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CMS Launches Bundled Payments

In 2010, federal health care reform established a new "innovation center" within the Centers for Medicare & Medicaid Services (CMS). The law directed the innovation center to test alternative payment methodologies to reduce costs and improve quality for health care services payable by Medicare and Medicaid.

In that vein, CMS launched a "Bundled Payments for Care Improvement" initiative aimed at reducing costs related to acute and post-acute care.

CMS set an April 2012 deadline for providers voluntarily to propose plans that convert Medicare's fee-for-service (FFS) payments into bundled payments covering entire episodes of care for particular beneficiaries. Although the formal deadline for proposals has now passed, CMS has the power to accept late proposals if it chooses to do so.

More specifically, the solicited bundled payment plans must fall within four general models.

A. The Four Models

1. Post-Acute Care Only: This model bundles the post-hospitalization care of an intermediate care provider (such as a nursing home or a home health agency). The bundle includes related Part B charges such as physician services, clinical lab services, and durable medical equipment. The episode of care begins with the post-hospitalization initiation of services and continues 30 days or more, depending on the agreement negotiated.

CMS expects applicants to propose criteria for (i) gain sharing, (ii) discounting traditional FFS payments; (iii) tracking quality; and (iv) beneficiary inclusion in bundling, though the diagnostic related group (DRG) associated with the hospitalization must play a substantial role.

CMS requires that providers agree to a discount (size to be negotiated) on traditional FFS payments. The discounted FFS payments will be made as services are provided, with CMS reconciling those payments to the bundle target retrospectively.

2.Inpatient Hospital Charges Only: This model bundles inpatient hospital charges (excluding physician services) for each inpatient stay, and applies to all DRGs. CMS takes a discount on FFS charges (escalating to 2% per charge over time) but pays the discounted rate as charged, reconciling to a bundle target retrospectively. CMS monitors costs for 30 days post-discharge to ensure that patients are not prematurely discharged to game the bundle target.

3.Inpatient Hospital Charges with Physician Charges Only: This model adds physician services to the inpatient charges only model. Here, CMS pays hospitals the bundle prospectively (rather than reconciling FFS payments) for a qualifying admission. The provider may choose to propose bundling for select DRG groups. Physician services are included in the bundle and may not be billed separately. CMS expects at least a 3% discount on aggregate charges as a condition of participating in this model.

4.Inpatient Hospital Charges with Post-Acute Care: This model bundles inpatient hospital charges with related Part B charges such as physician services, clinical lab services, and durable medical equipment. The episode of care begins with hospital admission and continues 30-90 days post-discharge, depending on the agreement negotiated. CMS pays a discounted FFS rate and then reconciles the aggregate payments to the bundle target retrospectively.

B. Impact on Maryland Hospitals

CMS has said that it will not approve any bundling that includes Maryland hospitals' inpatient services because Medicare pays Maryland hospitals differently than it pays other hospitals around the country. CMS' position may leave perhaps only Model 1 (post-acute only) as an option in Maryland, though CMS may be convinced to allow Models 3 and 4 (acute care for select DRGs) in particular cases.

Maryland hospitals charge Medicare for inpatient services under Maryland's unique all-payer rate system. In Maryland, the Health Services Cost Review Commission (HSCRC) generally sets hospital rates by capping the mean amount each hospital may charge per patient per admission. But for specific procedures, hospitals can apply for a variance from HSCRC rates. These variances are called "alternative rate methodologies" or "ARMs".

In contrast, non-Maryland hospitals charge Medicare under the "inpatient prospective payment system" or "IPPS" system. Under IPPS, payment amounts relate to a patient's diagnosis and the inpatient services provided. CMS uses the IPPS system to calculate bundles involving acute care.

Therefore, any "bundling" of hospital rates in Maryland requires both (1) HSCRC approval of an ARM and (2) CMS' agreement to set the bundled payment in relation to Maryland inpatient charges (which are typically higher) than IPPS charges (which are typically lower).

A hospital may pass these hurdles for specific DRGs, but the HSCRC would likely refuse to grant an ARM to bundle all inpatient charges (Model 2). A DRG-specific ARM is more likely, but might come with an additional catch: due to Maryland's all-payer system, the HSCRC might or might not require Maryland hospitals to offer any bundled payment ARM to all payers, and not just Medicare.


June 25, 2012




Rosen, Barry F.


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