Skip to main content
Learn more about advertising with us.

Bundled payments – a new reckoning that requires deep understanding of hospital data

Bill Fera, MD, Principal in Advisory Health, Ernst & Young LLP

One of the primary goals of the Affordable Care Act is curbing health care costs by incentivizing providers to deliver higher-quality care more efficiently. Toward these goals, the Centers for Medicare and Medicaid Services (CMS) has introduced a series of pilot programs over the past few years that tie provider payments more closely to quality and outcome, while also reducing Medicare spending. Until recently, all of these programs have been voluntary in nature – meaning that only those hospitals that anticipated being successful under a particular bundled payment plan elected to participate. However, on April 1, 2016, CMS introduced the mandatory Comprehensive Care for Joint Replacement (CJR) bundled payment program. Under the five-year CJR program, 794 hospitals in 67 regional markets are required to adhere to a bundled payment model for total hip- and knee-joint replacement surgery for their Medicare fee-for-service patients.

Under the CJR program, CMS sets a target episode price for each hospital based upon the hospital’s historical performance, the performance of other hospitals in the same region, along with a reduction of 3 percent as a savings target. The episode for hip and knee replacements includes the inpatient stay for the initial surgery and extends for 90 days after discharge. The hospital assumes full risk for episode spend and quality of services provided for not only the inpatient hospital stay but also post-acute providers such as home health agencies, nursing homes and physical therapists, among others. Hospitals that exceed the target episode price set by CMS will have to pay back the difference at the end of the performance year, while those that realize cost savings will receive additional payments.

While the CJR mandate presents a new challenge to hospitals, CMS is also arming hospitals with the data needed to understand, for the first time, how money is spent on the entire episode of care related to joint replacement. Until now, the hospital’s perspective was limited to its own claims for services rendered in the hospital and any of its owned post-acute care facilities. In year 1, hospitals subject to the mandate will receive three years of detailed Medicare claims data that reports spending by provider for each qualifying complete joint replacement episode. The data will include claims for hospital inpatient and outpatient services as well as any payments made to surgeons, anesthesiologists and post-acute providers (PACs) or for readmissions during a 90-day post-discharge period. Each calendar quarter thereafter, hospitals will receive updated claims information as well. CMS will use this data to determine the hospital’s target episode rate, which will transition from a blend of the hospital and regional average episode spend in year 1 to a 100 percent regional rate by year 4.

However, simply having the data from CMS is not enough – it must be processed and understood to gain useful insights that will allow hospitals to redesign care and monitor ongoing performance to consistently deliver care in a high-quality, efficient manner. There are three key areas of understanding related to this CMS data: 1) validate the CMS target episode spend, 2) combine CMS data with internal cost data and 3) analyze episode spend.

1. Validate the CMS target episode spend.

Hospitals bear the full risk of episode spend and will be accountable for keeping overall episode spend below the target episode rate defined by CMS to benefit from reconciliation payments and avoid repayment liability at the end of the performance year. Given the complexity of the calculations and the size of the data set used to determine target rates and reconciliation amounts, hospitals should perform their own calculation to validate CMS’s findings. To perform that validation, hospitals will need the technical infrastructure to organize the data and the resources to analyze it according to CMS regulations.

2. Combine CMS data with internal cost data.

There are two ways for hospitals to succeed under the CJR program, and doing well at both will provide the greatest opportunity for success. The first way is to meet, or exceed, the cost and quality thresholds defined by CMS. The rules and algorithms are well-defined, and the expectation is that hospitals will focus a great deal of effort in this area. However, CMS spending for the index admission is fixed by Diagnosis Related Groups (DRG) and the physician fee schedule. As a result, from a CMS cost perspective, there are no savings to be had in these areas, which amount to 47 percent of the lower extremity joint replacement episode cost. This means that for hospitals to reduce costs to CMS, they have to manage against the 53 percent of CMS spending that occurs after discharge.

The second way for hospitals to succeed is to reduce their own internal costs. Hospitals should combine CMS data with internal cost data to identify efficiencies, reduce the cost of inpatient care delivery and mitigate repayment liability at the end of the performance year. For example, administrators can analyze episode spend and internal cost data to identify variation in surgical care. With that insight, the hospital can establish gain sharing agreements with surgeons to align incentives to reduce costs. Engaging hospital staff in this type of arrangement now will pave the way for future bundled payment programs and will benefit the hospital beyond just the Medicare volume as other payers are proposing similar value-based programs. Hospitals require the technical infrastructure to integrate CMS claims data with internal hospital cost data to realize these opportunities.

3. Analyze episode spend.

Given that more than half of CJR episode spend is aligned with the “anchor admission event,” and thus paid on a fixed-fee basis, reducing Medicare spend per episode depends on the ability to reduce utilization and spend at PACs. Prior to the CJR mandate, hospitals did not have any incentive to evaluate the value of care provided after hospitals left their care and thus did not invest resources into analyzing PAC performance. CMS claims data provided as part of the CJR mandate will allow the hospital to analyze performance across PAC providers to prioritize gain sharing partnerships and maximize efficiency on this portion of the CJR episode. Hospitals with a mature data infrastructure and analytics capabilities will be best suited to perform that analysis and are likely to develop the best strategy to partner with PACs to align incentives.

It is more important than ever for hospital systems to prepare for the increasing transition to value-based payment, including bundled payments. The CJR program is considered to be the first of many; CMS projects that 50 percent of all payments will be in a value-based model by the end of 2018. The CMS data set shared as part of the CJR mandate will provide hospitals with the information they need to identify efficiencies, maximize gain sharing and minimize repayment risk. However, without a mature data infrastructure, hospital administrators will not be able to capitalize on that opportunity. Hospitals that can quickly organize, analyze and learn from this data will gain a competitive advantage in the new era of alternate payment models.