on September 28, 2011 |
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Topics: Planning, Strategy, Reimbursement, Finance, Payer and Regulatory Policy, Revenue Cycle, Payer and Regulatory Policy, Market Trends, Service Lines
Eric Cragun
Among the payment reforms under consideration by CMS and private payers, a methodology known as bundled payment has gained traction. Bundled payment programs seek to address one weakness of the fee-for-service payment system -- that physicians face little accountability for the cost of hospital-based patient therapy or care. Physicians consider cost less often than would be desirable when making cost-related decisions, such as which implant to use or when to discharge patients. Traditionally, hospitals cannot legally reward physicians for reducing costs associated with inpatient care.
However, the Center for Medicare and Medicaid Innovation (CMMI) recently released a bundled payment program in which participants can legally gainshare with physicians for episodes of care, during which the physicians keep costs below a pre-determined target. The goal is to provide hospitals with a mechanism for engaging physicians in cost control efforts. CMS benefits because participating hospitals must offer CMS a discount on services, and hospitals will come out ahead if they leverage the gainsharing to lower costs by more than the discount and/or grow volumes by tightening alignment with physicians. For a more detailed discussion of CMMI's Bundled Payment for Care Improvement Initiative, listen to the recording of our previous webconference and/or download the handout.
While previous bundled payment demonstrations focused specifically on cardiac and orthopedic procedures, CMMI unexpectedly opened three of the options within its program to any DRGs which applicants propose. The fourth option, or “model,” is essentially a pay-to-play gainsharing program that requires participants to provide Medicare a discount on all inpatient care.
Hospitals considering participation under the three DRG-specific models face the task of identifying those admissions most ripe for cost savings and then determining whether those potential cost savings justify taking a discount on Medicare revenue.
Where to look for opportunities to benefit from bundled payments? Which service lines might be best positioned to benefit from participation? The key to identifying opportunities is finding procedures for which tighter physician alignment would yield significant reductions in cost, either inpatient costs or more-broadly defined episodic costs. Thus, procedures and episodes with high variability in direct costs are the best place to start. Much like the focus of prior CMS demonstration projects, cardiovascular and orthopedic cases seem to be the most common sources of cost variation and, therefore, the most attractive options for bundled payment participation.
Sub-service Lines with Greatest Opportunity for Inpatient Cost Reduction
1 Variation in direct cost calculated by difference in direct costs for 25th percentile institution and 75th percentile institution.
2 Aggregate opportunity calculated by multiplying per case variation by median volume.
Generally, variability in inpatient costs is related to either variations in device prices or variability in length of stay. Lowering device spending through device standardization provides a higher probability of return on investment, given that any reduction in device spending will directly lower costs. Again, when identifying the most attractive bundled payment options by device utilization, cardiovascular and orthopedic procedures rise to the top of the list. Among the highest-volume, device-intensive procedures, most of the inpatient procedures fall under these two service lines.
1 Implantable Cardioverter Defibrillators.
Reductions in length of stay may only have marginal impact on costs, especially if reductions are not sufficient to allow actual reductions in staffing. But for institutions that operate near capacity, partnering with physicians to reduce length of stay may yield increased overall volume. Thus, even though the cost savings may be relatively modest, the potential for increased volume may justify bundled payments for procedures with high variability in length of stay, particularly medical cases. Through this lens, most institutions will find that cardiovascular services present the highest returns to participating in CMMI’s bundled payment initiative.
1 Bubble size represents median sub-service line volume.
2 Variation computed as average utilization or stay (in days) at 25th percentile institution less figure at 75th percentile institution.
The bundle under the CMMI initiative includes related readmissions in three of the models and post-acute care in two of the models. Thus, prospective participants may also identify attractive DRGs for bundled payments by considering elevated or variable readmission rates and post-acute care costs. Looking at readmission rates, cardiovascular and orthopedic service lines again stand out.
In addition to the opportunities above, interested organizations should also consider opportunities for strengthening key physician relationships. Bundled payments provide an opportunity to improve per case economics for physicians and, in addition to helping hospitals lower costs, might also encourage physicians to bring more cases to the hospital. Effectively evaluating whether to participate in CMMI’s bundled payment program requires identifying those specialists who would be most likely to both engage in the cost saving initiatives and view the gainsharing dollars as a reason to increase their caseload at the hospital. Ultimately, hospitals participating in the bundled payment program will take on some level of risk, so some combination of expected financial and strategic return must be sufficient to justify the risk.
For more information about the impact of payment reform on service lines, Marketing and Planning Leadership Council members may access the recent study Transforming Service Lines for Risk-Based Payment.
