On January 31, 2013, the U.S. Centers for Medicare & Medicaid Services (CMS) announced the health care organizations selected to participate in the Bundled Payments for Care Improvement (BPCI) Initiative.  Under the BPCI Initiative, CMS will compensate participating providers via bundled payments rather than the traditional fee-for-service (FFS) payments for providing certain services to traditional Medicare beneficiaries.  Bundled payments are designed to incentivize provider coordination and adoption of redesigned care processes by making a single payment for a set of services related to treatment of a particular condition during a pre-determined time period, the episode of care. 

The BCPI Initiative builds on CMS’s Acute Care Episode (ACE) Demonstration, which tested the effectiveness of providing bundled payments for a limited number of cardiac and orthopedic surgical procedures provided to traditional Medicare beneficiaries.  The BPCI Initiative represents an expansion of CMS’s experimentation with bundled payments in traditional Medicare as it applies to a much broader range of conditions (more Medical Severity Diagnosis Related Groups, or MS-DRGs) than the ACE Demonstration and is not limited to certain geographical areas.

Summary of Four Models

There are four different BPCI Initiative Models for applicants to choose from.  Under Model 1, the bundled payment is limited to the acute care inpatient hospitalization, while Models 2–4 go beyond the inpatient hospitalization to include post-acute care.  Model 1 applies to all MS-DRGs, while participants in Models 2–4 were able to choose to receive bundled payments for up to 48 different clinical condition episodes that CMS made available.  Examples of available episodes include knee and hip replacement, stroke care and coronary bypass surgery.

• Model 1: Under Model 1, the episode of care is limited to services provided during an acute care inpatient hospitalization.  Participants provide CMS a standard discount off each MS-DRG (each applicant was required to specify how much of a discount it was proposing to offer CMS).  All Part A services paid as part of the MS-DRG payment are included in the bundle; physician services will be paid separately.  Hospitals and physicians will be permitted to share any gains generated from care redesign.  CMS expects to announce a second opportunity to participate in Model 1 in the next several weeks for participation beginning in early 2014.
• Models 2 and 3: The bundled payment in Models 2 and 3 applies to post-acute care; Model 2 also includes the inpatient acute care hospitalization.  Model 2 and 3 applicants were able to propose episodes of care extending 30, 60 or 90 days after the hospital discharge (Model 2) or initiation of post-acute services (Model 3).  In their application, participants were required to propose a target price for the bundled payment based on the historical Medicare FFS payments for the episode services with a discount applied.  During the episode of care, participants will continue to receive FFS payments for all services related to the selected condition(s) provided to its Medicare patients.  After the episode is complete, CMS will retrospectively compare the actual FFS payments made for episode services provided during the episode of care to the target price.  Any amounts over the target price must be repaid to CMS and any savings may be distributed by participants to providers.
• Model 4: The bundled payment in Model 4 applies to all services during an acute care inpatient stay and includes all related readmissions provided within 30 days after discharge.  Unlike Models 2 and 3, under Model 4 CMS will make a single, prospective payment at the target price to the acute care hospital upon a beneficiary’s hospitalization for the selected condition(s).  All Part A and Part B services provided during the inpatient hospitalization that are related to the selected condition(s) are included in the bundle.  Participating physicians and other providers will submit no-pay claims to Medicare and will be paid out of the bundled payment amount that is sent to the hospital.  This Model is similar to the ACE Demonstration.

In the BPCI Initiative, applicants could ask for, and CMS indicated a willingness to grant, waivers of federal fraud and abuse laws to protect gain-sharing arrangements for care rendered by participating health care organizations. 

Implementation will Proceed in Two Phases

Models 2–4 will operate under two phases.  The participants announced on January 31 were the Phase 1 participants.  Phase 1 extends from January to July 2013 and awardees are not at financial risk during this period.  During this time, CMS and awardees will prepare for implementation and the assumption of financial risk.  Phase 2 is scheduled to begin in July 2013 and only those Phase 1 participants approved by CMS will be permitted to participate.  Phase 2 will be the beginning of risk-sharing where participants will be at risk if costs exceed the bundled payment amount for the episode.  At this time, CMS has not given any indication it plans to solicit applications for additional participants in Models 2–4.

Beneficiary Choice of Provider

Beneficiaries that seek care from BPCI Initiative participants are permitted to seek care from any provider after the episode of care has begun, regardless of whether that provider is connected to the organization receiving the bundled payment.  This freedom of provider choice limits the ability of participants to coordinate care amongst a beneficiary’s providers and, consequently, may limit a participant’s ability to control utilization and costs.  Any FFS amounts paid by CMS to providers that are not participating in the BPCI Initiative would be included when calculating whether the actual expenditures for an episode of care were greater or less than the bundled payment target price.  CMS suggested it would consider permitting providers to waive Medicare cost-sharing requirements for beneficiaries included in the initiative, although the January 31 announcement did not indicate if CMS took this step.  Reduced cost-sharing could provide an incentive for beneficiaries to stay within a particular group of providers.

Bundled Payments Outside of Traditional Medicare

Medicare Advantage organizations and health insurers offering products in the commercial market are already implementing similar bundled payment arrangements for specified conditions.  In these settings, managed care plans may be able to more effectively channel beneficiaries to the providers receiving the bundled payment, including through tiered or restricted network designs and cost-sharing incentives.  In this way, managed care plans may be able to create greater certainty for providers that they will be able to coordinate an enrollee’s care through the entire episode of care. 

There are, however, other legal challenges that may exist outside of the traditional Medicare context.  For example, state and federal limits on provider gain-sharing may apply as any CMS waiver on these limits would be limited to traditional Medicare.  Because each proposed bundled payment arrangement could raise unique legal issues depending on the insurance markets at issue, the applicable state laws and the provider relationships involved, managed care plans and providers interested in implementing bundled payment arrangements should contact their regular McDermott Will & Emery lawyer or an author for assistance addressing these complex legal considerations.