One of the big payment changes under the Affordable Care Act is the gradual switch to bundled payments for physicians and hospitals. The law gives Medicare officials the authority to experiment with new payment models, including moving away from paying separately for each service provided, and instead paying for episodes of care.

The Bundled Payments for Care Improvement Initiative (BCPI), which is being spearheaded by the Center for Medicare & Medicaid Innovation, includes four models of care. Three involve retrospective bundled payments. Under these models, Medicare officials will work with physicians and hospitals to come up with a target price for the episode of care. Providers will initially be paid on a discounted fee for service basis and, at the end of the episode of care, the total payments made will be compared with the target price. At that point, physicians and hospitals may be able to share in any savings.

The fourth model, which applies only to inpatient stays, provides a prospective bundled payment. Under this model, hospitals will receive a single prospective bundled payment to cover all services delivered during the inpatient stay. The hospital then makes payments to all providers out of the bundled payment.

From January-July 2013, more than 100 participants in Models 2, 3, and 4 will begin phase 1 of the project and will receive data from Medicare and learn how to improve care. Phase 2, which involves taking on financial risk for episodes of care, will start in July. Testing of Model 1 is scheduled to begin this spring. Dr. Jeffrey Clough of the Patient Care Models Group at the CMS Innovation Center, explained how the program will work.

Question: Three of the four models provide bundled payments retrospectively. Why did you favor this approach instead of a pure bundled payment model?

Dr. Clough: One of our goals is to meet providers where they are. During extensive engagement with stakeholders, we learned that work is still to be done to prepare providers to accept a prospective bundled payment. Retrospective bundled payment models are operationally simpler for both providers and CMS. Therefore, we decided to test some retrospective bundled payment models that seek to align incentives through setting target prices for all related services in an episode while permitting hospitals, physicians, and post-acute providers to be paid as usual for those individual services. We believe that the incentives in retrospective bundled payment models are similar to those in prospective models and are eager to test a variety of approaches.

Question: Are physicians ever forced to return money to Medicare if their costs are higher than expected in any of the models?

Dr. Clough: CMS will sign agreements with organizations that will bear the financial risk for the initiative. These organizations may be hospitals, postacute providers, physician group practices, or other entities. These organizations may also partner with hospitals, physicians, or postacute providers and delegate some of the financial risk to them through their own contracts with these entities. Those arrangements are worked out at the local level. Ultimately, the organization that holds the agreement with CMS would be responsible for paying money back to CMS if the total expenditures are higher than the agreed-upon target price in Models 2 and 3.

Question: How will this approach save money?

Dr. Clough: BPCI Models 2-4 seeks to redesign care within acute and postacute care settings, using a bundled payment approach for episodes of care to encourage more efficient, high-quality care at a lower cost. All models require awardees to accept an episode price based upon what historically Medicare would have paid in aggregate for the episode.

Question: Will the growth of accountable care organizations help to move bundled payments forward?

Dr. Clough: Under the theory that health care transformation requires some synergy between new payment methods and care improvement strategies, CMS encourages participation in the Bundled Payments for Care Improvement initiative and the Medicare Shared Savings Program, the Innovation Center Pioneer ACO and medical home initiatives, and other shared savings initiatives. We believe that programs that provide health care entities with opportunities to improve care can build off of one another. The competencies necessary for success under bundled payments and ACOs are overlapping, so we expect the growth of ACOs will bring to light opportunities and routes to success for providers engaging in other models.

Question: What changes can physicians make to their practices to help them thrive under a bundled payment system?

Dr. Clough: Well-coordinated, appropriate care that engages patients, relies upon evidence-based guidelines, and is informed by data analytics is key to higher quality, more efficient care. We believe that physicians practicing care that considers quality, cost, and outcomes will be essential contributors to success under bundled payment models like BPCI.

Dr. Clough is board certified in internal medicine and serves in the Patient Care Models Group at the Center for Medicare & Medicaid Innovation.

Implementing Health Reform: Medicare experiments with bundled payments