“Bundling” Payment for Episodes of Hospital Care

8/6/2019 “Bundling” Payment for Episodes of Hospital Care

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“Bundling” Payment forEpisodes of Hospital CareIssues and Recommendations or the New PilotProgram in Medicare

Harriet L. Komisar, Judy Feder, and Paul B. Ginsburg July 2011



1 Introduction and summary

4 Payment bundling and the Affordable Care Act

6 The case for bundled payments for episodes of carearound hospitalization

11 Issues and recommendations

22 Conclusion

23 Endnotes

25 About the authors and a cknowledgements

Contents



1 c n A an p g | “Bundl ng” pay n e d h al ca

Introduction and summary

A he hear o heal h re orm is he undamen al challenge o simul aneously improve he quali y o our heal h care and lower i s cos s. And a he hearo mee ing ha challenge is changing he way we use and pay or care. Te

A ordable Care Ac is reple e wi h measures aimed a his goal—includingini ia ives o promo e preven ion and primary care, o reward good (and penalizepoor) provider per ormance, and o combine now-separa e paymen s o doc ors,hospi als, and o her providers in o collec ive paymen arrangemen s or mul iple

services, hereby promo ing beter-coordina ed, more “accoun able” care.

In he middle o he mix is he requiremen ha he Depar men o Heal h andHuman Services launch a pilo projec o bundle Medicare paymen s aroundhospi al “episodes” o care— ha is, pay collec ively or he services an individualreceives during a hospi al episode (which includes a period o ime a er dis-charge), ra her han paying separa ely or each service delivered by each heal hcare provider a he hospi al.1

By paying or an episode o care as a whole, bundling o ers providers he exibil-i y and nancial incen ive o coordina e care wi hin an episode and avoid preven -able complica ions and readmissions. Bundling boas s he po en ial o bene :

• Pa ien s hrough beter care• Heal h care providers hrough nancial rewards or delivering ha care

more efcien ly • Te Medicare program hrough lower cos s.

Bundling, in shor , can be a win-win-win or everyone involved in episodes o care,

including axpayers.

Hospi al episode bundling is curren ly receiving less policy aten ion han a broader paymen re orm known as accoun able care organiza ions, which wouldcrea e new paymen incen ives or all services a person receives during he year—




ha is, pay on a per-person basis ra her han on a per-episode basis. Bu given heurgency as well as he uncer ain ies o e or s o improve our heal h care sys em,ew would sugges we pu all our eggs in one baske . Wi h i s po en ial o improvepa ien care by increasing coordina ion and reducing unnecessary services as wellas reducing complica ions, errors, and hospi al readmissions, hospi al episode

bundling o ers a promising oppor uni y o promo e efcien , coordina ed careha should be ac ively pursued.

Te goal o his repor is o o er guidance on key choices in designing a pilo pro-gram o mos e ec ively explore episode bundling o mee heal h re orm’s wingoals o beter quali y care a lower cos s. Speci cally, an e ec ive bundling piloprogram would:

• Encourage the broadest possible provider participation in nationally scalable

payment methods, wi h a paymen design ha se s broad condi ions or par ici-

pa ion bu leaves opera ional de ails o par icipa ing heal h care providers and isopen o all providers who sa is y he condi ions. Tis new model should buildon curren paymen me hods o simpli y implemen a ion.

• Target the pilot program to diagnoses with the greatest potential to improve

both quality and efficiency by ocusing on high-volume condi ions or whichin erven ions are well es ablished and suppor ed by clinical guidelines, andor which, despi e hose guidelines, ac ual rea men s (and rela ed cos s) vary subs an ially. As experience develops, bundling can be applied o a broaderarray o condi ions.

• Design payment methods to promote collaboration among providers, attract

participants, and assure quality. o acili a e collabora ion, o er providershe op ion o ei her a single bundled paymen amoun ha hey would divideamong hemselves, or an al erna ive paymen me hod ha pays each individualprovider involved in he episode an amoun ha blends exis ing paymen me h-ods wi h nancial incen ives based on he combined per ormance o all provid-ers involved in he episode.

• Set initial payment levels to reflect the current costs of care, to attract partici-pants, limi ing risks and o ering heal h care providers up- ron resources andrewards o efcien delivery. In subsequen years, cons rain annual ra e increaseso yield Medicare savings over he li e o he pilo . And o assure quali y careand pro ec pa ien s, vary paymen s o re ec pa ien s’ complexi ies, ie pay-men s o quali y per ormance, and require public repor ing o quali y measures.




• Engage and protect Medicare enrollees by requiring participating providers to

inform beneficiaries about the pilot program, providing pa ien advocacy sup-por o bene ciaries, and allowing bene ciaries o re ain he op ion o seekingcare rom nonpar icipa ing providers.

In he pages ha ollow, we will describe he pilo program manda ed by Congress,examine he reasons o develop episode-o -care paymen s involving hospi aliza-ions, and hen explore he bes ways we believe his pilo program could be se upand run. We hen close he paper wi h our de ailed se o recommenda ions ha we believe can bes es he efcacy o episodes o care as a paymen model o lower ourna ion’s heal h care cos s while improving he quali y o care.




Payment bundling and theAffordable Care Act

Broadly de ned, paymen “bundling” means paying or heal h care services wi ha single, comprehensive paymen amoun ha covers mul iple services and i emsreceived by a pa ien —ins ead o making separa e ee- or-service paymen s oreach par icular service or i em. Medicare’s prospec ive paymen sys em or inpa-ien hospi al care already uses “bundles” o pay or all services provided during ahospi al s ay; he paymen amoun varies according o he pa ien ’s diagnosis andmajor rea men decisions bu does no depend on he speci c quan i ies o spe-

ci c services received during he s ay.2 Medicare also applies a narrowly de ned bundle in paying surgeons or an opera ion and or one day o preopera ive and90 days o pos -opera ive care.3

Te A ordable Care Ac builds on hese paymen approaches by ex ending he“bundle” o cover paymen across mul iple providers. Al hough bundles could be shaped in various ways, he A ordable Care Ac explici ly requires a Na ionalPilo Program on Paymen Bundling in Medicare o pay or episodes o carearound hospi aliza ion. Te new heal h re orm law speci es an episode as heime period rom hree days prior o hospi al admission hrough 30 days a erdischarge—bu allows he secre ary o Heal h and Human Services o designa ea di eren ime rame. As speci ed in he law, he services o be covered by heepisode paymen consis o :

• Acu e inpa ien hospi al• Physician services delivered in and ou side he hospi al• Ou pa ien hospi al services• Emergency room services• Pos -acu e services such as physical herapy and nurse visi s a home• Appropria e services iden i ed by he secre ary such as care coordina ion and

ransi ional care services




Te pilo will es paymen bundling in Medicare or 10 condi ions, o be selec ed by he secre ary, wi h volun ary par icipa ion by providers. Medicare will pay apar icipa ing provider-en i y a bundled amoun or each “applicable” Medicare bene ciary— ha is, each bene ciary who is admited o a par icipa ing hospi al wi h one o he pilo program’s 10 selec ed condi ions and mee s cer ain Medicare

enrollmen cri eria.

Speci cally, he bene ciary mus be eligible or care under Medicare Par s A (hospi-al coverage) and B (medical insurance), bu no be enrolled in a priva e heal h planhrough Par C (Medicare Advan age) or PACE (Programs o All-Inclusive Care orhe Elderly). Te en i y receiving he bundled paymen could be a ormal organiza-ion comprising mul iple providers (including, or example, a hospi al, mul iplephysicians, and pos -hospi al care providers) or one o hose providers (a hospi al orphysician group, or example) wi h con rac ual arrangemen s wi h o hers.

Te pilo is scheduled o begin by January 1, 2013, and con inue or ve years. Buan impor an ea ure o he law is ha he secre ary has he op ion o expandinghe dura ion and scope o he pilo i expansion is expec ed o reduce Medicarespending while improving, or no reducing, quali y and no limi ing Medicare’scoverage or bene s or individuals. Tus, i he pilo is success ul, bundling could become a signi can elemen in Medicare paymen . In he nex sec ion we explainhe po en ial value o bundling around hospi aliza ions.




The case for bundled payments forepisodes of care around hospitalization

Compared wi h ee- or-service paymen , paymen s or bundled episodes o care al erhe nancial incen ives in a undamen al way. By paying or an episode ra her han oreach service, bundled paymen encourages providers o de ermine which services areappropria e wi hin an episode and o elimina e he unnecessary ones, in con ras orewarding volume o services. Fur her, paying providers as a “group,” ra her han payingeach separa ely, encourages providers o work oge her o coordina e care, elimina eduplica ive and unnecessary services, and avoid preven able complica ions.

As a resul , bundled paymen s have he po en ial o deliver beter care a lowercos s by reducing ragmen a ion and increasing he coordina ion o care while alsoreducing inefciencies.4 Providers, as well as pa ien s and he Medicare program,can po en ially bene rom paymen bundling.

Wi h bundling, providers have he oppor uni y o re ain nancial rewards rom nd-ing ways o reduce unnecessary services and avoiding preven able complica ions—and exibili y in nding ways o do so. Hospi als—which, beginning in Oc ober2012, will be nancially accoun able or especially high readmissions—can benerom he exibili y ha bundling permi s as well as rela ionship building wi h physi-cians. Bundled paymen s will, or example, o er a nancial incen ive or physicianso be engaged in helping hospi als reduce complica ions, avoid re-admissions, anduse hospi al resources efcien ly.

Bundling paymen around hospi aliza ion, as required in he pilo , will crea e incen iveso improve he coordina ion and efciency o care bo h during he hospi al s ay andduring a pos -hospi al period. During he hospi al s ay, i is physicians who direc a siz-able por ion o he resources. Beter aligning he nancial incen ives o physicians and

hospi als wi h bundled paymen could lead o more efcien use o hose resources—or example, hrough more cos -e ec ive choices o medical devices and pharmaceu-icals. Evalua ions o he Medicare Par icipa ing Hear Bypass Cen er Demons ra ionprojec , which es ed bundled paymen or inpa ien hospi al and physician services inhe 1990s, o er some evidence ha such savings can be achieved (see box).



Although previous experience with payment bundling is limited,there are several public- and private-sector initiatives that can in ormthe pilot program. Two Medicare demonstration projects involvebundled payment or inpatient hospital episodes—the Participat-ing Heart Bypass Center Demonstration, completed in 1996, and

the Acute Care Episode Demonstration, begun in 2009. In addition,some private organizations have developed bundled payment initia-tives. Among these, two examples that may be the most help ul indeveloping the pilot program are the PROMETHEUS Payment modeland Geisinger Health System’s ProvenCare program.5 So let’s examineeach o these programs brie y in turn.

Medicare Participating Heart Bypass Center DemonstrationIn the 1990s, the Medicare Participating Heart Bypass Center Demon-stration tested the application o a single, negotiated bundled priceor inpatient hospital and physician care or coronary artery bypassgra t patients. The demonstration included a total o seven hospitalsites; our participated or ve years, 1991-1996, and three partici-pated or three years, 1993-1996.6

Each hospital received a bundled payment amount or hospital andphysician services during the inpatient stay, plus any readmissionswithin 72 hours o discharge; the bundled amount increased annuallybased on updates in Medicare’s hospital and physician payment rates.Sites chose di ering methods o dividing the payment among thehospital and physicians. Patients covered by the demonstration were

responsible or a single preset cost-sharing amount in place o theusual deductible and co-insurance amounts, with the amount set tobe less than expected or a typical admission.

Overall, the demonstration was estimated to have reduced Medicarespending by about 10 percent compared with what it otherwisewould have been or covered patients, without adversely a ectingpatients. 7 An evaluation o the rst our hospitals in the demonstra-tion ound that the hospitals achieved lower costs mainly throughreductions in costs o intensive care unit and routine nursing,pharmacy, and laboratory. 8 Physicians, or example, became more

involved in reviewing hospital pharmacies’ drug ormularies andmaking substitutions to reduce costs.

Medicare Acute Care Episode DemonstrationA second Medicare demonstration, the Acute Care Episode Demon-stration, is currently testing bundled payment or several cardiac pro-

cedures (such as coronary bypass procedures and cardiac paceprocedures) and orthopedic procedures (such as knee replacemand hip replacement surgeries).9 Participating physician-hospiorganizations receive a single global payment that covers Medhospital and physician services provided during the hospital st

A ter the demonstration’s rst year, the Centers or Medicare anMedicaid Services, the ederal agency that administers these twhealth care programs, may consider broadening the scope o sein an episode to encompass some post-acute care. Each site deor itsel how the payment is divided among providers; nanciaincentives or providers to promote efciency are permitted subto certain rules and limits.

The participating sites and their payment amounts are determthrough a competitive bidding process. So ar, CMS has selecve sites or the demonstration: Two sites began their program2009, a third began on January 1, 2010, and the other two begNovember 2010. The demonstration may expand the number oup to a maximum o teen.

The demonstration is also testing the e ects o o ering bene cia-ries a nancial incentive to choose participating sites, re erred tMedicare Value-Based Care Centers. The dollar amount o the tive varies by procedure and site. Bene ciaries receive hal o thestimated amount Medicare saves, up to a maximum equal to t

annual Part B medical insurance premium amount (and currentgreater than $1,157).10

PROMETHEUS Payment ModelThe PROMETHEUS Payment model is part o an ongoing projecaimed at developing an episode-o -care approach to paying orhealth care or chronic and acute conditions.11 The model wasdesigned by a nonpro t organization, PROMETHEUS Paymen(now part o the Health Care Incentives Improvement Instituteprimary support rom the Robert Wood Johnson Foundation. TPROMETHEUS Payment model uses a bundled payment amou

justed or the patient’s severity and complexity, to pay or all seprovided during an episode o care.

These bundled payment amounts—called “evidence-in ormedrates”—are based on the appropriate services or treating a contion as determined by clinical guidelines and expert opinion, p

Previous experience with bundled payments for hospital episodes





Bundled paymen will also a ec services in he pos -hospi al period. Te provider organiza ion receiving he bundled paymen will be responsible or arrang-ing and coordina ing ollow-up care a er he hospi al s ay—and, impor an ly,or addressing any complica ions ha arise in he covered pos -hospi al period.Financial responsibili y encourages providers o ac ively preven complica ionsand avoid heir associa ed rea men cos s—lowering cos s and promo ing qual-i y a he same ime.

In con ras , under curren paymen incen ives, discharge policies a hospi als oday ypically ocus on geting he pa ien o he nex s ep, wi h litle incen ive o seeha ollow-up care is o good quali y. Te high ra e o hospi al readmissions amongMedicare bene ciaries is evidence o curren ly inadequa e suppor as pa ien s

an allowance or the costs o “potentially avoidable complications.”The allowance or potentially avoidable complications is a portion o the costs o these complications or the condition indicated in datare ecting typical experience. The objective is to give providers anincentive to prevent avoidable complications. And i they reduce the

cost o complications, on average, to less than the bundled paymentamounts allow, then the revenues will more than cover the costs o delivering appropriate care.

So ar, the PROMETHEUS model has created 21 evidence-in ormedcase rates that include ve inpatient procedures (such as hip replace-ment and heart bypass surgery), ve outpatient procedures (such asknee arthroscopy and colonoscopy), plus acute and chronic medi-cal conditions (such as stroke and diabetes).12 The relevant episodelength depends on the condition; or hospital procedures, theepisode length includes a rehabilitation period.

PROMETHEUS is now being tested at our sites. HealthPartners,a nonpro t health plan in Minnesota, has contracted with localprovider networks. Independence Blue Cross and Crozer-KeystoneHealth System have partnered in Pennsylvania. Employers’ Coalitionon Health is working in partnership with local healthcare providersin Rock ord, Illinois. And Priority Health-Spectrum Health is workingwith PROMETHEUS in Michigan.13 Additional sites are being devel-oped in New York and Colorado.

Geisinger Health System’s ProvenCareA second private initiative that involves bundled episode pay-ment or hospital services is the ProvenCare program developeby Geisinger Health System, a large, non-pro t, integrated delivsystem in Pennsylvania. Beginning in 2006, Geisinger implem

ProvenCare program or elective coronary ar tery bypass gra t sthat uses a checklist o 40 processes or benchmarks that shouldcompleted or every elective CABG patient, including a determthat the surgery is appropriate or the patient, based on establisguidelines or best practices.

As part o the program, Geisinger charges a xed rate or electivCABG surgery that covers all services related to the proceduretreating any related complications that occur within 90 days oing the surgery. Evaluations provide evidence that ProvenCarereduced hospital costs, complication rates, and readmissions aCABG patients.14 More recently, Geisinger developed ProvenCagrams or additional types o episodes, many o which are also as a bundled episode amount. 15

Previous experience with bundled payments or hospital episodes (continued)




ransi ion rom he hospi al. Te Medicare Paymen Advisory Commission, orMedPAC, which advises Congress on Medicare issues, es ima es ha 18 percen o Medicare bene ciaries discharged rom a hospi al in 2005 were readmited wi hin30 days, and ha abou hree-quar ers o hose readmissions (or abou 13 perceno o al admissions), cos ing $12 billion, were po en ially preven able.16

Bundling is one o several new paymen arrangemen s he Depar men o Heal hand Human Services is required o explore under he A ordable Care Ac . Broadexperimen a ion makes sense—and bundling can be compa ible wi h o herini ia ives, including Accoun able Care Organiza ions.17 Bu bundling has advan-ages in i s own righ . Firs , i s ocus on hospi al episodes, wi h a bounded se o services and providers, raises ewer organiza ional challenges han does a popu-la ion-based paymen arrangemen such as under accoun able care organiza ions,a ec ing all services a pa ien may need over a year.

Second, bundled episode paymen may ac ually be a desirable endpoin in i sel ,pre erable o popula ion-based paymen . Episode-based bundled paymen couldsuppor a sys em o provider organiza ions ha arge speci c areas, such asor hopedic procedures or services or people wi h diabe es. Arguably, develop-ing specialized organiza ions suppor s more compe i ion, consumer choice, andconsumer sa is ac ion han a paymen sys em relying on large in egra ed heal hsys ems o provide services. Bundling around hospi al s ays, as in he pilo , may provide a ransi ional s ep o a broader se o episode-based bundled paymen s.including ou pa ien acu e and chronic care episodes.

Bundling’s po en ial o improve quali y and lower cos s does no mean i is apaymen policy wi hou challenges or wi hou risks. Organiza ional challengesare signi can , as is de ning wha services are in and ou o a hospi al “bundle.”18 Fur her, bundling’s incen ives pose some nega ive, alongside posi ive, possibili ies.By rewarding physicians as well as hospi als or an efcien ly-managed hospi aladmission, bundling may genera e more hospi al episodes— hus, po en ially increasing he number o inappropria e hospi al episodes, even hough services wi hin each one would be efcien ly used.19

Moreover, by rewarding providers or lower cos s, episode paymen s may encour-age providers o skimp on services wi hin an episode—especially on services or which any adverse repercussions occur down he road, ou side he ime rame (orservice scope) o he episode—or avoid pa ien s who are likely o be especially cos ly wi hin a diagnosis ca egory.20




Issues and recommendations

In order o con ribu e o he overarching goals o he new heal h re orm law—delivering quali y care a lower cos s—an e ec ive design o a pilo or bundledpaymen mus address he ollowing ques ions:

• How can he pilo be designed o lead o na ional applica ion?• Wha ypes o condi ions should he pilo arge ?• How should bundled services be paid or?• How will he pilo engage and pro ec Medicare bene ciaries?

So le ’s urn o ways he Cen er or Medicare and Medicaid Services can besanswer hese ques ions o achieve heal h re orm’s goals.

How can the pilot be designed to lead to national application?

Medicare demons ra ions (including hose described in he box on page 7) aredesigned as care ully speci ed research en erprises— ha is, narrowly de ned oes a highly speci ed policy in erven ion, involve a small se o providers, adhereo evalua ion me hods ha can cons rain adap a ion, and produce resul s ha may or may no be prac ically replicable in na ional policy. o success ully promo echange, implemen a ion o he A ordable Care Ac will require a new approach oinnova ion and experimen a ion.21

Te key o ha approach when designing an episode-based bundling pilo should be rom he ou se o es me hods ha have he po en ial o be adap ed andadop ed widely— ha is, o be scaled o na ional implemen a ion in he u ure.

Achieving his goal requires a design ha is bo h sufcien ly simple o atrac broad provider par icipa ion and can be readily adminis ered by he Cen ers orMedicare and Medicaid Services, or CMS.




Speci c design choices will be discussed below. Bu he general elemen s ares raigh orward. For providers, he key is clear condi ions or par icipa ion andclear s andards or per ormance—wi h opera ional de ails ( or example, he na ureo paymen alloca ion, as discussed below) le in large par o he discre ion o par icipa ing providers. For CMS, he key is employmen o paymen and moni or-

ing mechanisms ha build on CMS’s exis ing capaci y and me hods. For ins ance, building on curren paymen me hods can no only acili a e managemen o hepilo , bu simpli y i s broader adop ion in he u ure i i proves success ul.

A ocus on acili a ing adop ion also calls or ex ensive, ra her han igh ly con-s rained, par icipa ion in he pilo . For accoun able care organiza ions, he

A ordable Care Ac opens par icipa ion o all providers who wan o par icipa eand sa is y par icipa ion cri eria. Al hough accoun able care organiza ions areechnically a program, ra her han a pilo , he new Cen er or Medicare and

Medicaid Innova ion wi hin CMS should adop a similar approach or he bun-

dling and o her pilo s. In so doing, CMS could drama ically speed up he innova-ion process—simul aneously learning abou and promo ing widespread change.

Unlike he accoun able care organiza ion program, a na ional pilo or bundledepisodes o care would be ime-limi ed—wi h con inua ion or modi ca ionrequiring an explici decision by he secre ary o Heal h and Human Services, based on he secre ary’s assessmen o i s impac on cos s and quali y o care. Al hough hese “pilo ” charac eris ics crea e more uncer ain y or providers hanhaving ormal “program” rules, hey o er providers as well as policymakers heoppor uni y o modi y policy based on experience—a signi can advan age inpromo ing no only rapid bu e ec ive change.

Te po en ial or broad adop ion o bundling can be ur her enhanced i priva einsurers join Medicare in exploring he bundled approach. Al hough many priva einsurers do no curren ly use Medicare’s so-called diagnosis-rela ed group, orDRG approach o hospi al paymen , in roduc ion o a new and broader paymen bundling in Medicare may provide an oppor uni y o align public and priva epaymen me hods and he incen ives providers ace. Priva e payer par icipa ionin a bundling ini ia ive (paying in he same way as Medicare or similarly de ned

se s o services, hough no a he same ra e) will give heal h care providers moreincen ives o change heir pricing behavior, ex end ha behavioral change o alarger share o he heal h care sys em, and signi can ly increase he impac o hispaymen innova ion on he efciency and quali y o care.




How should bundled services be paid for?

A number o undamen al decisions need o be made in developing he speci cdesign or bundled paymen .26 For he pilo , i will be crucial o be mind ul o prac ical considera ions—including he need o atrac heal h care providers

o par icipa e, he readiness o providers o respond o he new oppor uni y ochange prac ice paterns, and he ypes o da a i will be easible o ob ain. Tepilo can begin wi h a design ha is easible o implemen now bu ha can, overime, be enhanced o achieve broader resul s.

For ins ance, over ime, he paymen design can be expanded and re ned oencompass a larger array o medical condi ions, incorpora e more quali y andou come measures as hey become available, and achieve grea er cos savings asproviders learn how o increase efciency in he program o assure adequacy.

Offer both single bundled payments and an alternative design

In a basic bundled paymen design—which we re er o as single bundled pay-men —Medicare would make a single paymen or each episode o care. A provider en i y, such as a hospi al, a physician-hospi al organiza ion, a physiciangroup, or ano her ype o provider organiza ion, would receive he paymen and be responsible or organizing he range o services included in he episode anddividing he paymen among he various providers and suppliers. Te en i y receiving he paymen , or example, could work ou con rac ual arrangemen sgoverning how providers would work oge her and how paymen and nancialrisk would be shared.

For bundled episode paymen , Medicare needs a me hod o de ning an episode—ha is, an episode “grouper” ha iden i es which services in he ime period arerela ed o he hospi al episode and which are unrela ed.27 Medicare also needso de ermine an appropria e level o o al paymen or an episode. Te paymenamoun would vary based on he condi ion being rea ed and be adjus ed or addi-ional heal h condi ions o he pa ien ha a ec care needs or he episode— ha

is, adjus ed or he pa ien ’s severi y and complexi y.

Paymen s could also be adjus ed or o her ac ors a ec ing he cos o providingservices, such as inpu cos s in he geographic area, like hey are in he currenprospec ive paymen sys em or hospi als. Similar o Medicare’s curren hospi al




episodes, or example, could consis o all covered episodes o pa ien s rea ed aa par icipa ing hospi al during a year. I o al spending or all services in hese epi-sodes (hospi al, physician, and pos -acu e services) is below he benchmark, heneach o he providers involved in he episodes would receive a nancial reward.

Similarly, i o al spending exceeded he benchmark, hen providers’ paymen s would be reduced. Ini ially, as MedPAC sugges s, he nancial penal ies andrewards could apply o each par icipa ing hospi al and he physicians providingservices in he hospi al’s covered episodes (and no o her ypes o providers)—al hough o al spending or all service ypes in he episode would be used ode ermine he penal y or reward.30 Te nancial rewards, or penal ies, could beapplied o he hospi al and physicians in propor ion o each provider ype’s shareo “baseline” spending ( ha is, based on his oric spending or hospi al and physi-cian services or he same ypes o episodes). As experience wi h his ype o pay-men approach grows, however, o her providers involved in he covered episodes

should also be subjec o nancial rewards and penal ies.

In setting prices for the pilot, start with current amounts

How ini ial paymen ra es are se will have a signi can impac on providers’ willingness o par icipa e in he pilo . o promo e par icipa ion, he pilo can usecurren paterns o care o se i s ini ial ra es and benchmarks, and hen use hepo en ial savings o atrac providers o par icipa e.31 Tis would enable providerso inves resources in making changes o improve care coordina ion.

Te ra es in he rs year would here ore no be in ended o achieve aggrega esavings. o achieve he broader goal o savings over ime, paymen increases would be cons rained o reduce spending over ime compared wi h whaMedicare would o herwise pay. By limi ing risk and o ering rewards up ron ,his approach will help overcome providers’ reluc ance o inves s a ime ando her resources in es ablishing a program and developing necessary con rac sand arrangemen s. And by cons raining ra e increases in subsequen years ( orexample, by holding ra es a heir ini ial levels or he hree years o pilo or by

holding annual increases below he average increase in Medicare’s paymen ra es),he bundled ra es would yield Medicare savings over he li e o he pilo . And i providers achieve cos reduc ions, he Medicare program can reap larger savingsdown he road— or example, by cons raining episode ra es ur her over imeand by implemen ing bundled paymen s program-wide.




For he pilo , paymen ra es could be calcu-la ed ha are hospi al-speci c, bu also draw on regional in orma ion or pos -acu e services.

A base bundled paymen or an episode could be compu ed or each hospi al and episode

ype using acili y-speci c da a or he spe-ci c hospi al and i s aflia ed physicians plusregional da a or pos -acu e providers (becausehospi als may re er o numerous pos -acu eproviders). Tis approach has he advan ageo crea ing an incen ive or each par icipa inghospi al (or o her en i y receiving bundledpaymen ) o change heir behavior rela ive ohis orical paterns o reduce cos s.

Using DRG paymen s or hospi al servicesas he core in de ermining paymen makessense because hospi al services are he largescomponen o spending or hospi al episodes.In an analysis o average Medicare spendingor episodes around hospi al s ays ha include

30 days a er discharge, MedPAC ound hos-pi al services accoun ed or more han hal o episode spending or hree selec ed, rela ively prevalen , condi ions (see Figure 1).

Using paymen ra es se by Medicare in he pilo program has impor an advan-ages over compe i ive bidding or nego ia ed price approaches, bo h o which have

been used in Medicare demons ra ions and sugges ed or priva e and public bun-dled paymen ini ia ives. In hese wo approaches, each provider organiza ion in er-es ed in par icipa ing would propose bundled paymen amoun s or he covereddiagnoses ha Medicare could accep or rejec ( he compe i ive bidding approach),or use in nego ia ing wi h he provider o reach agreemen on ra es ( he nego ia edprice approach). Te problem wi h hese approaches, however, is ha compe i ive

bidding and nego ia ion work bes in si ua ions where providers use price ei hero compe e in a selec ion process (such as or a demons ra ion) or o compe e inatrac ing pa ien s. Nei her o hese si ua ions applies in he pilo program.

Figure 1

Most spending in episodes is for hospital services

Distribution o Medicare spending or hospital episodes by to service, selected conditions

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Chronicobstructivepulmonary

disease

56% 52%

76%

7%7%

20%21%

10%

6%

5% 3%5%

15%13%

4%Congestive

heart failureCoronary artery

bypass graftwith cardiac

catheterization

Hospital

Physician

Hospital read

Post-acute ca

Other

Notes: Based on average risk-adjusted Medicare expenditures during and 30 days following a hosptial st2001-2003. “Readmission” includes hospital and physician spending during a hospital readmission. “Othoutpatient services and physician services outside the hospital.Source: Medicare Payment Advisory Commission, “Report to the Congress: Reforming the Delivery Sys2008), available at http://www.medpac.gov/documents/Jun08_EntireReport.pdf.




Al hough bidding can work well in Medicare when providers are compe ing o be selec ed o par icipa e in a demons ra ion, i is no as well sui ed o si ua ions where he goal is po en ial widespread par icipa ion, such as in he bundling pilo . A bidding approach relies on selec ing “winning” bidders, and rejec ing o hers, oachieve cos -savings.

In con ras , a paymen -ra e approach would enable Medicare o allow widespreadpar icipa ion and achieve savings over ime by cons raining ra es. Bidding or nego-ia ed prices can also work well when hey provide a nancial incen ive—such ashrough di eren cos -sharing amoun s— or clien s o choose among di erenproviders. Tis approach has he po en ial o be an e ec ive s ra egy in priva einsurance si ua ions. Bu i is difcul o apply hese ypes o nancial incen iveso Medicare bene ciaries, as discussed in more de ail below.

Ra es based on his orical hospi al-speci c cos s have advan ages rela ive o wo

o her po en ial approaches o bundled ra es—speci cally, ra es or benchmarks based on na ional or regional averages among hospi als, and ra es based onevidence-in ormed pro ocols. Use o na ional or regional averages would makehe pilo especially atrac ive o providers who already have cos s below he aver-age; hese providers would be rewarded under he pilo even wi hou reducingcos s (and indeed, his approach could draw par icipan s who were unprepared omake he inves men s in care coordina ion and o her desired changes in deliv-ery). Selec ed par icipa ion o his ype could lead o bo h an overall increase inMedicare cos s (because providers previously below average would now ge aver-age paymen s) and yield less change in service han he hospi al-speci c paymendesign sugges ed here.

Basing ra es on evidence-based, ra her han his orical, cos s clearly has heore icalappeal. Te explora ion o evidence-in ormed case ra es in he PROME HEUSPaymen model, which is curren ly being es ed by several heal h plan-providerpar nerships, will provide valuable guidance o u ure paymen developmen . Ascurren ly implemen ed, PROME HEUS ra es are a blend o es ima ed cos s based on evidence-in ormed pro ocols and his orical cos s re ec ing ac ualexperience. Te PROME HEUS par nerships have he exibili y o ailor heir

approach o he speci c circums ances o par icipa ing providers.

Bu ha ailoring would be difcul o replica e on a na ional scale. And wi hou i ,paymen ra es ied o speci c pro ocols would place oo much weigh on he judg-men s o a panel o exper s and likely be oo rigid o allow providers enough dis-




cre ion o deliver appropria e care o individual pa ien s. In addi ion, basing ra eson a broadly-applied s andard, ra her han a hospi al-speci c one, would raise hesame challenges as no ed above or na ional or regional averages—namely haproviders wi h cos s ha were already below he ra e would be atrac ed o hepilo and rewarded even i heir behavior is unchanged.

Fur her, keeping evidence-based case ra es up- o-da e would pose an enormousadminis ra ive challenge given he rapidi y o change in medical prac ice and ech-nology. And he broader he applica ion o bundles across condi ions, he grea erhe burden—impeding ra her han acili a ing na ional applica ion. Al houghexperimen a ion wi h evidence-based bundled paymen should con inue, anaggressive na ional pilo would do well o s ar wi h some hing simpler.

Include financial incentives to promote quality

A goal o bundling is o improve efciency and appropria e services while reduc-ing unnecessary services. Bu a concern is ha bundling’s incen ives may alsoencourage providers o avoid rea ing he sickes pa ien s or o ail o providecos ly bu bene cial services o he pa ien s hey rea . Adjus ing paymen s ore ec pa ien s’ condi ions and complexi ies addresses reluc ance o rea pa ien s wi h he grea es needs. Addi ional measures are needed o assure quali y care.

Follow-up services a er a hospi al s ay, including medical and pos -acu e services,require par icular aten ion because he curren inadequacy and lack o coordina-ion in hese services con ribu es o preven able complica ions and re-admissions.By ex ending he hospi al “episode” beyond hospi al discharge, he pilo aims oaddress his problem—crea ing a nancial incen ive or providers o pay aten iono he care an individual receives a er leaving he hospi al.

Bu some services— or example, physical herapy a er surgery—migh con rib-u e grea ly o a pa ien ’s recovery and abili y o resume regular ac ivi ies, bu may no make much o a di erence in he risk o cos ly pos -hospi al complica ions.

An impor an concern, hen, is ha he provider organiza ion responsible or

receiving he bundled paymen migh provide only wha i considers he mini-mum pos -acu e care necessary o avoid a cos ly readmission, and ail o provideaddi ional services ha would be bene cial o a pa ien .




Concern ha aligning provider incen ives o reduce care migh harm bene cia-ries was re ec ed in he Depar men o Heal h and Human Services Ofce o heInspec or General’s judgmen ha ermina ed experimen s wi h “gainsharing”arrangemen s be ween hospi als and physicians in 1999. Te Ofce o he Inspec orGeneral concluded ha any arrangemen in which a hospi al makes a paymen ,

direc ly or indirec ly, o induce a physician o reduce or limi services o Medicare orMedicaid pa ien s is in viola ion o he Social Securi y Ac .32 Policy perspec ives andprescrip ions have changed, however. An explici objec ive o he A ordable Care

Ac is o reduce unnecessary services in ways ha ac ually improve quali y o care.

o assure ha bundled paymen promo es, ra her han undermines, good quali y care, paymen s should be ied o quali y per ormance. Bundled paymen s could be made con ingen on mee ing speci ed per ormance hresholds—includingou come measures—speci c o pa ien s’ diagnoses. Tis is he approach he

A ordable Care Ac requires or accoun able care organiza ions.

Fur her, quali y improvemen would be encouraged by requiring public repor ingo ou come and o her quali y measures. o promo e pa ien awareness and ins illquali y-based compe i ion, ha repor ing mus be imely, easily ob ainable, andunders andable o bene ciaries.

How will the pilot engage and protect Medicare beneficiaries?

Te pilo program is driven by he goal o promo ing changes in he way care isdelivered o yield improvemen s in he con inui y and quali y o care ha pa ien sexperience, alongside savings rom reducing avoidable complica ions and unnec-essary services. Pa ien s’ sa is ac ion wi h care received under he pilo is cen ralo i s success and po en ial or expansion.

An impor an design ques ion or he pilo , hen, is wha in orma ion and choicespa ien s will have. Provider par icipa ion in he pilo program is volun ary, bu deci-sions are needed as o he in orma ion and choices ha pa ien s have in he program.

I makes sense ha bene ciaries o bundled episodes o care would au oma i-cally be covered by he pilo i heir primary physician or he in erven ion (say,he surgeon) or hospi al is a pilo par icipan . Bu pa ien s should be in ormedo he hospi al’s and physician’s par icipa ion and i s implica ions, early enough (excep in emergencies) o allow considera ion o swi ching provid-




ers. In orma ion ha pa ien s receive should include speci cs on appropria eservices or heir condi ion and on providers’ obliga ions o assure quali y care,no only during he hospi al s ay bu hrough he en ire episode. In orma ionshould be supplemen ed wi h he availabili y o pa ien advocacy suppor .

A bene ciary’s decision o receive bundled services, however, should no limi allpa ien choices o providers par icipa ing in he pilo . Beyond he hospi al andprimary physician, bene ciaries should re ain he abili y o selec nonpar icipa -ing providers wi hou nancial penal y. I a pa ien receiving a bundled episode o care wan s services rom a pos -acu e provider or a consul a ion rom a physicianha is no aflia ed wi h he hospi al or he bundling pilo , hen he bene ciary

would be able o ob ain hose services as covered under heir regular Medicare bene s. Te cos s o hese services would be atribu ed o he organiza ionreceiving he bundled paymen when measuring nancial per ormance.

Some exper s propose encouraging pa ien par icipa ion in new paymenmechanisms by enabling pa ien s, along wi h providers, o bene nancially rom savings achieved.33 Al hough nancial incen ives may make sense in somecircums ances, heir use is problema ic or Medicare hospi al episodes. Onereason is ha because Medicare enrollees’ supplemen al coverage (Medigap orMedicaid) covers cos -sharing, i is difcul or impossible o reduce cos sharingas an incen ive o par icipa e.

Medicare’s Acu e Care Episode demons ra ion (see box on page 7) uses an al er-na ive approach o o er a nancial incen ive, paying bene ciaries a share o hesavings providers achieve. Early evidence rom one o he par icipa ing si es, how-ever, sugges s ha his nancial incen ive has had litle e ec on pa ien choices.34 Fur her, because nancial rewards associa ed wi h hospi al episodes have heperverse e ec o providing pa ien s wi h nancial gain rom seeking hospi al care,in orma ion and educa ion seem pre erable as s ra egies o engage bene ciaries inhe new paymen arrangemen .




Conclusion

Te Na ional Pilo Program on Paymen Bundling is one o several ini ia ivesin he A ordable Care Ac aimed a improving heal h care quali y and slowinggrow h in heal h care cos s. Pursuing hese ini ia ives aggressively and, ul ima ely success ully, is no only cri ical o sus aining coverage suppor ed by he new law, iis also essen ial o sus aining Medicare’s commi men s and assuring an a ordableheal h care sys em or he u ure.

Success will require aking ull advan age o every possible ool o shi paymenrom a paymen sys em ha promo es volume o services, wi hou regard oheir bene s, o a sys em ha rewards high quali y care, efcien ly delivered.Hospi al-episode bundling, e ec ively designed, is one such ool. Bundling pay-men around a hospi al s ay has he po en ial o give providers he exibili y andincen ive o work oge her o beter coordina e care and reduce avoidable compli-ca ions and unnecessary cos s.

Achieving ha resul on a na ional scale requires a pilo design ha is simple andatrac ive o a broad range o providers, arge s he mos sui able diagnoses, pro- vides paymen incen ives ha bo h lower cos grow h and improve quali y, andassures pa ien pro ec ion and choice. Te bundling design o ered in his papercan hereby advance urgen ly needed, success ul paymen and delivery re orm.




Endnotes

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4 B n n and r , “Us A a p y an pay n ” c ylL. Da b g and , “ex l ng e d -Ba d A a m d a p an m a u n , A un ab l y and pay n ,”(Wa ng n: Us D a n h al and hu an s v , 2009),ava labl a ://a . .g v/ al / /09/ /

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About the authors

Judy Feder is a Senior Fellow a he Cen er or American Progress and a pro essoro public policy a he George own Public Policy Ins i u e, where rom 1999 o2008 she served as dean o he ins i u e.

Paul B. Ginsburg is presiden o he Cen er or S udying Heal h Sys em Change, which he ounded in 1995.

Harriet L. Komisar is a research pro essor in he Heal h Policy Ins i u e wi hin heGeorge own Public Policy Ins i u e a George own Universi y.

Acknowledgements

In iden i ying issues and developing recommenda ions or his repor , we ben-e ed grea ly rom he inpu o a number o exper s in he eld, in par icularBob Berenson, David Cu ler, and Harold Miller. We are also gra e ul o NicoleCa arella and Elizabe h Wikler or superb research suppor . While we areindeb ed o hese colleagues or heir many con ribu ions, he views presen edhere are hose o he au hors. Te prepara ion o his brie was suppor ed by agran rom he Pe er G. Pe erson Founda ion. Paul Ginsburg’s par icipa ion as aco-au hor was suppor ed by he Rober Wood Johnson Founda ion.

“Bundling” Payment for Episodes of Hospital Care

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