2 Major Lessons From CMS' Bundled Payment ACE Demonstration

By now, most hospital executives are familiar with bundled payments but may not know just how successful they are or could be. The highly discussed "global" payments, which are part of healthcare reform, are changing the way healthcare is delivered — and reimbursed.

Currently, CMS is taking applications for the Bundled Payments for Care Improvement initiative. BPCI aims to reimburse healthcare providers a lump sum (the bundled payment) on the expected costs for a specific diagnosis-related group with the expectation that high-quality care will still be delivered. Participant hospitals in these models would be paid for their services under the original Medicare fee-for-service system but at a negotiated discount. Then, total payments would be compared with the target price at the end of the patient's episode of care, and those providers would share any of those savings with Medicare.

However, a different bundled payment program commissioned by CMS is more than three years deep. The Acute Care Episode demonstration has given five specific providers an early glimpse of the impacts of bundled payments.

Background of the ACE demonstration

The ACE demonstration started in 2009. CMS wanted to test the use of a bundled payment for an episode of care as an alternative approach to FFS. The bundled payment covered all Part A and Part B services, including physician services, related to the inpatient stay for Medicare FFS beneficiaries, and the episodes of care were specifically limited to cardiovascular and/or orthopedic procedures.

ACE demonstration sites were also given the option to reward individual clinicians, teams of clinicians or other hospital staff who succeed with measurable clinical quality and efficiency improvements. CMS chose five qualified hospitals and health systems to participate in this demonstration: Baptist Health System in San Antonio; Oklahoma Heart Hospital in Oklahoma City; Exempla Saint Joseph Hospital in Denver; Hillcrest Medical Center in Tulsa, Okla.; and Lovelace Health System in Albuquerque, N.M.

Baptist, Oklahoma Heart Hospital and Exempla Saint Joseph are finalizing figures, as most of the projects are still running through most of this year. Hillcrest and Lovelace, which are both part of Nashville, Tenn.-based Ardent Health Services, reported some early returns of the initial CMS-based bundled payment pilot, and several areas looked auspicious.

Then and now: Hillcrest Medical Center and Lovelace Health System

Steve Landgarten, MD, CMO and chief quality officer of Ardent, and Shannon Fiser, vice president of financial operations at Ardent, have played pivotal roles in both securing spots for Hillcrest and Lovelace within the ACE demonstration and monitoring the financial and clinical outcomes of the bundled payments. Hillcrest and Lovelace were "value-based care centers" for both orthopedic and cardiovascular procedures.

Over the first two years, Hillcrest alone has saved $1.59 million on cardiac and orthopedic services from the adjusted payments. To put that in perspective, CMS is paying Hillcrest $450 less than it normally would for a knee replacement because the hospital is offering a discount. At the same time, the pilot project showed that key quality measurements remained strong, and some — such as readmission rates, use of prophylactic antibiotics and length of stay — improved.

Mr. Fiser says in total, between the two Ardent systems, they have averaged 7 percent savings on orthopedics implants. That equates to about $300,000 per year, and over the life of the demonstration, the savings have totaled nearly $1 million on orthopedic implants. Similar savings were achieved on the cardiology implant side. "For this particular project, the primary savings are around implants and supplies," Mr. Fiser says. "A lot of surgical supplies have been negotiated down."

For Dr. Landgarten and Mr. Fiser, the ACE demonstration has been a major success, and they attribute the success to two broad lessons learned in the process.

Lesson #1: Bundled payments create a tighter connection to physicians in terms of managing service lines and the economics around those service lines.


Dr. Landgarten says physician involvement in the bundled payment project has achieved one of the most desired and sought-after strategies in hospital management today: the alignment of hospitals and physicians. "Probably the most significant area of [success] was physician involvement," he says. "We negotiated with vendors and standardized devices. [Physicians] have a vested interest in the financial and clinical outcome, and it was that leverage that helped achieve supply costs savings."

Hospital executives and physicians at Hillcrest and Lovelace have also been able to improve relations and communication with their vendors, who play a huge role in implant-heavy service lines like orthopedics and cardiovascular. "We still have a very open policy as far as [any implant vendor] is allowed to submit proposals and pricing quotes for these implants," Mr. Fiser says. "Physicians ultimately choose which devices we use, but it's not only price consideration, as there have been many cases where we haven't chosen the lowest-cost device."

However, when physicians see the costs and ramifications of the entire episode of care, they are more likely to be more economical and efficient in their choice of implants, testing and other areas of clinical decision making. What ties everything together, Dr. Landgarten says, is the fact that physicians and hospitals are still held to quality standards.

Lesson #2: Bundled payments are an educational exercise to learn what types of system changes should be made and what quality metrics need to be monitored.


One of the biggest concerns from patient advocates and other healthcare watchdog groups regarding bundled payments has been that providing a fixed Medicare payment for hospitals and physicians may lead to the rationing of care. If hospitals and physicians receive a fixed payment, will they forego certain treatments — at the expense of patients — to reach greater gainsharing? Dr. Landgarten acknowledged from the outside, this could look problematic, but he says that turns out to be a non-issue because physicians will actually be improving their quality and treatments as high-cost medical errors and clinical variation decreases.

"The single most important question that CMS asked was, 'Can you reduce costs while maintaining quality, or are you providing perverse incentives to withhold services from Medicare patients?'" Dr. Landgarten said. "If you think about it logically, some of the high costs are due to medical errors. But by standardizing processes, you reduce variability in outcomes and improve quality."

To that end, Dr. Landgarten says Hillcrest and Lovelace have maintained their level of treatment and quality measures for Medicare patients in the orthopedic and cardiovascular areas, and it has increased their focus on core quality metrics such as readmissions. Dr. Landgarten adds that physician participants were required to meet the threshold for the quality metrics before they could qualify for the financial incentives, and the health systems have reinforced the creed of former CMS Administrator Don Berwick, MD, along the way: "providing the right care for every person at the right time."

"This is not a matter of reducing resources but rather of standardization," Dr. Landgarten says. "It is reducing the unit of cost for resources that we were using anyway. Our outcomes in year three are every bit as good as year one. But this is a very good question, and that's the test question. CMS ought to be asking, 'Can you maintain quality while reducing costs?'"

Future lessons

Mr. Fiser says Hillcrest and Lovelace will always have the lessons learned from the ACE demonstration, which could benefit the systems if and/or when bundled payments become the norm and can especially be applied to those participating in the BPCI.

However, Dr. Landgarten is uncertain how bundled payments will work for complex medical cases where there is a lot of variation from patient to patient, such as diabetes, congestive heart failure and other chronic conditions. "That would require a much larger population management base to receive the same level of savings," Dr. Landgarten says. "Preventing hospitalizations are where most of the savings from Medicare will emerge."

The BPCI program is set to launch in 2013 to give even more hospitals and providers an opportunity to experience the benefits of bundled payments in hand-selected DRGs, and for the right service lines, both Mr. Fiser and Dr. Landgarten see a wealth of opportunity both financially and clinically. Hospitals and physicians will have to improve communication, rely on cost and clinical data and ensure that all incentives are in line to reach true ethical and business success. "From a medical standpoint, our physicians have been very pleased as to what they perceive to be the cutting edge of evaluating outcomes," Dr. Landgarten says. "It's been a very fortunate opportunity for us, and we think it's worked well. It's rare to see programs in which everyone wins: patients, physicians, facilities and CMS. It just doesn't get any better than that."

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