Blog | 7/31/2015

An Overview of a New Bundled Payment in Orthopedics: CMS's Comprehensive Care for Joint Replacement

By Masha Dumanis

The idea around bundled payments is that by combining all medical activities and expenses around a pre-defined “episode of care”, providers, not just payers, share in the risk and financial decision making around patient treatment. Bundled payments are not an entirely new concept and are gaining traction with public and private payers alike – CMS has been piloting bundled payments for several DRGs, including joint replacement, for several years now. CMS, however, has come to realize that a voluntary pilot program is not an effective one since it self-selects for participants who are likely to be early-adopters and have progressive and collaborative systems in place to improve cost-containment.

It is with this realization in mind that CMS announced earlier this month their new “Comprehensive Care for Joint Replacement” (CCRJ) model, which launches in January, 2016. CCRJ will more broadly test a bundled model for lower extremity joint replacement (i.e. primary hip and knee replacements) across a representative group of geographic areas and acute care hospitals within them. CMS has randomly selected 75 metropolitan statistical areas and virtually all acute care hospitals within them (with a few exceptions, such as those already participating in the ongoing Bundled Payment for Care Improvement model) will be forced to participate in this five-year model.

In its essence, the model is a retrospective program triggered by hospitalization of Medicare fee-for-service (FFS) beneficiaries discharged under DRG 469 or 470. The episode of care is defined as the hospitalization and 90-days post discharge, which is longer than the 30 days that many have theorized would be a model for bundled payment going forward. All Medicare Part A and Part B services will be included, except those unrelated to the episode (e.g. appendicitis or head-injury occurring within the 90 day post-discharge period). All providers and suppliers will continue to bill Medicare FFS in a typical fashion. Included services comprise, but are not limited to: physician services, hospitalizations (including readmissions), inpatient rehab, skilled nursing facility (SNF) stays, home health, clinical lab services, durable medical equipment (DME), outpatient physical and occupational therapy, and part B drugs.

Following each performance year, aggregate actual episode spending will be compared to a target episode price, and hospitals will bear financial responsibility in this two-sided model. If the actual price is below the target price, hospitals will be eligible to receive reconciliation payments. If the actual price exceeds the target, hospitals will be required to make a payment to CMS. Repayment begins in year two of the model. Hospitals may share risk with “collaborators”, such as home health agencies, SNFs, inpatient rehab, and others. Hospitals may not share more than 50% of repayment amount, and no single collaborator may share more than 25% of payment responsibility. All parties are incentivized to work together to reduce costs as hospitals may share either reconciliation payments or internal cost savings with collaborators directly involved in episodes of care.

Target prices for each hospital will be set by CMS before the start of each period and will be based on three years of historical data. Target prices will be re-evaluated every two years. One unique feature of target pricing is that it will be based on a blend of hospital-specific and regional data, and will transition to regional-only data for the last year of the model. This shift in target price determination should help better align regional hospital costs, which today may have highly discordant costs for joint replacement. Payment will also be tied closely to performance and quality metrics, and hospitals will receive additional financial incentive if they submit data on patient reported functional outcomes.

The model also puts in place some risk limits and adjustments. There is a 20% cap on reconciliation payments to hospitals known as a “stop-gain”. There are capped and phased-in “stop-losses” for hospital payments to CMS: 0% in the first year, a 10% maximum in the second year, and a 20% maximum in years 3-5. The program also includes some potential waivers to aid in cost-savings. One significant such waiver is the “3-day SNF rule”, which currently mandates that any beneficiary who will be moving to a SNF must remain hospitalized as an inpatient for at least three days, thus artificially inflating length of stay (LOS) and costing the hospital significant money (over $1,000 for each additional day). Under the new CCRJ model, hospitals will be able to waive this requirement for beneficiaries discharged to a 3-star or higher SNF (as rated on the CMS Nursing Home Compare website). Reducing inpatient LOS is likely to be a driving force of cost reduction in the early phases of this model.

Given the high-costs and high-variability associated with joint replacement, and the number of beneficiaries nationwide undergoing these procedures, there is no question that CCRJ is a positive move towards more collaborative and cost-effective care. At the same time, it leaves a lot of questions on the table for medical product innovators: Is there still room in this new environment for new devices and new services? How will new products be evaluated by hospitals? Who will pay for these products? To be successful, companies will be forced to demonstrate value across the care continuum and among stakeholders, and focus on cost-effectiveness will increase as a key tenet of portfolio planning.

Masha Dumanis is a Consultant at Health Advances

Opinions expressed here are solely those of the authors and do not reflect the views of Health Advances LLC, its management, or affiliates