Medicare’s bundled payment proposal: progress on health care payment reform
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Last month, the Centers for Medicare and Medicaid Services (CMS) proposed expanding the use of bundled payments for Medicare beneficiaries who are hospitalized for bypass surgery, heart attack, or hip fracture – some of the most serious and common conditions and procedures among seniors. The proposed reform makes the admitting hospital accountable for overall spending, not just in the hospital but for physician, rehabilitation, nursing facility, and other services for the 90-day “episode” after discharge.

The proposal would set a benchmark for total Medicare Part A and Part B spending for beneficiaries that is one and one half percent below current spending, measured as a combination of the hospital’s own historical spending pattern and spending in the region.  Hospitals that achieve overall spending below that level could keep the difference, provided that their patients receive high-quality care as reflected in a set of performance measures. Hospitals that do not perform as well on the quality measures would not receive as much of any savings. Hospitals whose beneficiaries have average spending above the benchmark would have to pay back the difference. That “downside risk” would be phased in over three years. The payment reform would be mandatory in a region, with exceptions for rural hospitals, and would start in about a third of metropolitan regions in the U.S.

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Evidence from Medicare supporting such episode payment reforms has been accumulating since the 1990s, and is also emerging from payment reforms in the private sector. The proposal builds on the bundled payment reform for joint replacement implemented by CMS earlier this year, and addresses some concerns about that proposal – such as whether orthopedists and other specialists participating in the bundled payment pilot could qualify for an advanced payment model “bonus” under the recent physician payment reform legislation.

This is an important step beyond CMS payment reforms that have been implemented so far. While CMS has highlighted that it already met its 2016 goal of 30 percent of Medicare payments in alternative payment models, those payments are concentrated in “shared savings” models that are only a limited step away from fee-for-service payment for most participating hospitals participating. In contrast, hospitals in these expanded episode payment proposals will face substantial “downside risk” - with both more pressure and more payoff to implement more substantial changes in care than under fee-for-service. This means more investment in steps to improve the continuum of care and preventing readmissions and other complications, through better coordination of care, better discharge planning and use of post-acute services, and other innovative approaches to deliver care more efficiently.

The proposal will be mandatory in the regions where it’s piloted. This enables Medicare to implement the payment reform in a way that more quickly rewards and encourages efficient care. In a voluntary pilot program, Medicare generally has to use a health care organization’s historical cost as a benchmark for improvement:  Medicare actuaries are understandably concerned that health care organizations will choose to participate not just because they think they can do better, but because they might get higher Medicare payments without improving care. In a mandatory program, Medicare can provide bigger and more timely rewards for efficient, high-quality providers, and stronger encouragement for high-cost providers to improve, without increasing costs.  An extensive and timely evaluation plan, particularly focused on vulnerable beneficiaries, will also permit course corrections as needed.

While the CMS proposal is an important step, there’s still a long way to go, both in refining the proposal before implementation and in paying attention to possible unintended consequences. These bundled payment reforms are linked to hospital admissions, but there is substantial evidence that effective non-hospital care can prevent many costly hospitalizations – including for heart attacks and hip fractures – not just avoidable or unnecessary procedures.  Effective payment reforms need to go beyond hospital episodes to support better pre-hospital care and healthcare organizations and collaborations that can take on accountability for the whole span of a patient’s care. 

In particular, CMS should consider further steps to assure that these reforms fit well with advanced payment models for primary care and for accountable care organizations (ACOs) that are also working to create savings from hospital and post-hospital care.  Further steps are especially needed to support new care models led by physician groups rather than by hospitals. For example, physician-led ACOs are showing promising results compared to other ACOs but are still fragile, and provide an alternative to consolidated hospital systems.  The bundled payment initiatives should be refined to work in synergy with these ACOs. Medicare Advantage plans and other private plans are implementing payment reforms that are patient- not hospitalization-focused, and CMS should align its bundled payment reforms with them.

Most importantly for these reforms to succeed, Medicare needs to take further steps to engage its beneficiaries.  Better and more publicly available and comparable quality measures are needed, particularly measures that reflect patient-reported outcomes and experience. Only one of Medicare’s bundles includes a patient-reported functional outcome measure, and it is optional. The quality and spending benchmarks need to account more thoroughly for differences across hospitals in patient risk, so that hospitals are not penalized for caring for the most complex patients. Finally, CMS should test giving beneficiaries, not just hospitals, the opportunity to share in the savings from lower-cost episodes of care.

These are all reasons for CMS to refine its bundled payment proposal before it is implemented, and then through further improvements down the road. Payment reform is challenging to get right in Medicare. But without meaningful reforms like this one, carefully tracked and studied, we aren’t moving far enough away from the Medicare FFS payments that haven’t worked well to support innovative approaches to care, transparency around quality and cost at the patient level, and reduced administrative burdens on physicians and other health care providers. We aren’t there yet, but the bundled payment proposal is a needed step toward better payment in Medicare. 

The authors all served in the George W. Bush Administration.  Michael O. Leavitt is former Secretary of Health and Human Services and Chairman of Leavitt Partners, Mark McClellan is former CMS Administrator and Director of the Duke-Margolis Center for Health Policy.  Leslie Norwalk is former CMS Acting Administrator and Strategic Counsel at Epstein Becker and Green. Tom Scully is former CMS Administrator and a partner at Welsh Carson and Alston and Bird.


The views expressed by authors are their own and not the views of The Hill.