7 Points to Know About the Bundled Payment Initiative

At the end of August, the Department of Health and Human Services introduced Bundled Payments for Care Improvement, a new program created by the Patient Protection and Affordable Care Act. Bundled payments reimburse healthcare providers a lump sum on the expected costs for the spectrum of a patient's care, and they aim to improve healthcare for patients while they are in a hospital and after they are discharged. Essentially, HHS and CMS are guiding healthcare toward a payment system based on episodes of care.

Deidre Baggot, MBA, RN, vice president of healthcare consultancy at The Camden Group, explains this initiative has major impacts for hospitals and other providers. "It signals the beginning of the end for physician fee-for-service for the biggest insurer in the country," Ms. Baggot says. "With this initiative, [CMS] expanded the definition of the episode and included post-acute care and readmission risk as part of the episode."

Here, Ms. Baggot gives seven points all healthcare providers should understand regarding the Bundled Payments for Care Improvement program.

1. Hospitals and physicians are incented on quality and collaboration, but success is not guaranteed. Instead of incenting hospitals and physicians based on services with high reimbursement rates, the program incents them to provide everything each patient needs and nothing the patient doesn't. Ms. Baggot says this is one of the biggest benefits of the program: It puts the emphasis on quality of care, and consequently, costs can be reduced as each part. "We all need to relinquish our dependency on fee-for-service, and this is that impetus," Ms. Baggot says. "It's an effective vehicle to bring hospitals and physicians together much more effectively than it has in the past." However, as a pilot program, reduced costs and improved quality are not guaranteed unless care is actually provided at a lower level of cost without compromising quality.

2. It is a highly flexible program.
The program was created to be flexible enough for most healthcare organizations, regardless of where they are at in terms of health IT infrastructure, clinical integration or cultural readiness to take on greater risk, Ms. Baggot says. There are four models: Models 1, 2, 3 and 4.

Model 1 involves only the inpatient stay at acute-care hospitals paid under the inpatient prospective payment system, and all diagnosis-related groups are included. Organizations interested in Model 1 have until Oct. 6, 2011, to submit a nonbinding letter of intent.

Model 2 includes both the inpatient stay as well as post-acute care, and the hospital decides the scope of DRGs to be included.

Model 3 focuses only on post-acute care, beginning when the patient is discharged from the inpatient stay and would end no sooner than 30 days after discharge. Similar to Model 2, the facility chooses the DRGs.

Model 4, like Model 1, focuses only on the inpatient stay. However, like Models 2 and 3, the hospital can propose the scope of DRGs to be included. One of the big differences that sets Model 4 apart from the others will be its prospective payments. All other models will have retrospective payments. Under retrospective payment, hospitals receive the usual fee-for-service payment, but then there is a retrospective comparison with the target price outlined beforehand. If there is a positive difference, hospitals share those dollars with all parties involved, but if there's a negative difference, hospitals must give money back to CMS. Prospective payments are when hospitals agree to a price upfront on a particular DRG, and CMS pays that specific bundled price to the hospital.

3. Model 4 is expected to be the most popular.
Ms. Baggot says most hospitals will pursue Model 4 because it has been the most tested and essentially is an expansion of the Acute Care Episodes bundle payment demonstration projects. Model 4 allows hospitals to begin by taking risk for acute-care services while they ready themselves for taking risk for post-acute care services and hospital readmissions. It also sets the stage to work toward a fixed budget with the prospective payments — something that will become commonplace sooner rather than later.

4. Gain sharing will boost payments to physicians.
In all four models, hospitals can gain-share with physicians up to an additional 50 percent of the Medicare Part B fee schedule. For example, if a physician is reimbursed $500 today for a procedure, the physician could receive as much as $750 for assisting the hospital efforts that cut costs or improve care quality. The 50 percent is a maximum, however.

5. Hospitals will begin to get used to being "pay master." In Model 4, the bundled payment is issued to the hospital, which then pays all physicians involved in the patient's care. For hospitals, it will be a new challenge to be the fiscal intermediary between CMS, physicians and other parties of the episode of care. Hospitals are used to submitting claims, not paying claims, Ms. Baggot says.

6. Proposing the scope of DRGs is new but beneficial. Each hospital will have a lot of say in terms of its scope and approach to bundled payments, such as which DRGs will be included in its bundled payments, Ms. Baggot says. If a hospital only wants to include orthopedics or cardiac care, it can do so — but it better have clinical care protocols in place, as well as meaningful utilization of cost data. Reproducible outcomes in cost and quality ensure that the economics of bundled payments works, Ms. Baggot says.

7. Hospitals assume readmission risks in Models 2, 3 and 4. Hospitals that partake in any of the latter three models are committing themselves to a 30-day readmission risk, which emphasizes the healthcare system's goal of highly coordinated and cost-effective care. For example, a patient comes in for a hip replacement or some other DRG designated by the hospital, and the hospital takes care of that patient. If the patient goes home, has a complication and comes back to the hospital, the hospital is on the hook for that care without any additional reimbursement. "You're responsible for that readmission and are not paid for that readmission," Ms. Baggot says. "CMS is signaling it is expanding the episode, and hospitals and physicians will be responsible to ensure the care they provide is effective beyond the hospital doors."

Related Articles on Bundled Payments:

CMS Extends Deadlines for Model 1 of Bundled Payment Initiative
Opportunities in the New Bundled Payment Initiative
HHS Announces New Bundled Payment Initiative

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