A Quick Lesson on Bundled Payments

By: John Nelson, MD, MHM

The Centers for Medicare & Medicaid Services (CMS) has too many new payment models for a practicing doctor to keep up with them all. But there are three that I think are most important for hospitalists to know something about: hospital value-based purchasing, MACRA-related models, and bundled payments. Here, I’ll focus on the latter, which unlike the first two, influences payment to both hospitals and physicians (as well as other providers).

Bundles for Different Diagnoses

Bundled payment programs are the most visible of CMS’s episode payment models (EPMs). There are currently voluntary bundle models (called Bundled Payments for Care Improvement, or BPCI) across many different diagnoses. And in some locales, there is a mandatory bundle program for hip and knee replacements that began in March 2016 (called Comprehensive Care for Joint Replacement, or CCJR or just CJR).

These programs are set to expand significantly in the next few years. The Surgical Hip and Femur Fracture Treatment (SHFFT) becomes active in 2017 in some locales. It will essentially add hip and femur fractures requiring surgery to the existing CJR program. New bundles for acute myocardial infarction, either managed medically or with percutaneous coronary intervention (PCI), and coronary bypass surgery will become mandatory in some parts of the country beginning July 2017.

How the Programs Work

CMS totals all Medicare dollars paid per patient historically for the relevant bundle. This includes payments to the hospital (e.g., the DRG payment) and all fees paid to physicians, therapists, visiting nurses, skilled nursing facilities, etc., from the time of hospital admission through 90 days afterdischarge. It then sets a target spend (or price) for that diagnosis that is about 3% below the historical average. Because it is based on the past track record of a hospital and its market (or region), the price will vary from place to place.

If, going forward, the Medicare spend for each patient is below the target, CMS pays that amount to the hospital. But if the spend is above the target, the hospital pays some or all of that amount to CMS. Presumably, hospitals will have negotiated with others, such as physicians, how such an “upside” or penalty payment will be divided between them.

It’s worth noting that all parties continue to bill, and are paid by Medicare, via the same fee-for-service arrangements currently in place. It is only at the time of a “true up” that an upside is paid or penalty assessed. And hospitals are eligible for upside payments only if they perform above a threshold on a fewquality and patient satisfaction metrics.

The details of these programs are incredibly complicated, and I’m intentionally providing a very simple description of them here. I think that nearly all practicing clinicians should not try to learn and keep up with all of the precise details. They change often! Instead, it’s best to focus on the big picture only and rely on others at the hospital to keep track of the details.

Ways to Lower the Spend

These programs are intended to provide a significant financial incentive to find lower-cost ways to care for patients while still ensuring good care. Any successful effort to lower the cost should start by analyzing just what Medicare spends on each element of care over the more than 90 days each patient is in the bundle. For example, for hip and knee replacement patients, nearly half of the spend goes toward post-hospital services such as a skilled nursing facility and home nursing visits. So the best opportunity to reduce the spend may be to reduce utilization of these services where appropriate.

For patients in the bundles for coronary artery bypass grafting and acute myocardial infarction treated with PCI, only about 10% of the total spend goes to post-hospital services. For these, it might be more effective to focus cost reductions on other things.

Each organization will need to make its own decisions regarding where to focus cost-reduction efforts across the bundle. For many of us, that will mean moving away from a focus on traditional hospitalist-related cost-containment efforts like length of stay or pharmacy costs and instead looking at the bigger picture, including use of post-hospital services.

Some Things to Watch

I expect there will be a number of side effects of these payment models that hospitalists will care about. Doctors in different specialties, for example, might change their minds about whether they want to serve as attending physicians for “bundle patients.” One scenario is that if orthopedists have an opportunity to realize a significant financial upside, they may prefer to serve as attendings for hip fracture patients rather than leaving to hospitalists financially important decisions such as whether patients are discharged to a skilled nursing facility or home. We’ll just have to see how that plays out and be prepared to advocate for our position if different from other specialties.

Successful performance in bundles requires effective coordination of care across settings, and I’m hopeful this will benefit patients. Hospitals and skilled nursing facilities, for example, will need to work together more effectively to curb unnecessary days in the facilities and to reduce readmissions. Many hospitals have already begun developing a preferred network of skilled nursing facilities for referrals that is based on demonstrating good care and low returns to the hospital. Your hospital has probably already started doing this work even if you haven’t heard about it yet.

For me, one of the most concerning outcomes of bundles is the negotiations between providers regarding how an upside or penalty is to be shared among them. I suspect this won’t be contentious initially, but as the dollars at stake grow, it could lead to increasingly stressful negotiations and relationships.

And, lastly, like any payment model, bundles are “gameable,” especially bundles for medical diagnoses such as congestive heart failure or pneumonia, which can be gamed by lowering the threshold for admitting less-sick patients to inpatient status. The spend for these patients, who are less likely to require expensive post-hospital services or be readmitted, will lower the average spend in the bundle, increasing the chance of an upside payment for the providers.

Editor’s Note: This piece originally appeared in the November 2016 issue of The Hospitalist

John Nelson, MD, MHM has been a practicing hospitalist since 1988. He is co-founder and past president of SHM, and principal in Nelson Flores Hospital Medicine Consultants. He is co-director for SHM’s “Best Practices in Managing a Hospital Medicine Program” course. Write to him at [email protected]

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