No Bundle of Joy?
August 25, 2009
No bundle of joy?
By Jennifer Lubell, Modern Healthcare
Posted: June 22, 2009 - 5:59 am EDT
Robert Minkin, president and CEO at Exempla St. Joseph Hospital in Denver, says
he 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,
Minkin 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
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
“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
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 postacute
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 postacute-
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, M.D., 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 demonstration 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 demonstration, “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
One of those is Exempla St. Joseph, whose participation in the demonstration will likely
be delayed until December, while the hospital undergoes final preparations to form its
Minkin says that he 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.
Demonstration 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 organization 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, Ohrin 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-andabuse
problems Ohrin describes. That’s because PACE qualifies as a managed-care
organization—or a similar organization 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 managedcare
plan,” Ohrin says.