In August, the Centers for Medicare & Medicaid Services (CMS) announced another health care reform initiative aimed at incentivizing coordination of care and efficient health care delivery. The initiative for bundling payments for episodes of care is a mechanism for hospitals and other providers to align service delivery with CMS’s triple aim of better care, better population and individual health, and lower costs. Taking advantage of this initiative will require teamwork and coordination among hospitals, physicians, and post-acute care providers, like many programs under P-PACA.

Bundling payments for health care services is not a new model for reimbursement. CMS currently pays for certain services through global payments, such as some surgeries, where providers must manage the costs of care for all services – pre-through post-procedure. Bundled payments have not been extensively used by CMS, in part because of industry push back. With the need for substantial market reform to maintain the financial viability of the U.S. health care system, P-PACA tests several models for attaining reimbursement reform by shifting the focus from quantity to quality of services.  P-PACA’s bundled payments, accountable care, and value-based purchasing programs are all designed to implement a fundamental change in health care delivery and drastically reduce health care costs.

The bundled payment initiative (BPI) is currently voluntary and by application only. In a teleconference to announce the BPI, CMS invited providers to apply to participate in the BPI to help test and develop the models of bundling payments so that both CMS and providers could collaborate on creating a fair payment mechanism for episodes of care, while better managing costs and coordinating care across providers. Three models proposed are based on retrospective payment bundling, while the fourth involves a single prospectively determined bundled payment to a hospital for all services furnished during an inpatient stay. The four models are defined by what is included in an episode of care:

Inpatient Stay Only: Model 1 defines the episode of care as all hospital services provided during an inpatient stay at a general acute care hospital. Only Part A fees are bundled; Part B services are unaffected. All diagnosis related groups (DRGs) may be subject to this model (unlike Models 2, 3, and  4 where the applicant proposes certain DRGs). CMS will make a discounted inpatient prospective payment system payment to participants based on the discount proposed by the applicant. Model 1 is based in part on the Medicare Hospital Gainsharing Demonstration Project.

Inpatient Stay plus a defined period of Post-Acute Care: Under Model 2, the applicant defines the episode of care to include all inpatient stay services, plus a fixed period of related post-acute care (from 30 to 90 days, also set by the applicant), including related readmissions and other defined services. Applicants propose the clinical conditions subject to the bundled payment and a target price. CMS makes the traditional fee-for-service (FFS) payments, which are retrospectively reconciled with the predetermined target price.

Post-Acute Care Only: Model 3’s episode of care covers post-acute care services, related readmissions, and other defined services. Like Model 2, applicants propose the clinical conditions subject to the bundled payment and propose a target price. Payment is made on an FFS basis with a  retrospective reconciliation. Prospective Inpatient Stay Only: Model 4 covers all hospital and physician services (and related readmissions) during an inpatient hospital stay. Applicants propose the DRGs for which the applicant wants to receive a bundled payment and agree to a prospective payment rate. CMS pays the negotiated prospective payment and the applicant is responsible for distributing payment. Model 4 is based on the Medicare Acute Care Episode  Demonstration Project.

Each model requires that the applicant propose a discount on payments made by CMS to the applicant (with minimum discounts set by CMS), and any additional savings achieved by the applicant may be distributed according to a previously developed gainsharing plan. Model 1 involves a discounted payment, while Models 2 and 3 involve a retrospective reconciliation of the FFS payment with the predetermined target price. In Model 4, the admitting hospital receives a single bundled payment of the predetermined amount from which it will distribute payment to the hospital and physicians. These differences permit CMS (and providers) to assess what works and what doesn’t when bundling payments in different settings and for a variety of providers. Under each model, applicants will be required to meet certain quality measures, give notice to beneficiaries of services subject to a bundled payment, and ensure beneficiary choice, among other requirements.

Hospitals that have developed successful processes and methods for coordinating care, managing costs, and efficiently providing quality care can embrace the BPI as an opportunity to increase revenue through savings from the negotiated prices. Success will depend on developing a reasonable proposal, distribution plan, and culture of teamwork among the care delivery team. Keep in mind, the BPI applies only to the base payment from CMS and not to any additional payments, such as graduate medical education payments or disproportionate share payments. The BPI represents another step toward necessary and inevitable health care reform.

What Can You Do? Go to the CMS Innovation Center website,, follow the links to BPI, and review the relevant guidance prepared by CMS. CMS envisions the BPI as a partnership between the agency and providers. As such, providers should participate in the BPI to have a role in setting current (and likely future) reimbursement methodologies.  Applicants for Model 1 must submit a nonbinding letter of intent (LOI) by September 22, 2011, with a target start date of January 2012, while applicants for the other models must submit their nonbinding LOIs by November 4, 2011, for a program start date of March 2012. Applicants must complete an application, submit (and comply) with a data use agreement in certain cases, and propose other terms on the relationship, as requested by CMS.