(This story was updated July 10, 2015.)
The CMS is planning to require hospitals in 75 geographic areas, including Los Angeles and New York City, to participate in a test of bundled payments for hip and knee replacements.
The procedures are among the most common that Medicare beneficiaries receive, and the price varies significantly. The average Medicare payment for surgery, hospitalization and recovery ranges from $16,500 to $33,000, the CMS said in a news release announcing the initiative, which would be administered by the CMS Innovation Center.
Hip and knee replacements are among the procedures included in Medicare's voluntary Bundled Payments for Care Improvement initiative. But the CMS has determined certain kinds of hospitals aren't signing up. The approach of the new program, the agency said in a proposed rule (PDF), would capture hospitals with a variety of utilization patterns, roles within their local markets, access to capital and other factors.
The initiative should send a clear message that the Obama administration is serious about rapidly moving away from the fee-for-service model and an acknowledgement that voluntary efforts in the industry aren't likely to achieve that goal, said Brian Fuller, a vice president with consulting firm Avalere.
“This is the first really strong signal that this is where the industry is going,” Fuller said.
The program would begin Jan. 1 and run for five years. Episodes included in the bundle would begin with the admission to the hospital and end 90 days after discharge. The hospitals would bear financial risk for the procedure, the inpatient stay and all care related to the patient's recovery.
The geographic areas chosen for the program range from large markets like New York City and Los Angeles to smaller ones like Flint, Mich., and Florence, S.C. (See a map and list of the areas below.) In all, more than 800 hospitals would be subject to the rule. Critical-access hospitals would be excluded.
The hospitals would continue to get paid for their services under Medicare's fee-for-service system. At the end of the year, depending on the hospital's quality and cost performance, the hospital would receive an additional payment or be required to repay Medicare for a portion of the episode costs. Hospitals will not be at risk the first year but must absorb losses starting in year two.
Still, that could be a challenge for hospitals that haven't made the necessary investments in data infrastructure or care coordination and suddenly find themselves under payment bundles in January, Avalere's Fuller said.
The CMS, though, said the program will give hospitals an incentive to work with physicians, home health agencies and nursing homes to make sure Medicare patients get coordinated care and reduce avoidable hospitalizations and complications.
The program would include quality measures for complications, readmissions and patient experience.
“We're doing this because we believe there's an opportunity to improve care for Medicare beneficiaries who are undergoing hip and knee replacements,” said Dr. Patrick Conway, the deputy CMS administrator for innovation and quality.
The American Hospital Association declined to comment Thursday, saying its experts were still reviewing the proposal. But Premier, the hospital purchasing, consulting and performance improvement company, said rolling out a mandatory bundled payment was "too much, too fast."
“A voluntary, national program would ensure that only providers who are ready to take on this challenge enter the program, avoiding unintended consequences,” Premier Senior Vice President Blair Childs said.
Bundled payment advocates Dr. Ezekiel Emanuel and Topher Spiro applauded the announcement but urged the CMS to go even farther. Bundles should be used for spine surgery and other procedures and the orthopedic bundles should be “the standard method of payment nationwide,” they said in a statement.
Emanuel, head of the University of Pennsylvania's medical ethics and health policy department, and Spiro, vice president for health policy of the Center for American Progress, championed bundled payments in a Wall Street Journal commentary published days ahead of the CMS announcement.
They argued that more must be done to curb spending growth as new economic data suggest an acceleration in health spending after a historic slowdown. Efforts to expand accountable care organizations—another Affordable Care Act payment-reform model—cannot be expanded as easily as bundles, they wrote.
“A cost-control strategy that relies on expanding the number of ACOs won't be successful,” they wrote. “Before it is too late, the Obama administration must focus on a reform that can be scaled. Medicare should lump together physician services, hospital costs, tests, medical devices, drugs and rehabilitation services related to common ailments—such as broken hips, heart stents and cancer treatments—into a bundle. It could then pay a medical provider a discounted amount for the whole array of services.”
ACOs have seen mixed results. Medicare savings have been minor in early years, though a broad, commercial ACO-type initiative in Massachusetts has produced more significant savings after four years.
An early test of bundles, the Medicare Acute Care Episode Demonstration, did save Medicare $319 per episode during a three-year program with the largest savings from orthopedics. However, published results are very limited for the Affordable Care Act's Bundled Payments for Care Improvement initiative. The CMS acknowledged the lack of data from that program but asserted the results have been positive and that the experience would inform the new experiment.
Most hospitals participating in the bundled payments initiative would be excluded from the new program.
In January, HHS announced a goal to have 50% of its fee-for-service spending under contracts that include cost and quality incentives.
In 2014, approximately 430,000 Medicare beneficiaries had discharges for lower-extremity joint replacements, costing Medicare more than $7 billion for the hospitalizations alone.
The CMS estimates that the new bundled-payment test will cover about 25% of the hip and knee replacements that Medicare pays for. The program would put about $2.2 billion in Medicare spending in the new bundles in 2016, and that figure would grow to $2.7 billion in 2020. The agency expects the model to yield $153 million in net savings during its five-year run.
Comments on the proposal are due Sept. 8.
