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Medicare Hopes to 'Bundle' Its Way to Better Hospital Care

By John Reichard, CQ HealthBeat Editor

May 16, 2008 -- Federal officials plan to test a new way of paying hospitals they hope will address growing concerns over spending and quality of care in the Medicare program. But the approach will require physician practices and hospitals to learn to cooperate in ways they've never had to before.

The Centers for Medicare and Medicaid Services said Friday it will test "bundled payment" in which hospitals and doctors team up to provide all the services associated with surgical procedures in return for a single payment amount. The announcement came amid growing pressure on the agency to move on the payment concept.

The Medicare Payment Advisory Commission has urged CMS and Congress to take various steps relating to bundling as a way of reducing wasteful Medicare spending.

Hospitals have expressed concern about not moving too quickly on bundled payment, which involves forging new links with physicians to determine not only how to best deliver care together, but also to resolve thorny issues such as how to divide up payments. James Bentley, senior vice president for policy planning at the American Hospital Association, praised the demo concept, depending on how it is actually structured. "We've got to learn to walk before we can run," he said in an interview.

In the project, providers would receive a single payment for both Part A services, the hospital side of Medicare, and Part B services, the doctor portion of the program. CMS now pays hospitals a pre-set amount for a particular diagnosis for all their services they provide, but that doesn't include the physician services involved.

"The physicians who care for the patient during the stay are paid separately under the Medicare Physician Fee Schedule for each service they perform," CMS noted in news release. "The separate payment systems can lead to conflicting incentives that may affect decisions about what care will be provided."

The "Acute Care Episode" (ACE) demonstration is open to applicants from Texas, Oklahoma, New Mexico, and Colorado. It will test 28 cardiac and 9 orthopedic inpatient surgical services. CMS said it will award only one ACE demonstration site per market in the first year of the program. "Each demonstration site, or 'Value-Based Care Center', will be selected and actively marketed by CMS to both beneficiaries and referring physicians," the agency said.

A CMS spokesman said the demo will start Jan. 1, 2009 and run through Dec. 31, 2011. Officials will pick up to 15 markets in the four states, he said. The four states were selected because of the readiness of Medicare administrative contractors in those areas to oversee the project in time for the Jan. 1 start, he said. The agency hopes savings will be "significant."

CMS hopes that the "global payment" approach will spur doctors and hospitals to work together efficiently so they can have more money left over to divide after delivering their various services. "CMS expects to demonstrate how to not only better coordinate inpatient care, but to also achieve savings in the delivery of that care than can ultimately be shared between providers, beneficiaries, and Medicare," said CMS Acting Administrator Kerry Weems.

The agency also aims to publicly post price and quality information associated with the procedures to test whether that draws more beneficiaries and physician referrals to the facilities involved.

Medicare ran a similar program from 1991 through 1996 to test bundled payment for cardiac bypass surgery at seven hospitals. Medicare estimated savings of about 10 percent on bypass patients treated in participating hospitals. Savings for the program totaled $42.3 million while Medicare patients and their insurers saved another $7.9 million.

All hospitals hoped to increase their bypass volumes and market shares but that "rarely happened," according to an evaluation of the bypass demo. "Several hospitals felt that the government had abandoned them by not actively promoting the demonstration or allowing them to waive patient co-pays for the uninsured." But most of the sites were able to reduce their costs, and nearly all of the hospitals signed major new private managed care contracts based on bundled payment.

"In three of the four original hospitals, staff were surprised at how quickly physicians were able to reduce lengths of stay, substitute generic for brand drugs, and reduce unnecessary testing and other services."

Nurses and quality assurance directors in most of the hospitals believed quality improved during the test, mainly because of increased emphasis by surgeons and other doctors on avoiding complications through closer patient monitoring, the evaluation said. It noted that those quality assessments were "subjective."

One area of dissatisfaction among all the hospitals was in billing and collection of payments; "nearly all sites felt they should have received extra payments to cover the novel billing arrangements."

Bentley said the demo should be a good experiment to determine how well hospitals and doctors work together. But he expressed concern that the project won't mandate one approach to bundling. "We need to find out if there are multiple models that work," he said. Alternatives could include a hospital taking the lead in contracting with physicians, physician practices initiating the contracting, or the hiring of an outside entity by both hospitals and doctors to manage the bundled payment and to set the rules for payment, he said.

Bentley also noted that hospitals outside the four states selected have expressed interest in bundling. "On the other hand, if you're going to start small, you've got to start small," he said.

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