

Note: Participating group 3 reduced its Medicare spending by almost 2 
percent, but did not exceed the threshold. 

[End of figure] 

PGP Demonstration, Early Test of Public Sector Pay-for-Performance 
Models: 

While the number of pay-for-performance programs--programs in which a 
portion of a provider's[Footnote 21] 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.[Footnote 
22] 

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,[Footnote 23] 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.[Footnote 24] 

Table 2: CMS's Demonstrations Related to Physician Pay-for-Performance: 

CMS demonstration project: Physician Group Practice Demonstration; 
Targeted organizations: Physician groups with 200 or more physicians; 
Statutory authority: BIPA,[A] section 412; 
Description: Participating physician groups are rewarded for improving 
the quality and efficiency of health care services delivered to 
Medicare fee-for-service beneficiaries through a methodology that 
shared savings with the Medicare program. The demonstration seeks to 
encourage coordination of inpatient and outpatient services, promote 
efficiency through investment in administrative structures and process, 
and reward physicians for improving health outcomes; 
Timing of demonstration: 3 years, CMS recently continued the 
demonstration for an additional year. 

CMS demonstration project: Medicare Health Care Quality Demonstration; 
Targeted organizations: Physician groups and integrated delivery 
systems; 
Statutory authority: MMA,[B] section 646; 
Description: Participating physician groups will test the effectiveness 
of different payment methodologies to improve quality and reduce costs. 
Participants will be rewarded using their choice of (1) a similar 
design and bonus payment methodology to that used in the PGP 
Demonstration or (2) a different payment methodology they elect; 
Timing of demonstration: 5 years, application period closed, projected 
to begin in 2008. 

CMS demonstration project: Care Management for High Cost Beneficiaries 
Demonstration; 
Targeted organizations: Physician groups, hospitals, and integrated 
delivery systems; 
Statutory authority: Section 402(a), Social Security Amendments of 
1967[C]; 
Description: Six organizations will test the ability of direct-care 
provider models to coordinate care for high-cost, high-risk 
beneficiaries by providing clinical support beyond traditional settings 
to manage their conditions; 
Timing of demonstration: 3 years, began October 2005. 

CMS demonstration project: Medicare Care Management Performance 
Demonstration; 
Targeted organizations: Solo and small to medium-sized physician 
practices in California, Arkansas, Massachusetts, and Utah; 
Statutory authority: MMA,[B] section 649; 
Description: Participants will be rewarded for meeting clinical 
performance standards for (1) treating diabetes, congestive heart 
failure, and coronary artery disease; (2) providing preventive services 
provided to high-risk, chronically ill patients; and (3) implementing 
electronic health records systems; 
Timing of demonstration: 3 years, began July 1, 2007. 

CMS demonstration project: Medicare Hospital Gainsharing Demonstration; 
Targeted organizations: Hospitals; 
Statutory authority: DRA,[D] section 5007; 
Description: Participating hospitals will be allowed to provide 
incentive payments to physicians to reward improvements in quality of 
care and increased financial efficiency; 
Timing of demonstration: 3 years, expected to begin January 1, 2007 but 
start currently delayed. 

Source: CMS. 

[A] Medicare, Medicaid, and SCHIP Benefits Improvement and Protection 
Act of 2000, Pub. L. No. 106-554, App. F, ï¿½ 412, 114 Stat. at 2763A- 
509. 

[B] Medicare Prescription Drug, Improvement, and Modernization Act of 
2003, Pub. L. No. 108-173, 117 Stat. 2066. 

[C] Pub. L. No. 90-248, 81 Stat. 821, 930-31 (1968), as amended by Pub. 
L. No. 92-603, ï¿½ 222(b)(2), 86 Stat. at 1393. 

[D] Deficit Reduction Act of 2005, Pub. L. No. 109-171, 120 Stat. 4 
(2006). 

[End of table] 

Participating Physician Groups Implemented Care Coordination Programs 
Designed to Achieve Cost Savings and Management Processes to Meet CMS- 
Set Diabetes Quality-of-Care Targets in PY1: 

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. Despite early positive indicators in cost savings, the full 
impact of programs implemented for the PGP Demonstration, particularly 
in care coordination, is largely unknown because many programs were not 
in place for all 12 months of the first performance year. 

Participating Physician Groups Implemented 47 Programs for the 
Demonstration, Largely in Care Coordination: 

The participating physician groups implemented 47 programs, which were 
either new or expansions of existing programs, to achieve cost savings 
and meet the CMS-set diabetes quality-of-care targets, with each 
participant implementing from 2 to 9 programs.[Footnote 25] (See app. 
II for a complete list of new and expanded programs implemented for the 
PGP Demonstration.) More specifically, participants focused nearly 
three-quarters of their new and expanded programs on care coordination-
-programs that manage the care of a small number of chronically ill and 
frail elderly patients who account for a disproportionately large share 
of overall costs. (See fig. 3.) The remaining one-quarter of programs 
focused on patient education, medication-related issues, improving 
administrative processes, and other initiatives. 

Figure 3: Percentage of New and Expanded Programs Implemented by 
Participating Physician Groups: 

[See PDF for image] 

This figure contains two pie-charts depicting the following data: 

All new and expanded programs: 
Care coordination: 72%; 
Administrative processes: 15%; 
Patient education: 6%; 
Medication related: 4%; 
Other: 2%. 

New and expanded care coordination programs: Of the 72% Care 
coordination: 
Disease management: 36%; 
Case management: 36%. 

Source: GAO. 

Note: There are two types of care coordination programs: (1) case- 
management programs that target high-cost, high-risk patients with 
multiple medical conditions, and (2) disease-management programs that 
treat patients with a specific disease, such as congestive heart 
failure. Information technology initiatives are not counted as discrete 
new or expanded programs because these initiatives were parts of 
broader participating physician group efforts. Administrative processes 
include such activities as physician and staff education programs, 
physician feedback systems, and data collection processes. Because of 
rounding, the pie chart does not total to 100 percent. 

[End of figure] 

Among the 47 programs, participating physician groups devoted the 
largest portion of their program resources to care coordination 
programs designed to reduce hospitalizations by improving post-acute 
care. Our analysis showed that for 9 of the 10 participants at least 
half of demonstration-specific, full-time equivalents (FTE) were 
devoted to care coordination programs. (See table 3.) Participants told 
us they selected care coordination programs that provided post-acute 
care because they believed these programs would reduce future 
hospitalizations and yield the most cost savings in the shortest amount 
of time. For example, both Billings Clinic and Park Nicollet Health 
Services used a telephonic interactive voice response (IVR) system to 
monitor patients' health status at home following a hospitalization or 
another significant health event.[Footnote 26] 

Table 3: Percentage of FTEs Devoted to Largest New and Expanded Care 
Coordination Programs Implemented by PGP Demonstration Participants, 
PY1: 

Participating physician group: Billings Clinic; 
Largest care coordination program: Cancer treatment center (disease 
management); 
Description of care managers' responsibilities following a 
hospitalization or significant medical event: Provided outpatient 
treatment, prevention, and education programs to decrease patients' 
risk for infections or other potentially harmful exposures to decrease 
the number and length of hospital stays; 
Percentage of demonstration-specific FTEs: 27. 

Participating physician group: Dartmouth-Hitchcock Clinic; 
Largest care coordination program: Health coaching (case management); 
Description of care managers' responsibilities following a 
hospitalization or significant medical event: Helped patients follow 
hospital post-discharge instructions, make follow-up appointments with 
physicians, and take the correct medications and dosages; 
Percentage of demonstration-specific FTEs: 55. 

Participating physician group: The Everett Clinic; 
Largest care coordination program: Palliative care program (case 
management); 
Description of care managers' responsibilities following a 
hospitalization or significant medical event: Educated patients about 
end-of-life planning, and provided information on community support 
agencies, alternative living options, and in-home support; 
Percentage of demonstration-specific FTEs: 67. 

Participating physician group: Geisinger Health System; 
Largest care coordination program: Post-acute Case Management (case 
management); 
Description of care managers' responsibilities following a 
hospitalization or significant medical event: Contacted patients to 
ensure home health services were received and correct medications were 
being taken, and assisted with coordinating community service programs; 
Percentage of demonstration-specific FTEs: 60. 

Participating physician group: Integrated Resources for the Middlesex 
Area; 
Largest care coordination program: Heart smart program (disease 
management); 
Description of care managers' responsibilities following a 
hospitalization or significant medical event: Provided case-management 
services to cardiac patients enrolled in home-care services; 
Percentage of demonstration-specific FTEs: 50. 

Participating physician group: Marshfield Clinic; 
Largest care coordination program: Anticoagulation Program (case 
management); 
Description of care managers' responsibilities following a 
hospitalization or significant medical event: Worked with patients 
taking the anti-clotting drug Warfarin to ensure dosages were adjusted 
properly, and recognize other factors affecting coagulation, such as 
diet, activity, other medications, and other illnesses; 
Percentage of demonstration-specific FTEs: 70. 

Participating physician group: Novant Medical Group; 
Largest care coordination program: Outpatient case management (case 
management); 
Description of care managers' responsibilities following a 
hospitalization or significant medical event: Ensured that high-risk, 
high-cost patients scheduled follow-up visits with physicians and 
informed patients of available resources; 
Percentage of demonstration-specific FTEs: 100. 

Participating physician group: Park Nicollet Health Services; 
Largest care coordination program: Heart failure care coordination 
(disease management); 
Description of care managers' responsibilities following a 
hospitalization or significant medical event: Monitored patients' 
medication usage and dietary regimes through an IVR system and 
initiated medical care when patients' health status worsened; 
Percentage of demonstration-specific FTEs: 100. 

Participating physician group: St. John's Health System; 
Largest care coordination program: Case management systems (case 
management); 
Description of care managers' responsibilities following a 
hospitalization or significant medical event: Coordinated inpatient and 
outpatient care for high-risk patients and helped patients follow 
physician treatment plans; 
Percentage of demonstration-specific FTEs: 79. 

Participating physician group: University of Michigan Faculty Group 
Practice; 
Largest care coordination program: Post-discharge transitional care 
(case management); 
Description of care managers' responsibilities following a 
hospitalization or significant medical event: Provided medication 
counseling, guidance on post-acute care treatment, assistance making 
post-discharge appointments, and assistance with nonclinical services, 
such as arranging transportation; 
Percentage of demonstration-specific FTEs: 63. 

Source: GAO analysis of survey data. 

Note: Care coordination programs were defined as large based on 
resources, as measured in FTEs, devoted to the program. 

[End of table] 

Approximately half of the care coordination programs were case- 
management programs that targeted high-cost, high-risk patients with 
multiple medical conditions, while the other half were disease- 
management programs that treated patients with a specific disease, such 
as CHF. Seven participants focused on case-management programs by using 
care managers for patients with multiple medical conditions to reduce 
hospitalizations. For example, an official from the Dartmouth-Hitchcock 
Clinic stated that the clinic's primary strategy for the PGP 
Demonstration was to reduce hospitalizations and readmissions through 
more effective discharge planning, such as calling patients at home 
following their hospital discharge and encouraging them to schedule 
follow-up appointments with their physicians. Three participants 
committed the majority of their resources to disease-management 
programs; two of the three participants told us they focused on CHF 
because it is a costly disease to treat and would therefore generate 
savings within the first performance year. Other diseases, such as 
diabetes, could take several years to generate cost savings. CHF and 
diabetes are two of the most common chronic diseases among Medicare 
beneficiaries, according to recent health policy research.[Footnote 27] 

All 10 participating physician groups reported that their care 
coordination programs were making progress in both achieving cost 
savings and providing broader benefits to their programs and 
communities. In particular, four participants reported declines in 
hospitalizations for patients enrolled in their CHF care coordination 
programs. For example, Park Nicollet Health Services reported a 61 
percent reduction in hospitalizations for patients enrolled in its CHF 
care-management program, which utilized an IVR to interact with 
patients on a daily basis. Park Nicollet representatives estimated this 
program saved $4,680 yearly, on average, for each patient enrolled in 
the program. Because the demonstration included other Medicare and non- 
Medicare patients, its benefits extended beyond the patients assigned 
to Park Nicollet for the demonstration. Further, several participants 
stated that collaboration and information sharing among the 10 
participants on designing and implementing programs and analyzing data 
resulted in improvements to their demonstration programs, which broadly 
benefit their organizations. Representatives from St. John's Health 
Systems stated that creating a care-coordination program had additional 
benefits, including the adoption of such programs by other health 
systems and physician groups throughout the community. 

Despite early positive indicators of cost savings, the full impact of 
programs implemented for the PGP Demonstration, particularly in care 
coordination, is largely unknown for a variety of reasons, including 
that many programs were not in place for all 12 months of the first 
performance year. Only 1 of the 10 participants had all of its programs 
in place for all 12 months of PY1. For example, the Marshfield Clinic 
had a case-management program operational for all 12 months in PY1, and 
a disease-management program operational for 4 months. By the beginning 
of PY2, only 6 of the 10 participants had all of their care 
coordination programs operational. Officials from participating 
physician groups stated that program implementation delays were caused 
by program complexity, the process of gaining management approval for 
significant program start-up costs, and educating physicians about the 
programs. In addition, two participants stated that because their care 
coordination programs were phased in throughout the first two 
performance years, PY3 may be the first year that the full impact of 
these programs is realized. 

Participating Physician Groups Improved Management Processes to Meet 
the Diabetes Quality-of-Care Targets in First Performance Year: 

To meet the quality-of-care targets set by CMS on diabetes management, 
participating physician groups improved their management processes by 
investing in IT, creating team-based approaches, and improving 
administrative processes, particularly for diabetes management, the 
quality-of-care target for PY1. To earn the maximum bonus, participants 
that met the 2 percent cost-savings target had to further meet a 
quality-of-care improvement target in a particular clinical area. The 
measures selected by CMS for each performance year of the demonstration 
focused on chronic conditions prevalent in the Medicare population that 
are treated in primary care.[Footnote 28] In PY1, CMS selected diabetes 
management as the focus for quality improvement for the demonstration 
participants. See table 4 for a categorization of how the participants 
worked to improve quality, specifically for diabetes, by using 
physician feedback, patient registries, team-based approaches, and 
improved documentation. 

Table 4: Management Processes Developed or Enhanced by Participating 
Physician Groups to Meet Diabetes Quality-of-Care Targets, PY1: 

Participating physician group: Billings Clinic; 
Physician feedback: [Check]; 
Patient registry: [Check]; 
Team-based approaches: [Check]; 
Improved documentation: [Empty]; 
Description of unique program components[A]: 
* Developed an electronic database that allowed physicians to identify 
patients with diabetes; 
* Utilized electronic database to generate reports for physicians on 
meeting diabetes quality-of-care measures; 
* Allowed care managers to manage certain aspects of a patient's care 
such as adjusting diuretic medications for heart failure patients. 

Participating physician group: Dartmouth-Hitchcock Clinic; 
Physician feedback: [Check]; 
Patient registry: [Empty]; 
Team-based approaches: [Check]; 
Improved documentation: [Check]; 
Description of unique program components[A]: 
* Provided reports to physicians on meeting diabetes quality measures 
through intranet; 
* Improved physician coordination with nurses, health coaches, and case 
managers; 
* Used flowcharts to ensure that diabetes patients receive the 
appropriate tests and treatments. 

Participating physician group: The Everett Clinic; 
Physician feedback: [Check]; 
Patient registry: [Empty]; 
Team-based approaches: [Check]; 
Improved documentation: [Empty]; 
Description of unique program components[A]: 
* Provided reports to physicians online, enabling them to view the 
percentage of diabetes quality-of-care measures they had completed for 
each patient; 
* Instructed medical assistants to begin performing more initial 
screenings on patients. 

Participating physician group: Geisinger Health System; 
Physician feedback: [Check]; 
Patient registry: [Empty]; 
Team-based approaches: [Check]; 
Improved documentation: [Empty]; 
Description of unique program components[A]: 
* Implemented an electronic system to track physicians' compliance with 
diabetes quality-of-care measures; 
* Implemented standing orders for nurses to test diabetic patients' 
urine for protein before each visit. 

Participating physician group: Integrated Resources for the Middlesex 
Area; 
Physician feedback: [Check]; 
Patient registry: [Empty]; 
Team-based approaches: [Empty]; 
Improved documentation: [Check]; 
Description of unique program components[A]: 
* Issued aggregated report cards for each physician location that 
measured performance in meeting the diabetes quality-of-care measures; 
* Distributed flow sheets to physicians at the point of care to help 
monitor care for diabetes patients. 

Participating physician group: Marshfield Clinic; 
Physician feedback: [Check]; 
Patient registry: [Empty]; 
Team-based approaches: [Check]; 
Improved documentation: [Check]; 
Description of unique program components[A]: 
* Provided reports to physicians on meeting diabetes quality-of-care 
measures through intranet; 
* Implemented standing orders for medical assistants to order tests and 
allowed care managers to adjust patients' Warfarin dosages based on 
protocols; 
* Created paper forms to help ensure that foot exams are completed and 
documented for diabetes patients. 

Participating physician group: Novant Medical Group; 
Physician feedback: [Check]; 
Patient registry: [Empty]; 
Team-based approaches: [Empty]; 
Improved documentation: [Check]; 
Description of unique program components[A]: 
* Provided reports to physicians on meeting diabetes quality-of-care 
measures, based on paper charts; 
* Used paper checklists placed in patients' medical records to record 
data on eye and foot exams for diabetes patients. 

Participating physician group: Park Nicollet Health Services; 
Physician feedback: [Check]; 
Patient registry: [Empty]; 
Team-based approaches: [Check]; 
Improved documentation: [Empty]; 
Description of unique program components[A]: 
* Developed electronic alerts and reminders that inform physicians of 
patients' immediate and future clinical needs, including the diabetes-
related measures; 
* Implemented standing orders for care managers to administer various 
treatments. 

Participating physician group: St. John's Health System; 
Physician feedback: [Check]; 
Patient registry: [Check]; 
Team-based approaches: [Empty]; 
Improved documentation: [Empty]; 
Description of unique program components[A]: 
* Used electronic database to check progress on meeting diabetes 
quality-of-care measures; 
* Developed an electronic database that allows physicians to identify 
diabetes patients. 

Participating physician group: University of Michigan Faculty Group 
Practice; 
Physician feedback: [Check]; 
Patient registry: [Empty]; 
Team-based approaches: [Empty]; 
Improved documentation: [Empty]; 
Description of unique program components[A]: 
* Provided reports to physicians at the point of care detailing each 
diabetes patient's test results, appointments, and medications. 

Sources: GAO and CMS. 

[A] Participating physician groups may have implemented more than one 
program to meet quality-of-care targets, with multiple components, and 
only a sample of selected components are included. 

[End of table] 

All participating physician groups made new investments in IT, by 
adding features to existing EHR systems or using technology to track 
physicians' performance on the quality-of-care measures set by CMS. For 
example, Marshfield Clinic implemented electronic alerts in its EHR 
system to remind clinical staff to provide care, such as immunizations. 
Participants primarily used electronic methods for physician feedback 
as a tool for physicians to track their performance and that of their 
peers to improve their internal operations and patient care. For 
example, Geisinger Health System's physician feedback system provided 
physicians with access to monthly reports for each physician, which 
compared each physician's performance in meeting the quality-of-care 
measures. According to administrators from Geisinger, this transparent 
approach fostered positive competition among its physicians to improve 
quality of care. Participants also invested in IT by creating 
electronic patient or disease-specific databases or lists referred to 
as patient registries to better identify patients eligible for 
enrollment in diabetes programs. The St. John's Health System, which 
did not have an EHR system, created an electronic patient registry to 
track patients with diabetes and to alert physicians to provide certain 
tests.[Footnote 29] 

Six of the participating physician groups relied to a greater extent on 
a team-based approach to improve care processes. Using a team-based 
approach, participants expanded the roles and responsibilities of 
nonphysician staff such as nurses, medical assistants, and care 
managers so that they worked more effectively with physicians to 
deliver quality care. Although the demonstration required additional 
quality reporting, officials from two of the participating physician 
groups stated that they were able to treat the same number of patients 
in a day. For example, Dartmouth-Hitchcock Clinic used care managers 
who were nurses to maximize the effectiveness of patients' office 
visits. These staff scheduled lab tests in advance of patients' office 
visits when appropriate, developed patient action plans, and 
communicated with physicians before and after patients' arrivals. 
Physicians from Dartmouth-Hitchcock told us that the time they spent 
with patients had become more effective because of this new approach. 

Four participating physician groups improved their administrative 
processes by creating better documentation methods for diabetes-related 
tests and exams. They created worksheets, derived from patients' 
medical records, to ensure that patients received diabetes tests, such 
as foot and eye exams. In addition to improving documentation, these 
initiatives served as reminders to physicians to complete diabetes- 
related tests and exams and also reduced the burden of data collection 
for reporting purposes. For example, IRMA created paper forms that were 
added to patient records to collect data on tests as they were 
conducted. In addition to improving documentation, these forms were 
intended to relieve some of the burden of collecting data for smaller 
practices within the organization. IRMA physicians also received paper 
worksheets at the point of care to help monitor and track care provided 
to their diabetes patients. 

CMS's PGP Demonstration Design Was Generally a Reasonable Approach, but 
Created Challenges: 

CMS's design for the PGP Demonstration was generally a reasonable 
approach for rewarding participating physician groups for cost-savings 
and quality performance. However, the demonstration design created a 
particular challenge for CMS in providing timely performance feedback 
and bonus payments to the participants which, if received more quickly, 
may have enabled them to improve their programs. 

CMS's PGP Demonstration Design Was Generally a Reasonable Approach for 
Rewarding Participating Physician Groups: 

CMS's design for the PGP Demonstration was generally a reasonable 
methodological approach for determining whether the actions taken by 
the participants resulted in cost savings and improvements in quality, 
and rewarding participants as appropriate. In particular, three aspects 
of the PGP Demonstration design were consistent with established 
methodological practices considered effective: a rigorous research 
study design to isolate the effects of the demonstration's incentives, 
a risk-adjustment approach to adjust for changes in patient health 
status, and a quality component to help ensure that participating 
physician groups did not achieve cost savings at the expense of 
quality. 

CMS used a rigorous research design to enable it to isolate the 
effectiveness of the actions taken by each of the participants in the 
demonstration. Specifically, CMS used a modified "pre-test/post-test" 
control group design that is generally viewed by experts as an 
effective way to control for some of the most common threats to 
internal validity, in this case the ability of the study design to 
measure the true effects of CMS's incentive payments.[Footnote 30] The 
features of CMS's study design included a separate comparison group for 
each participant to distinguish the effects of the demonstration's 
incentives from unrelated spending trends in the participants' service 
areas. Comparison groups' beneficiaries are from the participants' 
geographic service areas and, as such, are affected by the same local 
market trends as the participants. In addition, the study design 
included a baseline period, before the demonstration began, that helped 
to control for trends that may have occurred without demonstration- 
related interventions. A standard pre-test/post-test control group 
design would have randomly assigned beneficiaries to either a 
comparison group or a participant's beneficiaries. To avoid having to 
restrict or control beneficiaries' choice of providers and health care 
services, and to continue to operate within the Medicare FFS system 
while the demonstration was in place, CMS modified this standard 
approach. Rather than assigning beneficiaries randomly at the start of 
the demonstration to participant or comparison groups, the agency 
retrospectively assigned beneficiaries at the end of each year based on 
the beneficiaries' natural use of outpatient E&M services. 

CMS also used a rigorous risk-adjustment approach to adjust for changes 
in patients' health-care status. Without these adjustments, CMS could 
not have been reasonably assured that changes in spending growth were 
not attributable to changes in patients' health care status, and the 
severity and complexity of diagnosis. For the PGP Demonstration, CMS 
tailored the CMS-Hierarchical Condition Category (HCC) model, the risk- 
adjustment model that it currently uses to make capitation payments to 
Medicare managed care plans.[Footnote 31] This model accounts for 
changes in the health status of beneficiaries. 

Furthermore, CMS incorporated a quality component into the research 
design, which helped ensure that participants would not achieve cost 
savings at the expense of quality. The quality-of-care measures CMS 
selected were based on a consensus of experts and were developed in 
collaboration with the American Medical Association and quality 
assurance organizations and with input from the participants. In 
addition, CMS has placed an increased emphasis on quality in its bonus 
payment methodology for future years. By PY3, half of the available 
bonus pool will be awarded based on each participant's success in 
meeting quality-of-care metrics in six clinical areas: diabetes, CHF, 
CAD, management of hypertension, and screening for breast cancer and 
colorectal cancer. 

PGP Demonstration Design Created Several Challenges: 

While CMS's research design for the PGP Demonstration was generally a 
reasonable approach, it also created some challenges for the 
participating physician groups. Challenges resulting from the 
demonstration design included providing timely performance feedback and 
bonus payments and the use of a uniform 2 percent savings threshold 
that may have disadvantaged certain participants. Participants also 
raised other concerns related to the demonstration design that were 
related to their local markets. 

Certain Aspects of the Demonstration Design Made Providing Timely 
Feedback and Bonus Payments Challenging: 

Overall, participants did not receive performance feedback or bonus 
payments for their PY1 efforts until after the beginning of the third 
performance year. Specifically, CMS provided participants with 
performance feedback and bonus payments regarding their efforts in PY1 
in three phases beginning 12 months after the end of PY1. In April 
2007, CMS provided each participant with a cost-savings summary report 
displaying its success in controlling Medicare expenditures for PY1 and 
the size of its cost-savings bonus pool. (See fig. 4.) A little over 2 
months later, CMS provided each participant with a detailed settlement 
sheet displaying its individual cost-savings and quality-of-care 
bonuses for PY1. It was not until July 2007, 15 months after the end of 
PY1, that the two participants that earned a demonstration bonus for 
PY1--the Marshfield Clinic and the University of Michigan Faculty Group 
Practice--received their bonus payments of $3.4 million and $2.1 
million, respectively. 

Figure 4: Gap between Completion of First Performance Year and 
Performance Feedback and Bonus Payments: 

[See PDF for image] 

This figure is an illustration of the Gap between Completion of First 
Performance Year and Expected Bonus Payments. The following data is 
depicted: 

Performance Year 1: April 1, 2005 - April 1, 2006; 
Number of months: 12. 

Performance Year 2: April 1, 2006 - April 1, 2007; 
Number of months: 12 (extended to 15, through July 1, 2007); 
April 2007: Cost-savings feedback for PY1; 
Mid-June 2007: Cost-savings and quality-of-care bonuses for PY1; 
July 2007: Bonus payments distributed for PY1. 

Performance Year 2: April 1, 2007 - April 1, 2008; 
Number of months: 12. 

Source: GAO analysis of GMS data. 

Note: The 15-month period includes the typical 6-month period necessary 
for CMS to process a sufficient number of claims to meet its 98 percent 
complete claims threshold that it uses for analysis. 

[End of figure] 

CMS officials explained that generating feedback for the participating 
physician groups required 15 months because the demonstration design 
depended on the time-consuming process of retrospectively analyzing 
Medicare beneficiaries' claims and chart-based data. Specifically, CMS 
officials stated that the process of calculating participants' cost- 
savings bonuses required at least 12 months after the conclusion of the 
first performance year--6 months to accrue claims data that were 
sufficiently complete and a second 6 months to analyze and calculate 
the bonus amounts.[Footnote 32] In addition, they stated that the 
calculation of the quality-of-care bonus required an additional 3 
months to audit and reconcile chart-based data with claims-based data 
pertaining to the 10 diabetes quality-of-care measures. CMS officials 
stated that to calculate the cost-savings bonus they chose to use a 
claims file that was 98 percent complete because they wanted to ensure 
that the feedback they provided to participants was accurate. CMS 
officials also stated that the time frames for providing performance 
feedback and bonus payments to participants in PY1 will be the same for 
PY2 and PY3. 

Officials from all 10 participating physician groups expressed concern 
about the length of time CMS took to provide them with performance 
feedback and bonus payments. Several participants stated that they had 
difficulty making adjustments to their programs and improving their 
overall performance because of delayed feedback and payments. One 
official from the Novant Medical Group stated that the 15-month time 
lag in receiving bonus payments would prevent the organization from 
reinvesting these resources into demonstration-related programs and 
improving them for subsequent performance years. In addition, two of 
the participants told us that other pay-for-performance programs they 
have participated in have used payment methodologies that yielded more 
timely performance feedback or bonus payments. For example, officials 
from the University of Michigan Faculty Group Practice indicated that a 
pay-for-performance program sponsored by Blue Cross Blue Shield of 
Michigan provided them twice a year with feedback for meeting certain 
quality-of-care targets. 

In response to these concerns, CMS has been working to provide each 
participating physician group with a quarterly Medicare patient claims 
data set related to beneficiaries they served. Initially, data sets 
were provided quarterly and focused on identifying patients with 
chronic conditions who had a hospital admission or emergency room 
visit. In July 2007, CMS provided each participating group with a data 
set on hospital inpatient, outpatient, and physician information 
consisting of the Medicare claims of beneficiaries likely to be 
included in the PY2 cost-savings calculations. In September 2007, CMS 
responded to participants' requests for quarterly claims data that 
would allow them to assess their cost-savings performance during the 
performance year, by providing them with a revised data set. CMS's most 
recent data set included Medicare inpatient, outpatient, and physician 
claims data for beneficiaries likely to be included in the year-end 
cost-savings calculation. The data set includes information on these 
beneficiaries for the first quarter of PY3. CMS noted that it will not 
provide equivalent information pertaining to comparison group 
beneficiaries because these data are too time-consuming to assemble. 

While CMS's provision of ongoing quarterly data sets to participants is 
timelier than the information provided before, most participants told 
us they do not have the necessary resources to analyze these data sets 
in a timely manner. This lack of timely actionable data could hinder 
participants' ability to adjust their programs on a more "real-time" 
basis. Officials from only 2 of the 10 participants told us they would 
able to analyze and use the quarterly data sets CMS provided. 
Consequently, the data sets are not as useful as providing CMS- 
generated quarterly reports, similar to the final reports CMS provided 
on participants' progress in achieving cost-savings and quality-of-care 
targets. CMS may not be able to provide quarterly reports that include 
comparison group trends or provide quality-of-care data that rely on 
chart-based data because of complexity and cost. However, CMS could 
provide participants with estimates on their growth in per-beneficiary 
expenditures each quarter, as well as changes in the profile of the 
beneficiaries who are likely to be assigned to the participants. CMS 
could also use more readily available claims data to provide quarterly 
estimates of participants' progress in meeting the quality-of-care 
targets. In PY1, for example, that would have included reporting 
progress on 4 of the 10 claims-based quality targets on diabetes, such 
as whether a beneficiary received an eye exam. 

Use of a Uniform 2 Percent Savings Threshold for All Participants May 
Have Made Earning a Bonus More Challenging for Particular Providers: 

CMS officials said they adopted the use of a uniform 2 percent 
threshold to ensure that savings generated really were due to 
demonstration-related programs. Just as CMS used individual comparison 
groups for each participant, CMS could have used separate savings 
thresholds that more closely reflected the market dynamics of each 
participant's overall area instead of a uniform savings threshold 
chosen based on historical data averaged across the 10 participants. 
However, use of different thresholds for each participant, according to 
CMS officials, would have been complex and would have generated 
additional administrative burden in processing bonus payments. 

Nevertheless, the use of a uniform savings threshold--2 percent--that 
all participating physician groups had to achieve before becoming 
eligible for a bonus payment may have made earning bonus payments more 
challenging for particular providers, specifically those with already 
low Medicare spending growth rates or those that had comparison group 
providers with low spending growth rates. Participants with low 
relative spending may have had difficulty generating annual Medicare 
savings of greater than 2 percent compare to those participants with 
high spending growth rates before the demonstration began, some 
participants argued. Supporting this concern is the wide variation in 
the amount participants spent per beneficiary in the year prior to the 
demonstration, which ranged from $6,426 to $11,520, after adjusting for 
health status. In addition, participants with comparison groups that 
had relatively low spending growth may have faced more of a challenge 
reducing their spending below 2 percent of their comparison groups' 
spending than participants with comparison groups that had higher 
relative spending growth. In fact, both participants that received a 
bonus, Marshfield Clinic and the University of Michigan Faculty Group 
Practice, were measured against comparison groups with high relative 
spending growth rates--the 2 largest among the 10 participants. While 
their success cannot necessarily be attributed to the high relative 
spending of their comparison groups, the high spending growth of the 
comparison groups against which they were measured may have had some 
effect. 

Additional Participant Concerns: 

In addition, several participating physician groups noted selected 
concerns particular to their local markets. For example, officials from 
one participating physician group expressed concern that CMS did not 
adequately adjust for the conversion of several hospitals in their 
market to critical access hospitals (CAH),[Footnote 33] which generally 
receive higher Medicare payments. Participant officials noted that 
their physician group treat more patients from these hospitals, which 
resulted in a higher spending trend and lower likelihood of obtaining a 
cost-savings bonus. CMS stated that the agency will examine this issue 
as part of its evaluation at the conclusion of the PGP Demonstration. 

Several participating physician groups were also concerned that their 
groups had more beneficiaries with specialist visits relative to their 
comparison groups.[Footnote 34] As a result, participants providing 
more specialty care may have had less control over the health outcomes 
of these beneficiaries. However, analyses conducted by CMS showed that 
these participants provided 80 percent or more--a predominant share--of 
the E&M services for most of the beneficiaries assigned to them in PY1, 
regardless of specialty, and had meaningful opportunities to influence 
beneficiary health care expenditures. CMS officials stated that they 
will continue examining this issue and other related issues brought to 
their attention by the participants as part of their evaluation of the 
demonstration. 

Participating Physician Groups Had Several Size-Related Advantages, 
Which May Pose Challenges in Broadening the Payment Approach Used in 
the Demonstration to More Participants: 

The large size of the 10 participating physician groups compared with 
the majority of physician practices operating in the U.S. gave the 
participants certain size-related advantages that might make broadening 
the payment approach used in the demonstration to more participants 
challenging. The 10 participating physician groups had significantly 
higher numbers of physicians, higher annual medical revenues, and 
higher numbers of supporting staff, and were more likely to be 
multispecialty practices than most practices in the U.S. Specifically, 
the participating physician groups generally had three unique size- 
derived advantages: institutional affiliations that allowed greater 
access to financial capital, access to and experience using EHR 
systems, and experience prior to the PGP Demonstration with pay-for- 
performance programs. 

While all the participating physician groups in the demonstration have 
200 or more physicians in their practices,[Footnote 35] significantly 
less than 1 percent of the approximately 234,000 physician practices in 
the U.S. in 2005 had 151 or more physicians in their practice.[Footnote 
36] (See fig. 5.) By contrast, practices with only 1 or 2 physicians 
comprised 83 percent of all practices. Furthermore, while all 10 
participants were multispecialty practices, 68 percent of the all 
practices in the U.S. were single-specialty practices, which are 
generally smaller organizations. The 10 participating physician groups 
were also large compared with other physician practices in terms of 
annual medical revenues and nonphysician staff. Participants generated 
an average of $413 million in annual medical revenues in 2005 from 
patients treated by their group practice,[Footnote 37] far greater than 
the revenues generated by single specialty practices in the U.S. Only 
about 1 percent of single specialty practices had revenues greater than 
$50 million. In addition, these physician groups and their affiliated 
entities, such as hospitals, employed approximately 3,500 nonphysician 
FTEs, over 100 times more than the average single-specialty 
practice.[Footnote 38] 

Figure 5: Relative Proportion of Physician Practices in the United 
States, by Practice Size, 2005: 

[See PDF for image] 

This figure contains graphical illustrations of the Relative Proportion 
of Physician Practices in the United States, by Practice Size, 2005. 
The following data is depicted: 

1 to 2 physicians: 
Proportion of physicians practices, by practice size: 83% (194,2780; 
All physician practices: 100% (234,222). 

3 to 10 physicians: 
Proportion of physicians practices, by practice size: 14% (33,660); 
All physician practices: 100% (234,222). 

11 to 25 physicians: 
Proportion of physicians practices, by practice size: 2% (4,135); 
All physician practices: 100% (234,222). 

1 to 2 physicians: 
Proportion of physicians practices, by practice size: 1% (2,149) [Among 
this group, 280 physician groups had 151 or more physicians and all 10 
of the physician groups participating in the PGP Demonstration had 200 
or more physicians]; 
All physician practices: 100% (234,222). 

Source: Medical Group Management Association. 

Note: Physician groups are defined as a subset of physician practices, 
consisting of three or more physicians. 

[End of figure] 

Their larger relative size gave the 10 physician groups participating 
in the PGP Demonstration three size-related advantages over smaller 
physician practices, which may have better prepared them to participate 
in the demonstration's payment model and implement programs encouraged 
by the demonstration. First, participants typically had institutional 
affiliations with an integrated delivery system, a general hospital, or 
a health insurance entity. Specifically, 9 of the 10 participating 
physician groups were a part of an integrated delivery system, 8 were 
affiliated with a general hospital, and 5 were affiliated with an 
entity that marketed a health insurance product. In contrast, a 
representative of the Medical Group Management Association estimated 
that approximately 15 percent of all physician practices in the U.S. 
have an affiliation with a general hospital. 

As a result of these affiliations, participating physician groups 
generally have greater access to the relatively large amounts of 
financial capital needed to initiate or expand programs. On average, 
each participating physician group invested $489,354 to initiate and 
expand its demonstration-related programs and $1,265,897 in operating 
expenses for these programs in PY1. (See app. III.) Specifically for 
individual programs, participants reported spending an average of 
$190,974 to initiate and $409,332 to operate case management programs 
in PY1, almost twice the spending associated with any other type of 
program. (See table 5.) Several participants reported that the majority 
of their individual program expenditures were labor costs for care 
managers. Officials from several participating physician groups said 
that smaller practices might have difficulty implementing similar 
programs because they may not have the financial resources to do so. 

Table 5: Range and Average of Initial Start-up and PY1 Operating 
Expenditures Reported by Participating Physician Groups, by Program 
Type and Order of Average Amount Spent, 2005: 

Type of investment: Initial start-up expenditures; 
Type of program: Case management; 
Minimum amount spent: $75,000; 
Maximum amount spent: $891,499; 
Average amount spent: $190,974. 

Type of investment: Initial start-up expenditures; 
Type of program: Administrative processes[A]; 
Minimum amount spent: $2,350; 
Maximum amount spent: $411,000; 
Average amount spent: $107,595. 

Type of investment: Initial start-up expenditures; 
Type of program: Disease management; 
Minimum amount spent: $4,450; 
Maximum amount spent: $917,398; 
Average amount spent: $89,530. 

Type of investment: Initial start-up expenditures; 
Type of program: Other programs; 
Minimum amount spent: $93,200; 
Maximum amount spent: $93,200; 
Average amount spent: $93,200. 

Type of investment: Initial start-up expenditures; 
Type of program: Medication related; 
Minimum amount spent: $12,536; 
Maximum amount spent: $94,879; 
Average amount spent: $53,707. 

Type of investment: Initial start-up expenditures; 
Type of program: Patient education; 
Minimum amount spent: $15,110; 
Maximum amount spent: $85,500; 
Average amount spent: $20,122. 

Type of investment: Annual operating expenditures for PY1; 
Type of program: Case management; 
Minimum amount spent: $55,404; 
Maximum amount spent: $2,005,422; 
Average amount spent: $409,332. 

Type of investment: Annual operating expenditures for PY1; 
Type of program: Patient education; 
Minimum amount spent: $1,897; 
Maximum amount spent: $947,245; 
Average amount spent: $214,479. 

Type of investment: Annual operating expenditures for PY1; 
Type of program: Administrative processes[A]; 
Minimum amount spent: $33,049; 
Maximum amount spent: $411,000; 
Average amount spent: $179,059. 

Type of investment: Annual operating expenditures for PY1; 
Type of program: Disease management; 
Minimum amount spent: $5,500; 
Maximum amount spent: $917,398; 
Average amount spent: $174,873. 

Type of investment: Annual operating expenditures for PY1; 
Type of program: Medication related; 
Minimum amount spent: $65,997; 
Maximum amount spent: $238,003; 
Average amount spent: $147,221. 

Type of investment: Annual operating expenditures for PY1; 
Type of program: Other programs; 
Minimum amount spent: $92,500; 
Maximum amount spent: $92,500; 
Average amount spent: $92,500. 

Source: GAO. 

Note: Start-up investment expenditures for Integrated Resources for the 
Middlesex Area were not available. 

[A] Administrative processes include such activities such as physician 
and staff education programs, physician feedback systems, and data 
collection processes. 

[End of table] 

The second advantage the 10 large participating physician groups had 
over smaller physician practices is a greater likelihood of having or 
acquiring EHR systems, which was essential in participants' ability to 
gather data and track progress in meeting quality-of-care targets. 
Eight of the 10 participating physician groups had an EHR in place 
before the demonstration began, and the 2 other participants, out of 
necessity, developed alternative methods for gathering patient data 
electronically specifically for the demonstration, such as creating 
patient registries. In contrast, only an estimated 24 percent of all 
physician practices in the United States had either a full or partial 
EHR in 2005, and large practices were more likely to have EHRs than 
small practices.[Footnote 39] These systems enable physician group 
practices with multiple locations, such as the 10 participating 
physician groups, to share patient information and other administrative 
resources across a wide geographic area. Health care information 
technology experts believe that the primary reason smaller physician 
practices have not implemented EHRs is their cost, estimated at $15,000 
and $50,000 per physician. In addition, experts estimated that annual 
maintenance costs add between 15 and 25 percent of the initial per 
physician investment.[Footnote 40] Furthermore, experts noted that 
small practices tend to pay more per physician for EHR systems than 
larger physician practices because larger physician practices are 
better able to spread the fixed costs of these systems across more 
physicians. 

Finally, the third size-related advantage that most of the 10 
participating physician groups had over smaller physician practices was 
the larger groups' experience with other pay-for-performance systems 
prior to participating in the PGP Demonstration. Overall, 8 of the 10 
participants had previous experience with pay-for-performance programs 
initiated by private or public sector organizations. This experience 
may have eased their adjustment to the PGP Demonstration and afforded 
them greater initial and overall success. For example, the University 
of Michigan Faculty Group Practice's participation in a pay-for- 
performance system sponsored by Blue Cross Blue Shield of Michigan 
offered the physician group incentives to upgrade its chronic care 
infrastructure. In addition to experience with pay-for-performance 
programs, generally, the majority of the 10 participating physician 
groups had experience with specific elements of pay-for-performance, 
such as physician bonus compensation methods and physician feedback 
processes. Representatives from some of the participating physician 
groups stated that their exposure to one of these various elements of 
pay-for-performance elements prior to the PGP Demonstration may have 
enabled their organizations to adjust to the demonstration more 
rapidly. 

Conclusions: 

The care coordination programs used by the participating physician 
groups show promise in achieving cost savings and improving patient 
outcomes for Medicare beneficiaries. As a result of the demonstration, 
participating physician groups generated several different approaches 
for coordinating patient care across inpatient and physician settings 
for high-risk and high-cost patients, such as those with CHF, and 
better managing patients with diabetes, the quality-of-care target for 
the demonstration set by CMS. Additional years of the demonstration may 
be needed, however, for CMS to collect and analyze the information 
necessary to fully evaluate the effectiveness of these care 
coordination programs and their potential for cost savings in this 
demonstration. Only one participant had all of its care coordination 
programs operational for all 12 months of PY1, and participants did not 
receive timely feedback from CMS on their progress until PY3 had 
already begun. 

While CMS's demonstration design was generally reasonable, the lengthy 
time CMS took to provide participating physician groups with 
performance feedback and bonus payments may limit more widespread use 
in other demonstrations, or use as an alternative method for paying 
physicians group in Medicare FFS. The lack of timely and actionable 
performance feedback also hinders participants' ability to improve 
their programs in response to data. Providing performance feedback and 
bonus payments to participants more than 12 months after the end of the 
measurement period precludes physician groups from adjusting their 
program strategies on a more "real-time" basis. CMS has recently taken 
action to provide participants with quarterly claims data sets on their 
beneficiaries for PY3, but most participants indicated they would have 
difficulty analyzing such data to determine their progress in achieving 
cost-savings and quality-of-care targets. 

Measuring participants' performance using a comparison group where 
beneficiaries were retrospectively assigned after the end of a 
performance year, as used in this demonstration, may be impractical for 
more widespread use beyond this demonstration because physician groups 
cannot accurately predict on an ongoing basis whether they would be 
able to generate cost-savings and receive bonus payments. In addition, 
the use of a uniform savings threshold amount, such as the 2 percent 
used in this demonstration, raises questions about whether this 
approach provides a disincentive for physician groups that have lower 
spending. Physician groups with fewer than 200 physicians--the vast 
majority of practices in the United States--may also have more 
difficulty than larger practices, such as the participants in this 
demonstration, absorbing the start-up and annual-operating costs of the 
care coordination programs and implementing them without EHR systems 
that many groups believed were necessary to achieve cost savings while 
maintaining and improving the quality of care. 

As the PGP Demonstration continues, data will become available to CMS 
to determine how much influence factors such as the delay in the start- 
up of participating physician groups' care coordination programs and 
its decision to use a uniform 2 percent threshold, and other factors, 
may have had on participants' ability to earn bonus payments. 
Consequently, it is understandably too early to determine the success 
of the PGP demonstration, but evidence so far indicates that the care 
coordination programs initiated by the participants show promise, but 
that the wider applicability of the payment methodology used in the 
demonstration may be more limited. 

Recommendation for Executive Action: 

We recommend that the Administrator of CMS provide participating 
physician groups with interim summary reports that estimate 
participants' progress in achieving cost-savings and quality-of-care 
targets. 

Agency Comments and Our Evaluation: 

CMS reviewed a draft of this report and provided comments, which appear 
in appendix IV. CMS stated that it appreciated our thoughtful analysis 
and that our report would provide additional insight into performance 
year one results and complement its ongoing evaluation efforts. 

CMS agreed with the intent of our recommendation. CMS stated that it 
was developing a new quarterly report and refined data set to aid the 
physician groups in monitoring their performance, coordinating care, 
and improving quality. CMS stated that these reports would address a 
key limitation of existing quarterly data sets--that most physician 
groups do not have the necessary resources to analyze the data sets in 
a timely manner. We agree that this information would be helpful in 
improving performance feedback to physician groups, which would allow 
them to adjust their program strategies on a more "real-time" basis. As 
the demonstration continues, we encourage CMS to continue its efforts 
to improve performance feedback to the physician groups participating 
in the PGP demonstration. 

We are sending copies of this report to the Administrator of CMS. We 
will provide copies to others on request. In addition, this report is 
available at no charge on the GAO web site at [hyperlink, 
http://www.gao.gov]. 

If you or your staff have questions about this report, please contact 
me at (202) 512-7114 or [email protected]. Contact points for our Offices 
of Congressional Relations and Public Affairs may be found on the last 
page of this report. GAO staff members who made key contributions to 
this report are listed in appendix V. 

Signed by: 

Kathleen M. King: 
Director, Health Care: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

For the first performance year, we examined three objectives: (1) what 
actions the participating physician groups took to achieve cost savings 
and meet the diabetes quality-of-care targets selected by the Centers 
for Medicare & Medicaid Services (CMS), (2) the extent to which the 
demonstration design was a reasonable approach to rewarding 
participating physician groups for cost savings and quality 
performance, and (3) potential challenges involved in broadening the 
payment approach used in the demonstration from the 10 large 
participating physician groups to other physician groups and nongroup 
practices. For each of our reporting objectives, we analyzed data we 
collected, by written questionnaire, and supplemented this information 
with interviews in person and by telephone and site visits to 5 of the 
10 locations. 

Questionnaire: 

We sent questionnaires to individuals CMS identified as points of 
contact at each of the participating physician groups. These 
individuals were often physicians or administrative staff tasked with 
overseeing their physician group's demonstration efforts. All 10 
participants completed and returned our questionnaire. The 
questionnaire contained three sections. The first section gathered 
standardized information about the practice's general characteristics, 
including organizational structure, size, institutional affiliations, 
and the extent to which it used electronic health records systems. The 
second section gathered information about the programs participants 
used as a part of the Physician Group Practice (PGP) Demonstration. 
This section confirmed summary statements the individual practices 
described in their original applications to CMS or in other documents 
we obtained from CMS's contractor, Research Triangle Institute (RTI), 
and provided an opportunity for the group to add new programs, if 
needed. Summary statements detailed the purpose, type, and 
characteristics of each program. We also asked participants whether 
each of their programs was created specifically for the demonstration, 
was a preexisting program, or was an expansion of a preexisting 
program. In addition, we asked officials from these physician groups to 
identify the start-up costs and the annual operating costs of these 
programs. We also asked about the extent to which the physician groups 
believe smaller physician practices could implement similar programs. 
The third section of the questionnaire gathered information about how 
the participating physician groups compensated their physicians and how 
any demonstration bonus dollars they may earn would be distributed to 
individual physicians within the group. 

Site Visits and Interviews: 

We also conducted site visits or telephone interviews with staff of all 
10 participating physician groups. Five of these interviews were site 
visits, which we chose to reflect geographic diversity (region of 
country and urban/rural), size, and ownership status, among other 
factors. We conducted site visits to Geisinger Health System in 
Pennsylvania, Park Nicollet Health Services in Minnesota, Marshfield 
Clinic in Wisconsin, Billings Clinic in Montana, and the Everett Clinic 
in Washington. We collected the same information by telephone from the 
other participants in the demonstration. For these in-person or 
telephone interviews, we interviewed the demonstration project 
managers, physicians, care managers, finance officials, and information 
technology staff. 

Analysis for Reporting Objectives: 

To identify programs used by the participating physician groups to 
achieve cost savings and meet the CMS-set diabetes quality-of-care 
targets, we analyzed data we collected by written questionnaires and 
interviews, supplemented with information we obtained at site visits to 
5 of the 10 participants. We included in our analysis new programs or 
expansions of existing programs created in response to the 
demonstration. To determine the extent to which the demonstration's 
design was reasonable, we analyzed documents on the overall research 
design and bonus payment methodology obtained from CMS, analyzed data 
collected through the questionnaire, and used interviews we conducted 
with the participating physician groups and CMS and its contractor RTI. 
We also reviewed and analyzed CMS-contracted documents on the design of 
PGP Demonstration. To determine the potential challenges involved in 
broadening the payment approach used in the demonstration to other 
physician groups, we compared selected characteristics of the 10 
participating physician groups to physician practices in the United 
States, using data primarily from the Medical Group Management 
Association's (MGMA) annual survey. We also used data we collected from 
the questionnaire and from our interviews with officials from the 
physician group practices. We also interviewed experts on health 
information technology systems. 

Data Reliability: 

We assessed the reliability of the information we obtained about 
participating physician group practices and the data we used to compare 
them to other physician groups in the U.S. in several ways. First, we 
checked the internal consistency of the information we obtained from 
the physician groups with information from RTI's PGP Demonstration site 
visit reports and CMS's 2006 Report to Congress on the PGP 
Demonstration. We verified the information we collected from the 
questionnaire with detailed follow-up interviews with officials from 
all 10 participants. Second, we spoke to the survey director for the 
2005 MGMA survey to ensure that we used the information from that 
survey appropriately and that we understood any data limitations. In 
addition, we compared the data we used on U.S. group practices from the 
2005 MGMA survey with data from the 2005 National Ambulatory Medical 
Care Survey and determined that the results were largely consistent and 
adequate for our purposes. Third, on the basis of this comparison and 
discussions with experts knowledgeable about the data, we used broad 
categories to describe the data. We determined that the data used in 
our analysis were sufficiently reliable for the purposes of this 
report. 

We conducted our work from May 2006 through December 2007 in accordance 
with generally accepted government auditing standards. 

[End of section] 

Appendix II: New and Expanded Programs Implemented by the 10 
Participating Physician Groups for the PGP Demonstration: 

Participating physician group: Billings Clinic; 
Program name and program type: Cancer treatment center--care 
coordination (disease management); 
New or expanded program: Expansion; 
Description: Patients received coordinated cancer care including 
screening, prevention education, and infusion treatments. 

Participating physician group: Billings Clinic; 
Program name and program type: Chronic obstructive pulmonary disease 
(COPD) management--care coordination (disease management); 
New or expanded program: Expansion; 
Description: Care managers worked with COPD patients to avoid 
functional decline, offer preventive services such as immunizations, 
and treat complications early. 

Participating physician group: Billings Clinic; 
Program name and program type: Community crisis center--care 
coordination (case management); 
New or expanded program: New; 
Description: High-risk patients with chronic psychiatric conditions 
were redirected from the emergency room to the psychiatric center for 
treatment. 

Participating physician group: Billings Clinic; 
Program name and program type: Diabetes program--administrative 
process; 
New or expanded program: Expansion; 
Description: A patient registry was used to identify diabetes patients 
and create patient report cards, which displayed treatment confirmation 
and treatment gaps. 

Participating physician group: Billings Clinic; 
Program name and program type: Heart failure clinic--care coordination 
(disease management); 
New or expanded program: Expansion; 
Description: Care managers monitored an automated system, which 
recorded patients' answers to health status questions, and intervened 
if necessary. 

Participating physician group: Billings Clinic; 
Program name and program type: Hospitalist program--care coordination 
(case management); 
New or expanded program: New; 
Description: Hospitalists worked with internists and family 
practitioners to improve the communication and care provided to 
patients at hospital discharge. 

Participating physician group: Billings Clinic; 
Program name and program type: Medication reconciliation--medication 
related; 
New or expanded program: New; 
Description: Electronic prescription system better reconciled patients' 
medications between inpatient and outpatient settings to reduce adverse 
events. 

Participating physician group: Billings Clinic; 
Program name and program type: Palliative care program, 5 wishes--
administrative process; 
New or expanded program: Expansion; 
Description: Nursing home staff educated on consulting a Billings 
geriatrician before admitting patient to the hospital. 

Participating physician group: Billings Clinic; 
Program name and program type: Physician assistants at nursing homes-- 
administrative process; 
New or expanded program: Expansion; 
Description: To coordinate nursing home and hospital care, physician 
assistants were assigned to patients entering the hospital's emergency 
room from local nursing homes. 

Participating physician group: Dartmouth-Hitchcock Clinic; 
Program name and program type: Cancer care/palliative care--care 
coordination (case management); 
New or expanded program: New; 
Description: Care managers assisted cancer patients and families in 
coordinating, planning end-of-life care. 

Participating physician group: Dartmouth-Hitchcock Clinic; 
Program name and program type: Health coaching--care coordination (case 
management); 
New or expanded program: New; 
Description: Care managers helped patients follow hospital post- 
discharge instructions, make physician appointments, and take the 
correct medications and dosages. 

Participating physician group: Dartmouth-Hitchcock Clinic; 
Program name and program type: Provider performance support and 
feedback--administrative process; 
New or expanded program: New; 
Description: Physicians received feedback through intranet, met with 
management on identified issues. 

Participating physician group: The Everett Clinic; 
Program name and program type: Coronary artery disease (CAD) 
management--administrative process; 
New or expanded program: New; 
Description: Forms were placed on the front of patients' medical charts 
to remind physicians of CAD quality-of-care measures. 

Participating physician group: The Everett Clinic; 
Program name and program type: Director for PGP demonstration--other; 
New or expanded program: New; 
Description: A director position was created and charged with 
coordinating program interventions and with overseeing all care for 
Medicare patients. 

Participating physician group: The Everett Clinic; 
Program name and program type: Hypertension management program--care 
coordination (disease management); 
New or expanded program: New; 
Description: A patient registry was used to identify patients with 
hypertension and remind physicians to measure and document patients' 
blood pressure. 

Participating physician group: The Everett Clinic; 
Program name and program type: Palliative care program--care 
coordination (case management); 
New or expanded program: Expansion; 
Description: Care managers provided patients and families end-of-life 
planning information on quality-of-life issues, alternative living 
options, and in-home support. 

Participating physician group: The Everett Clinic; 
Program name and program type: Patient care coordination--care 
coordination (case management); 
New or expanded program: New; 
Description: Care managers coordinated inpatient and outpatient care, 
helping to ensure proper discharge planning and schedule follow-up 
appointments with physicians. 

Participating physician group: Geisinger Health System; 
Program name and program type: COPD management--care coordination 
(disease management); 
New or expanded program: Expansion; 
Description: Care managers worked with patients to monitor their health 
status and to encourage patients to visit their physicians when 
necessary. 

Participating physician group: Geisinger Health System; 
Program name and program type: Congestive heart failure management--
Care coordination (disease management); 
New or expanded program: Expansion; 
Description: Care managers monitored patients' health status through a 
voice recognition system and contacted patients when their health 
status became problematic. 

Participating physician group: Geisinger Health System; 
Program name and program type: Diabetes disease management--care 
coordination (disease management); 
New or expanded program: Expansion; 
Description: Care managers worked with patients to educate them on 
managing diabetes. 

Participating physician group: Geisinger Health System; 
Program name and program type: Moderate risk case management--care 
coordination (case management); 
New or expanded program: New; 
Description: Care managers worked with patients to reduce risk factors 
associated with potential future hospitalizations. 

Participating physician group: Geisinger Health System; 
Program name and program type: Postacute case management--care 
coordination (case management); 
New or expanded program: New; 
Description: Care managers contacted patients after a hospital 
discharge to ensure that home health services were received, correct 
medications taken, etc. 

Participating physician group: Integrated Resources for the Middlesex 
Area; 
Program name and program type: Anticoagulation--care coordination (case 
management); 
New or expanded program: New; 
Description: Pharmacists and physicians worked with patients during a 
hospitalization to ensure prescriptions were correct and to assist in 
the transition from inpatient to outpatient care. 

Participating physician group: Integrated Resources for the Middlesex 
Area; 
Program name and program type: Cancer care management--care 
coordination (disease management); 
New or expanded program: New; 
Description: Care managers worked with colon, breast, and lung cancer 
patients and their physicians to ensure that evidence-based treatment 
guidelines are followed for psychological, nutritional, and palliative 
care. 

Participating physician group: Integrated Resources for the Middlesex 
Area; 
Program name and program type: Chronic care management--care 
coordination (case management); 
New or expanded program: New; 
Description: Care managers educated patients admitted to the hospital 
on disease self-management and proper medication use. 

Participating physician group: Integrated Resources for the Middlesex 
Area; 
Program name and program type: Congestive heart failure (CHF)--care 
coordination (disease management); 
New or expanded program: New; 
Description: Care managers helped patients understand and follow their 
post-discharge instructions. 

Participating physician group: Integrated Resources for the Middlesex 
Area; 
Program name and program type: Diabetes disease management--care 
coordination (disease management); 
New or expanded program: Expansion; 
Description: Care managers worked with diabetes patients to coordinate 
care across providers, provide in-person patient education, and remind 
patients of appointments. 

Participating physician group: Integrated Resources for the Middlesex 
Area; 
Program name and program type: Diabetes education--patient education; 
New or expanded program: Expansion; 
Description: Certified diabetes educators assisted patients in 
understanding diabetes self management tools. 

Participating physician group: Integrated Resources for the Middlesex 
Area; 
Program name and program type: Heart smart program--care coordination 
(disease management); 
New or expanded program: Expansion; 
Description: Care managers provided case management services to cardiac 
patients enrolled in home care services. 

Participating physician group: Integrated Resources for the Middlesex 
Area; 
Program name and program type: HomeMed program--care coordination (case 
management); 
New or expanded program: New; 
Description: Frail, elderly patients with multiple conditions receive a 
telemedicine device in their home that monitors vital signs. 

Participating physician group: Marshfield Clinic; 
Program name and program type: Anticoagulation--care coordination (case 
management); 
New or expanded program: Expansion; 
Description: Care managers worked with patients to ensure that dosages 
of the anticlotting drug Warfarin were adjusted properly. Also educated 
patients on recognizing factors that can influence anticoagulation such 
as diet, activity, other medications, and other illnesses. 

Participating physician group: Marshfield Clinic; 
Program name and program type: CHF management--care coordination 
(disease management); 
New or expanded program: New; 
Description: Care managers called patients to check on health status, 
schedule physician visits, and answer questions. 

Participating physician group: Novant Medical Group; 
Program name and program type: Disease management, compass--care 
coordination (disease management); 
New or expanded program: New; 
Description: Care managers assisted patients with medication 
management, appointments, and physician referral. 

Participating physician group: Novant Medical Group; 
Program name and program type: Outpatient case management--care 
coordination (case management); 
New or expanded program: New; 
Description: Care managers helped high-risk, high-cost patients 
recently discharged from the hospital schedule follow-up physician 
visits and learn of available resources. 

Participating physician group: Novant Medical Group; 
Program name and program type: Palliative care program--administrative 
process; 
New or expanded program: Expansion; 
Description: Physicians and staff were educated on how to talk to 
patients about palliative care. 

Participating physician group: Novant Medical Group; 
Program name and program type: Physician and staff education--
administrative process; 
New or expanded program: Expansion; 
Description: Participating physician group: Physicians and clinical 
staff were educated on evidence-based guidelines for chronic disease 
management. 

Participating physician group: Novant Medical Group; 
Program name and program type: Transition of care program--care 
coordination (case management); 
New or expanded program: New; 
Description: Nurses contacted patients after hospital discharges to 
ensure patients made follow-up physician appointments. 

Participating physician group: Park Nicollet Health Services; 
Program name and program type: Diabetes care management--care 
coordination (disease management); 
New or expanded program: New; 
Description: Care managers educated newly diagnosed diabetes patients 
on diabetes self management. 

Participating physician group: Park Nicollet Health Services; 
Program name and program type: Health support model; 
New or expanded program: New; 
Description: During a 30-minute office visit, patients received an 
evaluation of needs, health education, diagnoses, prevention measures, 
and fitness counseling. 

Participating physician group: Park Nicollet Health Services; 
Program name and program type: Heart failure care coordination--care 
coordination (disease management); 
New or expanded program: New; 
Description: Care managers monitored patients' medication usage and 
dietary regimes through an interactive voice response system. 

Participating physician group: Park Nicollet Health Services; 
Program name and program type: 24/7 nurse triage/nurse on call--patient 
education; 
New or expanded program: Expansion; 
Description: Patients telephoned a call center where nurses directed 
them to care based on their symptoms. 

Participating physician group: St. John's Health System; 
Program name and program type: Case management systems--care 
coordination (case management); 
New or expanded program: Expansion; 
Description: Care managers provided care to high-risk patients 
including coordination of inpatient and outpatient care services and 
guidance on following treatment plans. 

Participating physician group: St. John's Health System; 
Program name and program type: Disease management--care coordination 
(disease management); 
New or expanded program: Expansion; 
Description: Care managers managed, educated, and coached patients with 
chronic conditions. 

Participating physician group: St. John's Health System; 
Program name and program type: CHF program (disease management); 
New or expanded program: New; 
Description: Nurses assessed the health status of heart failure 
patients. 

Participating physician group: St. John's Health System; 
Program name and program type: Medication access--medication-related; 
New or expanded program: New; 
Description: Low-income patients were assisted in obtaining free 
medications from pharmaceutical companies. 

Participating physician group: University of Michigan Faculty Group 
Practice; 
Program name and program type: Complex care coordination-- care 
coordination (case management); 
New or expanded program: New; 
Description: Care managers monitor patients with multiple chronic 
diseases and educate them on self management. 

Participating physician group: University of Michigan Faculty Group 
Practice; 
Program name and program type: Post-discharge transitional care--care 
coordination (case management); 
New or expanded program: New; 
Description: Care managers provided education, medication counseling, 
guidance on post-acute care treatment, and assistance with making and 
getting to post-discharge appointments. 

Sources: GAO and CMS. 

[End of table] 

[End of section] 

Appendix III: Reported PGP Demonstration-Related Start-up and Operating 
Costs for New and Expanded Programs: 

Physician group: Billings Clinic; 
Number of programs: 9; 
Start-up investment expenditures: $317,503; 
Total operating expenditures for performance year 1: $2,703,379. 

Physician group: Dartmouth-Hitchcock Clinic; 
Number of programs: 3; 
Start-up investment expenditures: $878,031; 
Total operating expenditures for performance year 1: $1,344,749. 

Physician group: The Everett Clinic; 
Number of programs: 5; 
Start-up investment expenditures: $365,750; 
Total operating expenditures for performance year 1: $617,500. 

Physician group: Geisinger Health System; 
Number of programs: 5; 
Start-up investment expenditures: $82,573; 
Total operating expenditures for performance year 1: $929,888. 

Physician group: Integrated Resources for the Middlesex Area; 
Number of programs: 8; 
Start-up investment expenditures: [A]; 
Total operating expenditures for performance year 1: $1,192,185. 

Physician group: Marshfield Clinic; 
Number of programs: 2; 
Start-up investment expenditures: $917,398; 
Total operating expenditures for performance year 1: $2,922,820. 

Physician group: Novant Medical Group; 
Number of programs: 5; 
Start-up investment expenditures: $916,499; 
Total operating expenditures for performance year 1: $917,500. 

Physician group: Park Nicollet Health Services; 
Number of programs: 3; 
Start-up investment expenditures: $402,226; 
Total operating expenditures for performance year 1: $512,762. 

Physician group: St. John's Health System; 
Number of programs: 5; 
Start-up investment expenditures: $96,354; 
Total operating expenditures for performance year 1: $1,081,801. 

Physician group: University of Michigan Faculty Group Practice; 
Number of programs: 2; 
Start-up investment expenditures: $427,848; 
Total operating expenditures for performance year 1: $436,386. 

Physician group: Average for physician group; 
Number of programs: 4.7; 
Start-up investment expenditures: $489,354; 
Total operating expenditures for performance year 1: $1,265,897. 

Physician group: Total; 
Number of programs: 47; 
Start-up investment expenditures: $4,404,182; 
Total operating expenditures for performance year 1: $12,658,970. 

Source: GAO. 

[A] Start-up investment expenditures for Integrated Resources for the 
Middlesex Area were not available. 

[End of table] 

[End of section] 

Appendix IV: Comments from the Centers for Medicare & Medicaid 
Services: 

Department Of Health & Human Services: 
Centers for Medicare & Medicaid Services: 
Office of the Administrator: 
Washington, DC 20201: 

Date: January 22, 2008: 

To: Kathleen King: 
Director, Health Care: 
Government Accountability Office: 

From: [Signed by] Kerry Weems: 
Acting Administrator: 

Subject: Government Accountability Office (GAO) Draft Report: "Medicare
Physician Payment: Care Coordination Programs Used in Demonstration 
Show Promise, But Wider Use of Payment Approach May Be Limited" (GAO-08-
65): 

The Centers for Medicare & Medicaid Services (CMS) appreciates the 
opportunity to respond to GAO's draft report entitled, "Medicare 
Physician Payment: Care Coordination Programs Used in Demonstration 
Show Promise, But Wider Use of Payment Approach May Be Limited." Like 
GAO, CMS is encouraged by the Physician Group Practice (PGP) 
Demonstration's first-year results. The results show that we are on the 
right track to meeting the demonstration's goals and objectives of 
fostering coordination of Part A and Part B services, promoting 
investment in care management and quality improvement processes, and 
rewarding providers for improving health outcomes. 

At the end of the first year, we found that all groups improved the 
clinical management of diabetes patients. Two groups earned $7.3 
million as their share of the total savings of $9.5 million generated 
for the Medicare Trust Funds, and six additional physician groups had 
lower Medicare spending growth rates than their local market areas, but 
not sufficiently lower to share in savings under the demonstration's 
performance payment methodology. 

We also observed the PGP participating physician groups investing in 
and implementing care management strategies designed to anticipate 
patient needs, prevent chronic disease complications and avoidable 
hospitalizations, and improve quality of care. Your report found 78 
programs in place at the 10 physician practices, of which 47 programs 
were new or expanded as a result of the opportunity to share in savings 
under the demonstration. We are optimistic that as these care 
management programs mature, we will share additional savings and 
observe further quality improvements. 

The PGP Demonstration provides critical learning opportunities as we 
focus on finding ways to control health care costs while also improving 
the overall quality of care. In addition, the demonstration compliments 
many local pay-for-performance initiatives and serves as a catalyst in 
local markets to improve the quality and efficiency of care across all 
patient populations. 

GAO Recommendation: 

The Administrator of CMS should provide PGP participating physician 
groups with interim summary reports that estimate participants' 
progress in achieving cost-savings and quality-of-care targets. 

CMS Response: 

We have been working with the physician groups on how best to provide 
interim feedback within the demonstration's resources since the start 
of the demonstration. Initially, we provided quarterly data sets that 
identified patients with a chronic illness who had a visit at the group 
and who also had a hospital admission or emergency room visit during 
the quarter. However, most physician groups, as you note, do not have 
the necessary resources to analyze these data sets in a timely manner 
but are interested in expenditure data on patients likely to be 
assigned to them under the demonstration. 

As a result, we began to explore with the physician groups how best to 
provide interim information on patients likely to be assigned to them 
at annual reconciliation and their utilization of inpatient services. 
The information about inpatient services utilization is designed to 
serve as a proxy for financial performance since many of the physician
groups' care management and quality improvement activities are designed 
to reduce avoidable inpatient admissions to generate shareable savings 
under the demonstration. 

In November 2007, we held a conference call with the physician groups 
to: discuss how the quarterly data sets have been used; identify 
specific ideas or strategies for using the quarterly data sets; and 
solicit feedback on the information that should be contained in a new 
quarterly data set. As a result of the call, we are developing a new 
quarterly report and refined data set to aid physician groups in 
monitoring their performance, coordinating care, and improving quality. 
The new quarterly report and data set will include aggregated 
information and specific data elements in the following areas: assigned 
beneficiary demographics; hospital utilization; hierarchical condition 
category risk adjustment status; and quality of care gaps. 

Our intention is that these new quarterly reports and refined data sets 
will be consistent with the reports and data sets provided to physician 
groups as part of the annual reconciliation process. They will address 
a key limitation of existing quarterly data sets identified in your 
report, that most physician groups do not have the necessary resources 
to analyze the data sets in a timely manner. They will give physician 
groups interim information on patients for whom they are most likely to 
be held accountable, as well as information on a key proxy for savings 
under the demonstration. 

While we are working to improve the quarterly reports, we do not plan 
to provide interim expenditure results for several reasons. First, 
interim expenditure results may conflict with annual performance year 
results since they do not use final action claims and have not 
undergone the extensive review and validation process that the annual 
reconciliation results and reports undergo. Second, the production of 
interim expenditure results presents significant operational and 
resource issues. Finally, interim expenditure results may not be 
actionable by physician groups since only information on likely 
assigned patients is provided and comparison group expenditure data is 
required to calculate savings and performance under the demonstration. 

In closing, your report provides additional insight into performance 
year one results and complements our ongoing evaluation activities. We 
appreciate your thoughtful analysis as we continue to learn from this 
and other pay-for-performance demonstrations on how best to incorporate 
value-based purchasing strategies into the Medicare program. 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Kathleen M. King, (202) 512-7114 or [email protected]: 

Acknowledgments: 

In addition to the contact named above, Thomas Walke, Assistant 
Director; Jennie Apter; Kelly Barar; Zachary Gaumer; and Jennifer 
Rellick made key contributions to this report. 

[End of section] 

Footnotes: 

[1] Medicare Part B helps pay for doctors' services, outpatient 
hospital care, and durable medical equipment. 

[2] MedPAC is an independent federal body established by the Balanced 
Budget Act of 1997, Pub. L. No. 105-33, ï¿½4022, 111 Stat. 251, 350-55, 
to advise Congress on issues affecting the Medicare program. 

[3] Medicare Part A pays for inpatient hospital stays, care in skilled 
nursing facilities, hospice care, and some home health care. 

[4] Pub. L. No. 106-554, App. F, ï¿½ 412, 114 Stat. 2763, 2763A-509- 
2763A-515. 

[5] 67 Fed. Reg. 61116 (Sept. 27, 2002). 

[6] The number of physicians includes physicians and clinical 
professionals who can bill Medicare as physicians, such as physician 
assistants. Unless otherwise noted, the term physician includes all 
professionals paid under the Medicare physician fee schedule. 

[7] Performance year two began April 1, 2006 and ended March 31, 2007, 
and performance year three began April 1, 2007, and ends March 31, 
2008. 

[8] In each performance year, the Medicare beneficiaries assigned to 
each of the 10 unique comparison groups are similar to the Medicare 
beneficiaries being served by the participating physician group they 
are compared against, in terms of their geographic location and the 
services they receive. 

[9] We visited Geisinger Health System in Pennsylvania, Park Nicollet 
Health Services in Minnesota, Marshfield Clinic in Wisconsin, Billings 
Clinic in Montana, and The Everett Clinic in Washington. 

[10] CMS received 26 applications in response to its Request for 
Proposal for the PGP Demonstration from a variety of organizations. 

[11] We defined an integrated delivery system as a health care system 
that includes at least one hospital in addition to the physician group, 
and may include other health care providers, such as home health 
agencies or nursing homes. The Everett Clinic identified itself as an 
integrated delivery system that does not include a general hospital but 
does include two ambulatory surgical centers, a laboratory, and a 
radiation center. 

[12] For the purposes of the PGP Demonstration, service areas consist 
of all counties in which a given participating physician group derives 
at least 1 percent of its assigned Medicare FFS beneficiaries. These 
counties are combined to form each participating physician group's 
service area. 

[13] Under the Medicare physician payment system, E&M services refer to 
visits and consultations furnished to patients by physicians and 
include 10 current procedural terminology codes that represent the 
level of E&M service provided. 

[14] Other savings generated by the participating physician groups but 
not awarded to them include the first 2 percent of savings generated as 
well as any unearned quality-of-care bonuses. 

[15] The quality measures were developed by CMS in conjunction with 
professional associations such as the American Medical Association's 
Physician Consortium for Performance Improvement, the National 
Committee for Quality Assurance, the National Quality Forum, and the 10 
participating physician groups. 

[16] The other measures were influenza vaccination, pneumonia 
vaccination, low-density lipoprotein cholesterol test, urine protein 
test, and Hemoglobin A1c test (which measures blood sugar level) in the 
recommended time interval, and whether Hemoglobin A1c, blood pressure, 
and low-density lipoprotein cholesterol are at the recommended levels. 

[17] NCQA created the health plan employer data and information set 
(HEDISï¿½) to measure performance on important dimensions of care and 
service, and it is now a tool used by more than 90 percent of health 
plans. For each measure, participating physician groups must achieve at 
least one of three targets: (1) meet the higher of 75 percent 
compliance or the Medicare HEDISï¿½ mean for the measure (for those 
measures where HEDISï¿½ indicators are also available), (2) demonstrate a 
10 percent or greater reduction in the gap between the administrative 
baseline and 100 percent compliance, or (3) achieve the 70th percentile 
Medicare HEDISï¿½ level (for those measures where HEDISï¿½ indicators are 
also available). 

[18] The Marshfield Clinic was eligible to earn about $1.5 million 
($1,448,613) in PY1 as a quality bonus if it met all 10 of the diabetes 
quality targets. 

[19] The University of Michigan Faculty Group Practice was eligible to 
earn $838,951 in PY1 as a quality bonus if it met all 10 of the 
diabetes quality targets. 

[20] Collectively, these theoretical savings amounted to about $8 
million. However, CMS does not consider these savings to be actual 
savings because based on the demonstration design, savings below the 2 
percent threshold could be caused by random fluctuations in 
expenditures. 

[21] A provider could be a physician, hospital, or other professional 
health care service organization. 

[22] Congressional Research Service, The Library of Congress, CRS 
Report for Congress: Pay-for-Performance in Health Care (Washington, 
D.C.: updated Dec. 12, 2006). CRS's count of pay-for-performance 
programs includes those targeting compensation to physicians, physician 
groups, and hospitals. 

[23] For this demonstration, participants can also choose a different 
payment methodology rather than the bonus payment methodology used in 
the PGP Demonstration as long as it includes a hybrid shared savings 
approach incorporating a cost-savings and quality component. 

[24] Seth W. Glickman et al., "Pay for Performance, Quality of Care and 
Outcomes in Acute Myocardial Infarction," The Journal of the American 
Medical Association, vol. 297, no. 21 (2007). 

[25] Participants in the PGP Demonstration reported using 78 total 
programs to achieve cost savings and quality targets: 28 were new 
programs created specifically for the demonstration, 19 were expansions 
of existing programs, and 31 were existing programs that did not change 
as a result of the demonstration. 

[26] Interactive voice response systems are automated telephonic 
systems that patients call in to on a regular basis to answer a series 
of health-related questions. 

[27] See Michael Trisolini et al., "Medicare Physician Group Practice: 
Innovations in Quality and Efficiency," Commonwealth Fund, (December 
2006), and Stuart Gutterman et. al., "Enhancing Value In Medicare: 
Demonstrations and Other Initiatives to Improve the Program," 
Commonwealth Fund, (January 2007). 

[28] The quality measures selected by CMS for the PGP Demonstration are 
a subset of the measures CMS developed for its Doctors' Office Quality 
project. This project was designed to develop and test a comprehensive, 
integrated approach to measuring the quality of care for chronic 
disease and preventive services in the doctors' offices. Participants 
for this demonstration are located in California, Iowa, and New York. 

[29] Officials at the St. John's Health System regarded this as a 
precursor to a full-featured EHR system. 

[30] For a more detailed discussion of the study design and its 
tradeoffs, see Donald T. Campbell and Julian C. Stanley, Experimental 
and Quasi-Experimental Designs for Research (Boston: Houghton Mifflin 
Company, 1963). 

[31] To adapt the CMS-HCC model for the PGP Demonstration, CMS used 
current-year data to make projections, rather than using prior-year 
data, and in doing so increased the explanatory power of the model from 
10 percent to 50 percent. In addition, CMS made a mathematical 
adjustment to the weights of the CMS-HCC model to accommodate the 
population of beneficiaries eligible for the demonstration, end-stage 
renal disease patients, organ transplant patients, and people who join 
Medicare in the middle of a performance year. 

[32] CMS officials stated that in any given year, they considered a 
claims data file to be sufficiently complete if it contained 98 percent 
of claims for services provided to a given group of Medicare 
beneficiaries. 

[33] CAHs are small rural hospitals that receive Medicare payments for 
their reasonable costs of providing inpatient and outpatient services, 
rather than being paid fixed amounts for services. 

[34] Assignment may be based on providing less than half of a 
beneficiary's evaluation and management E&M services if no other 
physician practice has provided a larger portion of E&M services during 
the performance year. 

[35] The 10 participating physician groups had an average of 627 
providers in their practices, including nonphysician providers who can 
bill Medicare as physicians, ranging from 232 to 1,291. 

[36] The majority of individual physicians in the U.S. practiced 
medicine in a group-practice setting in 2005. While 1 percent of 
physician practices consisted of more than 25 physicians, 36 percent of 
physicians practiced in physician groups with more than 25 physicians. 

[37] Annual medical revenues were not available from IRMA. 

[38] Ninety-nine percent of single-specialty practices in the United 
States had annual medical revenues that were $50 million or less, and 
the average single-specialty practice employed 29 FTEs in 2005. 

[39] National Center for Health Statistics' National Ambulatory 
Medicare Care Survey, 2005. 

[40] An official from the Certification Commission for Healthcare 
Information Technology added that its estimate of initial acquisition 
costs of EHR systems includes hardware, software, training, and 
implementation costs and its estimate of annual maintenance costs does 
not include the expected costs physician groups will likely incur to 
hire the internal information technology management staff needed to 
operate EHR systems. 

[End of section] 

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