Last month, the CMS announced the Bundled Payment for Care Improvement initiative, a unique opportunity made possible by the Patient Protection and Affordable Care Act for physicians, hospitals, post-acute providers and others to come together as partners, to redesign Medicare payments and significantly improve coordination of care.

We come to the Center for Medicare and Medicaid Innovation Center as a former hospital CEO and a practicing physician who has served as president of the American Medical Association. We see enormous promise in this initiative, not least because bundling payments based on episodes of care makes sense.

Patients experience care based on an episode of illness or injury; why can't providers deliver and be paid the same way? In addition, better coordination of care can raise quality, by reducing unnecessary duplication of services and preventable medical errors, helping patients heal without harm. And all of these can lower costs both for the beneficiary and the Medicare program.

For years, physicians have asked that the barrier between Medicare Part A (hospital and other institutional services) and Medicare Part B (physician and other outpatient services) be eliminated, so payments could be better aligned with care improvement efforts. The bundled payments initiative responds to this call.

This demonstration program gives hospitals and physicians a greater incentive to coordinate care during an inpatient stay and ensure continuity of care as the patient continues to heal after discharge. So, rather than paying for services separately, the initiative will align payments across an episode of care that begins with an inpatient stay.

The innovation center will require participants to ensure that quality and experience of care improve and costs fall while protecting the patient's rights to decide how they receive their care.

The innovation center will offer learning sessions and other support to help participants collaborate and share best practices. But it will be the physicians and hospitals that propose the conditions and related services to target, the episode's time frame and other details.

Dr. Nancy Nielsen

The bundled payments initiative will test four models. One covers inpatient hospital stays only; hospitals offer a discount to Medicare fee-for-service rates, share in program savings and can make gainsharing arrangements with physicians. In two of the models—one covering post-acute periods only and one covering both inpatient stays and post-acute periods—the CMS will perform a retrospective reconciliation of actual costs with a predetermined target price. In the fourth model, providers will receive a prospective, single bundled payment for all Medicare Part A and Part B services and 30-day readmissions.

Because examples from around the country have demonstrated that gainsharing can increase coordination and foster best practices, all four models allow participating hospitals to enter into arrangements with physician that would give them incentives to work collaboratively with the hospital to reduce internal hospital costs through quality improvement and efficiency initiatives.

For example, in the inpatient-only model, the episode of care would be defined as the inpatient stay in the general acute-care hospital. Medicare will pay the hospital a discounted amount based on the payment rates established under the inpatient prospective payment system, and will pay physicians separately for their services under the Medicare physician fee schedule. However, hospitals will share in any savings to Medicare resulting from their participation, and hospitals will be permitted to pay incentives to physicians to find ways to improve care and save money.

Valinda Rutledge

We know it seems like a paradox that hospitals (and physicians) could benefit financially by charging Medicare less for their services. However, the CMS knows of a number of hospitals that with relatively modest resources and effort have improved quality of care and significantly lowered cost. These hospitals have focused methodically on particular diagnostic groups, and then adapted the care improvement and cost-saving strategies identified to other diagnostic groups, and to the care furnished to patients covered by commercial insurance.

Doctors, hospitals and other healthcare providers can apply now to participate in the bundled payments initiative. For models other than the inpatient-only model, the innovation center will provide Medicare data to applicants to help them refine their proposals.

Over the past year, the innovation center has visited clinics and hospitals across the country to discuss how care can be improved and costs reduced. In addition, the innovation center has received hundreds of ideas for improving care delivery through the “Share Your Ideas” page on its website, innovations.cms.gov. There's a pervasive theme running through this feedback—by working together, doctors and hospitals can find ways to deliver the highest quality care and lower costs at the same time. The CMS shares this premise and, through its innovation center, can help.

Valinda Rutledge is director of the patient-care models group at the Center for Medicare and Medicaid Innovation Center and former president and CEO of CaroMont Health, Gastonia, N.C. Dr. Nancy Nielsen is an internist and senior adviser to the Center for Medicare and Medicaid Innovation Center and a past president of the American Medical Association.