Medicare’s new way of paying hospitals could cause a bundle of problems for some, study finds

Researchers call for risk adjustment in mandatory bundled payment programs

ANN ARBOR, Mich. — Hospitals that take care of the oldest, sickest and most complicated patients could suffer financially under the Medicare system’s new approach to paying for some types of care, a new study finds.

But there’s still time to adjust the approach to make the playing field more level, the 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.

While the payment program only applies right now to hip and knee replacements in 800 hospitals in certain metro areas, and only started four months ago, its use is likely to expand to more conditions and include more 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 potential impact of the approach, called mandatory bundled payments. They simulated the impact of the new Medicare program, called Comprehensive Care for Joint Replacement.

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. “Reconciliation payments” then reduce payments to hospitals if their spending is above a 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.”  

The new analysis uses anonymous Medicare data from 23, 251 Michigan residents who had hip or knee replacement surgery at 60 hospitals across 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, they found. But if the program used a standard measure to adjust for patient complexity, those 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 get rolled out in other types of care, the numbers could become very large, says Ellimoottil.

Adjusting a hospital’s performance based on how old or sick a patient is – a process 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 still happen even 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 start to take a major effect until the third year of the program.

“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-HCC model, is an accepted model used in other settings. CMS didn’t include it in the CJR program, the agency said, 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." 

In addition to Ellimoottil, the research team includes fellow IHPI member and U-M orthopaedic surgeon Brian Hallstrom, M.D., who leads the Michigan Arthroplasty Registry Collaborative Quality Initiative.funded by Blue Cross Blue Shield of Michigan. Senior author David Miller, M.D., M.P.H., and co-authors Andrew Ryan, Ph.D., and James Dupree, M.D., M.P.H. are all IHPI members.

The researchers have funding from the Agency for Healthcare Research and Quality (HS024193 and HS018546), and from the National Cancer Institute (CA174768).

Reference: Health Affairs 35, No. 9, September 2016, 10.1377/hlthaff.2016.0263