Several provisions of the Patient Protection and Affordable Care Act (ACA) encourage alignment, collaboration, and communication among providers, such as bundling payments for services provided for a single episode of care.  On August 23, 2011, the Centers for Medicare and Medicaid Services (CMS) announced the Bundled Payments for Care Improvement Initiative (Bundled Payments Initiative).¹  The Bundled Payments Initiative includes four approaches to bundled payments. One model includes a single prospective payment for all services provided during an inpatient stay, and three models include a retrospective payment system with a target price for an established episode of care.² The Bundling Payments Initiative is expected to provide better outcomes in environments where physicians and hospitals have already established strong communication and collaboration.³ 

The Bundled Payments Initiative aims to improve care through a patient-centered approach, emphasizing care coordination and quality.⁴  Though limited evidence-based literature regarding bundled payments currently exists, recent data indicates: (1) bundled payments may reduce spending for an episode of care; (2) some providers are ready to participate in bundled payments program while others have not yet expressed readiness; and, (3) bundled payments can promote quality improvements in care.  Each of the four models presented by CMS incentivize coordination of care and lower costs by allowing providers to share in any cost savings achieved based on a historic fee-for-service payment rate and a discounted target price per episode of care.⁵

Each of the four models proposed by the Bundled Payments Initiative has a different definition for a single episode of care, or what the bundled payments will cover. Models One through Three all reimburse retrospectively. Model One sets the episode of care as the patient’s inpatient stay at a general acute care hospital, with the discounted payment rate based on the Inpatient Prospective Payment System. Model One pays physicians and hospitals separately, although both may participate in shared gains. Model Two and Model Three bundle physician services, care by post-acute providers, related readmissions, and any other services proposed in the episode definition (i.e., laboratory services, durable medical equipment, prosthetics, Part B drugs, etc.). Model Two establishes an episode of care that includes the patient’s inpatient days as well as post-acute care following discharge. The length of post-acute time covered under the episode of care ranges from 30 days to 90 days, following discharge. Model Three’s episode of care begins at discharge and ends 30 days following discharge. Model Four is the only model to use a prospective payment bundling system.⁶

Model Four has a single payment that encompasses all services provided during the inpatient stay, whether performed by the hospital, physician, or other practitioners. Payment is made directly to the hospital, which then pays physicians and practitioners from the bundled payment.⁷  The table below explains and compares some key features of the bundled payments models.

According to a 2008 Medicare Payment Advisory Commission (MedPAC) report, payment systems should encourage collaboration between physicians and hospitals.⁸  Valinda Rutledge, Director of the Patient Care Models Group at the CMS Innovation Center, stated that hospitals and physicians have expressed a desire to work collaboratively but have experienced barriers when previously trying to do so.  Dr. Cecil B. Wilson, former American Medical Association (AMA) president, stated: “We are pleased the initiative provides flexibility and a range of models…This may be an important opportunity to learn how to organize these approaches to improve patient care, quality, cost of care and practice economics.”⁹  The AMA has encouraged CMS to provide technical assistance and data resources to physicians expressing interest in the initiative.¹⁰

Final applications for the first Bundled Payments Initiative were due on October 21, 2011.  For participation in one of the other three initiative models, letters of interest must have been submitted by November 4, 2011, along with any requests for historical Medicare claims data. Final applications must be received on or before March 15, 2012.¹¹ Hundreds of hospitals and physician groups are expected to participate in one of the four bundling initiatives.¹²