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. Particularly problematic is the traditional fee-for-service mechanism which rewards the volume of services provided rather than the value or quality of the services. The new health reform law, the Patient Protection and Affordable Care Act (PPACA), authorizes the U.S. Department of Health and Human Services (HHS) to test payment models that will incent providers to better manage the care of their patients and thereby reduce the cost of care while maintaining or improving the quality of the 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 among the providers involved in the patient’s care.

Given the increasing cost of the Medicaid program at both the federal and state levels, a Medicaid demonstration project utilizing bundled payments could test the bundled payment methodology with respect to its ability to lower costs while improving quality and value. Indeed, Medicaid’s 2009 projected growth rate for federal and state Medicaid spending combined is 9.9%, the program’s fastest rate of growth since 2002. Experts project that the 2010 growth rates for Medicaid spending and enrollment will remain comparatively high at 8.9% and 5.6%, respectively.^[1] Additionally, the new health reform law will provide insurance coverage to an additional 32 million people, half of which are expected to derive their coverage from Medicaid and the State Children’s Health Insurance Program (SCHIP).^[2] Such an expansion has a projected 10-year cost of $434 billion in addition to federal funding.^[3]

Moreover, state Medicaid agencies are under extraordinary pressure to reduce costs, given the effects of the recession coupled with the end of the enhanced Federal Medical Assistance Percentage (FMAP) under the American Recovery and Reinvestment Act (ARRA, the economic stimulus law) at the end of this year (or at the end of June 2011 at the latest). Both ARRA and the new health reform law prohibit Medicaid eligibility cuts, making alternative cost containment mechanisms attractive and essential. Payment reforms such as bundled payments are one method to reduce costs while maintaining or improving quality, and positions states for the enrollment of millions more Medicaid beneficiaries.

Changes Made by Health Reform Law
Pub. L. 111-148, § 2704

• The law requires the Secretary of HHS to establish a Medicaid demonstration project “to evaluate integrated care around a hospitalization.”^[4] Specifically, this project aims “to evaluate the use of bundled payments for the provision of integrated care for a Medicaid beneficiary . . . with respect to an episode of care that includes a hospitalization . . . and for concurrent physicians services provided during a hospitalization.”^[5]
• The law requires the demonstration project to begin on January 1, 2012, and end on December 31, 2016.^[6]
• The demonstration project “shall be conducted in up to 8 states, determined by the Secretary based on consideration of the potential to lower costs under the Medicaid program while improving care for Medicaid beneficiaries.”^[7]
• The law clarifies that “a state selected to participate in the demonstration project may target the demonstration project to particular categories of beneficiaries, beneficiaries with particular diagnoses, or particular geographic regions of the state, but the Secretary shall insure that, as a whole, the demonstration project is, to the greatest extent possible, representative of the demographic and geographic composition of Medicaid beneficiaries nationally.”^[8]
• The demonstration project must “focus on conditions where there is evidence of an opportunity for providers of services and suppliers to improve the quality of care furnished to Medicaid beneficiaries while reducing total expenditures under the state Medicaid programs selected to participate, as determined by the Secretary.”^[9]
• A participating state in the demonstration project is required to specify the one or more “episodes of care” that the project will address, as well as the “services to be included in the bundled payment” and the “rationale for the selection of such episodes of care and services.”^[10] The Secretary may modify both the episodes of care and/or the services included in the bundled payment either before or after approving the project. Moreover, the Secretary retains the right to vary these factors among the different participating states.^[11]
• The Secretary must “ensure that payments made under the demonstration project are adjusted for severity of illness and other characteristics of Medicaid beneficiaries within a category or having a diagnosis targeted as part of the demonstration project.”^[12] The participating states must ensure that the level of Medicaid beneficiary cost-sharing is not greater than it otherwise would be in the absence of the demonstration project.
• The law requires that hospitals participating in the project either “have or establish robust discharge planning programs to ensure that Medicaid beneficiaries requiring post-acute care are appropriately placed in, or have ready access to, post acute care settings.”^[13]
• The law requires both the Secretary and the participating states ensure that each Medicaid beneficiary, whose covered services are subject to payment under the demonstration project, does not receive fewer covered items and services than he/she otherwise would in the absence of the demonstration project.^[14]
• The law also allows the Secretary to waive any provision of Medicare, Medicaid, or the general agency administrative requirements of the Social Security Act “as may be necessary to accomplish the goals of the demonstration, ensure beneficiary access to acute and post-acute care, and maintain quality of care.”^[15]
• All participating states in the demonstration project must report to the Secretary, in whatever form and manner the Secretary specifies, “relevant data necessary to monitor outcomes, costs, and quality, and evaluate the rationales for selection of the episodes of care and services specified by states . . . .”^[16]
• The Secretary must submit a report to Congress on the results of the demonstration project not later than one year after its conclusion.^[17]

Implementation

Agency

The Centers for Medicare and Medicaid Services (CMS), through its newly created Center for Medicare and Medicaid Innovation, will implement the demonstration project as part of its authority over Medicaid payment and policy, in conjunction with the participating state Medicaid Directors. It is anticipated that CMS will work closely with the Agency for Healthcare Research and Quality on the development of demonstration quality measures, the Office of the National Coordinator for Health Information Technology on criteria applicable to health-information and meaningful-use capabilities, and the Health Resources and Services Administration on the development of bundled payments for entities operating in or serving medically underserved communities.

Key Dates

Besides the demonstration project dates described above, none.

Process

The health reform law does not provide specific direction to the Secretary regarding the administrative process used to implement the law, except for the broad grant of authority on behalf of the Secretary to waive certain provisions of law described above. 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, or using other types of approaches such as 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 Issues

• Bundled-payment rate
  • How much discretion will HHS allow states in designing these demonstration projects?
  • How exactly will the bundled payment rate be set and evaluated?
  • 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?
  • Will CMS set a bundled rate for an “episode of care” or take bids from eligible providers?
  • How will the bundled payment be adjusted for the severity of the patient’s case and other patient characteristics?
  • Does receipt of the bundled payment depend on the providers attaining some level of quality of care? If so, how will this be measured?
• 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 will be included in the definition of “concurrent physicians services provided during a hospitalization” for the purposes of the bundled payment?
  • How will CMS assure that payment rates are adequate to assure patient access?
  • How will savings be measured?
• Episode of care
  • How will the Secretary define what is meant by an “episode of care?”
  • Can the bundled payment be adjusted if the applicable beneficiary’s inpatient stay exceeds a specified number of days? If so, will the Secretary establish an alternate definition?
• Participating providers
  • How clinically integrated must a participating provider entity be in order to participate in the demonstration project?
  • What size requirements will be imposed on participating providers?
  • Will Medicaid beneficiaries have a choice regarding participation?
  • How will the bundled payments be shared among the participating providers?
• Performance measurement and reporting
  • What level of public reporting will be encouraged?
  • Will information be aggregated to all demonstrations or will information be made available on individual participating providers’ performance?
  • How will quality and outcomes be measured and evaluated?
  • Will there be any minimum quality or efficiency requirements for provider participation?
  • Will patient satisfaction and engagement be a factor in selection and/or in the evaluation?
• Authority of the Secretary
  • Will any limits be imposed on the Secretary’s authority to waive any provision of Medicare, Medicaid, or the administrative requirements of the Social Security Act?
  • Will there be any right of action to appeal such waivers?
  • Will the Secretary be required to give notice to affected parties before the use of the waiver authority?
• Interaction with managed care
  • What will the demonstration’s interaction be with Medicaid managed care organizations, which currently serve the majority of Medicaid beneficiaries, given that the demonstration is aimed at reforming traditional Medicaid?

Recent Agency Action

There is no recent agency action as of this writing.

Authorized Funding Levels

This change addresses individual entitlements and thus does not specify an aggregate amount of spending.