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Bundled Payments' Disruptive Effects Detailed

By Gregory A. Freeman  
   July 14, 2015

Mandatory bundled payments for hip and knee surgeries would shutter one in four skilled nursing facilities and trigger "demand destruction in areas such as diagnostic testing, hospital stays, and avoidable readmissions," says an expert on bundled payments.

Hospitals and health systems are likely to respond quickly and ruthlessly to the announcement last week that the Centers for Medicare & Medicaid Services will soon require bundling of reimbursement for hip and knee surgeries, with profits tied closely to costs and quality metrics. With outcomes dictating reimbursement levels, postop facilities that can't make the grade are likely to be cut loose.


Deirdre Baggot, PhD
The CMS move is not surprising says Mark Bogen, senior vice president of finance and CFO at South Nassau Communities Hospital in Oceanside, NY. Under the initial demonstration project set up through CMS, he notes, many providers selected DRGs 469 and 470 (major joint replacement or reattachment of lower extremity, with and without major complications or comorbidities) as a way to test moving toward a value-based payment system.

Through the demonstration project, CMS determined that more than half of the cost of providing care for joint replacements occurred post-surgery, Bogen notes, with the bulk of that cost occurring in either the acute inpatient rehabilitation unites or the sub-acute rehabilitation units of SNFs. 

"In typical CMS style, they have decided early into the demonstration project to move forward without waiting until all the results are in. This was similar to a number of years ago when CMS put together a demo project for the recovery audit contractors utilizing California, Florida, and NY and before the demo period ended, they announced the expansion nationally, as the early returns showed significant recoupment back to the Medicare Program."

The evidence to support bundled payments as a more cost-effective alternative to traditional fee-for-service is clear, says Deirdre Baggot, PhD, former lead for CMS's Acute Care Episode Demonstration (ACE) Bundled Payments Pilot, a CMS-appointed expert reviewer for the Bundled Payments for Care Improvement Initiative, and senior vice president with The Camden Group in Los Angeles, CA. She says the bundling is long overdue.

The effects of the CMS move may be seen soon, Baggott says.

Demand Destruction
"On the hospital side we can expect to see demand destruction in areas such as diagnostic testing, hospital stays, and avoidable readmissions, which is a good thing," she says. "Post-acute providers will see a significant hit to inpatient rehab and [skilled nursing facility] utilization as providers search for lower cost alternatives such as home health services."

Hospitals are likely going to cut out their one- and two-star SNFs to mitigate the risk of penalties during the post-discharge period, says David Friend, MD, MBA, consulting managing director with the Center for Healthcare Excellence and Innovation of BDO consulting in New York City. Friend expects 25% of SNFs to close soon, while medically advanced SNFs will flourish.

The SNFs most likely to close are those that have low star ratings, lack of IT integration with hospitals, poor physical therapy, lack of full interact clinical protocols, poor physician alignment, and lack of a full time medical director rounding on patients every day, he says.


David Friend, MD, MBA
"It is already happening, but is just going to accelerate," Friend says. "We thought it would take five years with a closer rate about 5% a year. We now believe bundling will dramatically accelerate the trend because no integrated system that bundles these services will want to work with a less than excellent therapy and skilled nursing providers."

Baggot agrees that SNFs will be squeezed, but she expects more of a tempered response from hospitals and health systems.
"While I don't see hospitals severing ties per se, as there is still an element of patient and family choice, they will absolutely de-emphasize SNFs with higher cost-per-case and poor quality performance, which we are already seeing," she says. "We should expect to see continued consolidation in this area of the market."

SNFs that see their share of Medicare dollars fall as a result of being cut out of these programs will have a tough time surviving, Friend says. Those SNFs that become medically advanced skilled nursing facilities, and can deliver their portion of the bundle efficiently and with quality, will thrive.

No More Blank Checks
The move by CMS will require a sea change for providers and hospitals in the ways they approach knee and hip replacement surgery, says Mike Lessila, director of business development with Vestica Healthcare, a medical benefits administration company based in Menomonee Falls, WI.  

Rather than having a "blank check for services," as they do now, their reimbursement will be based on a fixed amount of money, he says. Under the proposed rules, this means that the hospital systems will be taking a financial risk for these common procedures and guaranteeing the outcome of the surgery.

"If they successfully complete the episode of care for less than the contracted cost, while maintaining the appropriate quality of care, they gain financial profit," he notes. "If problems arise due to poor episode management, a preventable hospital readmission, or another complication such as a hospital-acquired infection, however, the provider will bear the cost of fixing them as well as potential penalties from CMS."

CMS is starting with hip and knee replacements because they are easy to define and are relatively routine procedures, Lessila says.  There is a clear beginning, middle, and end to the episode and the services required are well-documented, unlike chronic conditions such as diabetes or congestive heart failure where there are a lot of gray areas.

Bundling is not all bad news, though. Bogen believes bundled payments may be easier to implement than the accountable care organization (ACO) alternative, because the infrastructure necessary to accomplish any significant shared savings is enormous under the ACO model.

Financial Administration
Still, bundled payments introduce several complexities to care that hospital systems must deal with, Lessila says. One is that the hospital system must think through its care coordination for these procedures, or the likelihood of failure is high. This will require additional resources to ensure the patients' experiences are good and that they follow all of the recommended steps to ensure a successful episode. The bundling also will motivate providers and facilities performing the services to streamline and improve communication.

'Financial administration of the bundle becomes far more difficult since a single bundle procedure will involve payments to one or many physicians, medical devices and hospital facility charges. The hospital system must understand who gets paid how much and in what form, and be able to track all of the details to determine whether the bundle is profitable or not in the end," Lessila says.

"Most legacy billing systems aren't set up to administer these contracts and aggregate the data appropriately so there is going to be a lot of back office work that needs to take place before they can be successful. If it's not done right, there's a potential for lost revenue or contract breaches, especially as the volume increases."

 

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