New Medicare Payment Model May Cause a Bundle of Problems for Some Hospitals

Hospitals with the oldest, sickest and most-complicated patients could take a financial hit under the Medicare system's new approach to paying for some items, a new study finds.

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But there's still time to level the playing field, researchers from the University of Michigan Institute for Healthcare Policy and Innovation say in a new paper published in the September issue of Health Affairs.

Although the payment program currently applies only to hip and knee replacements in 800 hospitals in certain metro areas — and started just four months ago — its use is likely to expand to more conditions and hospitals.

The Centers for Medicare and Medicaid Services, the federal agency that runs Medicare, has put an emphasis on the approach as it tries to encourage smarter spending for the care of millions of older and disabled Americans.

That's why the U-M team set out to use real-world data to look at the impact of the new Medicare program, Comprehensive Care for Joint Replacement, and its mandatory bundled payments.

CJR pays hospitals a set "bundled" amount for the full range of care provided to a hip or knee replacement patient, rather than paying individual bills for parts of that care such as the operation, hospital stay and care after the hospitalization. (The bundled amount is different for each hospital, and is based on what that hospital has historically billed Medicare for that kind of care.) Reconciliation payments then reduce payments to hospitals if their spending is above a regional target and increase payments if spending is below a target.

"Previous bundled payment programs have based reconciliation payments on a hospital's own past performance, but under CJR those payments gradually become based on a comparison with hospitals in a wide region," says Chandy Ellimoottil, M.D., M.S., lead author of the new paper. "We found that this will result in more penalties for hospitals that care for more complex patients. We also found that changing the program to account for patient complexity would dampen this impact."

'Patient complexity matters'

The new analysis reviewed anonymous Medicare data from 23,251 Michigan residents who had hip or knee replacement surgery at 60 hospitals during a three-year period.

The hospitals that operated on patients who had more co-existing health problems, or were older or more seriously ill, stood to lose hundreds of dollars per patient under the program, the analysis found.

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But if the program used a standard measure to adjust for patient complexity, busier hospitals could hold on to more than $100,000 per year.

That amount may be a drop in the bucket in a large hospital's budget. But if mandatory bundled payments using the CJR formula are rolled out in other types of care, the numbers could become significant, says Ellimoottil.

Adjusting a hospital's performance based on how old or sick a patient is — called risk adjustment — is already used in many other Medicare programs that assess health care quality and spending.

Introducing appropriate risk adjustment into mandatory bundled payments could occur in the CJR program that launched in April, the authors say. That's because the formula for paying or penalizing hospitals based on the regional price comparison doesn't take major effect until the program's third year.

"There could be a lot of unintended consequences from this approach unless risk adjustment is added," Ellimoottil warns. "In past bundled payment programs, patient complexity didn't matter because hospital payments have been based on a comparison with the hospital's own past pricing, which reflects the complexity of the patient population it serves. Now, under this new model of regional comparison, complexity becomes relevant, and risk adjustment is needed."

The form of risk adjustment the team simulated, based on the CMS-Hierarchical Condition Category model, is an accepted model in other settings. CMS didn't include it in the CJR program, the agency says, because it hasn't been validated for bundled payment in orthopedics. The new paper may help in that regard.

Ellimoottil, a urologist whose research extends to bundled payments for many types of care, notes that the new paper essentially confirms what many providers voiced concern about when the Medicare agency was accepting public comments on the CJR program before it went into effect.

"Patient complexity matters. Rolling out a one-size-fits-all model could really hurt hospitals that are trying to appropriately treat patients. We don't want to incentivize reducing access to care for Medicare patients who are medically complex," he says.