Electronic Health Reporter

Guest post by Neil Smiley, CEO and founder, Loopback Analytics.

When I remodeled my house a few years ago, I hired a contractor, and negotiated a bundled payment for the entire job.  The fees I paid to the contractor covered project management costs as well as the costs of independent subcontractors assembled do the work, such as carpentry, dry-wall, electrical and painting.  The contractor stood to make a nice profit if they efficiently managed the work of their subcontractors. On the other hand, he could lose his shirt if there were unmanaged rework and cost overruns.

Bundled payments are still relatively rare in healthcare. If a patient has knee replacement surgery, each provider – the surgeon, anesthesiologist, hospital, rehab facility and home health agency are paid separately. The patient is often left to serve as their own general contractor, without any one provider responsible for the cost and quality of episode. As a result, there can be significant variations in episode cost and clinical outcomes for the same procedure.

CMS has been experimenting with voluntary bundled payment demonstration projects for about five years. In 2011, CMS launched the Acute Care Episode (ACE) program with a handful of healthcare systems. In 2013, CMS began the Bundled Payment Care Initiative (BPCI) with over a hundred participating hospitals. The bundled payment programs included different conditions, procedures and episode durations. However, they all worked in a similar way: CMS combined a bundle of health care services that had been previously paid as separate components. A bundled payment price was set, representing the average historical episode cost, less a withheld amount (typically around 3 percent). A general contractor (AKA “convener”) was assigned responsibility for the total cost and quality of the episode of care. After five years of voluntary experimentation, the concept of bundled payments is about to go big.

In April 2016, CMS will require 800 hospitals that are located in one of 67 geographic regions to be conveners for Comprehensive Care for Joint Replacement (CJR) surgeries – mostly elective hip and knee replacements.  The bundle payment will include the costs of the hospital stay along with all related costs within 90 days of the hospital discharge. Each of the providers involved in the surgery and post-discharge care will continue to bill Medicare as before, but the hospital will now be financially responsible for all of the costs. If the bundled costs are below the target price, the hospital will receive a bonus that they may share (or not) with the other providers participating in the care episode. However, if costs are above the target, the hospital is responsible for paying the difference to CMS.

The first year of the CJR program, hospitals have only upside, with a bundled payment target price based mostly on their own hospital’s historical average cost per episode. As the CJR program moves into years three and beyond, the bundled payment target price will shift to average regional costs. Hospitals will continue to be eligible for bonuses if they beat the target price, but they will also exposed to financial penalties if costs are above the regional average.

In addition to the economic implications of bonus payments and penalties, CJR has the potential to result in significant shifts in market share. A CJR hospital that successfully reduces the cost of care episodes may share savings with orthopedic surgeons that refer business to their hospital. The bonus payment can be significant to a physician: an increase of up to 50 percent above the standard surgical reimbursement rate. However, bonus payments can only be made from savings. CJR hospitals that are slow in getting their bundled costs under control will be unable to offer their referring surgeons a bonus, and may experience a loss in market share as surgeons move their referral volume to high performing CJR hospitals.

The mandatory Bundled Payment program will require CJR hospitals to develop new partnerships, systems and capabilities. CJR hospitals will need narrow network partners comprised of high quality, low cost providers. Systems will be needed to connect data from partners across the network to track the flow of patients as they move between care settings and provide analytics to manage cost and quality measures. CJR hospitals will also need to assimilate CMS claims data to evaluate cost drivers, develop effective interventions and manage distribution of gains and losses with network partners.

CJR is but one step in a broader campaign by CMS to align financial incentives in an effort to improve care coordination and reduce costs. Bundled payments are here to stay.