Bundled Payments in the Operating Room

If you’re a supply chain manager (SCM) and you can help implement a bundled payment program, it’s hard to find a reason not to do it. The potential impact of a gain-sharing program that is focused on creating mechanisms to affect physician preference and improve alignment can be very large. Negating the effect of vendor-driven device decisions by offering a financial incentive from the hospital to the physician is real under this program.

Patient Protection and Affordable Care Act
As part of the Patient Protection, and Affordable Care Act (PPACA, now claimed as Obama Care) the Bundled Payment Demonstration program creates a series of positive incentives the encourage provider innovation in cost reduction, clinical integration, and care management.  There are four versions, called Models, of the program where 3 models are retrospective (models 1-3), and one (model 4) is prospective. Retrospective models function by taking a discount and focusing on creating cost efficiencies that the CMS can learn from. Gains can be shared between providers, but losses are limited by a fixed discount and billing as otherwise usual. The focus of the program is to create cost efficiencies through alignment, and in past demonstration programs, the outcomes have been very good; some facilities reduced episode costs by as much as 70%.

Here’s How it Works…

Model 1
Providers apply for participation in the program by doing analysis and defining Care-Episodes. These can be virtually any high volume inpatient episode. To illustrate we’ll examine Model 1 which is limited to one care-setting; the inpatient episode. Doctors and Hospitals are paid as normal (physicians under Part B, Hospitals under Part A), but at a negotiated discounted rate for the episode. The discount rate is determined through analysis and the establishment of a target price for the episode. Procedures and cases are then performed over the demonstration period (at least one year). Results are reviewed by claims submission to Medicare.

During the program period, if the provider hits or performs better than the target price, gains can be shared. These gains will come from cost reduction.

For example, if a Joint Replacement surgery is reimbursed at $7,500 currently, but the provider in collaboration with its physicians determines that the total case can be done for $6,500, that price could be offered. If accepted, procedures in this category would be performed and the Hospital would be paid the negotiated rate, $6,500 in this example. Physicians would be paid their professional fee (also discounted.) However, if the cost of the procedure is driven down to $5,000, the hospital could legally share those cost efficiency gains with physicians, as incentive payments or bonuses.

In this way the program opens the opportunity for greater financial alignment between physicians and their host facilities to drive down cost.

Model 2
Model 2 includes the post-acute provider in the acute care originated episode. The aim of this model is to produce savings by reducing cost in two episodes, opening the opportunity to apply a potentially more costly intervention in the acute care setting that reduces downstream costs. Overall gains can be shared among providers.

Model 3
Model 3 focuses on Post-Acute providers, and aims to reduce readmissions, and gains are also available for sharing between providers.

It is important to remember that many of these case categories are marginally profitable or unprofitable already. Taking reduced reimbursement would therefore seem like a bad idea. However, if costs could be affected with coordinated action, and the prohibition against paying physicians to change their behavior is lifted (as under this program) opportunities abound. Using a less costly procedure tray, implant, and more conservative intervention are all currently uninteresting to many physicians since their reimbursement incentives are aligned with the opposite behavior. Similarly, exposing the health system to the claimed benefit of a more expensive intervention in one setting, that reduces costs in another is also possible; robotic surgery for example has higher acute care costs, but claims lower downstream costs.

Model 4
The only prospective model considered under this program is Model 4. This model establishes a comprehensive bundled payment up-front. Gain sharing is still allowed, but providers face a single capitated-style payment that they can divide up as they chose. The CMS will keep track of care-delivery patterns in this model as well using “no-charge” billing.

Overall this program seeks to do two things: 

1. Allow providers to use their own financial resources to re-shape physician and partner organization behavior without violating Fraud and Abuse regulations.
2. Allow the CMS to learn from provider innovations in coordination, clinical integration, and patient care management.

The program sets up a safe zone for experimentation and allows sophisticated providers to raise the bar for everyone by demonstrating best practices.

Moving Forward
The path forward is clear. The CMS intends to use these innovations to structure future payment systems. By allowing the provider community the opportunity to participate in the evolution of more efficient payment systems, rather than oppose arbitrary cuts, the CMS is attempting to mitigate resistance. Participating in the development of our shared future is therefore recommended, and prudent.