Bundled Payment Reform Models

Central to the nation’s health care reform agenda is the principle of value-based reform – restructuring provider payment incentives to control volume growth and to optimize efficiency, quality and access. Four value-based payment methodologies are currently receiving considerable attention from the Centers for Medicare & Medicaid Services (CMS) and the Medicare Payment Advisory Commission (MedPAC), and may shape physician reimbursement in the near future: bundled payments, gainsharing, the use of the medical home to coordinate care, and pay-for-performance arrangements. This month, bundled payment pilots are being launched around the country. The concept features a single payment made for an array of health care services by multiple providers to care for a patient diagnosed with a specific condition across a defined episode of care. Such a “global case rate reimbursement” includes services provided by a hospital, physicians, laboratories, imaging centers, pharmacies and outpatient care. The approach features evidence-based guidelines, benchmarked performance incentives and a degree of risk-sharing among that constellation of providers. CMS is launching an Acute Care Episode (ACE) demonstration featuring global payments within Medicare fee-for-service, to be shared among physicians and hospitals, and focusing on select orthopedic and cardiovascular inpatient services. In the private sector, the Robert Wood Johnson Foundation has granted $6.4 million to pilot a bundled payment model known as Prometheus Payment Inc., which will focus initially on five procedural diagnoses – hip/knee replacement, coronary artery bypass graft (CABG) surgery, cardiac catheterization, bariatric surgery, and hernias; and five chronic illnesses – congestive heart failure, chronic obstructive pulmonary disorder, asthma, coronary artery disease, and hypertension. Two pilot sites are launching the model this month – in Illinois and Minneapolis – while Aetna and Independence Blue Cross are evaluating the Prometheus Payment model for possible piloting with the Crozer Keystone Health System in southeastern Pa. These payment pilots are designed to stimulate greater collaboration among hospitals, physicians and other health care providers, who will share the financial incentive to reduce potentially avoidable complications and share in cost savings. The bundled case rate reimbursement model also accommodates benchmarked performance incentives. The model represents the natural evolution of pay-for-performance, in that it integrates evidence-informed clinical science with aligned incentives that address the fragmentation of care delivery under the current, siloed fee-for-service reimbursement model, according to Alice Gosfield, J.D., first chairman of the board of Prometheus Payment Inc., and principal of Alice G. Gosfield and Associates P.C. in Philadelphia. “Pay-for-performance models offer small drips of money on top of an existing payment system that doesn’t give us the quality we want. It is not sustainable as a business model, and is transitional, at best,” Gosfield argues. Gainsharing is more about cost containment than quality and has a short shelf life: a one-year waiver structure and an eventual uncompensable moment when waste is reduced and no more savings can be squeezed out of the arrangement, she says. The medical home model may be dying on the vine as payment might never be sufficient for the infrastructure physicians need to produce the promised quality improvements, Gosfield maintains. The bundled payment approach may be attractive to some physicians, if certain concerns can be addressed satisfactorily. The American Medical Association (AMA) notes that the concept is already used by Medicare to pay inpatient services and some global surgical services, that it could provide incentives for reducing the costs of patient care and, if the bundle includes both hospital and physician services, it could permit physicians to share in any savings produced by changes in patient management. The AMA is concerned, however, that the concept is not yet well-developed for use among multiple independent providers, while key unanswered questions remain regarding the contents of the bundle, how to allocate the bundled payment amounts, how to risk-adjust those payment amounts, and whether the payment approach might lead to cherry-picking patients and inappropriate care rationing. CMS’s ACE Demonstration Beginning this month, CMS is launching a three-year Acute Care Episode demonstration with up to 15 physician-hospital organizations (PHOs) located in Texas, Oklahoma, Colorado and New Mexico to test the use of global payments for defined episodes of care as an alternative approach to fee-for-service payment. An episode of care is defined as Medicare Part A and Part B services provided during an inpatient stay for hip/knee replacement surgery and/or CABG surgery, while the time window for an episode of care during the first year of the demonstration will be the traditional window covered by current Medicare hospital rules, e.g., all pre-admission hospital testing services, post-discharge services, and emergency room services. After year one of the demo, CMS and demonstration sites may consider including some post-acute care services in the episode of care. All inpatient facility (hospital) and professional (physician) services rendered to the demonstration’s patients from the date of admission through the date of discharge at the demonstration facility are included in the bundled payment. CMS notes that the project is specifically designed to align financial incentives across providers and provide flexibility to hospitals and physicians by bundling all related inpatient services into an episode of care by paying a single, global payment that can be used as the health care groups deem most appropriate. CMS says it is initially focusing on nine orthopedic and 28 cardiovascular inpatient surgical procedures because profit margins and volume have historically been high, the services are easy to specify, and quality metrics are available for them. CMS is limiting participation to providers that meet evidence-based proficiency volume thresholds for procedures. The ACE demo builds upon earlier global payment demonstrations – one for heart bypass surgery and one for cataract surgery; both in 1996 – that CMS says achieved cost efficiencies through streamlined processes leading to fewer re-operations, lower readmissions, and shorter lengths of stay. The ACE demo expands the concept to a broader set of inpatient orthopedic and cardiovascular procedures with the potential to expand to post-acute care services (e.g., cardiac and orthopedic rehabilitation) after the first year, says CMS. Unlike previous bundling demonstrations, CMS notes, patients will share in Medicare savings and CMS intends to take an active role with ACE demo sites to market the demonstration. CMS will share up to 50 percent of any Medicare savings in the form of payments to offset patients’ Medicare cost-sharing obligations, in the form of a payment not to exceed their annual Part B Premium amount. The ACE demo will test whether aligning payment incentives between hospitals and physicians leads to improved care coordination, and CMS expects the arrangement to result in greater program efficiency and higher quality of care and outcomes for Medicare beneficiaries. Sites have the option to reward individual clinicians, teams of clinicians, or other hospital staff who succeed with measurable clinical quality improvement. An independent evaluation will be conducted to evaluate the feasibility and cost effectiveness of the bundled payment methodology. Prometheus Model A central premise of episode-based payment models is that a bundled payment rate should cover the cost of resources for treating a patient for a particular condition over time, while potentially reining in the rapid rise in unnecessary volume and cost of health care, improving quality by reducing avoidable complications, and avoiding putting providers at risk by providing insufficient funds to cover the cost of services rend

ered. Those goals are ambitious, and the Prometheus payment model seeks to accomplish them by paying hospitals, physicians and ancillary health care providers a single, evidence-informed case rate (ECR) – a clinically-derived and risk-cushioned bundled payment aimed at promoting coordination among providers involved in a given patient’s care episode to deliver improved outcomes for the patient, with an explicit profit margin built in. Developed by a nonprofit corporation, Prometheus Payment, Inc., ECR payment amounts are based on the resources required to provide care as recommended in widely-accepted clinical guidelines, while the model also allows for a portion of the payment to be withheld and re-distributed based on provider performance on measures of clinical process, outcomes of care, and patient experience with care received, according to Gosfield. To generate ECRs, Prometheus Payment convened working groups consisting of medical professionals, health care researchers and data modeling experts who examined prevalence of diagnoses, costs, treatment variation, coordination, reimbursement and other issues, and ultimately selected five procedural diagnoses and five chronic illnesses for which to model ECRs. The workgroups developed the scope of each ECR by examining work-ups required to diagnose the condition, services covered by the ECR, and evidence-informed criteria for successful completion of care, Gosfield notes. An ECR defines the boundaries of “typical” care and establishes a base payment, designed to cover all health care services recommended by clinical guidelines or expert opinion, while also factoring in cost modifiers for: • Regional variations in practice patterns (intended as a buffer to avoid punitive pricing for providers in some regions, at least at the outset when the model is piloted). • Patient severity and comorbidity. • An additional 10 percent margin over the base severity-adjusted ECR (as another financial buffer against too lean a payment at the outset, in recognition of the artificially depressed fee schedules that are reflected in historical claims data upon which ECRs are based). • An allowance for 50 percent of potentially avoidable complications, e.g., infections and routine complications specific to surgical treatment and medical care incurred in hospitals. • An incentive payment for achieving certain benchmark levels of performance (to be phased in as potentially avoidable complication rates decrease). Simply reducing the number of avoidable complications could potentially bring tremendous savings to the health care delivery system. According to Prometheus analysis, some 30 percent of fee-for-service payments for acute myocardial infarctions and 60 percent of payment for diabetes care goes toward potentially avoidable complications, while ECRs would incent providers to coordinate and improve their care by holding them accountable for the “technical risk” of patient outcomes that are the result of suboptimal care, says Gosfield. The AMA is closely examining Medicare payment reform proposals, including bundled payment models, and will reserve the opportunity to compare and contrast physician payment reform proposals until its Council on Medical Service, an influential advisory committee to the AMA, has completed its study and allowed the nation’s medical societies an opportunity to provide their views, according to AMA spokesman Robert Mills. The Council is developing recommendations to the AMA’s House of Delegates, regarding how alternative Medicare payment methodologies should be structured in order to best serve patients and physicians, and in a report last November indicated that bundled payments need to address a number of issues, including: • How the package subject to bundled payment should be defined (e.g., physician-only services; all services related to a single care episode). • Whether there should be a single payment or separate payments for different components of the package. • Which entity or entities should receive the bundled payments and how much flexibility they should have in allocating them among different stakeholders (specifically, how to ensure physicians retain control over their portion of bundled payment). • How to determine the appropriate payment amount for the package and/or its components. • Whether and how to risk-adjust payment for such things as severity of illness and differences in patients’ socioeconomic status. • How to pay for an episode of care, if the most resource-intensive tests and procedures occur early in an episode (for example, should payment be front-loaded or paid in equal installments). • Whether to provide additional payments for teaching hospitals and hospitals caring for the uninsured, as well as for outlier cases. • How to ensure that physicians and/or hospitals do not avoid treating difficult patients. • How to ensure that quality of care does not suffer. • How to ensure that bundled payment covering both hospital and physicians’ services does not run afoul of federal antitrust laws and laws applying to tax-exempt hospitals, and federal laws precluding physician self-referral, kickbacks, and hospital payments to physicians for reducing or limiting patient services. Bundled payment issues that matter to the hospital community include the following, according to Paula Bussard, senior vice president of policy and regulatory services of the Hospital & Healthsystem Association of Pennsylvania: • Payments can’t be one-sided, e.g., dictated by payors without provider input. • All parties must agree on the measures to be used. • The model must not be “one-size-fits-all,” and be adaptable to all configurations of hospitals and their relationship to physicians. • It must minimize unintended consequences, such as channeling sicker and more complex patients to hospital emergency rooms for care. “Who should be at risk for a hospital readmission if a patient can’t get an appointment with a physician?” asks Bussard. “As the stakeholders develop these models, they need to address the possibilities of these issues,” she adds. Offering promise for a successful bundled payment model are a growing base of measurable, coordinated knowledge of best clinical practices, and actual care cost experience, notes Bussard. “Given the right systems for coordinating them, we now have the opportunity to align the clinical and financial aspects of health care delivery,” she says. The Prometheus model attempts to address key physician and hospital concerns, as Gosfield explains, and as Prometheus Payment explicates on its website: At the outset, neither health plans nor providers have credible data regarding the actual costs associated with delivering specified clinical care as articulated in a clinical practice guideline. Patients who are truly complex will not be included under Prometheus until enough is known about how to create ECRs for very clinically complicated patients. In order to test the new bundled payment process, a starting point has been defined as an approximation to price a guideline equitably: historical claims data, cushioned to correct for artificially depressed fee schedules. ECRs will have to be recalibrated regularly (at least once a year) to account for introduction of new clinical evidence and new technology. Over time, Prometheus expects that providers will establish their own internal cost-accounting processes and will be able to negotiate ECRs based on a full understanding of what it actually costs them to deliver the care – including clinician time. In the end, knowledge of what it costs to treat a patient for a condition is at the core of a well-grounded negotiation for a case rate. While clinical practice guidelines are often ambiguous and not all have a solid evidence base, Prometheus will focus on those that are widely accepted and uncontroversial, providing a transparent basis to determine whether the salient processes have been deployed for the patient’s care, while minimizing the risk that providers will skimp on care to enhance financial margins. Good clinical
practice guidelines based on consensus are also eligible for inclusion as a basis for payment, even though their evidence base may not have been subjected to randomized controlled clinical trials or rigorous assessment. Either is preferable to the inferior alternative of using historical claims data that reflect current utilization patterns, which have no basis in evidence of what constitutes good care, and include significant distortions currently present in care delivery. The model avoids saddling providers with the risk that they may have a sicker patient panel than average, or that patients’ conditions or disease mix can be more unfavorable (in terms of resource use) per patient than the average, by attempting to construct payment rates that reflect the quantity and range of services recommended by guidelines relevant to the patient’s condition, and adjusting them to account for normal clinical variation and relative severity of patients. The model accounts for facilities and providers who treat more vulnerable populations by offering higher severity-adjusted rates for managing relatively sicker populations or those with more risk factors, while all rates are adjusted to account for facilities that have a specific mission (e.g., teaching or disproportionate share). To avoid the potential for cherry-picking patients, once a provider decides to participate in the model, all patients with the condition in the ECRs paid for by a participating health plan will be paid in this way. ECRs also have fail-safe “breakers” that insulate the provider in the event a patient turns into a catastrophic case. While physician-hospital organization disputes arose in the past because the hospital drove the negotiations and held physicians’ money for disbursement – often without explicit bases to parse out money to individuals – allocation of ECRs is assigned in advance, while 30 percent of a provider’s performance scores turn on the behavior of other providers treating the patient, rewarding those who collaborate in the patient’s best interest. Under the model, no one holds a provider’s money unless the provider chooses that approach. Providers themselves decide on whether to participate in the model, and how to configure themselves. Physician groups may join with hospitals, therapy providers, imaging facilities or any other entity with which they think would be worthwhile to collaborate to achieve better results for patients. There is no obligation that these aggregations of providers accept money together, but they can if they want to. Providers are entirely free to determine their own organizational relationships and referral relationships. To further motivate explicit clinical collaboration, if two providers seek to be paid for the same portion of the ECR and cannot agree between them as to who was managing which portion of the care, neither will be paid under the ECR, and they will both be paid under their existing contracts. While physicians still choose to whom they wish to refer patients, they will have the incentive to pay closer attention to collaboration with their referral network colleagues. Hospitals will have an incentive to create closer collaborative bonds with physicians without having to own their practices and, while in theory they should lose some admissions as care quality improves, they would be seeing different case mixes. Although the ECR is a fixed rate, the model discourages providers from skimping on care because it takes into account necessary resources to treat more complex patients, risk-adjusts for co-morbidities, and uses a performance contingency fund (10 percent for physicians and 20 percent for hospitals and other providers) that is payable only if the provider reaches a minimum threshold of performance. Providers who consistently fall below that threshold will lose the right to be paid under this model. Services associated with symptoms extraneous to the ECR would be excluded from the ECR and paid for separately. Non-participating providers continue to be paid under current payment methods, while the cost and quality of care they deliver is included in 30 percent of the provider’s performance scores. Prometheus believes providers actually stand to make significant profit margins while non-participating providers will only receive their regularly contracted fee schedules. There is still a substantial volume of appropriate and necessary health care services which are not being delivered, and national studies estimate that Americans are getting only 55 percent of the services that evidence says they should be receiving. Where data demonstrates underuse in comparison with guideline-based care under the Prometheus model, additional dollars will be available to good providers. Physicians who manage care well are able to keep the difference between the actual cost of delivering care and the case rate. While physicians who over-utilize resources may experience reductions in revenues, changing their practice to reflect clinical practice guideline-based care should be able to lower their expenses and thereby increase their margins. Applying guidelines to drive payment for participating providers should reduce overuse and misuse of health care services, but it remains unknown whether this resulting correction will result in a net decrease in health care expenditures. Reducing avoidable complications could, on the other hand, potentially trim billions of dollars from those expenditures. Prometheus believes that no new legal structures are necessary to make the model work, and that relatively simple contract amendments establishing a carve-out for the negotiated ECRs and protecting providers from medical management programs (e.g., profiling, utilization review, prior authorizations) for the rest of their business are all that is necessary. Certain groups of providers may choose to formally configure themselves into a network but there is no obligation for that to happen, as the model emphasizes clinical collaboration without financial integration. Prometheus believes the model can work for solo physicians, group practices, standalone hospitals, or integrated delivery systems. Since no one is paid for referrals in the model (providers are paid for the work that they do in accordance with the rate that they have negotiated), Prometheus believes that fraud and abuse laws do not affect providers’ ability to participate. Providers enter into amendments to their plan participation agreements to establish the new payment model and rates to them. Implementation does not require collaboration among multiple payers in a market, nor does it require financial integration of participating providers. Implementation of the model calls for payers in pilot sites to “plug into” the Prometheus Payment model engine – a combination of claims tracking and financial accounting system, along with a scorecard that uses both claims and other data, including medical record data, to measure the quality of care that is being delivered to patients. Payers and providers will not have to modify their existing claims systems to accommodate implementation of the model, as the engine will track the ECRs in the background and deliver quality, utilization and payment data to participating payers and providers. Implementation Plans Aetna and Independence Blue Cross both indicate they are in discussions with Crozer Keystone Health System evaluating a pilot of the Prometheus Payment model bundling hospital and physician payment for knee and hip replacement surgery. “It’s a very powerful model, in concept. When you look at it at the macro level, there’s nothing not to like, but it can break down quickly with real patients,” if not handled correctly, according to Don Liss, M.D., Aetna’s medical director for the mid-Atlantic region. Even with a credible baseline rate of avoidable complications in a population, says Liss, it is difficult to point to a specific post-operative infection from a hip or knee replacement and convince a physician that it was an avoidable complication. “A leap of faith is required between population-based

outcomes and discrete clinical cases. Physicians may be reluctant to participate in the model, or may feel they’re getting dinged on these complications. It’s going to be a tough sell to physicians and hospitals who deal with skewed or smaller numbers of cases,” adds Liss. Nevertheless, he adds, “Prometheus is way ahead on these issues and we are excited about its prospects. We don’t know if the model is good enough, and the proof is in the pudding.” Highmark is hesitant to jump into bundled payment pilots, and is going to wait and see what happens with CMS’s ACE demonstration, says Carey Vinson, M.D., Highmark’s vice president of quality and medical performance management. Ten years ago, global capitation arrangements with hospitals faced problems coordinating and allocating provider payments correctly, says Vinson. Global case rate reimbursement for specialists never got off the ground nine years ago, and was criticized by the physician community, which had difficulty understanding the reimbursement model and said it paid much less than a traditional fee schedule, Vinson notes. Those concerns are still there, says Vinson, and are compounded by the prospect of bundling payment to many more ancillary providers involved in an episode of care. Even though bundled payment rates of models like ACE and Prometheus incorporate severity adjustment, physicians treat relatively small numbers of patients, says Vinson, and physicians would want reassurance to protect against outliers in the patient mix, which could wipe away otherwise positive returns. The challenge for models like Prometheus, he says, is how to build acceptable exceptions. “There are so many moving parts on this model that it’s not surprising that physicians are leery,” adds Vinson. A bundled payment approach with properly aligned goals among providers is “the only model that has a chance of voluntarily changing the way physicians practice, because it drives dollars in the correct direction and physicians derive economic benefit from bringing new technologies and efficiencies to the system,” says Lewis S. Sharps, M.D., past president of the Pennsylvania Orthopedic Society and president of Positive Physicians Insurance Co., a medical liability insurance exchange. When physicians created minimally invasive knee and shoulder surgery, says Sharps, a five-day hospital stay became a two-day stay, and the only thanks physicians got from the traditional reimbursement system was a two-thirds reduction in payments over the past decade. “Physicians are trained to deliver quality care. They do that automatically, without being rewarded. Any quality and efficiency improvements that are brought to the table should be shared,” says Sharps. Nine years ago, Sharps spearheaded attempts to create an episodic care management model for orthopedic surgery that was configured much like the Prometheus model, e.g., a single price covering facility, surgical fee, anesthesia, pathology, radiology, medical consults, post-acute care, home care and rehab. Unresolved contracting complexities prevented the model from getting off the ground back then, says Sharp. “Prometheus would work best for an integrated delivery system, or one that is large enough to negotiate a fee and sidestep the complexity of multiple contracts and fee schedules,” says Sharps. Crozer Keystone contracts with a private group of about 20 orthopedic surgeons that has a single tax ID, which is well-configured to handle the case rate model, he believes. The model could also work with workers’ comp, Sharp says, which uses a uniform fee schedule across the state and has an internal case management infrastructure that facilitates control and follow-up of cases. “A lot of reinsurers of worker’s comp may be interested in doing this,” he adds.