In July of this year, the federal Centers for Medicare & Medicaid Services (“CMS”) proposed a new model to support better and more efficient care for beneficiaries undergoing the most common inpatient surgeries for Medicare beneficiaries: hip and knee replacements. On Nov. 16, 2015, CMS issued the final rule, which is codified at 42 CFR Part 510.

This model, called the Comprehensive Care for Joint Replacement (“CJR”) and formerly known as the Comprehensive Care for Joint Replacement Model under the Proposed Rule, would test bundled payment and quality measurement for an episode of care associated with hip and knee replacements to encourage hospitals, physicians and post-acute care providers to work together to improve the quality and coordination of care from the initial hospitalization through recovery. These hospitals will be held accountable for the quality and cost of care provided to Medicare fee-for-service beneficiaries for these procedures. Under CJR, participation will be mandatory for Hospitals located in 67 geographic areas across the United States.

Although this is being characterized by CMS as a demonstration program, it portends the future of Medicare and Medicaid.

Model Background

According to CMS, hip and knee replacements are some of the most common surgeries that Medicare beneficiaries receive. In 2013, there were more than 400,000 inpatient primary procedures in Medicare, costing more than $7 billion for hospitalization alone.

While some incentives exist for hospitals to avoid post-surgery complications that can result in pain, readmissions to the hospital, or protracted rehabilitative care, the quality and cost of care for these hip and knee replacement surgeries still vary greatly among providers. The CJR proposes to hold hospitals accountable for the quality of care they deliver to Medicare fee-for-service beneficiaries for hip and knee replacements from surgery through recovery.

Model Details

A bundled payment can best be defined as a fixed payment for a bundle of health care services related to a specific health care procedure or an episode of care. Simply put, all health care providers (e.g. hospitals, physicians, rehabilitation facilities and home health care agencies) that would normally participate in the care of a patient related to a specific episode of care would be paid out of the same bundled payment.

In theory, all the providers would share this lump sum payment in lieu of their normal fee for service, and would be responsible if the cost of the care exceed the bundled payment. Conversely, if the cost of care is less than the bundled payment the providers would share in the savings. Of course, the program is not that simple and raises many questions on how the savings or the unreimbursed costs would be shared among the providers.

The proposed rule and the final CJR are modeled after Bundled Payments for Care Improvement (“BPCI”) initiative that CMS began in 2013, and is still continued today. CMS’s goal with BPCI initiative is to align payment incentives among providers and suppliers with the health care experience of the patient. Although the BPCI has had many critics, CMS is expanding bundled payments with the CJR. CMS believes that requiring all the providers involved in the episode of care to accept and share the fixed payment will force those providers to coordinate better their care of patient as it relates to the episode, and should result in better outcomes at a lower overall cost.

Model Participants

The CJR implements the proposed model in 791 hospitals physically located in any of the 67 Metropolitan Statistical Areas (“MSAs”) selected for participation. (MSAs are counties associated with a core urban area that has a population of at least 50,000.)

These hospitals are required to participate in the BPCI for the knee or hip replacement. The Hospitals will be held financially accountable for the quality and costs of care from the time of the surgery through the 90 days after discharge), through the use of a retrospective bundled payment. The hospital may be eligible to receive an incentive payment from CMS if the total aggregate cost for all Episodes is below the aggregate target price, or may owe CMS if the total aggregate cost for all Episodes is above the aggregate target price. During the initial year, the Hospitals will not be responsible for costs in excess of the bundled payment but that responsibility will begin in the second year but the incentive payments will be available during the initial year.

The Proposed Rule generated nearly 400 comments from the public. Many comments criticized the proposed start date of Jan. 1, 2016; the lack of formal waivers for fraud and abuse authorities; and the lack of any risk-adjustment methodology. While the start date was delayed, CMS emphasized in the final rule that avoiding the selection bias inherent to any voluntary model is a central purpose of CJR, so capturing hospitals in various states of preparation for a bundled payment program is an integral purpose of the model. No waivers of any fraud and abuse authorities are being issued in the Final Rule. Rather, CMS and OIG will jointly issue a notice regarding the waiver of certain fraud and abuse laws for purposes of testing this model. The notice will be published on the CMS and OIG websites.

In CMS’s press release, Patrick Conway, M.D., CMS’ principal deputy administrator and chief medical officer stated that “This model is about improving patient care. Patients want high quality, coordinated care – not just for a day, but for an entire episode of care. Hospitals, physicians, and other providers who work together can be successful and improve care for patients in this model, and CMS will help providers succeed.”

Participant hospitals are encouraged to enter into certain financial arrangements with other providers in an Episode to encourage reductions in cost and increases in quality, and to share in both the downside risk and upside gain of CJR. The waivers will facilitate these arrangements and will apply to: (1) distribution of gainsharing payments in CJR; (2) distribution of such payments from a group practice after payment by the hospital; and (3) certain patient engagement incentives made to beneficiaries, all where certain conditions are met in their entirety.

The model’s goal is to give hospitals a financial incentive to work with physicians, home health agencies, skilled nursing facilities, and other providers to ensure that Medicare beneficiaries get the coordinated care. CMS believes that the CJR can help minimize confusion and in some cases, eliminate multiple care plans and instructions for beneficiaries that conflict and can lead to re-hospitalizations and complications.

If CMS continues with this paradigm shift, it will cause even more consolidation opportunities among hospitals, physicians and long term care providers. It will also force these providers to create integrated health care delivery systems (“IDSs”) that can handle all the various types of care needed by a patient in connection with a specific health care procedure or an episode of care. An attorney can help providers navigate the many unique challenges and loss exposures associated with IDSs.