Background

One criticism of the U.S. health care system is that provider reimbursement does not include appropriate incentives for providers to improve quality and value by coordinating care. Health-policy experts suggest that one way to encourage providers to better coordinate care would be to establish a “bundled-payment” system. A “bundled payment” is a single payment for all health care services related to a specific course of treatment or condition over a period of time. Under a bundled-payment system, providers are not reimbursed for each discrete service, interaction, or procedure. Instead, a single payment is made for each episode of care for a single patient, which is divided appropriately amongst the providers involved in his or her care.

The Medicare Payment Advisory Commission (MedPAC), Congress’ Medicare policy advisory arm, has suggested that Medicare test bundled payments as one of several new incentives and payment models that encourage providers to better coordinate across a full episode of care for a given patient.^[1] Experts argue this approach would provide incentives for providers to work together for high-quality outcomes for beneficiaries, unlike Medicare’s current fee-for-service approach. The fee-for-service model is believed to create financial incentives for more services because each provider in the chain of care receives a separate payment for every service. Further, this payment method often results in excess expenditures because the beneficiaries frequently move between hospital stays and a host of post-acute care providers.

Changes Made by the Health Reform Law
Pub. L. 111-148, §§ 3023 & 10308

A Medicare pilot program will be set up under the new health reform law to test “bundled payments” for certain “applicable conditions” around a hospitalization.^[2]

• The law requires the Secretary of Health and Human Services to establish a Medicare pilot program “for integrated care during an episode of care provided to an applicable beneficiary around a hospitalization in order to improve the coordination, quality, and efficiency of health care services” in the Medicare program.^[3]
• The law requires the Secretary “to develop payment methods for the pilot program” and specifies that “[s]uch payment methods may include bundled payments and bids from entities for episodes of care” around a hospitalization.^[4]
• The law provides for implementation of this Medicare pilot program by January 1, 2013, for a period of five years. At any point after January 1, 2016, the Secretary may extend the scope and duration of the Medicare pilot program if:
  • the Secretary finds that such expansion will reduce spending without reducing quality of care, or improve quality of care without increasing spending;
  • the Chief Actuary of CMS certifies that such expansion would reduce program spending; and
  • the Secretary determines that such expansion would not deny or limit the coverage or provision of benefits under the public insurance programs.^[5]
• A “participating provider” eligible to take part in the pilot program is “an entity comprised of providers of services and suppliers, including a hospital, a physician group, a skilled nursing facility, and a home health agency, who are otherwise participating in Medicare.^[6] The Secretary must also apply the provisions of this pilot program, with certain changes, “to separately pilot test the continuing care hospital model.”^[7] The law requires the Secretary to develop additional requirements for participation in the pilot program to “ensure that all applicable beneficiaries have an adequate choice of providers of services and suppliers under the pilot program.”^[8]
• The law requires the bundled payment to “be comprehensive, covering the costs of applicable services and other appropriate services furnished to an individual during an episode of care . . . and made to the entity which is participating in the pilot program.”^[9]
• The bundled payment made to the providers for the “applicable condition” must include payment for the furnishing of “applicable services,” which include:
  • acute care inpatient services
  • physicians’ services delivered in and outside of an acute care hospital setting
  • outpatient hospital services, including emergency department services
  • post-acute care services, including home health services, skilled nursing services, inpatient rehabilitation services, and inpatient hospital services furnished by a long-term care hospital
  • other services the Secretary deems appropriate^[10]
• The law also requires that the bundled payment must also include payment for “other appropriate services” beyond the “applicable services” listed above, such as:
  • care coordination;
  • medication reconciliation;
  • discharge planning;
  • transitional care services; and
  • other patient-centered activities as determined appropriate by the Secretary.^[11]
• The “episode of care” that the bundled payment covers includes “the three days prior to the admission of the applicable beneficiary to a hospital for the applicable condition; the length of stay of the applicable beneficiary in such hospital; and the 30 days following the discharge of the applicable beneficiary from such hospital.”^[12] The law also permits the Secretary to establish a different period of time as an “episode of care” under the pilot program. Moreover, the Secretary must establish procedures for the payment of post-acute care for instances in which the “applicable beneficiary” requires continued services after the “episode of care” has ended.^[13]
• The law requires that bundled payments be based on an “applicable condition.” The Secretary must choose ten applicable conditions.^[14] In selecting the ten conditions, the Secretary must choose a mix of chronic, acute, medical, and surgical conditions, while taking into account whether the condition:
  • is common in the Medicare population;
  • causes a significant number of readmissions;
  • is of high cost to Medicare;
  • is one for which there is an opportunity to reduce expenditures by improving quality of care;
  • is of high volume and has high post acute-care expenditures; and
  • is amenable to payment bundling.^[15]
• Bundled payments for services may not result in a greater expenditure that would otherwise be incurred if the pilot program was not implemented.^[16]
• An “applicable beneficiary” under this pilot program is an individual who “is entitled to, or enrolled for, benefits under part A and enrolled for benefits under part B . . . but not enrolled under part C or a PACE program . . . and is admitted to a hospital for an applicable condition.”^[17]
• The law requires the Secretary to establish a set of quality measures “related to care provided by the entities participating in the pilot program” that must include measures of:
  • functional status improvement;
  • reducing rates of avoidable hospital readmissions;
  • rates of discharge to the community;
  • rates of admission to an emergency room after a hospitalization;
  • incidence of health care acquired infections;
  • efficiency measures;
  • measures of patient-centeredness of care;
  • measures of patient perception of care; and
  • other measures, including measures of patient outcomes, determined appropriate by the Secretary.^[18]
• The law requires an entity participating in the pilot program to “submit data to the Secretary on quality measures [as established by the Secretary] during each year of the pilot program . . . .”^[19] The Secretary is also authorized to require that the submission of such quality data be done through the use of an electronic health record.
• The law also requires the Secretary to select a “patient assessment instrument” to be used in the pilot program to evaluate the “applicable condition” of the “applicable beneficiary” to best assess where post-acute care should be provided.^[20] In addition, the Secretary must also develop, in consultation with the Agency for Healthcare Research and Quality, an agency within the Department of Health and Human Services, quality measures to use in the pilot program to assess “episodes of care” and “post-acute care.”^[21]
• Additionally, the Secretary shall conduct an independent evaluation of the pilot program, measuring the extent to which the pilot program has:
  • improved quality measures;
  • improved health outcomes;
  • improved applicable beneficiary access to care; and
  • reduced spending.

Based on this evaluation, the Secretary shall submit an initial report to Congress within two years of the implementation of the pilot programs, and a final report within three years.^[22]

• The law also requires the Secretary to consult with representatives of small rural hospitals about their participation in the pilot program, specifically with respect to any difficulties that these hospitals may be experiencing with bundled payments given their traditionally low volume of services provided.^[23]

Implementation

Agency and Timeline

The Centers for Medicare and Medicaid Services (CMS), an agency within the United States Department of Health and Human Services, will implement this program as part of its authority over Medicare payment and policy.  It is anticipated that CMS will work closely with Agency for Healthcare Research and Quality on the development of pilot quality measures, the Office of the National Coordinator for Health Information Technology on criteria applicable to health information and meaningful use capabilities, and Health Resources and Services Administration on the development of pilot criteria for “continuing care hospitals.”

Process

The health reform law does not provide specific direction to HHS regarding the administrative process used to implement the law. The agency therefore has the discretion to use a range of tools to implement the statute, such as publishing regulations in the Federal Register with a public notice and comment period, posted policy instructions, funding availability announcements (where applicable), official letters to affected entities (such as letters to state Medicaid agencies), and posted rulings and notices. Agency websites can be checked regularly for updates.

Key Implementation Issues

• Bundled-payment rate: How exactly will the bundled-payment rate be set? Does the setting of the bundled rate depend on a specific methodology? Will these methods be developed in the pilot programs themselves or set beforehand? How will the Secretary define what is meant by a “bundled payment” or an “episode of care?” Will CMS set a bundled rate for an “applicable condition” or take bids from eligible providers? Will the selection of the lowest bidder compromise patient care? How will the bundled payment be adjusted for the severity of the patient’s case and other patient characteristics?
• Other payment methods: Will the Secretary develop and test other payment methods under this pilot or focus solely on bundled payments?
• Applicable conditions: Which conditions will the Secretary select as applicable conditions? Who exactly will have a say in the conditions selected?
• Limitations on what is included in the bundled payment: Where will the Secretary draw the line regarding what services are (or are not) included in the bundled payment? What “other services” might the Secretary include in “applicable services?”
• Episode of care: Is the in-patient “length of stay” portion of the “episode of care” unlimited? Can the bundled payment be adjusted if the applicable beneficiary’s inpatient stay exceeds a specified number of days? Will the Secretary establish an alternate definition?
• Participating providers: How clinically integrated must a participating provider entity be in order to participate in the pilot? What size requirements will be imposed on a participating provider to ensure that “all applicable beneficiaries have an adequate choice of providers?” How will an “adequate choice” be determined? Will such a determination include an assessment of the patient’s primary language?
• Performance measurement and reporting: What level of public reporting will be encouraged? Will information be aggregated to all pilots or will information be made available on individual participating providers’ performance? How will the initial performance measures be established? What standards and procedures will govern the expansion of performance measures?
• Interaction with Medicare Advantage: What will be the interaction with Medicare Advantage organizations, which have some 10 million participating beneficiaries, given that the pilot is aimed at reforming traditional Medicare?

Recent Agency Action

There is no recent agency action as of this writing.

Authorized Funding Levels

Medicare is an entitlement program funded by payroll taxes, beneficiary premiums and through general tax revenues, and is not subject to the regular authorization and appropriations process. Income from payroll taxes are credited to the Hospital Insurance trust fund and premiums and general revenues are credited to the Supplemental Medical Insurance trust fund. Providers receive payment for services from these trust funds.