Sheila Sankaran, MA

CMS recently announced that more than 6500 Medicare providers had signed up to participate in its pilot program to test bundled payments—an arrangement in which a single payment is established to cover some or all of the services delivered during an episode of care.

With that many participants, the Bundled Payments for Care Improvement (BPCI) Initiative is one of the largest demonstrations in Medicare history.

To policy makers and health policy experts, bundled payments are an attractive alternative to current Medicare fee-for-service payment approaches in that they encourage more coordination among providers, which can lead to cost efficiencies. The Medicare Participating Heart Bypass Center Demonstration, conducted from 1991 through 1996, resulted in savings of approximately 10%.

More recently, an evaluation of the Acute Care Episode Demonstration estimated that it saved Medicare $7.3 million in 5 demonstration sites.

It has been estimated that widespread implementation of bundled payments in Medicare could save the program $3 billion to $15 billion per year.

If Medicare is to successfully transition from traditional fee-for-service to episode-based payment approaches, the high interest in the BPCI Initiative is an encouraging sign. As a pilot, the BPCI Initiative provides an opportunity for CMS to evaluate the effects of alternative bundled payment models and help inform the design of broader efforts. The initiative also offers an opportunity for providers to gain experience with bundled payments on a voluntary basis.

Although broad participation in the BPCI Initiative could pave the way for a smoother transition to nationwide implementation of bundled payments in Medicare, CMS may not be there yet. As of April 2014, hospitals participating in BPCI had higher Medicare Inpatient Prospective Payment System (IPPS) margins, more beds, and fewer Medicare discharges as a percentage of all discharges, and were more likely to be located in large urban markets compared with all IPPS hospitals.

Anecdotal evidence suggests that many providers submitted a letter of intent to apply for the BPCI during the initial enrollment process but ultimately decided not to submit an application.

In a recent study for The Commonwealth Fund, we interviewed leaders from 10 organizations—mostly hospitals&mdash;that withdrew from the program, and 5 organizations that continued to participate, seeking to understand the factors that affected their decision to participate or not. Financial and clinical leaders from both groups recognized that the healthcare landscape is moving toward global payment models and expressed the need to stay ahead of this change. They viewed the establishment of bundled payments for certain service lines as an opportunity to distinguish their organizations from competitors. All of the organizations we interviewed were motivated to explore BPCI participation because of the opportunity to examine Medicare claims data to better understand the care pathways of patients treated in their hospitals.

Despite these motivations for participation, nonparticipant interviewees ultimately decided that the potential benefits were outweighed by the costs. While few of our interviewees indicated that financial gain was a significant motivator, all nonparticipants reported that downside financial risk was a driver in their decision not to pursue BPCI participation. Participants must incorporate a discount to Medicare in their benchmark prices (typically 3%) and are responsible for repaying CMS for Medicare payments that exceed the benchmarks; all interviewees noted that their benchmark prices would also reflect sequestration cuts of 2%, as required by Congress as part of the Budget Control Act of 2011.

Establishing the infrastructure to support bundled payments requires significant investment of time and financial resources. Our interviewees cited the need to hire new staff—from care coordinators to data analysts&mdash;as a cost driver. Additionally, effectively tracking patients and outcomes within and across settings requires investment in technology. The financial model and expected resource requirements were often seen as limiting opportunities for hospitals to achieve any meaningful savings.

Whether the most recent enrollees in the BPCI Initiative will fully commit to the program is unclear. Recent developments, however, may make it easier for providers to enter the risk-bearing phase, such as the emergence of private, nonprovider entities serving as risk-bearing conveners for BPCI applicants. These companies assume risk and offer analytical and technological resources as well as help providers to manage care. The ability to partner with these types of firms might encourage more risk-averse or less financially stable providers to pursue BPCI participation.

The BPCI Initiative also appears to be engaging more physician specialists in delivery system reform than other efforts. To date, many of the episodes being tested in bundled payment arrangements involve surgical treatment because these episodes tend to be more predictable than episodes for chronic conditions. Thus, bundling payment may be an effective way to engage surgical specialists in reform efforts, whereas accountable care organizations tend to focus more on primary and chronic care physicians. The growth of physician groups in the BPCI Initiative may reflect the desire of physicians to maintain control of care decisions rather than cede more control to hospitals.

Despite these developments, many providers may continue to shy away from the BPCI Initiative. The required discounts, sequestration cuts, financial investments, and uncertainty of a return on their efforts may prove too much for prospective participants. However, a wait-and-see approach could put these providers behind the curve if bundled payments are more broadly implemented in Medicare. It may also reflect a missed opportunity for improving the efficiency of Medicare and the healthcare delivery system in general.

Changes could be made to the program to encourage more applicants to fully commit to the BPCI Initiative. For example, CMS could introduce a model that offers less downside risk while providers are investing in the development of new patient care processes. However, policy makers may resist the idea, as some believe that providers need more skin in the game. The growth of nonprovider, risk-bearing conveners in the program also raises questions about the need for refinements to the financial model. A time-limited, low-risk option may strike the appropriate balance between the need to encourage more participants to enter the risk-bearing phase and CMS’ need to fulfill its fiduciary responsibilities. In addition, consistent and clear rules related to the establishment of benchmark prices, assessment of savings, and regulatory and legislative waivers for participants are essential for program success.

Whether or not changes are made to encourage more participants to commit fully to the BPCI Initiative, the approach CMS has adopted and adjustments to the application process have encouraged greater interest in the program. The changes allow CMS to evaluate the effects of participating in the BPCI preparatory phase. Among our interviewees, the opportunity to examine data for episodes of care that extend beyond their own organizations, coupled with the opportunity to work more closely with physicians and post acute care providers, led to new observations and insights about care delivery, as well as stronger relationships with multiple and sometimes new partners. The outcomes of these enhanced discussions around better coordination of care may yield improvement in outcomes and efficiency even when providers withdraw from the BPCI Initiative. If these preliminary observations prove true, it may force many to rethink the role of the traditional CMS demonstrations when it comes to testing new models of delivery system reform.

The authors wish to thank Stuart Guterman, MA, Dominique Hall, BA, and Mark A. Zezza, PhD, of The Commonwealth Fund for their guidance on the study approach and comments on the draft manuscript. The authors also wish to thank the provider organizations that agreed to be interviewed for this study.

KNG Health Consulting, LLC (LK, JN, SS), Rockville, MD; L&M Policy Research, LLC (JD), Washington, DC; Department of Orthopaedic Surgery, Duke University School of Medicine (RCM), Durham, NC.

 This work was supported by a grant from The Commonwealth Fund.

Dr Koenig and Mses Doherty, Nguyen, and Sankaran report no conflicts of interest. Dr Mather is member of the board of North Carolina Orthopaedic Association, a consultant for KNG Health Consulting, and received payment for his involvement in this manuscript.

 Lane Koenig, PhD, KNG Health Consulting, LLC, 15245 Shady Grove Rd, Ste 365, Rockville, MD 20850. E-mail: 

1. Bundled payments for care improvement initiative fact sheet [press release]. Baltimore, MD: Centers for Medicare & Medicaid Services. http://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2014-Fact-sheets-items/2014-07-31.html. Published July 31, 2014. Accessed August 5, 2014.

2. Jerry Cromwell, Debra A. Dayhoff, Nancy T. McCall, et al; Health Care Financing Administration. Medicare Participating Heart Bypass Center Demonstration: extramural research report. https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/Reports/downloads/oregon2_1998_3.pdf. Published September 1998. Accessed May 21, 2014.

3. IMPAQ International, LLC; The Hilltop Institute. Evaluation of the Medicare Acute Care Episode (ACE) Demonstration: final evaluation report. CMS website. http://downloads.cms.gov/files/cmmi/ACE-EvaluationReport-Final-5-2-14.pdf. Published May 31, 2013. Accessed May 21, 2014.

4. Cutler DM, Ghosh K. The potential for cost savings through bundled episode payments. N Engl J Med. 2012;366(12):1075-1077.

5. BPCI Initiative episodes: details on the participating health care facilities. CMS website. http://innovation.cms.gov/initiatives/Bundled-Payments/Participating-Health-Care-Facilities/index.html. Published January 31, 2013. Accessed May 21, 2014.

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