Medicare Bundled Payment Initiative: Back to the Future?

October 2011Articles Allegheny County Medical Society Bulletin
Remember the 1990s fad when managed care companies proposed to pay for physician, hospital and ancillary services in a bundled payment to be divided up by the providers? That idea never really took off on a large scale, and the few risk-sharing contracts that were offered contributed to financial problems at a number of health systems that took the plunge. Now, spurred by the Affordable Care Act (ACA) and ongoing budget pressure, the Centers for Medicare and Medicaid Services (CMS) is taking another look at the bundling concept as a way to reorient the Medicare payment system toward cost control and quality improvement and away from payment for the volume of care. Circumstances have changed since the last round of bundled payment proposals, particularly with the increased horizontal and vertical integration of health systems, so it is possible the outcome may be different this time.

On August 23, 2011, CMS released its Bundled Payments for Care Improvement Initiative, which solicits applications under four models of bundled payments for episodes of care. Like the ACA Shared Savings program for Accountable Care Organizations, the Bundled Payment Initiative would reward participating providers for bringing costs under budget targets, but unlike the ACO program, this initiative imposes accountability at the patient/episode level. Each of the four models includes a slightly different mix of services and/or payment mechanism. And like the “Premier ACO” model previously announced by CMS, the Bundled Payment Initiative gives applicants the ability to design the details of their own proposals around CMS guidelines.

In each case, CMS would enter into a contract with an “awardee,” i.e., an entity able to assume financial risk and receive and distribute payment. Awardees may be providers, provider networks or “conveners,” defined as entities that can bring together multiple participating health care providers, such as a state hospital association or a collaborative of providers. A risk-bearing convener that also may receive payments from CMS can participate in the initiative as an awardee. A convener not able to bear risk may not receive payments from CMS but may participate in the initiative as a facilitator for participating awardee providers. Awardees will also be responsible for monitoring and reporting a variety of quality measurements to assure that appropriate levels of care are being provided. Under the initiative, an “episode” is the defined period of time during which all Medicare-covered services required to manage the specific medical condition of a patient are grouped and paid as a unit.

Model 1 – Inpatient Stay Only, Discounted Fee for Service with Gainsharing

The first model is available to physician group practices, acute care hospitals, health systems, physician-hospital organizations and conveners. Payments would be based on discounts against traditional fee-for-service costs, reconciled against a predetermined target price after the episode is complete. Hospitals would agree to minimum discounts of their usual Part A DRG fees and offer voluntary gainsharing arrangements with their physicians intended to encourage them to efficiently utilize hospital resources during the episodes of care. The physicians would continue to be paid traditional Part B professional fees. CMS would monitor both Part A and Part B costs during the episode, and costs exceeding trended targets would be at risk for repayment.

Model 2 – Inpatient Stay Plus Post-Discharge Services

Model 2 expands the scope of services to include post-discharge services and includes physicians and other Part B providers along with the hospital’s Part A payments, long-term care hospital services (LTCH), inpatient rehabilitation facility services, skilled nursing facility services, home health agency services, hospital outpatient services, independent outpatient therapy services, clinical laboratory services, DME and Part B drugs. Applicants can propose their own criteria for defining the episode, based on DRGs and the duration of the post-discharge services, which can be a minimum of either 30 or 90 days. Payments would be based on traditional fee-for-service rates reconciled retrospectively against agreed-upon targets, with Medicare and the providers sharing in the savings. Cost overruns would be repayable to Medicare. This model is available to physician group practices, acute care hospitals, health systems, physician-hospital organizations, post-acute providers and conveners.

Model 3 – Post-Discharge Services Only

This model is similar to Model 2 but excludes the hospital stay itself. Physician group practices, acute care hospitals, health systems, physician-hospital organizations, LTACs, SNFs, home health agencies and conveners are eligible to apply.

Model 4 – Inpatient Stay Only, Comprehensive Prospective Rate

Model 4 most closely resembles what is usually thought of as a bundled payment system in the private insurance world. It encompasses all services during, but not after, the hospital stay, both Part A and Part B, and is based on a prospectively determined payment. It may be considered a “Super-DRG,” which includes physician services and other Part B services not currently reimbursed under Part A. This model is based on Medicare’s Acute Care Episode (ACE) demonstration project, which required gainsharing between hospitals and physicians. Generally, the hospital would be responsible for dividing up the bundled payment with all providers. The hospital would reimburse physicians under the existing fee-for-service model, with or without discounts, or under another methodology agreed to between the providers and physicians as approved by CMS.

Open Issues

Applicants will need to be able to accurately evaluate the financial risk they are undertaking before submitting a proposal. CMS will make historical data available to applicants that submit letters of intent. Few health systems, and even fewer physician groups, have the infrastructure, experience and expertise necessary to adequately assess such risk to formulate a proposal and to monitor costs, utilization and quality during the term of the CMS agreement.

Models 2 to 4 involve the allocation of payments among a variety of providers, potentially including independent, non-employed physicians. Health systems that look to participate in this initiative will need to be able to provide assurance to physicians that they won’t be shortchanged when funds are divided. The only way this concept can succeed is if providers and professionals across the spectrum of care have their goals aligned toward quality and cost control.

The odds are that highly integrated systems with a large proportion of employed physicians will be the first to take the leap. For example, Geisinger Health System of Danville, PA, has reported positive results with a variety of bundled payment arrangements. However, a high degree of trust must exist between a health system and its physicians for bundled payments to succeed.

CMS recently extended its application deadlines for participation: Interested organizations must submit a nonbinding letter of intent by October 6, 2011, for Model 1 and by November 4 for the remaining models. The deadline for final applications was extended to November 19 for Model 1 and to March 15, 2012, for Models 2 to 4.

The traditional fee-for-service method of paying for health care services may not be heading for total extinction, but its days as the exclusive or dominant method may be numbered if practical and effective alternatives can be proven to work.

This article appeared in the October 2011 issue of the Allegheny County Medical Society Bulletin.