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The Medicare Physician Group Practice Demonstration: Lessons Learned on Improving Quality and Efficiency in Health Care

In April 2005, the Centers for Medicare and Medicaid Services (CMS) initiated the Physician Group Practice (PGP) demonstration, which offers 10 large practices the opportunity to earn performance payments for improving the quality and cost-efficiency of health care delivered to Medicare fee-for-service (FFS) beneficiaries.

A legislative mandate for the PGP demonstration was included in the Medicare, Medicaid, and State Children's Health Insurance Program Benefits Improvement and Protection Act of 2000. Three goals have been outlined for the demonstration:

  1. Encourage the coordination of health care furnished under Medicare.
  2. Promote investment in care management processes for efficient service delivery.
  3. Reward physicians for improving health care processes and outcomes.

The practices participating in the demonstration span all four census regions. They each have at least 200 physicians, and together number more than 5,000. The PGPs include freestanding group practices, components of integrated delivery systems, faculty group practices, and a physician network organization comprising small and individual physician practices. Together, they provide the largest portion of primary care services for more than 220,000 Medicare FFS beneficiaries.

The demonstration includes a base year and three performance years covering the following time periods:

  • Base Year: January 1, 2004-December 31, 2004
  • Performance Year 1: April 1, 2005–March 31, 2006
  • Performance Year 2: April 1, 2006–March 31, 2007
  • Performance Year 3: April 1, 2007–March 31, 2008

An evaluation of the demonstration is also planned to assess the interventions applied by the participating PGPs and the quality and cost results.

The demonstration incentives toward improving traditional FFS reimbursement are similar to capitation incentives and reward efficient and effective provision of care. Participating PGPs should therefore be motivated to reduce unnecessary utilization of services and improve quality of care for Medicare FFS patients. Performance indicators on both quality and cost-efficiency are used in the calculation of performance payments.

CMS is encouraging physician groups to better coordinate care for chronically ill beneficiaries and also aims to promote active use of clinical and utilization data to improve efficiency and outcomes. Increased investments in information technology and quality improvement systems are expected as a result of the demonstration.

This report is based on the proceedings of a site conference held in Baltimore on November 30 through December 1, 2006 and co-sponsored by The Commonwealth Fund, CMS, and the Agency for Healthcare Research and Quality. Staff from the 10 PGPs gathered to participate in workshops and to report lessons learned. They also discussed how these lessons could be exported to other providers. In addition, the conference gave PGPs opportunities to compare experiences across practices; exchange ideas about how to improve and expand their interventions in the future; and discuss the broader implications for the Medicare program.

Specifically, the meeting provided a forum for PGPs to: (1) explore in-depth specific care management models, including methods for both implementation and assessment of effectiveness; (2) accelerate learning across PGPs through information sharing and establish methods for continued sharing; and (3) harvest knowledge and develop a plan for case studies and descriptive reports on successful care management models. Reports are planned to be disseminated to physician groups of all sizes and type of organization to improve health care quality and efficiency.

About the Physician Group Practice Demonstration

Each PGP earns quality performance payments based on the size of its quality performance pool and the proportion of quality targets it has met. The demonstration includes 32 quality measures drawn from CMS's Doctor's Office Quality (DOQ) project, focusing on measures from five condition modules: coronary artery disease, diabetes, heart failure, hypertension, and preventive care. One of the diabetes measures, for example, is the percentage of diabetics who received an HbA1c (blood sugar) test at least once per year.

For each quality measure, PGPs must satisfy at least one of three targets: 1) the higher of either 75 percent compliance or, where comparable data are available, the mean value of the measure from the Medicare Health Plan Employer Data and Information Set (HEDIS); 2) the 70th percentile Medicare HEDIS level (again, where comparable data are available); or 3) a 10 percent or greater reduction in the gap between the level achieved by the PGP in the demonstration’s base year and 100 percent compliance in Year 1. The first two targets are threshold targets, while the third is an improvement-over-time target.

The quality measures are phased in over the course of the demonstration, with the diabetes measures active in Year 1, the heart failure and coronary artery disease measures added in Year 2, and all five modules now becoming active in Year 3. Two types of measurement processes have been used to calculate quality performance: one method uses Medicare claims (billing) data for seven of the quality measures, while the other uses data abstracted from beneficiaries' medical records for the other 25 quality measures.

A comparison population is also defined for each PGP to provide a benchmark for assessing cost-control performance. For this demonstration, comparison beneficiaries were drawn from each PGP's local market area, including the counties where at least 1 percent of a PGP's assigned beneficiaries reside. Comparison beneficiaries are limited to those with characteristics similar to assigned beneficiaries. For example, they are all FFS beneficiaries, without any periods of Medicare Advantage enrollment during the given year.

The PGP demonstration tests a unique reimbursement mechanism that rewards providers for coordinating and managing the overall health care needs of the FFS Medicare patient population. The demonstration also offers CMS the opportunity to assess whether a new financial incentive structure could improve service delivery and quality for Medicare beneficiaries and ultimately prove cost-effective.

Under the demonstration, researchers calculated Medicare savings for each PGP by comparing actual spending to a target. They set the target as the PGP's own base year per capita expenditures (i.e., the Medicare expenditures per beneficiary treated by the PGP during the calendar year prior to the demonstration) trended forward by the comparison group's expenditure growth rate (i.e., the growth rate of expenditures per beneficiary in the area from which the PGP draws its patients). Case-mix adjustments are made to account for changes over time in the types of patients treated by the PGP and in the types of patients included in the comparison group. Medicare savings in excess of 2 percent are distributed to each PGP based partly on the magnitude of savings achieved by the PGP and partly on its performance on the set of demonstration quality measures.

Results from Year 1 of the Demonstration

During Year 1, the quality of care performance targets focused on the 10 diabetes quality measures. All the participating PGPs improved the clinical management of their diabetes patients. Specifically, all 10 groups achieved benchmark or target performance levels on at least seven of the 10 diabetes quality measures. Moreover, two PGPs—Forsyth Medical Group in North Carolina and St. John's Health System in Missouri—met all 10 benchmarks. In addition, all groups increased their scores on at least four diabetes measures, eight groups increased their scores on at least six measures, and six groups increased their scores on nine or more measures.

Two of the groups in the demonstration—Marshfield Clinic in Wisconsin and University of Michigan Faculty Group Practice—earned performance payments of$7.3 million for meeting DOQ quality and cost-efficiency measures as their share of a total of $9.5 million in savings to the Medicare program. In addition, other groups had lower risk-adjusted expenditure growth rates for their assigned diabetes populations compared with their local market comparison groups, but not sufficiently lower toearn performance payments.

Both groups that shared in savings had inpatient and outpatient risk-adjusted expenditure growth rates for their assigned populations that were lower than those of their comparison group populations. These lower growth rates are consistent with the demonstration's goals to coordinate health care services provided under Medicare and improve efficiency.

Implications for Medicare and the U.S. Health Care System

Demonstration staff and PGPs have identified a number of promising change opportunities, ongoing challenges, and strategies for disseminating lessons learned.

Promising Change Opportunities
1) Increasing Patient Engagement. The PGPs believe that involving patients more deeply in pre-visit processes and self-management support has the potential to improve quality while containing costs. The goals are to make physician visits more effective and accurate in the treatment that can be provided and to enable complementary services to be provided in a more timely fashion if reimbursement can be made available.

Increasing patient self-management is a goal for both general care management programs and chronic disease care. Much of day-to-day chronic disease care can be provided by patients themselves or by family members. This care includes adherence to prescribed medications; consistent attendance at regular physician visits; active communication with physicians and nurses regarding symptoms and problems; prompt attendance for ordered testing services; and maintaining diet and exercise programs as consistently as possible.Demonstration PGPs are working on a number of patient education and coaching programs to promote improved patient self-management. The demonstration incentives could be one way to fund these programs if PGPs can demonstrate that savings can be achieved.

2) Expanding Care Management. Demonstration PGPs are now focusing on heart failure care management since it has the potential for significant cost savings through reduced hospital admissions. Many PGPs are intensifying their efforts through daily telemonitoring programs, nurse telephone management, patient education, andother interventions.

The PGP demonstration incentives provide one way of funding these programs through performance payments for demonstrated cost savings. PGPs are also interested in exploring direct incentives, such as per-member per-month capitated reimbursement for heart failure case management, which could fund a range of non-visit services, such as telephonic nurse case management.

3) Improving Care Transitions. Health care providers historically have given too little emphasis on care transitions, partially because clinical responsibilities and associated reimbursements are often divided between providers. The demonstration incentives reward PGPs for reducing overall Medicare spending, however, so they havea financial incentive to better manage the many care transitions that may be required for treatment of chronic diseases.

A number of PGPs are testing new transition management programs that may apply to patients with particular diagnoses or those undergoing particular types of transitions, such as the transition from hospital to home. Preventing hospital readmissions through timely outpatient follow-up care by physicians has been a particular focus of these programs since it has the potential to reduce costs and also patient morbidity.

In addition, demonstration staff are also exploring management of other types of transitions, such as those from hospitals to nursing homes. Since those organizations are often separate corporations, they typically have not shared data on patients effectively in the past, and communication regarding care transitions has often been incomplete. Coordinating care among the multiple specialist physicians who may treat high-risk patients is also a potential area for improvement, since they may not communicate well about treatments and prescriptions a patient has received.

4) Expanding the Roles of Non-Physician Providers. Demonstration staff are also focusing on expanding non-physician provider roles in an effort to improve clinical workflows. They have studied redesigning primary care practice to increase the use of non-physicians, such as through greater use of planned visits; integrating care management into clinical practice, such as delegating some types of patient testing or exams (e.g., diabetic foot exams) to non-physicians; expanding patient education; and providing greater data support to physicians to enhance the quality and cost-effectiveness of their clinical work.

Physician buy-in to these efforts has sometimes been a challenge, but many of the PGPs have had success in implementing the new non-physician roles, and all are optimistic about incorporating these roles more broadly in the future. If the new roles are well-structured, and the staff well-trained, then physicians may view them as complementing the care they provide and enabling them to concentrate on the elements of care that clearly need their expertise.

The PGP demonstration incentives provide the potential for reimbursement of non-physician care that has not been traditionally funded and where it can show an impact on cost savings and quality of care. These factors provide PGPs with broader flexibility to implement new roles and to test new care models.

Ongoing Challenges
Some PGPs have had issues with the speed of implementation for new interventions. Since the demonstration is currently active for three performance years, PGPs need to organize cost saving and quality improvement interventions quickly so they will be able to show positive outcomes early in the demonstration and earn performance payments. Moreover, the Medicare savings are calculated on a cumulative basis, so early savings provide an ongoing advantage in terms of potential bonus payments in succeeding years. Several PGPs, however, have indicated that motivating physician and organizational change has taken longer than expected, and their interventions have not become fully operational until Year 2.

Some PGPs have also noted data and reporting lags. Ideally, rapid feedback of data on assigned beneficiaries would enable PGPs to more quickly evaluate the impact of specific interventions and revise them as needed during the demonstration. Claims data take some time to accumulate, however, so rapid feedback has been difficult to achieve.

Limited reimbursement for non-physician care and medical home programs has also been a broad concern. While the PGP demonstration incentives may indirectly fund these efforts, PGPs recommend that some type of direct reimbursement for these services also be considered by CMS to provide stronger incentives and funding for non-demonstration providers.

While care management programs have been actively developed for a number of conditions, most notably diabetes and heart failure, several additional types of care management programs should be more fully developed and tested. Examples cited by PGPs include care management and multiple chronic disease care management. Both are viewed as having potential for reducing costs at the same time as improving quality of care, but the optimal clinical approaches for these programs have not yet been identified.

Similarly, a number of innovations in primary care are being tested. A planned visit concept has been discussed, as has improving workflow through better data systems and team-based care. Optimal approaches for these interventions are still being worked out, and Year 3 of the demonstration may bring additional lessons learned in these areas.

Disseminating Lessons Learned
Exporting lessons learned from the demonstration can be achieved through a number of approaches. One of the most important is to focus on high-leverage change ideas. Given the broad range of health care delivery interventions being proposed around the country, a benefit of the demonstration could be to identify those with the highest potential for producing positive cost and quality outcomes. They can then become the focus of more intensive efforts for motivating physician and organizational change, since those efforts often need a sharp focus on a limited number of interventions to be successful. While this report includes a number of promising change ideas highlighted by the participating PGPs, other providers will need to carefully select those that fit best with their organization and environment.

Another important dissemination method could be to engage physicians in efforts to export change ideas beyond their organizations. This method could be challenging, however, given the workloads and time limitations faced by physicians. The PGPs are taking a range of approaches for engaging physicians in change efforts, including recruiting physician champions for leading design and implementation of new health care delivery interventions; educating physicians about the importance of new care delivery models; offering financial incentives; and fostering competition on quality-of-care indicators.

Cross-organizational affinity groups or benchmarking collaboratives could also be a way to engage physicians and other PGP staff in structured interactions with other providers to spread their experiences and lessons learned. Such groups have the benefit of extensive ongoing interactions that may stretch over many months and even years. Ideas can be cross-fertilized; tested and measured in practice; and results shared among all.

PGP demonstration conferences involving outside providers and other interested parties are another dissemination approach. Virtual conference breakout sessions could also be held periodically by conference call and WebEx to facilitate information sharing.

Finally, round-robin site visits among demonstration PGPs could be another way to maintain involvement and give staff the chance to hear about interventions being applied by other providers. These visits could be targeted to PGPs reporting particular success with selected interventions, and in-depth written case studies could result. These case studies could be disseminated broadly on the Web and summarized for conference presentations and journal articles.

For More Information

Additional information regarding the methods used for measuring quality and financial performance under the demonstration can be found on the CMS Web site. Reports on the PGP "Demonstration Bonus Methodology Specifications" and the PGP "Demonstration Quality Measurement and Reporting Specifications" can be found at To access these reports on that Web page:
  1. Click on "Medicare Demonstrations" in the box on the upper-left-hand side of the screen.
  2. Scroll down to "Medicare Physician Group Practice Demonstration" in Year 2000. Bypass the "select from the following options" section.
  3. Scroll down to the downloads section. Select the following two reports from the PDF files: "Performance Payment Methodology Specifications" and "Quality Specs Report."

Publication Details



M. Trisolini, J. Aggarwal, and M. Leung, et al., The Medicare Physician Group Practice Demonstration: Lessons Learned on Improving Quality and Efficiency in Health Care, The Commonwealth Fund, February 2008.