On August 23, 2011,  the Centers for Medicare & Medicaid Services (CMS) announced that is was seeking applications for participation in one or more of its initial four models in the Bundled Payments for Care Improvement initiative (Bundled Payment Initiative) beginning in 2012.   Section 3023 of the Patient Protection and Affordable Care Act (PPACA) requires CMS to establish, by January 1, 2013, a pilot program for integrated care during an episode of care furnished to Medicare beneficiaries around a hospitalization “in order to improve the coordination, quality, and efficiency of health care services.”  

The Bundled Payment Initiative is being launched by the CMS “Innovation Center” (a creation of PPACA), and seeks to test payment models centered around hospital admissions that would achieve these statutory objectives.  There are four models being tested by the program:

  • Model 1:  Retrospective payment models around the acute inpatient hospital stay only.
  • Model 2:  Retrospective bundled payment models for hospitals, physicians, and post-acute care providers for an episode of care consisting of an inpatient hospitals stay followed by post-acute care.
  • Model 3:  Retrospective bundled payment models for post-acute care where the episode of care does not include the acute inpatient hospital stay.
  • Model 4:  Prospectively administered bundled payment models for the acute inpatient hospital stay only, such as prospective bundled payment for hospitals and physicians for an inpatient hospital stay.

CMS has invited organizations to submit proposals that define episodes of care in one or more of these four models, and requests that the proposals “demonstrate care improvement processes and enhancements such as reengineered care pathways using evidenced based medicine, standardized care using checklists, and care coordination.”  For each model, CMS has provided some broad parameters, such as a minimal Medicare saving rates, but many aspects of the initiative are opened-ended and subject to the provider’s proposal.  Providers, for example, will have flexibility to determine which episodes of care and which services will be bundled together and will propose a price for those services.  Under Models 2 through 4, participants will be able to request Medicare claims data to assist them in arriving at a definition of episode of care, a payment rate for the bundled services, etc.

According to the CMS Fact Sheet, applicants would propose the target price for a defined episode of care in the three retrospective models, which would be set by applying a discount to total costs for a similar episode of care as determined from historical data.  Participants in these models would be paid for their services under the original Medicare fee-for-service (FFS) system, but at a negotiated discount.  At the end of the episode, the total payments would be compared with the target price.  Participating providers may then be able to share in those savings.

The prospective model (Model 4), would involve CMS making a single, prospectively determined bundled payment to the hospital that would encompass all services furnished during the inpatient stay by the hospital, physicians and other practitioners.  Physicians and other practitioners would submit “no-pay” claims to Medicare and would be paid by the hospital out of the bundled payment.  CMS specifically indicated that the proposals for participation under any of the models “may include gain sharing arrangements.”  

It is clear that both Congress and CMS consider bundled payment initiatives as key to controlling rising health care costs, while at the same time, at least in theory, improving the quality of outcomes.  Indeed, in its press release, CMS points to its Heart Bypass Center Demonstration Project from 1991-1996 (involving ten hospitals, although only seven hospitals participated for all five years of the project), which boasted $42.3 million in cost savings to the Medicare program (a ten percent reduction in expected costs).  In addition, the demonstration project also saved $7.9 million in copayments and reduced hospital mortality rates.  Thus, the Bundled Payment Initiative is likely an omen of  the future of Medicare reimbursement and presents an opportunity for providers to take part in the development of these future payment models.

The non-binding letter of intent and application for Model 1 are due by September 22, 2011 and October 21, 2011, respectively.  The non-binding letter of intent and application for Models 2 through 4 are due by November 4, 2011 and March 15, 2012, respectively.  In addition, to receive Medicare claims data, participants in Models 2 through 4 must submit a “research request packet” and data use agreement when they submit their letter of intent.  CMS’s Fact Sheet about the initiative is available here and the Department of Health and Human Services’ news release is available here.  More detailed program and application information is available here.