CMS's bundled payment proposal is huge news. Here's why.

The Daily Briefing's Dan Diamond spoke with Rob Lazerow, the Advisory Board's expert on payment reform, to understand CMS's proposal to mandate bundled payments for hip and knee replacements in 75 geographic areas.

Q: Medicare officials have announced a slew of payment reforms in recent weeks—proposals for value-based home health care, a new physician fee schedule, the Million Hearts initiative, and so on.

Rob Lazerow: That's fair—there have been a lot of Medicare proposals lately.

Q: Now, they're debuting the 'Comprehensive Care for Joint Replacement Model.' What makes this proposal especially important?

Or to put it more bluntly, why should providers care?

Lazerow: Here's why: CMS is showing it's committed to integrated care delivery.

It's the first time that Medicare is proposing to make bundled payments mandatory for hospitals, doctors, and other providers in at least 75 locations, which include areas like Miami and New York City.

There have been a number of bundled payment programs in the past, and they've all been voluntary. Thousands of providers are voluntarily participating in the Bundled Payments for Care Improvement Initiative, after interest surged last summer.

This new model is very different. There's not that element of choice.

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Q: And any decision to mandate payment changes will be closely scrutinized, given that Medicare is trying to push providers away from traditional fee-for-service—but not do it so fast that providers push back.

Rob Lazerow: Exactly.

If you think about the broad shift to new payment models, we’ve seen two approaches from CMS.

Some programs are voluntary. Again, providers get to choose whether or not they want to participate in the Bundled Payments for Care Improvement Initiative, or Medicare's accountable care organization programs.

But there are mandatory programs underway. The Hospital Value-Based Purchasing Program, for instance, or Medicare's readmissions penalties. And for physicians, the new SGR replacement law mandates value-based payment changes, too.

Today's announcement fits in that camp of mandatory payment reforms.

Q: There's an important time crunch: CMS has pledged to shift 50% of Medicare payments to alternate forms like ACOs and bundles by 2018.

Lazerow: That's right. It's an ambitious goal. And to date, many of these new payment models have been voluntary in nature, so some observers have wondered how Medicare is tracking against its goals.

But today's announcement raises the possibility that Medicare is becoming more willing to use mandatory programs to accelerate the transition to alternative payment models.

Q: CMS has the power to quickly scale up its payment reform pilots. But do we know if bundled payments can work at scale?

Lazerow: They have a decent body of evidence pointing to the potential of bundled payment. Keep in mind, CMS has run several pilots here. The CABG demonstration in the 1990s; the ACE demonstration more recently.

There's also an important distinction between bundled payments and shared savings, or the ACO model, at least from the perspective of Medicare.

In a bundle, the payer applies the price cut across every episode of care—they essentially get the savings upfront rather than waiting to see if providers can reduce costs across the year.

What that means: CMS would be getting a discount on what it currently pays for hip and knee replacements. That could translate to real savings, given that in 2013, Medicare spent more than $7 billion on hospitalizations for hip and knee replacement surgeries alone.

To get customized data on your 90-day joint replacement episodes, hospital members can click hereNote: If you don’t see your hospital’s data in the tool, please request access by emailing

Q: So this all sounds good for Medicare. What about providers? Will they be happy with the terms of the proposal?

Lazerow: I suspect that providers will have mixed reactions to the announcement. Organizations that decided against participating in the Bundled Payments for Care Improvement initiative—or left that program already—will probably feel surprised by the news. And more broadly, introducing a mandatory program is a substantial change for providers, who generally assumed bundles would be optional for the foreseeable future.

That said, while CMS wants to create a mandatory bundled payment program, fortunately they are taking a minimally disruptive approach to the model.

First, they're using a retrospective bundled payment model, essentially creating virtual bundles.

As a result, no provider has to collect the payment, or play the role of the "banker" as I like to call it. Instead, everyone will continue to be paid by CMS directly. That reduces the administrative burden involved.

Second, there's no downside risk in the first year of the program. That means providers will have a year to operationalize their programs without risking any downside financial consequences.

Q: Help me understand: Where does this new proposal fit across the broader landscape of payment reform?

Lazerow: Today's announcement has important implications for stakeholders across the health care industry.

Hospitals, orthopedic surgeons, and post-acute care providers in these 75 markets should start talking about partnerships to be ready when this program launches.

And from my perspective—the race for partners is on.

Hospitals have an imperative to drive these conversations, because they'll be the ones held accountable if spending exceeds targets.

This proposal includes some tools to help there, like gainsharing—financial arrangements with other providers involved in the episode of care. That should help align incentives around high-quality, efficient episodes of care.

Beyond providers, I see clear implications for medical device manufacturers too. Providers will focus on their device spend as they look to reduce input costs to offset the program’s two percent episode price cut.

Keep in mind that at this point, this is a proposed rule: Public comment extends through September 8.

So if you have feedback or concerns, now's the time to voice them before the proposal is finalized.

From the Advisory Board

Need help understanding how to navigate bundled payments?

In this video, we explain what bundled payments are, how they differ from fee-for-service, and what the potential benefits and pitfalls are when working under this model.

Want to view customized data on your 90-day joint replacement episodes? Hospital members can click here. Note: If you don’t see your hospital’s data in the tool, please request access by emailing

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