The Centers for Medicare & Medicaid Services (CMS) has launched the Bundled Payments for Care Improvement Initiative under Section 3021 of the Affordable Care Act (ACA), which authorizes the Secretary to test innovative delivery arrangements to reduce federal spending while preserving or enhancing the quality of care. Under the Bundled Payments Initiative, CMS seeks applicants who will strive to improve care coordination for Medicare beneficiaries who are hospitalized and when they leave the hospital. Very broadly, applicants will offer a discount to Medicare compared to usual Medicare spending; the applicant will be paid the Medicare savings beyond the discount level, but will assume risk for Medicare expenditures above an established risk threshold. CMS invites proposals with one of following four approaches to bundled payments:

  • Model 1: Retrospective payment models for the acute inpatient hospital stay only

For this model, the episode of care consist of all Part A services furnished to “included beneficiaries” during a hospital stay, including hospital diagnostic testing and all related therapeutic services furnished by an entity wholly owned/operated by the admitting hospital in the three days prior to admission and the hospital facility services furnished during the hospital stay. Awardees will offer a discount from the usual Part A hospital inpatient MS-DRG payments; the minimum discount varies by year, ranging from 0% for the first six months, gradually increasing to 2% by year three. 

  • Model 2: Retrospective bundled payment models for hospitals, physicians, and post-acute providers for an episode of care consisting of an inpatient hospital stay followed by post-acute care

All beneficiaries admitted to an awardee acute care hospital for agreed-upon MS-DRGs will be included in the episode. The episode begins with the inpatient hospital admission to a participating provider and continues for a minimum of 30 days following discharge. The episode includes all hospital services (as defined in Model 1), plus Part A and Part B services furnished during the hospital stay, and Part A and Part B services furnished in the post-discharge period related to the episode “anchor.” In addition to the inpatient services, bundled services include inpatient hospital readmission services; long term care hospital services (LTCH); inpatient rehabilitation facility services (IRF); skilled nursing facility services (SNF); home health agency services (HHA); hospital outpatient services; independent outpatient therapy services; clinical laboratory services; durable medical equipment (DME); and Part B drugs. Applicants should propose a target price for the episode that includes a single rate of discount on the expected Medicare payments for all included Part A and Part B services. CMS requires minimum discount of 3% for applicants who propose a 30-89 day post-discharge episode, and a 2% minimum discount for 90 day or longer episode. Awardees may not restrict beneficiary choice of provider, including post-acute care provider, and awardees will be financially liable for care for included beneficiaries that is furnished by providers who are not participating in the model. 

  • Model 3: Retrospective bundled payment models for post-acute care where the bundle does not include the acute inpatient hospital stay

The episode anchor is the initiation of post-acute care services at a SNF, IRF, LTCH, or with an HHA within 30 days of beneficiary discharge from an acute care hospital for an agreed-upon MS-DRG. The episode will begin on the date post-acute services are initiated with an awardee and continue through a minimum of 30 days following initiation of the episode. The episode must include all related Part A and Part B services furnished during the episode period, including related readmissions (all services in Model 2 except acute inpatient services). Applicants should propose a target price for the episode that includes a single rate of discount off of the expected Medicare payments for all included services. Awardees may not restrict beneficiary choice of provider; awardees are financially responsible for care for included beneficiaries furnished by providers who are not directly participating in the model.  

  • Model 4: Prospectively-administered bundled payment models for hospitals and physicians for the acute inpatient hospital stay only

Proposals under Model 4 will build on the ongoing Medicare Acute Care Episode (ACE) demonstration for cardiac and orthopedic inpatient procedure hospitalizations, but will expand to additional geographic areas and clinical conditions. CMS notes that, unlike the ACE demonstration, the Bundled Payment Initiative will not include sharing savings with patients because such policies previously “have proven operationally challenging to administer and confusing for beneficiaries.” The episode of care is the acute inpatient admission to an awardee for agreed-upon MS-DRGs through patient discharge. The episode will include Part A hospital services (as defined in Model 1) and Part B professional services, along with specified services furnished during certain readmissions. The CMS will consider applicant proposals around risk adjustment, which must include a description of the methodology and may include plans for updating risk adjustment on a yearly basis. Applicants should propose a target price for the episode that includes a single rate of discount off of the expected Medicare Part A and Part B payments for all hospital facility and professional services furnished during the hospitalization and related readmissions for all beneficiaries with the agreed-upon MS-DRGs (a minimum 3% discount). CMS and the awardee will agree to the price for the bundle of services in advance, and the awardee bears full risk for the price of the episode.

Additional requirements for each model are set forth in the request for application (RFA). In general, CMS seeks to ensure that total Medicare expenditures under any model will decrease relative to what they would have been absent this initiative, and that quality measures are met.   Gainsharing arrangements are permitted under each model, but they must meet criteria “designed to ensure that care is not inappropriately reduced, that the quality of care remains constant or is improved, that there are not inappropriate changes in utilization or referral patterns, and to guard against fraud, waste, and abuse.” CMS states in the RFA that it will consider using its waiver authority with respect to fraud and abuse laws and other Medicare provisions for such gainsharing arrangements as appropriate. Bundled payment agreements will include a performance period of 3 years, with the possibility of a 2-year extension, beginning with program start date (which may be as early as the first quarter of CY 2012 for Model 1 awardees). Potential applicants must submit a letter of intent by September 22, 2011 for Model 1 and by November 4, 2011 for Models 2, 3, and 4; additional deadlines are set forth in the RFA materials. CMS also published a Federal Register notice announcing the initiative.