The government has announced the Bundled Payments for Care Improvement initiative that will work to align payments for services delivered across the entire care continuum. The Centers for Medicare & Medicaid Services (CMS) is inviting providers to help test four bundled payments models. The combination of bundled payments and the accountable care organization (ACO) model could save Medicare $50 billion over a 10-year period.

The initiative, made possible by the Patient Protection and Affordable Care Act (PPACA), will help coordinate and improve care, and hopefully save Medicare costs, according to U.S. Department of Health and Human Services (HHS).

“Patients don’t get care from just one person – it takes a team, and this initiative will help ensure the team is working together,” HHS Secretary Kathleen Sebelius said in a statement. “The Bundled Payments initiative will encourage doctors, nurses and specialists to coordinate care. It is a key part of our efforts to give patients better health, better care and lower costs.”

Under the initiative, payments will be bundled for the package of services patients receive to treat a specific condition during a hospital stay and/or recover from that stay (i.e., a heart bypass or hip replacement). Coordinating care across the continuum may help to reduce the duplication of services and unnecessary testing and reduce preventable medical errors or readmissions, and at the same time, reduce system-wide costs.

The initiative was implemented after previous research showed that a heart bypass bundled payment model saved nearly $42.3 million in Medicare dollars and also saved patients $7.9 million.

The government will test four models under the initiative; three will test retrospective payment bundling arrangements and one will test prospective payment bundling.

Within the three retrospective payment bundling models, CMS and providers will set target payment amounts for a specific episode of care. The hospital would then propose a target price that would be set by applying a discount to total costs for a similar episode of care. Providers would be paid for services under the original Medicare fee-for-services (FFS) model, but at a discounted price.

Providers would have the ability to choose whether to define an episode of care as:

• Hospital services provided to a beneficiary during an acute inpatient stay, where physicians are partners in improving care (Model 1);
• Hospital, physician, post-acute provider, and other Medicare-covered services provided during the inpatient stay as well as during recovery after discharge to the home or another care setting (Model 2); or
• Hospital, physician, post-acute provider, and other Medicare-covered services beginning with the initiation of post-acute care services after discharge from an acute inpatient stay (Model 3).

Under the prospective payment bundling strategy, CMS would determine the bundled payment to the hospital for all services performed during an inpatient stay. The physician would then submit a “no-pay” claim to Medicare, which would be paid by the hospital out of the designated bundled payment.

“This Bundled Payment initiative responds to the overwhelming calls from the hospital and physician communities for a flexible approach to patient care improvement,” said CMS Administrator Donald Berwick, MD.  “All around the country, many of the leading healthcare institutions have already implemented these kinds of projects and seen positive results.”

Positioned alongside the proposed Accountable Care Organization (ACO) model, a bundled payment system would help coordinate care and improve patient care at a lower price tag. CMS said it is looking to invest upward of $1 billion to drive these changes. The Hospital Value-Based Purchasing program, set to begin in FY2013, is positioned to reimburse hospitals on quality, rather than volume.

The initiative will be launched by the Center for Medicare and Medicaid Innovation Center. Hospitals who are interested in applying to project must submit a Letter of Intent no later than September 22, 2011 for Model 1, and November 4, 2011 for Models 2, 3, and 4.

View the four proposed models here.