Paying by the Bundle
May 06, 2009
Article published April 6, 2009
Robert Minkin, president and CEO of Exempla St. Joseph Hospital, Denver
Paying by the bundle
Docs, hospitals ‘at risk’ under new CMS bundling demonstration project
By Jennifer Lubell
Posted: April 6, 2009 - 5:59 am EDT
Robert Minkin, president and CEO at Exempla St. Joseph Hospital in Denver, expects to see long-term gains by participating in a new CMS demonstration project that will “bundle” payments to hospitals and physicians—even though at the outset his hospital will be getting paid less by Medicare.
Under the current system of payment, for example, Medicare might pay a heart surgeon a fee of $6,000 for triple-bypass surgery, and reimburse Exempla St. Joseph $40,000 for the cost of the hospitalization. But once the hospital starts participating in the CMS’ Acute Care Episode, or ACE, demonstration project later this year, all of that will change.
Under the bundled or fixed-fee payment method, both the hospital and physician will each experience an approximate 5% “discount” (or cut in reimbursement) for the individual patient receiving the surgery. Overall, “Medicare would make a savings of $2,300 in total for that one case,” Minkin says.
“You also have to remember that we’re taking risk” along with that bundled payment, he says, meaning that the hospital would not get additional reimbursement if a patient acquired a urinary tract infection and had to stay for a longer period of time in the hospital.
That risk is one of the reasons the change in payment will drive participating hospitals and doctors to provide the highest level of quality care possible under this model, Minkin says.
“The demonstration project seeks to create a greater value—high quality, lower price to Medicare. And we believe that hospitals that are competent at this will improve market share over time.” For 436-bed Exempla St. Joseph, “it will enable our hospital to achieve further dominance” in the care it provides to the community, he says.
The concept of “bundling,” which essentially means paying providers a fixed amount per month or year for all covered services, has garnered a great deal of attention lately in the nation’s capital. Last year, the Medicare Payment Advisory Commission in its June report devoted an entire chapter to the concept of bundling payments to physicians and hospitals for episodes of care, a methodology that will be tested in the CMS demonstration project.
Bundling has also been tagged by the Obama administration as a cost-saving measure that could help finance a reserve fund for future health reform initiatives. The administration estimates that bundling Medicare payments covering hospitals and post-acute care could save as much as $17 billion over the next 10 years.
The practice has been hailed as an effective cost-saving measure and a way to make hospitals and physicians more accountable for the services they provide. Yet, provider sources caution that much still needs to be learned about the practice and the responsibilities that come with it.
Hospitals understand that Medicare’s payment systems are fragmented, and paying providers based on volume isn’t efficient anymore, says Don May, vice president for policy at the American Hospital Association. Bundling could be a means to offer incentives to providers to coordinate care in a more cost-effective manner, he adds.
However, he cautions that doing this in practice will require a careful and thoughtful approach. “Lots of pieces need to come together for the hospital and doctors and post-acute-care providers to do this. Bringing those organizations together is really the first step and we’re not there yet.” There needs to be some level of infrastructure to make such payments, he says.
Similar to capitation
The concept of bundling isn’t new: The capitation model for HMOs is essentially the ultimate bundled payment at the insurer level, says Nicholas Wolter, CEO of 219-bed Billings (Mont.) Clinic. Under these arrangements, an insurer “contracts with a large business to provide care for their employees for a pre-agreed amount of money, with hospitals and physicians receiving payment under that umbrella.”
What the CMS is experimenting with in its ACE demonstration project is a different concept than capitation: “bundling at the level of the hospital and doctor, which means payment will be directed by the providers,” Wolter says.
“Bundling is a payment applied to a cluster of services, whereas capitation usually implies paying annually over the course of a year for all services that might be required by an individual,” Wolter says.
Currently, the CMS pays the hospital a single prospectively determined amount under the inpatient prospective payment system for all the care it furnishes to the patient during an inpatient stay. The physicians who care for the patient during the stay are paid separately under Medicare’s physician fee schedule for each service performed.
Under the demonstration, a bundled payment will consist of a single payment for both Medicare hospital services (Part A) and physician services (Part B) furnished during an inpatient stay. Twenty-eight cardiac and nine orthopedic inpatient surgical services and procedures are included in the bundled payment demonstration—elective procedures selected for their history of high volume.
In addition to Exempla, four other hospitals or systems—1,189-bed Baptist Health System, with four campuses in San Antonio; 78-bed Oklahoma Heart Hospital in Oklahoma City; 418-bed Hillcrest Medical Center in Tulsa, Okla.; and Lovelace Health System, which has four hospitals with a total of 283 beds in Albuquerque—have been selected for the three-year demonstration.
All hospitals in the demo had to have a physician-hospital organization, or one under development, and the doctors had to agree to be a part of that organization. Under the bundled payment demo, “hospitals will be responsible for divvying up the payment through a voluntary agreement reached by the hospitals and physicians,” says Cynthia Mason, a project manager with the CMS’ Medicare Demonstrations Group. “In addition, the hospitals and physicians will be able to share savings achieved through improved quality and increased efficiencies.”
Concerns among doctors
Physicians certainly have had concerns about the hospital being in charge of administering their payment under a bundling approach. “I think as long as you have a formal structure in governance that can accept payments, like a physician-hospital organization, this model could work,” Wolter says.
Of the five selected sites, three are in the final stages of getting started on the project this spring. “The other two will be implementing the demonstration at a later date, once various administrative issues related to Medicare payment contractors are addressed,” she says.
One of those is Exempla St. Joseph, whose participation in the demo will likely be delayed until December, while the hospital undergoes final preparations to form its physician-hospital organization.
Minkin is confident the bundling model will provide incentives for physicians to improve clinical outcomes, “which will also have the effect of increasing the value received by Medicare beneficiaries compared to the former program,” he says. Patient-care quality will increase, length of patient stay will be reduced and total costs will be lower for Medicare, so “society wins and especially the patient wins,” he adds.
Advocates of this approach, however, should be aware it may run into legal snags once it is put into practice, says Lisa Ohrin, a partner with the healthcare practice at Sonnenschein, Nath & Rosenthal in Washington.
Demo projects have limitations in that they generally waive fraud-and-abuse laws, says Ohrin, who previously served as director of the division of technical payment policy at the CMS. Once a bundling methodology like this goes outside the world of the demonstration, some fraud-and-abuse laws, in particular the Stark regulations, may need to be modified to implement this, she says.
Under these regulations, a physician cannot refer the patient for certain designated health services to any entity with which the physician has a financial interest. Because it involves some type of compensation arrangement between the physician and hospital, the bundling system that the CMS is pilot-testing has the potential to conflict with the Stark rules, Ohrin says.
“So, when fraud-and-abuse laws prohibit this type of connection, they may need to be modified to allow for more flexibility” in a situation like bundling, she says.
Modifications to the statute could come from either Congress or HHS. But because HHS is limited to working within the statutory framework of the physician self-referral law and the other fraud-and-abuse laws, “a change at the congressional level might be of greater utility,” Ohrin says.
Bundling as a concept continues to grow within the healthcare community, with testing coming in small increments. Billings Clinic, for example, is a participant in the Program of All-Inclusive Care for the Elderly, or PACE, program, which is financed by Medicare and Medicaid for frail older adults and uses a bundled payment format. Under this arrangement, all necessary care from doctors, hospitals and nursing homes is covered by a fixed amount for the year for each patient.
Because of how the PACE program is structured, it may not be subject to the fraud-and-abuse problems Ohrin describes. That’s because PACE qualifies as a managed-care organization—or a similar entity that receives a fixed payment. “There are specific exceptions to the fraud-and-abuse laws for financial relationships between designated health services and physicians where services are provided to enrollees of a managed-care plan,” Ohrin says.