The Bundled Payment for Care Improvement Initiative: Achieving High-Value Care with a Single Payment

The Centers for Medicare and Medicaid Services (CMS) has begun reviewing applications for a new payment initiative that will test four different "bundled" payment models in Medicare. Under bundled payment, a single payment is made for an episode of care—a defined set of services delivered by designated providers in specified health care settings, usually delivered within a certain period of time, related to treating a patient’s medical condition or performing a major surgical procedure. The goal is to encourage hospitals and physicians to work together to coordinate care and improve care transitions, to reduce rehospitalizations, and to ensure delivery of appropriate care following discharge. The Bundled Payment for Care Improvement Initiative is a three-year project, beginning in 2012, that will allow physicians, hospitals, and post–acute care providers to receive bundled payments as a way of supporting the delivery of efficient and high-value care.

Currently, most providers are paid on a fee-for-service basis, receiving additional payments as more care is delivered, regardless of its value. Bundled payments would eliminate the incentive to earn more simply by doing more. Under the various payment models in this initiative, bundled payments could cover all services provided by a single hospital during an inpatient stay, hospital and physician services during the initial inpatient stay and any related readmissions, or a broad range of items and services delivered by multiple providers in more than one setting.

Bundled payments may encourage providers to focus on delivering high-quality, efficient care. But they may inadvertently create incentives for providers to stint on providing appropriate care. To prevent this, payment levels must be carefully calibrated to ensure providers' financial viability while providing incentives to reduce costs and safeguards to ensure high quality.

If appropriately designed, bundled payments could support the goals of health reform by encouraging providers to consider not only the services they deliver but the overall efficiency, effectiveness, and coordination of care patients receive across providers and settings. This broader notion of health care delivery could lead to improved quality and the reduced cost growth necessary to enhance the long-term sustainability of the health system.

Given the important role that bundling—and the more coordinated health care delivery that it is intended to encourage—is expected to play in health reform, as well as the variety of circumstances faced by different providers treating different conditions, it is critical to test various payment models to determine which approaches work under which circumstances. The results from the Bundled Payment for Care Improvement Initiative can help inform Medicare and other stakeholders as they aim to find effective approaches to achieve the goals of payment reform. Below, we examine the four bundled payment models the initiative will evaluate.

Model 1: Acute Care
In Model 1, the episode of care for the bundled payment will be defined as the inpatient acute-care hospital stay. Hospitals will continue to be paid for each case based on the current system, in which hospital discharges are grouped into categories (diagnosis-related groups, or DRGs) depending on the patient’s reason for admission and other diagnoses and conditions. However, hospitals will need to offer a discount from the current DRG payment rate that must be at least 2 percent by the third year. Although the payment amount would continue to vary by the type of condition, the same percentage discount would apply to all DRGs included in the pilot.

The bundled payment will cover all hospital services provided to the Medicare beneficiary during the inpatient stay, including diagnostic testing and therapeutic services provided by any entity owned or operated by the hospital within three days prior to the admission (this condition applies to all four payment models).

The major advantage of this arrangement, compared with the current DRG payment model, is that it enables hospitals to enter into gainsharing agreements with physicians and other providers. That is, hospitals will be allowed to pay providers with a share of the savings incurred as a result of collaborative efforts to improve overall quality and efficiency.

Under the Medicare fee-for-service program, hospitals and physicians are usually paid separately, even if a physician is working in the hospital. In fact, whereas hospitals are usually paid on a per case basis, physicians are typically paid on a per service basis. As a result, physicians have little motivation to shorten lengths of stay or choose higher-value services, which can drive up costs for hospitals. Gainsharing arrangements help align physician and hospital incentives by offering physicians a portion of a hospital's cost savings in exchange for identifying and implementing cost-saving strategies.

Typically, such arrangements between providers have not been allowed, for fear of potential collusive arrangements that might limit competition and undermine quality. Under the right circumstances, however, these arrangements have the potential to reduce costs—and, in fact, to increase quality. CMS will use performance measures to help ensure that quality is maintained among participating providers.

This model offers those with little experience managing care across providers a relatively low-risk, incremental approach to bundled payment. However, the potential gains to be had from improved coordination under this payment model may also be modest.

Model 2: Hospitals, Physicians, and Post–Acute Care Providers
Model 2 is the broadest of the four models, involving a bundled payment for hospitals, physicians, and post-acute providers for an episode of care consisting of an inpatient stay followed by post–acute care, such as visits to rehabilitation facilities or home health care. In this case, only certain procedures and conditions, such as major joint replacement and heart failure, will be eligible for the bundled payment.

The episode begins with the inpatient stay (including the related care within three days prior to hospitalization) and continues for a minimum of 30 days following discharge from the hospital. Compared with Model 1, the extended time frame and broader scope of services and providers encompassed by such episodes should offer greater opportunities to manage care and control costs. In particular, this model should encourage providers to improve the way they manage care transitions and post-discharge care, which should result in greater continuity of care and reduced hospital readmissions.

The target price for each condition will be based on expected costs for all physician, hospital services and post-acute care within the episode. Hospitals and other participating providers will continue receiving their usual fee-for-service payment, followed by a "reconciliation" process. That is, if fee-for-service payments for the included services exceed the target price, the participants must repay Medicare for the difference; if costs come in below the target, providers get to keep the difference. Episode-related costs from non-participating providers (who are paid their usual fee-for-service payments) will be considered when comparing episode costs to the spending targets.

Under this model, as well as Models 3 and 4, CMS will consider applicant proposals for methods of risk adjustment, which can help ensure providers are paid appropriately for cases with higher (or lower) than expected health problems and costs.

Model 3: Post–Acute Care
Model 3 is similar to Model 2, but in this case the episode is initiated with the first post–acute care service provider, such as a skilled nursing facility, home health agency, or inpatient rehabilitation facility, within 30 days of a patient’s discharge from an acute care hospital for one of the agreed-upon conditions. In contrast to Model 2, the initial hospital visit is excluded from the bundle. The episode must be at least 30 days long, and no minimum discount amount is required although applications with higher discounts are likely to be preferred. This model may be most attractive to post–acute care providers that want to be the primary applicant, since each episode must include post–acute care services.

Model 4: Expansion of ACE Demonstration
Model 4 builds on the ongoing Medicare Acute Care Episode (ACE) demonstration, which involves a single prospective payment for hospitals and physicians for services provided during each hospital stay involving certain orthopedic and cardiovascular inpatient procedures. Unlike bundled payments under Models 2 and 3, the bundle does not include post–acute care services. Model 4 will expand the geographic scope of the ACE demonstration (which was limited to a few selected sites in Texas, Oklahoma, New Mexico, and Colorado) and clinical conditions that will be considered for inclusion. However, Model 4, unlike the ACE demonstration, will not provide financial incentives for patients to choose participating providers.

Model 4 participants will be paid a single bundled payment for each agreed-upon condition and cover all hospital and inpatient physician services. The payment will be based on historical spending trends, covering all hospital facility and professional services during the initial hospitalization and related readmissions. CMS and the participating providers will agree to the payment for the bundle of services, including the discount, in advance.

The bundled payment will be made to the hospital after the initial hospital stay, meaning that it will cover any related readmissions. Participating providers will be required to have some infrastructure in place to distribute payments to all of the partnering providers that deliver care during the episode. This is not the case for the other models, in which the participants will continue to receive payments directly from Medicare through the usual fee-for-service system.

Because of the fixed, upfront payments, Model 4 participants will bear the highest amount of financial risk, as they are fully responsible for costs in excess of the agreed-upon price for the episode. Related readmissions, for example, will not result in additional payments. On the other hand, since the price levels are based on historical costs, Model 4 participants can also achieve higher rewards for out-performing their past trends, particularly by reducing the prevalence of readmissions.

Exhibit 1 shows the services that can be included under each model, while key characteristics of each model are highlighted in Exhibit 2. All models are set to begin in 2012, with Model 1 beginning as early as the first quarter. Providers may participate in multiple models.

Speed and Flexibility
Bundled payment has been in place for Medicare hospital inpatient services since 1983, but its application to services across providers and in different health care settings has been limited. Private sector initiatives such as the Prometheus Model are being tested in the field, but providers are still ramping up their abilities to coordinate and manage care across settings and the applicable patient populations have been small. The Medicare Bundled Payment for Care Improvement Initiative has the potential to speed up bundled payment implementation by testing various models and giving providers a great deal of flexibility to design a model that works for them. Also, making these models available for millions of Medicare beneficiaries should enable providers to develop economies of scale when investing in new infrastructures for coordinating and managing care. With health care costs rising and health system performance flagging, pursuing these innovations and learning from them as quickly as possible is imperative.