CMS is Bundling Up - Are You?

This issue of IMA Insights seeks to provide an overview of CMS Bundled Payments for Care Improvement Initiative which was announced late last summer. A discussion of the various aspects of the proposed payment models, including key considerations that applicants must take into account with respect to this initiative follows.
On August 23, 2011, the CMS Innovation Center announced its Bundled Payments for Care Improvement Initiative (BPCII). This program is a voluntary program and its purpose is to have providers partner with CMS to test proposed payment and delivery service models which are aimed at reducing program expenditures and improving quality of care to beneficiaries. CMS has proposed four bundled payment models, which provide for a single bundled payment for all services provided to a Medicare beneficiary, during a defined episode of care. Under the current payment system, Medicare makes separate payments to all providers responsible for a patient's care, which many believe causes redundancies and inefficiencies and additional costs.

Bundled payments may cover multiple providers in multiple care delivery settings, depending on the definition of the episode of care. A single payment is then made to the hospital and it must be distributed to the various providers participating in that patient's care. Accordingly, under BPCII, hospitals, physicians and other providers are able to share in any savings generated (i.e., gain sharing) that result from the better coordination of care.

Proposed Payment Models

Four bundled payment models have been proposed, all of which seek to encourage providers to work toward a better coordination of care for patients. These payment models are differentiated primarily by how the episode of care is defined (i.e., which services are included in the bundled payment). Three of the four payment models target care provided in an inpatient acute care hospital setting, and two of these models provide the option for the participant to select specific health conditions rather than having all MS-DRGs subject to bundling. The remaining model focuses solely on all post acute services subsequent to an acute inpatient stay, including, but not limited to, hospital readmissions related to the initial stay, home health and skilled nursing.

The four bundled payment models are briefly summarized below:

Model 1: IP Hospital Only (All MS-DRGs) - Bundled payments apply to acute inpatient hospital stay only. All MS-DRGs are subject to the bundling. The minimum discount rate will increase from 0% in year 1 to 2% in year 3. Hospitals are permitted to gainshare with participating physicians; however, physicians will continue to receive their payments directly from CMS without any reduction.

Model 2: IP Hospital, Physician & Post Acute Services (Selected MS-DRGs) - Bundled payment applies to acute inpatient hospital stay, and all post discharge services (including readmissions) for a minimum 30-day period, and physician services for the entire episode. Under this model, applicants can target specific MS-DRGs to be bundled versus having all MS-DRGs subject to bundling as in Model 1. Minimum discount rate is one to two percent, depending on the option chosen relating to the duration of the post acute care period to be included in the episode.

Model 3: Post Acute Care Services Only (Selected MS-DRGs) - Bundled payment applies to post acute care services only; acute inpatient hospital services are excluded. Therefore the initiation of post acute services triggers the beginning of the episode. Like Model 2, specific clinical conditions (i.e., MS-DRGs) can be targeted.

Model 4: IP Hospital & Physician Services (Selected MS-DRGs) - The bundled payment includes the acute inpatient hospital stay and physician services provided during that stay. Post-acute care services are excluded. Participants can target specific MS-DRGs to be bundled. This model requires a minimum of greater than 3% for the 37 DRGs included in the Medicare Acute Care Episode Program (currently underway), and a minimum of 3% for all other MS-DRGs.

It should be noted that the bundled payment initiative applies to traditional Medicare fee-for-service beneficiaries only (i.e., excludes Medicare Advantage enrollees). Further, Medicare will continue to pay indirect medical education, disproportionate share hospital, and capital payments outside of the bundled payment methodology.

Providers were required to submit a letter of intent to participate that must be followed by a formal application. CMS has encouraged providers to submit an application for multiple models and participation is subject to CMS approval. The application deadline for BPCII participation for Model 1 was November 1, 2011. Applications for Models 2 through 4 are due March 15, 2012, assuming the letters of intent were previously filed.
The challenges for providers are numerous and providers need to assess if there is sufficient upside for participating in a program with the risks which these payment models could potentially present. Under this inititiative, providers bear the full financial risk if payments made by CMS do not cover costs and obligations to other parties furnishing services included in the bundle. Providers will need to successfully reduce costs (or grow volumes) to offset the voluntary reduction in payments.

Further, each of these models includes a provision for a post-episode monitoring period which CMS included to ensure that providers do not drive up costs outside of the bundle. Any costs incurred beyond a certain risk threshold (CMS' expected level of spending) must be repaid by the provider to the Medicare program.

Providers will be submitting applications to participate in the BCPII utilizing historical data provided by CMS to construct and price their bundles. The applicant's ability to properly utilize information with inherent limitations is crucial to accurately price bundles and develop gainsharing models. Failure to do so could result in financial losses.

One of the biggest challenges of this initiative is that there is no provision limiting the Medicare beneficiary's freedom of choice. Therefore, patients have no incentive to receive their care from participating providers, and this will limit the hospital's ability to contain costs.

Adhering to certain program requirements increases the risk of incurring significant administrative costs. This initiative requires that hospitals not only report on standard existing quality measures, but develop new ones. Further, managing the bundled payment arrangements with physicians and other providers could take considerable time and effort and result in conflict. The hospital's ability to estimate and identify the incremental cost savings and maintain amenable relationships with physicians and other providers will be critical to the success or failure of this bundled payment program.

The question then becomes, with all of these challenges, what are the benefits to participating? Providers with an established framework for coordinating care are clearly better poised to participate. Hospitals should carefully consider each model before submitting an application. This will enable the hospital to select the best model or models for its particular circumstances.

Whether the provider community embraces these changes or not, it appears that payment reform is moving away from traditional fee-for-service payment arrangements. Therefore, bundled payments may provide a real opportunity to align physician and hospital incentives. Moreover, even if a hospital decides not to participate in bundled payments at this time, it needs to begin to establish and enhance the relationships that will enable success under bundled payments or other non-fee-for-service models. This will not only lead to long-term financial benefits, but will also enhance the current working relationships with physicians and other providers.

CMS' goal appears to be to develop payment models which will motivate hospitals, physicians, and non-physician practitioners in the fee-for-service arena to work collaboratively by aligning incentives. CMS believes this should result in lower cost and higher quality.

In order for the hospital to be successful, the first step would be to analyze both its own data and other information to truly understand the drivers of costs and quality. The hospital should then begin to build productive, collaborative relationships with physicians (both independent and employed). These enhanced relationships should result in significant short and long term benefits. Some of the short term benefits could be reductions in length of stay or reductions in supply cost resulting from better communication and standardization. In addition, the relationships that will be required in the future, in order to be successful, will already have been cultivated and established. This should enable hospitals to react quickly as more payment reforms are established.

In conclusion, not only will the savings that are achieved be available from Medicare patients, these savings will be available across all patients. Therefore, all of the savings from non-Medicare patients will accrue to the providers potentially without any mandatory payment reductions from other payers.   
We are pleased to have the opportunity to present this information to you. If you have any questions or need assistance, please call IMA Consulting at (484) 840-1984.

Best Regards,

Ed Ladely
IMA Consulting