Bundled Payments Get a Boost

The Center for Medicare and Medicaid Innovation (CMMI) continues to push forward important delivery system reforms, last week announcing a new initiative -- the Comprehensive Care for Joint Replacement (CCJR) Model -- to bundle payments for hip and knee replacements. The proposed rule will be published in the Federal Register today.

Hospitals in 75 geographic areas would receive a single payment for the joint replacement surgery and 90 days of care thereafter (rather than individual payments for each service involved, hence the term "bundled") and would be eligible for financial bonuses if they are able to reduce costs while meeting quality metrics. Some of the specifications are similar to CMMI's previous iteration -- the Bundled Payments for Care Improvement (BPCI) initiative -- but the key difference is that CCJR is mandatory in those 75 geographic areas.

CCJR would be tested over a five-year period starting in 2016 and would charge hospitals with trying to limit the spending associated with the joint replacement surgery and follow-up. The hospital is being asked to bear the financial risk because they are best suited to coordinate a patient's care and because most of the variation in costs today occurs during post-acute care (after the initial surgery). Presumably, financial and quality incentives will place a much higher onus than exists today on hospitals to tailor the most appropriate recovery plan for their patients and better manage their care.

Given the difficulties voluntary CMMI initiatives can have in producing significant savings and fostering innovation over time, the mandatory nature here is vital. By making the CCJR mandatory, CMMI will also gain valuable knowledge about the effectiveness of bundled payments in Medicare.

Knee and hip replacements make a good first target because, as the Centers for Medicare and Medicaid Services (CMS) notes, hospitalizations for joint replacement surgeries are expensive -- costing Medicare $7 billion in 2013 -- and the cost per episode differed vastly from $16,500 to $33,000.

Coincidentally, CMMI's announcement comes right on the heels of an op-ed in The Wall Street Journal from Ezekiel Emanuel and Topher Spiro laying out reforms that the Obama Administration should take to "secure the other fundamental legacy of the Affordable Care Act: controlling health-care costs." They note that although health care cost growth has been slow in recent years, that may be changing, so the coming years are critical. As they put it, "Will we let our foot off the brakes, or will we permanently bend the cost curve?"

With the Department of Health and Human Services making a goal of tying 50 percent of Medicare payments to value by 2018, finding successful payment models is important. Emanuel and Spiro argue that Accountable Care Organizations (ACOs), which Medicare has used on a small scale in the last few years, cannot be the primary cost-control strategy since it has had mixed results so far, is voluntary in nature, and has seen many ACOs drop out. As they say, "The fundamental problem with a voluntary program is that to attract participants, Medicare needs to make it easy for the ACO to be rewarded. Paradoxically, this makes it hard to achieve substantial savings."

Therefore, they argue that bundling payments shows more promise and can be more easily scaled up to apply more broadly and be made mandatory. The limited trial proposed by CMMI is expected to save $153 million over its five years, but bundling payments and setting them at a discount rate could achieve significant savings (the Congressional Budget Office estimates $50 billion over ten years) if applied to a number of procedures and expanded nationwide. Paying a single amount for an episode of care should reduce the high variation in the cost of such procedures, which has been shown to be unrelated to the quality delivered.

Bundled payments and ACOs, though, should be thought of as complements, not substitutes. In fact, an ACO is effectively a very broad bundled payment (for all covered health care services in a given year). Moreover, mandating bundled payments should help encourage hospitals and post-acute care facilities to work more closely together to coordinate patient care, building relationships that could prove important to also forming an ACO. Our PREP plan included both bundled payments and improvements to ACOs, the latter of which were based on the work of the Campaign to Fix the Debt and Dartmouth.

CMMI's new initiative to make mandatory certain bundled payments in 75 geographic areas is just one of many that shows the importance of continuing to test new payment models and to fund research to see what works best. Controlling health care costs while improving quality is not easy, but models like bundled payments, if done right, have the potential to help achieve this dual aim.