Bundled Payments and the Scars of Capitation

by Dan Diamond, California Healthline Contributing Editor

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Congress may be shuttered for the summer, but Washington, D.C., is still shaking. Well, metaphorically -- an HHS staffer assured California Healthline that the Hubert H. Humphrey building was untouched by Tuesday's earthquake, just hours after CMS' latest plan sent shockwaves through the health policy world.

The agency's announcement of the Bundled Payments Initiative was hardly unexpected, but it does offer the potential to stir up long-established practice.

How Do Bundled Payments Fit in Reform?

Bundled payments -- which often go by other names, such as episode-based payments -- turn the established fee-for-service model on its head. Rather than pay individual providers for each incremental procedure, bundled payments try to align reimbursement along an episode of care. Providers are then left to carve up the "bundles" based on services rendered.

Some have said that bundled payments are at the heart of the Affordable Care Act's effort to reduce health costs and improve quality. Perhaps that's fitting, given that a pair of bundled payment projects involving heart patients are what gave the model traction.

The model first caught the attention of policy wonks after a mid-1990s CMS demonstration plan for heart bypass surgery patients reduced Medicare spending by millions. But bundled payments moved into the national spotlight after the New York Times' 2007 front-page story about Pennsylvania-based Geisinger Health System's "surgery with a warranty" plan.

Geisinger's model aimed to address a perverse incentive: providers often benefit financially by doing follow-up care. Instead, Geisinger offered its ProvenCare system -- which included 90 days of follow-up treatment at no additional cost -- to heart bypass surgery patients as a "guarantee of its workmanship." Essentially, the organization would take a revenue hit for each patient who needed to be readmitted.

CMS Offers Details

Under its new plan, the CMS Innovation Center is inviting providers to apply for four broadly defined models of care; three models involve retrospective bundled payments and the fourth would reimburse providers using prospective payments. Applicants would propose the target price and have "great flexibility" to select which conditions to bundle, set up the delivery structure and determine how to allocate payments among participating providers, the agency notes.

CMS officials have said that they expect "hundreds of providers" to join the program. That would be a much more favorable reaction than some of the ACA's other reforms have received.

For example, skepticism over CMS' proposed accountable care organization model has kept many providers from applying to participate. Some hospitals and health systems say that CMS is asking them to take too much risk to become ACOs; meanwhile, consumer advocates warn that the model could concentrate too much power in the hands of large health care organizations.

Advocacy organizations like the American Hospital Association have also pushed back on other federal reforms to adjust payments, such as tying a larger share of reimbursement to quality reporting.

But one point in bundled payments' favor: The CMS plan isn't calling for transformative changes. Instead, the agency appears to have designed the program with maximum flexibility in mind. The plan's range of models for participants could be an "appealing notion" for member hospitals, AHA's Nancy Foster told The Hill's Sam Baker. Foster added that hospitals realized the current fiscal environment demands cuts and that bundled payments could offer financial upsides for top performers.

California's Own Experience With Payment Models Could Be Boon

Another reason that CMS may be slow-pedaling its bundled-payment program is that the model harkens back to the mid-1990s push for capitation -- and many providers across the nation have dark memories of that effort. Many hospitals and health systems sought to vertically integrate with physician groups to receive larger, capitated payments, only to abandon their attempts after finding such integration financially onerous and difficult to execute.

However, California providers fared better than most with capitation, partly because the model took hold in the Golden State several decades ago. The added years of experimentation in a less concentrated health care market allowed organizations like Kaiser Permanente to pioneer care delivery systems that were multidisciplinary and highly patient-focused. Meanwhile, state hospitals learned how to operate under capitated payments to coordinate with physicians and enhance revenue.

This track record may prove to be helpful ahead of coming payment changes, experts suggest. "Physician groups that have experience with capitation may be relatively well-positioned to receive bundled payments," a September 2009 California HealthCare Foundation report noted. CHCF is the publisher of California Healthline.

Golden State providers' expertise in "monitoring and managing service use for a designated set of enrollees could be transferable to a variety of payment arrangements," the report added.

Meanwhile, California already has a number of organizations experimenting with bundled payment models. The most high-profile effort is being led by the Integrated Healthcare Association, which launched a bundled-payment pilot program last year involving a number of state organizations. While organizers cautioned California Healthline that the pilot was "only a piece of the puzzle" to reform payments, its results will be closely watched as other Golden State organizations weigh whether to join the new CMS initiative.

"Road to Reform" will be on a summer hiatus until September, although you can follow breaking reform news on Twitter at @CalHealthline. Before we sign off, here's a look at what else is making news across the nation.

Eye on the Courts

  • An ongoing debate over the ethical code of conduct that would determine when a U.S. Supreme Court justice should be disqualified from hearing a case has raised questions among health care interest groups anticipating the high court's review of the federal health reform law. Supreme Court justices individually decide whether to recuse themselves from a particular case, which has "provoked a volley of criticism" from interest groups against some justices. In recent months, some groups have questioned whether Justices Clarence Thomas and Elena Kagan should be disqualified from reviewing health reform-related cases because of potential conflicts of interest. Thomas' wife actively and publicly opposed the overhaul, while Kagan served as U.S. solicitor general in the Obama administration when the law was enacted (Totenberg, "All Things Considered," NPR, 8/17).

Inside the Industry

  • A proposed standard health plan benefit form unveiled by HHS and CMS officials last week has prompted questions from the insurance industry about the costs and timing of implementing the form (Reichard, CQ HealthBeat, 8/17). The six-page proposed standard form would feature information about available health plans (Wilde Mathews/Adamy, Wall Street Journal, 8/17). A spokesperson for America's Health Insurance Plans asked that the benefits of the new standard form "be balanced against the increased administrative burden and higher costs to consumers and employers." Noting that the form's release was delayed by five months, he also requested that "the implementation date also should be pushed back to give health plans sufficient time to make the operational and administrative changes needed to create these new documents" (Wall Street Journal, 8/17).
  • The National Association of Insurance Commissioners has warned the Office of Personnel Management that language in the federal health reform law could put multistate insurance plans at an advantage over smaller plans. In 2014, OPM will contract with at least two health plans that will be sold in every state health insurance exchange. According to NAIC, the law's language could create two sets of rules: one for the multistate plans and one for other plans. For instance, the language could be interpreted as exempting multistate plans from additional consumer protections imposed by states, NAIC said (Commins, HealthLeaders Media, 8/16).

In the States

  • Recently, Idaho Gov. C.L. Otter (R) said his state would accept federal funding to establish a state health insurance exchange mandated by the federal health reform law (Baker, "Healthwatch," The Hill, 8/22). The state has until Sept. 30 to apply for a $40 million federal grant to establish an exchange on its own (AP/Houston Chronicle, 8/22). However, Idaho lawmakers have been reluctant to accept federal money associated with the health reform law, partly because the state is involved in the multistate lawsuit that is challenging the constitutionality of the law's individual mandate. Despite the opposition, Idaho Insurance Commissioner Bill Deal said that ceding the administration of the state's exchange to the government would "be very disruptive to the Idaho marketplace and, particularly, with our domestic insurance companies and our agents" ("Healthwatch," The Hill, 8/22).

Rolling Out Reform

  • In July, HHS granted an additional 106 waivers exempting organizations from a provision in the federal health reform law that prohibits caps on health benefits. The agency now has granted waivers to 1,472 organizations, which cover 3.4 million U.S. residents. The waivers granted in July will last for three years. Meanwhile, HHS will permit organizations that received one-year exemptions to extend them until 2014, when the reform law fully takes effect and prohibits mini-med plans. HHS previously announced it will stop accepting applications after September (Baker, "Healthwatch," The Hill, 8/19). Last week, CMS also released supplemental guidance for health reimbursement arrangements, which stipulates that HRAs with annual limits do not have to submit individual applications for waivers (Norman, CQ HealthBeat, 8/19).

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