Overview In August, the U.S. Department of Health and Human Services (“HHS”) unveiled a new initiative, Bundled Payments for Care Improvement, intended to incentivize health care providers to coordinate care, improve care quality, and save money for Medicare. The Bundled Payments for Care Improvement Initiative (“Initiative”) is being launched by the new Center for Medicare and Medicaid Innovation (“Innovation Center”), an entity created by the Affordable Care Act and tasked with discovering new and better ways of providing and paying for health care to Medicare and Medicaid beneficiaries. This bundled approach will combine payment for physicians, hospitals, and other provider services into a single bundled payment of a predetermined amount for all services furnished to a beneficiary during an episode of care. According to the Innovation Center, bundling will align provider incentives with the three-part goal of the Centers for Medicare & Medicaid Services (“CMS”): better health, better health care, and reduced expenditures. In addition, the Initiative will support accountability at the individual patient level instead of the population level.

Under the current Medicare model, hospitals, physicians, and other health care providers bill and receive payment separately for their services. The Initiative seeks to change this model by bundling care for a set of services patients receive during the treatment of a specific medical condition during a single hospital stay and/or recovery from that hospital stay. This treatment for a specific medical condition during a definite time period is known as the “episode” of care. For example, under the current Medicare model, a surgical procedure generates multiple claims from multiple providers. In contrast, under the Initiative’s bundling model, the entire team of care providers would be compensated with a “bundled” payment, providing incentives to deliver more efficient health care services and consider the financial implications of their decisions, while continuing to improve the quality of care.

According to CMS, the bundling approach responds to the strong desires of hospital and physician communities for flexible approaches to patient care improvement. Furthermore, the Initiative is based on extensive research and prior demonstration projects that suggest great potential for the program. A Medicare heart bypass surgery bundled payment demonstration saved the program $42.3 million, roughly 10 percent of expected costs, and saved patients $7.9 million in coinsurance while improving care and lowering hospital mortality.  

Bundled Payment for Care Improvement Models

To carry out the Initiative, CMS is partnering with health care providers to create models of bundling payments. At this time, the Initiative is seeking applications for four expansively defined models of care. Broadly defined, Models 1, 2, and 3 are “retrospective” models, in which the typical fee-for-service payments are made and then the total payment for the episode is reconciled against the predetermined target price. In contrast, in Model 4, the “prospective” model, a negotiated single payment is paid as a lump sum in lieu of a traditional fee-for-service payment.

Retrospective Payment Bundling

Under Models 1, 2, and 3, CMS and the applicant would determine a target payment amount for a defined episode of care. The applicant would propose the target price, which would be set by applying a discount to total costs for a similar episode, determined by historical data. At the end of the episode, the total payments would be compared to the target price, and participating providers may then be able to share in the savings. Each model defines the episode of care differently.

Model 1 defines the episode of care as services provided during the inpatient stay in a general acute care hospital only. Medicare will pay the hospital a discounted amount based on the payment rates established under the Inpatient Prospective Payment System (“IPPS”), and Medicare will pay physicians separately under the Medicare Physician Fee Schedule. Hospitals and physicians will then be allowed to share in any savings arising out of better coordinated care. Model 2 defines the episode of care more broadly, including services provided during the inpatient stay and post-acute care delivered after discharge to the home or a different care setting. At the applicant’s option, the episode will end either a minimum of 30 or 90 days post-discharge.

Model 3 defines the episode of care as beginning with the initiation of post-acute care services after discharge from an acute inpatient hospital stay and ending no sooner than 30 days after discharge. In both Models 2 and 3, the target price will be discounted based on the applicant’s historical fee-for-service payments for the episode. After payment is made at the usual fee-for-service rates, the total Medicare payment for the episode will be reconciled against the target price. Participating providers will then be allowed to share in any decrease in expenditures beyond the discount reflected in the target price.  

Prospective Payment Bundling

Under Model 4, CMS would make one, prospectively determined bundled payment to the hospital that would cover all services provided during the inpatient stay by the hospital, physicians, and other care providers. Physicians and other care providers would then submit “no-pay” claims to Medicare, and the hospital would pay them out of the bundled payment.

In sum, this episode payment model will create a framework that rewards providers for taking accountability for improving health, improving the quality of care, lowering costs, and coordinating care. In return, the Initiative will give providers great flexibility in choosing conditions to bundle, creating the care delivery structure, and dividing payments among participating providers.  

Gainsharing Arrangements

Gainsharing payments (that is, payments of a share of the savings resulting from efforts to improve quality and efficiency) may be an element of all applicant proposals under Models 1-4. In these gainsharing arrangements, hospitals or providers will distribute gainsharing payments to physicians and/or other practitioners. In its Request for Applications (“RFA”), the Innovation Center has highlighted a number of criteria that any gainsharing arrangement must meet to be eligible for participation in the Initiative. These requirements are designed to ensure that care is not improperly reduced, that the quality of care stays the same or improves, and that there are not inappropriate changes in utilization or referral patterns. These requirements are also designed to protect against fraud, waste, and abuse. A detailed description of the required criteria may be found in the RFA.  

Additional Application Information

CMS is encouraging organizations to apply for and participate in one or more models. In addition to other criteria, applicants will be required to identify the clinical condition(s) through MS-DRGs, define the time period for the episode of care, and identify the services included in the bundled payment. In addition, applicants will be required to plan and implement quality assurance and improvement activities as a condition of participation in the Initiative. Applicants are asked to provide their own episode definitions and bundled payment proposals. CMS will provide historical Medicare claims data to potential applicants applying for Models 2, 3, and 4. To be considered for receipt of data, applicants must submit a Research Study Protocol with their Letter of Intent (“LOI”) and will later be expected to submit a Data Use Agreement.

Applicants for Model 1 must submit a nonbinding LOI by September 22, 2011 and a completed application by October 21, 2011. Applicants for Models 2, 3, and 4 must submit a nonbinding LOI by November 4, 2011. In addition, applicants who wish to receive historical Medicare claims data must complete a Research Request Packet by November 4, 2011. Completed applications for Models 2, 3, and 4 must be submitted by March 15, 2012.  

Additional information may be found at: www.innovations.cms.gov