3 Best Practices for Bundled Pricing From CMS' ACE Demonstration Project Participants

Healthcare reform has created an impetus for hospitals and other healthcare providers to work together to provide more efficient, higher quality care. These efforts are likely to take many forms, and the use of bundled payments specifically for acute-care episodes is almost certain to be among them as it is already being piloted by the Centers for Medicare & Medicaid Services. Bundled payments provide global payments rather than fee-for-service payments, typically for a certain episode of care, and most bundled payment programs allow for gainsharing among providers of any savings created.  

CMS' current ACE demonstration project
In January 2009, CMS announced that five sites in Texas, Colorado, Oklahoma and New Mexico would take part in a three-year Acute Care Episode demonstration project on the use of bundled payments for certain cardiovascular and orthopedic procedures. Under the demonstration, CMS will pay the hospitals a lump sum for all Part A and Part B services, including physician services, pertaining to the inpatient stay for Medicare fee-for-service beneficiaries. The hospital, then, is responsible for compensating the physicians and any other providers for their services.

The pilot intends to help CMS bend the cost curve by targeting some of the highest cost procedures and giving providers financial incentives to become more efficient, says Robert Minkin, a senior vice president with healthcare consulting firm The Camden Group, and formerly CEO of Exempla Saint Joseph Hospital in Denver when it was selected to participate in the ACE project.

PPACA's five-year pilot
The Patient Protection and Affordable Care Act created a five-year Medicare pilot to test bundled payments for a wider array of services than the current pilot. This demonstration will cover acute-care and post-acute care services, including such services as rehab and physician office visits, for certain medical episodes and is scheduled to begin in Jan. 2013. As with the current pilot, providers must bid to participate, offering Medicare a certain percentage discount off of fee-for-service pricing. As such, hospitals that bid for the demonstration project must be cautious in evaluating the financial risk such relationships create.

Bundled payments with insurers
While CMS isn't expected to roll out bundled pricing more widely until at least after 2018 — and that's assuming the pilots are successful — many hospitals across the country are already entering into bundled payment agreements with commercial insurers. As hospitals enter into these relationships, they should consider the following three issues in order to ensure the rewards of such an arrangement outweigh the risks.

1. Move toward integrated delivery. Many of the savings created in the current ACE demonstration project come from improving efficiency and standardizing care, but hospitals taking part in the second pilot will need to oversee care coordination among several outpatient providers in order to be successful.  

Shannon Fiser, vice president of financial operations for Ardent Health Services, which has two systems in the current ACE pilot — Hillcrest Medical Center in Tulsa, Okla., and Lovelace Health System in Albuquerque, N.M. — says Hillcrest achieved cost reductions primarily by working with physicians to standardize devices and reduce surgical supply costs. The ACE project allows Hillcrest to share the savings with the physicians, thereby incenting them to continue working with the hospital to further reduce costs.

However, process improvement within hospitals can only go so far. Eventually the processes will reach a breaking point of efficiency where no more costs can be derived. After this, the only savings that can be created will come from better coordinating care across multiple providers and sites — an issue the second demonstration project addresses. In order to be successful in coordinating care, hospitals will need to develop or join systems that allow for the integrated delivery of care.

"Hospitals have detailed data on their costs and can often confidently provide a technical fee discount to payor," says Mr. Fiser. However, many hospitals don't know the costs for outpatient components of care. Unless a hospital is a part of an integrated system, it may have difficulty comparing the true costs of physician and other outpatient services against standard reimbursements, thereby making it very challenging to offer a bid that includes an appropriate level of risk. Hospitals that are part of integrated systems have a deeper knowledge of non-hospital-based costs and greater opportunity to create savings through coordinating care. 

Integrating care also moves hospitals toward being an accountable care organization, for which the PPACA also created a Medicare pilot. Mr. Minkin calls ACOs "the end state for what national health reform anticipated." He adds, "ACOs move these relationships from smaller scale ideas like bundling payment for a single cardiac or orthopedic episode to an arrangement that holds providers accountable for managing the care of an entire population." ACOs are expected to take different permutations, but essentially build on the idea that care must be more tightly coordinated. Providers that position themselves in away that allow them to coordinate care, will be most poised for success under this model as well.

2. Actively take on the role of a payor. Most healthcare providers are not currently set up to take on the role of a payor, both in terms of human and healthcare information technology resources, says Mr. Minkin. In order to be successful under a bundled payment system, hospital must be able to assess risk, set appropriate prices given those risks and pay out claims to the various providers offering their services as part of the bundled payment.

"Becoming a claims administrator is the biggest operational issue to address," says Mr. Fiser. Hillcrest contracted with a third-party software provider to develop a program that allows the hospital to handle claims and communicate claims information to physicians. "Because of the small number of claims that fall under the bundled contract we have been able to do it ourselves, but if it became a broader concept, we would have to look at a higher-end contract [with a third-party]," he says.  

Hillcrest's claims process works like this: Hillcrest submits the technical portion of a claim to its fiscal intermediary, and the physician does the same for the professional fee. Hillcrest's software is then able to "grab" the physician's claim from the fiscal intermediary and calculate the payment rate to the physician, says Mr. Fiser. Because of its unique claims process, Mr. Fiser says the hospital has experienced a greater slow down in receivables payments than anticipated, which other hospitals should take note of.  

3. Ensure physicians' and other providers' incentives align with desired outcomes. Finally, in order to ensure physicians — who drive the majority of health costs — are actively engaged in taking costs out of healthcare delivery, hospitals must align financial incentives for physicians with the desired outcomes of the bundled arrangement. Often, this means physicians are rewarded for following specific protocol for providing care. For example, Hillcrest physicians receive a bonus of up to 25 percent of their fee-for-service reimbursement rates if they follow clinical protocol in 98 percent of their cases.  

Mr. Minkin says financial incentives even at the 25 percent mark can be powerful given the increasing downward pressure on Medicare physician fees. Although not as direct as an incentive payment, Exempla Saint Joseph further encourages physician participation by paying claims to physicians within 15 days, while the average length before receiving a Medicare payment is 45 days. "Paying our participating physicians more quickly is another form of incentive to further reinforce that these changes are good for them as well," he says.

Keep in mind, however, that hospitals should be cautious in any financial arrangement with physicians. While the current Medicare ACE pilot provides legal exemptions for incentive payments and it is expected other pilots will do the same, hospitals must still ensure their incentives payment are not based on the volume or value of a physician's referrals.

Looking ahead

While many Medicare and commercial bundled payment programs are just in their infancy, the emphasis healthcare reform places on coordinating care to draw out costs is expected to only increase the prevalence of these and similar arrangements. Hospitals that begin to develop structures and processes to allow for bundled agreements will be better positioned for success in light of reform than those that do not.  

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