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Maximize Value Infographics October 30, 2015

Ready or Not – CMS Initiates the Next Wave of Payment Reform

Partner and Chief Medical Officer, Health & Life Sciences, Oliver Wyman
Principal, Oliver Wyman Actuarial Consulting
Actuarial Analyst, Oliver Wyman Actuarial Consulting
Key Takeaway
Hospitals must take greater responsibility in organizing delivery system & managing patient care - @OliverWyman CMO

In response to ever increasing costs, Congress established the Center for Medicare and Medicaid Innovation to test the effectiveness of “innovative payment and service delivery models to reduce program expenditures …while preserving or enhancing the quality of care.” In July CMS released draft regulations outlining the Comprehensive Care for Joint Replacement (CCJR) model. Oliver Wyman’s Chief Medical Officer Bruce Hamory joins actuarial analysts Josh Sober and Corryn Brown to address the looming question of how a hospital should structure its provider relationships so that all are aligned and appropriately incentivized to meet the goals of this new guidance:

With this model, the Innovation Center is looking at the opportunity to lower the cost and increase the quality of care for hip and knee replacement procedures (lower extremity joint replacement, or LEJR services, MS-DRGs 469 and 470), two of the most common procedures performed in acute care hospitals. In 2013, based on Oliver Wyman calculations using CMS data, there were roughly half a million of these procedures performed on Medicare patients representing roughly $6.7 billion in total inpatient hospital revenue.

Under this model, beginning January 1, 2016, CMS will sum the costs associated with the acute care stay for the LEJR procedure (anchor stay) and the related Medicare Part A and B services for the 90 days post discharge to develop an episode cost; this episode cost will then be compared to regional cost targets for LEJR procedures. For calendar year 2016, a hospital will receive a year-end reconciliation payment if total episode costs come in below the target price (developed using historical data), and the hospital meets a variety of quality control thresholds. Beginning January 1, 2017, hospitals will be assuming upside and downside risk; if the cost of LEJR services exceeds the target, the hospital will be required to pay CMS the difference.

Importantly, hospitals will be held financially responsible for the treating physician’s behavior and the performance of downstream providers, regardless of whether the hospital has any formal relationship with these providers beyond physician admitting privileges.

Seventy-five Metropolitan Statistical Areas (MSAs) have been selected by CMS to participate in the CCJR bundled payment program (see map).

CMS is expecting savings upwards of $150 million over the five years the model is to be in place. The chart below shows the expected savings by year for CMS throughout the model period. Note in the first year CMS anticipates a loss as the hospitals will not be subject to any downside risk but could benefit from low episode costs.

With respect to the CCJR model, discharge planning and patient engagement will be important in managing episode cost. In the table below, we show how moving one-quarter of patients from a skilled nursing facility (SNF) into a home-based setting results in a $2,575 swing in reimbursement per case, based on actual client data under the BPCI model data for LEJR episodes. It will be critical for participating facilities to work with the patient and his or her physician in advance of the surgery so that all parties are aligned with the discharge site.

Hospitals will need to adapt as value-based payment models become the norm, and these adaptations will have to include building relationships with the physicians providing care, establishing treatment protocols and targets, and monitoring adherence to those protocols and performance against those targets in real time.

The looming question is how a hospital should structure the relationship with the remaining parts of the delivery system, so that all providers are aligned and appropriately incentivized. To the extent hospitals are not successful in this regard, beginning January 1, 2017, hospitals will bear the risk and financial responsibility for others’ poor performances, excessive home visits, over-reliance on rehab hospitals, and more.

The final consideration we bring forward is the shift to regional target prices in the final years of the model. Historical data will be used to develop the average cost per episodes for each facility and each census region. As an example, experience in Alaska, California, Hawaii, Oregon, and Washington will be combined in developing the regional target price for facilities in those states. The final target price is a weighted blend of the regional target price and the facility target price. As the program progresses, the target price will eventually be based exclusively on the regional average. The table below shows the progression of hospital and regional weights over the course of the model.

High cost facilities are at particular risk in this model as it may be difficult for them to lower costs to the regional average as the model progresses.

The CCJR model has implications beyond LEJR for hospitals across the country, including those outside the 75 selected MSAs. As HHS moves towards its goal of linking 50% of Medicare fee-for-service payments to alternative payment models by 2018 (either population-based payments or alternative payment models built on the fee-for-service architecture), the concept of bundled payments with quality thresholds will only expand. CMS is expecting the CCJR model to provide statistical data enabling them to determine the effectiveness of compulsory bundled payments.

If this program is successful, we can expect to see an expansion of programs like the CCJR model to new hospitals, across new services and episodes of care. Hospitals will be expected to take greater responsibility in organizing the delivery system and in taking the lead in managing patient care.

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