Read more from TIGI on Group Purchasing Power.

1. [ SourceBook ]
Purchasing Power
The Benefits of
By Gunter
Wessels,
PhD
Bundled Payments
Wessels is a
partner at Total Innovation
Group Inc., a consulting
firm specializing in health
care. Clients of his firm
include policy makers,
payers, providers, group
If you’re a supply chain leader and you can help the program is to create cost purchasing organizations
implement a bundled payment program, it’s hard to efficiencies through align- and supplier companies,
find a reason not to do it. A gain-sharing program that ment. In past demonstration both in the United States
is focused on creating mechanisms to affect physician programs, the outcomes have and internationally.
preference and improve alignment can make a huge been very good. Some facilities You can contact him at
impact. By offering a financial incentive from the hos- reduced episode costs by as gunter@tigi.net.
pital to the physician, the program can much as 70 percent.
Some help negate the effect of vendor-driven
device decisions.
The first three bundled
payment models are retrospective payment arrange-
facilities As part of the Patient Protection and ments where providers are paid a discounted Medicare
reduced Affordable Care Act (PPACA), last year
the Centers for Medicare and Medicaid
fee-for-service rate. Model 4 is based on prospective
payments. Providers may choose to implement more
episode Services (CMS) presented the “Bundled than one model.
costs by Payments for Care Improvement” ini-
tiative. The program creates a series of
Providers apply for participation in the program by
doing analysis and defining “care-episodes,” which
as much as positive incentives that encourage pro- can be virtually any high-volume inpatient episode.
70 percent. vider innovation in cost reduction, clinical
integration and care management. Here’s how the models work:
The program has four versions, called With Model 1, the episode of care is an inpatient stay
models. The models function by taking a discount in a general acute-care hospital. Doctors and hospitals
and focusing on creating cost efficiencies. Gains can are paid as normal (physicians under Part B, Hospitals
Thinkstock
be shared among providers, but losses are limited under Part A), but at a negotiated discounted rate for
by a fixed discount and normal billing. The focus of continued on page 12
8 The Source | Fourth Quarter 2012

2. [ SourceBook ]
Purchasing Power
continued from page 8
the episode. The discount rate is determined
through analysis and the establishment of a
target price for the episode. Procedures and
cases are then performed over the demonstra-
tion period (at least one year).
During the program period, if the provider
hits or performs better than the target price,
gains can be shared. These gains will come
from cost reduction.
For example, if a joint replacement sur-
gery is currently reimbursed at $7,500, but
the provider, in collaboration with physi-
cians, determines that the total case can be
done for $6,500, that price could be offered. If
accepted, procedures would be performed
and the hospital would be paid the negotiated
rate, $6,500 in this example.
Physicians would be paid their professional
fee (also discounted.) However, if the cost
of the procedure is driven down to $5,000,
the hospital could legally share those cost
efficiency gains with physicians, as incentive payments or bonuses. possible. For example, robotic surgery has higher acute-care costs,
With Model 2, the episode of care involves an inpatient stay and but claims lower downstream costs.
post-acute-care for a minimum of 30 or 90 days after discharge Model 4 is the only prospective model in this program. This
(at the provider’s election). The aim of this model is to produce model establishes a comprehensive bundled payment upfront.
savings by reducing cost in two episodes, opening the opportunity Gain sharing is still allowed, but CMS proposes to pay a single
to apply a potentially more costly intervention in the acute-care fixed amount for all services by all providers during the stay. The
setting that reduces downstream costs. Overall gains can be shared hospital would pay the physicians and all other providers out of
among providers. the bundled payment and submit “no pay” claims to Medicare for
Model 3 focuses on post-acute providers and aims to reduce record-keeping purposes.
readmissions. Gains are also available for sharing between providers.
It’s important to remember that many of these case categories Overall, the bundled payment demonstration project
are marginally profitable or already unprofitable. Taking reduced seeks to do two things:
reimbursement would therefore seem like a bad idea. However, if 1. Allow providers to use their own financial resources to re-shape
coordinated action could have an effect on costs, and the prohibi- physician and partner organization behavior without violating
fraud and abuse regulations.
The program sets up a safe zone 2. Allow the CMS to learn from provider innovations in coordina-
tion, clinical integration and patient care management.
for experimentation .. .It opens
the opportunity for greater The program sets up a safe zone for experimentation and allows
financial alignment between sophisticated providers to raise the bar for everyone by demonstrat-
physicians and their host ing best practices. It opens the opportunity for greater financial
facilities to drive down cost. alignment between physicians and their host facilities to drive
down cost.
The path forward is clear. The CMS intends to use these innova-
tion against paying physicians to change their behavior is lifted (as tions to structure future payment systems. By allowing the provider
under this program), opportunities abound. Right now, using a less community the opportunity to participate in the evolution of more
costly procedure tray, implant and more conservative intervention efficient payment systems, rather than oppose arbitrary cuts, the
are all uninteresting to many physicians since their reimbursement CMS is attempting to mitigate resistance. Participating in the de-
incentives are aligned with the opposite behavior. Similarly, expos- velopment of our shared future is recommended—and prudent.
ing the health system to the claimed benefit of a more expensive For more information, visit www.innovations.cms.gov/initiatives/
intervention in one setting that reduces costs in another is also bundled-payments/index.html. •
12 The Source | Fourth Quarter 2012