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The Centers for Medicare & Medicaid Services (CMS) has announced that the proposed rule for bundled payments (also known as episode payments) for high-quality, coordinated cardiac and hip fracture care modules will be targeted for initial implementation in 98 randomly selected metropolitan demonstration areas starting in July 2017. 

The full phase-in will occur over the next five years, with completion by the end of the 2021 calendar year.

At the same time the healthcare industry was focused on implementing ICD-10, some of our colleagues in the industry have been testing the Bundled Payments for Care Improvement (BPCI) episode payment models in the last few years. Each model combines various conditions and care settings to assess if improved care can be delivered at lower costs to Medicare. 

Now’s the time to learn more about bundled payments and their effect on revenue cycle management, because payment models are shifting. Organizations can be proactive in educating themselves about the opportunities and challenges arising from value-based reimbursement (VBR) and the Patient Protection and Affordable Care Act (PPACA) in order to reap the benefits of the new bundled payment strategies. 

What is a Bundled Payment? 

BPCI from CMS was developed to test bundling payments for a single condition. Traditionally, providers’ services for care of a patient’s condition have been billed independently. For example, consider a patient scheduled for a knee arthroplasty. The full spectrum of care for the procedure starts before the surgery and ends after the surgical procedure. The patient sees the primary care physician, has laboratory tests done, and visits the surgeon before surgery takes place. These encounters traditionally have been billed and paid separately even though the services are all related to the knee replacement surgery. With bundled payments, the services are grouped together and one payment is received for the episode.

Assuring success with a bundled payment program requires more than achieving targets. The goal of bundled payments is to have all the healthcare organizations involved in the episode of care coordinate services, focus on quality, and reduce costs. A successful model requires all providers to work together. This has been challenging for organizations that are not part of integrated delivery networks (IDNs). 

The new models for cardiac and hip fracture care that will be implemented in 2017 provide some assistance for non-IDNs. Medicare will allow hospitals to have financial arrangements with non-IDN organizations to encourage cost savings sharing. The details are outlined in the proposed rule. 

In the bundled payment model, there is one payment for the entire episode of care for a knee arthroplasty. If an organization delivers the quality care target at a lower cost than the CMS payment, it keeps the difference in revenue. If the costs are more than the CMS payment, the organization absorbs the extra cost. The important element in the model is that the quality of care must meet CMS standards for treatment of the condition. 

Organizations volunteered to test the BPCI models to determine the effect on cost and quality of outcome of bundling these services. The participating organizations completed a deep analysis of their data on up to 48 conditions to identify areas of improvement to reduce cost and improve the quality of care.

Some organizations also completed an analysis of the clinical processes related to those conditions. As a result of their additional analyses, some health systems have implemented their own initiatives to improve clinical outcomes and influence costs while maintaining or improving quality across their health systems. Due to progressive implementations and claims lag, only two years of data are available at this time. While early results are mixed, individual organizations have reported positive results with bundled payment models.

Seeing opportunity, companies have developed solutions to help organizations complete the data analysis and methodologies necessary to improve key clinical processes in preparation for implementing bundled payments. These tools are important as we look at a broader implementation in the demonstration sites. 

New Proposed Rule

The proposed change in bundled payment models adds incentives for organizations, physicians, and other providers to work together to deliver better care at lower costs.

The BPCI is expanding to test a new model for heart attack, bypass surgery, and hip (extending to femur) and knee replacement. For the cardiac bundles, hospitals in 98 randomly selected metropolitan statistical areas (MSAs) will participate. Hospitals outside these geographic areas will not participate in the model. There is no application process for hospitals for these models. For the hip/femur fracture surgeries model, which builds on the existing Comprehensive Care for Joint Replacement (CJR) model, CMS proposes to test these bundled payments in the same 67 MSAs that were selected for that model.

In addition, CMS proposes to limit financial risk for the remaining rural hospitals that are located in participating MSAs, such as sole community hospitals, Medicare-dependent hospitals, and rural referral centers.  

The new bundled payment model includes inpatient stays and services for these particular qualifying conditions through 90 days following patient discharge. The hospital is responsible for cost and quality of care for these patients, and for coordinating with physicians and other providers of services during this period.

The notice of the proposed rule from CMS has provided an illuminating example:

“Consider hospitals in model years 4 and 5 in a region where Medicare historically spent an average of $50,000 for each coronary bypass surgery patient, taking into account the costs of surgery as well as all related care provided in the 90 days after hospital discharge. Target prices would reflect the average historical pricing minus the discount rate based on quality performance and improvement.

  • Hospital A is performing at the highest overall level on quality measures and its discount rate is 1.5 percent for the episode. As a result, its quality-adjusted target price for bypass surgery is $49,250 (or $50,000 minus the discount of $750). By taking measures to avoid readmissions and other unnecessary costs, Hospital A is able to reduce average total hospitalization and related 90-day post-discharge costs for bypass surgery patients to $48,000. Hospital A would be paid average savings of $1,250 per patient. 
  • Hospital B, in the same region, also reduces its average costs to $48,000 per patient. However, it achieves only acceptable overall performance on quality measures. Its discount rate is 3 percent and its quality-adjusted target price is $48,500 (or $50,000 minus the discount of $1,500). Hospital B would be paid average savings of $500 per patient.
  • Hospital C also only achieves acceptable performance on quality measures (discount rate of 3 percent) and has a quality-adjusted target price of $48,500. However, Hospital C has average costs of $50,000 per patient. If Hospital C is unable to improve its cost and/or quality performance, it would have to repay Medicare an average of $1,500 per patient.”

CMS has developed its phased approach to provide time for organizations to process the changes they have implemented. When the first model year ends in 2018, the actual spending for these conditions will be compared with the target costs for Medicare A and B. When a hospital delivers quality care meeting or exceeding the published standards while achieving lower-than-target cost, the hospital keeps the savings. The savings that can be retained will be capped at 20 percent by the end of the five-year implementation period. 

If the hospital does not meet quality standards and does not improve its performance, it will be required to repay Medicare. To protect hospitals from repayment risk, CMS will minimize the risk by phasing it in over the five-year implementation period. The total losses are limited to 3 percent for the second through fourth quarters of 2018 and 5 percent for 2019 through 2021.

The repayment amount is the difference between its quality-adjusted target price previously set by Medicare and what the organization charged for the episode.

Medicare is providing tools for hospitals to assist them in improving and coordinating care. It is also providing data on spending and utilization. As with the BPCI models, Medicare wants participating hospitals to share what they have learned throughout the process. Proactive organizations can reach out to their peers through national summits and other information-sharing strategies.  

It is important that your organization review and comment on the new rule before the proposed implementation in 2017. Examining your data on the trial conditions is an excellent proactive step to take. 

What Does the Bundled Payment Model Mean to Medical Coding?

The keys to revenue cycle are medical coding and diagnosis-related group (DRG) assignment. As your organization prepares for the initiative, you still will want to focus on quality and accuracy of codes and DRGs. With DRGs driving the conditions to bundle, identifying the most accurate DRG will be even more important because only those conditions appropriate for bundling are included in the new payment model. Take these next steps:

  • Educate yourself and your team on all the components of bundled payments.
  • Examine your data using a comprehensive, episodic view rather than an encounter view.
    • As a simple example, consider looking at duplicate laboratory tests ordered for an episode. 
    • Discuss bundled payments with your revenue cycle peers. 
      • Determine if you have initiatives on bundled payments underway in your organization.
      • Ensure that your DRGs are fine-tuned.
        • Complete an audit on these DRGs to see if you have any underlying concerns. 
        • Fine-tune your coding team skills. 


The clock is ticking on your preparedness for bundled payments. Educate yourself now so your organization will be optimally prepared.

Proactive organizations can learn about the opportunities and challenges arising from the new bundled payment strategies that are part of value-based reimbursement. These organizations have helped themselves to the menu of data analysis tools and process improvement methodologies developed by companies to prepare their clients for the next round of implementation. Organizations have also helped each other understand the effects of bundled payments through peer-to-peer forums, including national summits on bundled payments.


Laurie A. McBrierty, MLT ASCP, CICA

Laurie McBrierty brings nearly 30 years of experience in healthcare, healthcare information systems, and product management to Career Step, where she drives the product management of the company’s offerings. Prior to joining Career Step, Laurie served in various executive positions with companies such as xG Health Solutions, WellPoint, Resolution Health, QuadraMed, Kaiser Permanente, SoftMed, 3M HIS, and Stanford Health Services. She has also served on various boards and committees within the American Health Information Management Association (AHIMA) and is a respected leader in health information management. Laurie holds a bachelor’s degree in Information Systems Management from the University of San Francisco.

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