Thomas A. Warrington, Jr., AVA, senior manager, and Jennifer Brunkow, ASA, CPA/ABV/CFF, senior analyst with VMG Health, point to several implications — intended and unintended — in the CMS bundled payment pilot program.
The Centers for Medicare and Medicaid Services' pilot initiative — Bundled Payments for Care Improvement — will test and evaluate the use of bundled payments for Medicare services over a five-year period. Under the bundled payments initiative, Medicare will provide a single lump payment to participating hospitals, physicians and other providers for an episode of care, rather than pay individually for each item or service. CMS will determine whether the initiative improves quality of care and reduces spending during the five-year period.
The bundled payment system consists of four different payment models. The first three are retrospective payment models, which require all parties that provide patient care throughout the episode to agree on a target payment price. This price is proposed by the applicants and is determined by applying a discount to total historical costs for a similar episode of care. Providers then receive payment for their services under the Medicare fee-for-service system — but at the predetermined discount. If total payments under the Medicare fee-for-service system are less than the target payment price, CMS will pay out the difference to the providers as an additional bonus.
The fourth model is a prospective payment model, in which providers receive a predetermined lump-sum payment from CMS for all services provided.
While the payments will be based on the pilot program's applicants, we have opted to look specifically at the advantages and disadvantages of the bundled payment system that may be observed from any perspective — whether a hospital, physician or other provider. Certainly, there are advantages to consider when thinking about moving toward bundled payments; however, there are also some disadvantages to keep in mind.
Advantages
The bundled payments initiative was established with the intent of incentivizing providers to work together as a team to provide better care in a more efficient manner. The notion of offering only one predetermined payment to compensate all parties that provide services throughout a single episode of care has several implications on the level of care provided.
First, proponents believe physicians, specialists and hospitals will be encouraged to not only communicate with one another on each patient's progress, but also coordinate each patient's acute and post-acute care as a team of providers. Any efficiencies that can be gained by working as a resolute and synchronized team will result in a reduction of overall treatment costs, as well as an increase in the amount of bundled payment left over that can be shared by the team.
Second, the bundled payment system does not offer an incentive for providers to provide unnecessary or costly care. This is because a predetermined payment has already been negotiated, and the volume of procedures or appointments will not be taken into account in reimbursement. In addition, unlike the fee-for-service system, the bundled payment system does not reward providers for using more expensive tests and procedures. By relying on more cost-efficient options, providers are more likely to earn an additional bonus for keeping actual costs below the target payment price.
Last, because the bundled payment system includes all services provided throughout an episode of care, it does not penalize providers that care for severely ill patients. The level of care required is considered during the negotiations of the predetermined payment. Therefore, longer hospital stays, as well as a greater number of required appointments and procedures, are taken into account in negotiating the target payment price.
Disadvantages
Although the bundled payment system was established to encourage the outcomes mentioned above, some believe there are several unintended consequences that could result.
The bundled payment structure introduces several new challenges. For example, providers may struggle to predict the total cost of care that will be necessary throughout an episode of care. The actual cost at the end of an episode of care could be much higher than the original predicted cost. In addition, because the bundled payment is partially based on historical costs, providers that already operate efficiently would have less room to improve and reduce costs below the target payment price.
While the bundled payment system reduces the incentive to provide unnecessary or costly care, some argue it also reduces the incentive for providers to provide necessary care. If less care or inadequate care is provided, fewer costs are accumulated and more of the episode payment is available for division among the team. Similarly, the bundled payment system could unintentionally encourage providers to overstate a patient's illness and the level of care required during the payment negotiations. Lastly, if complications arise, some believe providers may be less likely to diagnose them until after the episode of care.
From a regularly perspective, the physicians, specialists and hospitals involved in an episode of care may find it difficult to agree on a fair method of distributing the lump payment. Therefore, transparency, communication and trust must be developed between hospitals and physicians. Medicare funding could trigger a review of the payment allocated to physicians. The government stipulates that compensation between a hospital and physician must be set at fair market value. The federal anti-kickback statute prohibits the payment of remuneration in exchange for patient referrals, and the Stark Law limits certain physician referrals. The methodology relied upon to distribute bundled payments must comply with these regulations. An independent, third-party expert can work with you and your counsel to ensure compliance in these areas.
Only time will tell
Ultimately, only time will demonstrate if bundled payments will drive the intended changes to the current healthcare system. Everyone — providers and patients alike – will benefit if quality increases while overall healthcare costs are reduced. Historically, providers have been able to offset reimbursement declines through increased volumes. If bundled payments stick, that option will no longer be available. If not, it may be back to the drawing board for CMS. Whatever the case, there seems to be more momentum in the current environment for payment reform than ever before.
Learn more about VMG Health.
Contact Thomas A Warrington Jr. at thomasw@vmghealth.com.
Contact Jennifer S. Brunkow at jenniferb@vmghealth.com.
Related Articles on Hospital/Physician Relationships:
Kaiser Opens New Sports Medicine Facility
Banner Health, Aetna Form New Commercial Accountable Care Program
Overlake Hospital in Washington Acquires Issaquah Medical Group
The Centers for Medicare and Medicaid Services' pilot initiative — Bundled Payments for Care Improvement — will test and evaluate the use of bundled payments for Medicare services over a five-year period. Under the bundled payments initiative, Medicare will provide a single lump payment to participating hospitals, physicians and other providers for an episode of care, rather than pay individually for each item or service. CMS will determine whether the initiative improves quality of care and reduces spending during the five-year period.
The bundled payment system consists of four different payment models. The first three are retrospective payment models, which require all parties that provide patient care throughout the episode to agree on a target payment price. This price is proposed by the applicants and is determined by applying a discount to total historical costs for a similar episode of care. Providers then receive payment for their services under the Medicare fee-for-service system — but at the predetermined discount. If total payments under the Medicare fee-for-service system are less than the target payment price, CMS will pay out the difference to the providers as an additional bonus.
The fourth model is a prospective payment model, in which providers receive a predetermined lump-sum payment from CMS for all services provided.
While the payments will be based on the pilot program's applicants, we have opted to look specifically at the advantages and disadvantages of the bundled payment system that may be observed from any perspective — whether a hospital, physician or other provider. Certainly, there are advantages to consider when thinking about moving toward bundled payments; however, there are also some disadvantages to keep in mind.
Advantages
The bundled payments initiative was established with the intent of incentivizing providers to work together as a team to provide better care in a more efficient manner. The notion of offering only one predetermined payment to compensate all parties that provide services throughout a single episode of care has several implications on the level of care provided.
First, proponents believe physicians, specialists and hospitals will be encouraged to not only communicate with one another on each patient's progress, but also coordinate each patient's acute and post-acute care as a team of providers. Any efficiencies that can be gained by working as a resolute and synchronized team will result in a reduction of overall treatment costs, as well as an increase in the amount of bundled payment left over that can be shared by the team.
Second, the bundled payment system does not offer an incentive for providers to provide unnecessary or costly care. This is because a predetermined payment has already been negotiated, and the volume of procedures or appointments will not be taken into account in reimbursement. In addition, unlike the fee-for-service system, the bundled payment system does not reward providers for using more expensive tests and procedures. By relying on more cost-efficient options, providers are more likely to earn an additional bonus for keeping actual costs below the target payment price.
Last, because the bundled payment system includes all services provided throughout an episode of care, it does not penalize providers that care for severely ill patients. The level of care required is considered during the negotiations of the predetermined payment. Therefore, longer hospital stays, as well as a greater number of required appointments and procedures, are taken into account in negotiating the target payment price.
Disadvantages
Although the bundled payment system was established to encourage the outcomes mentioned above, some believe there are several unintended consequences that could result.
The bundled payment structure introduces several new challenges. For example, providers may struggle to predict the total cost of care that will be necessary throughout an episode of care. The actual cost at the end of an episode of care could be much higher than the original predicted cost. In addition, because the bundled payment is partially based on historical costs, providers that already operate efficiently would have less room to improve and reduce costs below the target payment price.
While the bundled payment system reduces the incentive to provide unnecessary or costly care, some argue it also reduces the incentive for providers to provide necessary care. If less care or inadequate care is provided, fewer costs are accumulated and more of the episode payment is available for division among the team. Similarly, the bundled payment system could unintentionally encourage providers to overstate a patient's illness and the level of care required during the payment negotiations. Lastly, if complications arise, some believe providers may be less likely to diagnose them until after the episode of care.
From a regularly perspective, the physicians, specialists and hospitals involved in an episode of care may find it difficult to agree on a fair method of distributing the lump payment. Therefore, transparency, communication and trust must be developed between hospitals and physicians. Medicare funding could trigger a review of the payment allocated to physicians. The government stipulates that compensation between a hospital and physician must be set at fair market value. The federal anti-kickback statute prohibits the payment of remuneration in exchange for patient referrals, and the Stark Law limits certain physician referrals. The methodology relied upon to distribute bundled payments must comply with these regulations. An independent, third-party expert can work with you and your counsel to ensure compliance in these areas.
Only time will tell
Ultimately, only time will demonstrate if bundled payments will drive the intended changes to the current healthcare system. Everyone — providers and patients alike – will benefit if quality increases while overall healthcare costs are reduced. Historically, providers have been able to offset reimbursement declines through increased volumes. If bundled payments stick, that option will no longer be available. If not, it may be back to the drawing board for CMS. Whatever the case, there seems to be more momentum in the current environment for payment reform than ever before.
Learn more about VMG Health.
Contact Thomas A Warrington Jr. at thomasw@vmghealth.com.
Contact Jennifer S. Brunkow at jenniferb@vmghealth.com.
Related Articles on Hospital/Physician Relationships:
Kaiser Opens New Sports Medicine Facility
Banner Health, Aetna Form New Commercial Accountable Care Program
Overlake Hospital in Washington Acquires Issaquah Medical Group