New Payment Models and Rewards for Better Care at Lower Cost

Posted: Jul 25 2016

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On July 25, 2016, the Department of Health & Human Services (HHS) proposed new models that continue to shift Medicare reimbursements from quantity to quality by creating strong incentives for hospitals to deliver better care at a lower cost. These models would reward hospitals that work together with physicians and other providers to avoid complications, prevent hospital readmissions, and speed recovery.


Under the proposed episode payment models, the hospital in which a patient is admitted for care for a heart attack, bypass surgery, or surgical hip/femur fracture treatment  would be accountable for the cost and quality of care provided to Medicare fee-for-service beneficiaries during the inpatient stay and for 90 days after discharge. Participating hospitals will receive a separate target price for each MS-DRG under the model. All providers and suppliers would be paid under the usual payment system rules and procedures of the Medicare program for episode services throughout the year. At the end of a model performance year, actual spending for the episode (total expenditures for related services under Medicare Parts A and B) would be compared to the Medicare quality-adjusted target episode price that reflects episode quality for the responsible hospital. Hospitals that work with physicians and other providers to deliver the needed care for less than the quality-adjusted target price, while meeting or exceeding quality standards, would be paid the savings achieved. Hospitals with costs exceeding the quality-adjusted target price would be required to repay Medicare.

Episode Payment Model Details

Setting Target Prices for Specific Conditions

Each year, CMS would set target prices for different episodes based on historical data on total costs related to the episode for Medicare fee-for-service beneficiaries admitted for heart attacks, bypass surgery, or surgical hip/femur fracture treatment, beginning with the hospitalization and extending 90 days following discharge. Target prices would be adjusted based on the complexity of treating a heart attack or providing bypass surgery. For example, CMS proposes to adjust prices upwards for those heart attack patients who need to be transferred to a different hospital during their care to reflect the most resource-intensive cardiac care provided during the hospitalization. For heart attack patients, target prices would also differ depending on whether the patient was treated with surgery or medical management.

Target prices would be based on a blend of hospital-specific data and regional historical data:

July 1, 2017 – December 31, 2018 (performance years 1 and 2): Two-thirds participant-specific data and one-third regional data;

2019 (performance year 3): One-third participant-specific data and two-thirds regional data; and

2020 – 2021 (performance years 4 and 5): Only regional data.


Paying More for Higher-Quality Care

Under the proposed bundled payment models, hospitals that delivered higher-quality care would be eligible to be paid a higher amount of savings than those with lower quality performance. Specifically, an individual hospital’s quality-adjusted target price would be based on a 1.5 to 3 percent discount rate relative to historical spending, with the lowest discount percentage for those hospitals providing the highest-quality care. Payments would be based on a quality-first principle: only hospitals meeting quality standards would be paid the savings from providing care for less than the quality-adjusted target price.

Hospitals would be assessed based on quality metrics appropriate to each episode, using performance and improvement on required measures that are already used in other CMS programs and submission of voluntary data for other quality measures in development or implementation testing:

Heart attacks:

Hospital 30-Day, All-Cause, Risk-Standardized Mortality Rate Following Acute Myocardial Infarction (AMI) Hospitalization (NQF #0230)   
Excess Days in Acute Care after Hospitalization for Acute Myocardial Infarction
Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) Survey (NQF #0166)
Voluntary Hybrid Hospital 30-Day, All-Cause, Risk-Standardized Mortality eMeasure (NQF #2473) data submission

Bypass surgery:

Hospital 30-Day, All-Cause, Risk-Standardized Mortality Rate Following Coronary Artery Bypass Graft (CABG) Surgery (NQF #2558)
HCAHPS Survey (NQF #0166)

Hip/femur fractures (same measures as in the existing Comprehensive Care for Joint Replacement (CJR) model):

Hospital-Level Risk-Standardized Complication Rate Following Elective Primary Total Hip Arthroplasty (THA) and/or Total Knee Arthroplasty (TKA) (NQF #1550)
HCAHPS Survey (#0166)
Voluntary Total Hip Arthroplasty (THA)/Total Knee Arthroplasty (TKA) Patient-Reported Outcome (PRO) and Limited Risk Variable data submission

As part of implementing the new models, CMS would provide hospitals with tools to help them improve care coordination and deliver higher-quality care. Proposed activities include providing participants with relevant spending and utilization data, waiving certain Medicare requirements to facilitate development of novel approaches to the delivery of care, and facilitating the sharing of best practices between participants through a learning and diffusion program.

Phased Implementation

Recognizing that hospitals will need time to adapt to the new models and establish processes to coordinate care, the proposed rule includes a number of measures to ease the transition, including gradually phasing-in risk.

Downside risk (possible repayments to Medicare) would be phased in:

 July 2017 – March 2018 (performance year 1 and quarter 1 of performance year 2):  No repayment;
April 2018 – December 2018 (quarters 2 through 4 of performance year 2): Capped at 5 percent;
2019 (performance year 3): Capped at 10 percent; and
2020 – 2021 (performance years 4 and 5): Capped at 20 percent.

Gains (payments from Medicare to hospitals) would be phased in:

 July 2017 – December 2018 (performance years 1 and 2): Capped at 5 percent;
2019 (performance year 3): Capped at 10 percent; and
2020 – 2021 (performance years 4 and 5): Capped at 20 percent.

The first performance period would run from July 1, 2017 to December 31, 2017. The second through fifth performance periods would align with calendar years 2018 through 2021.

How the Bundled Payments Would Work: An 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 only $500 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 only $500 per patient. 

Participants in the New Bundles

For the new cardiac bundles, participants would be hospitals in 98 randomly-selected metropolitan statistical areas (MSAs). Hospitals outside these geographic areas would not participate in the model.  There is no application process for hospitals for these models.

Because the hip/femur fracture surgeries model builds upon the existing CJR model, CMS proposes to test these bundled payments in the same 67 MSAs that were selected for that model.

Rural counties are excluded from the models. 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.  Specifically, these hospitals’ total losses are limited to 3 percent for the second through fourth quarters of 2018 and 5 percent for 2019 through 2021.

Collaboration with Other Providers

One of the major goals of bundled payments is to encourage coordination among all providers involved in a patient’s care: for example, collaboration between hospitals and physicians and skilled nursing facilities. Therefore, as in the CJR model, CMS is proposing to allow hospital participants to enter into financial arrangements with other types of providers (for example, skilled nursing facilities and physicians), as well as with Medicare Shared Savings Program Accountable Care Organizations (ACOs). Those arrangements would allow hospital participants to share reconciliation payments, internal cost savings, and the responsibility for repayment to Medicare with other providers and entities who choose to enter into these arrangements, subject to the limitations outlined in the proposed rule.


As noted above, preliminary results from other tests of bundled payments for cardiac and orthopedic care suggest that these models have strong potential to improve patient care while reducing costs. Because they will include a wide range of hospitals around the country, the models announced today will allow CMS to test the impact of bundles on quality and cost when implemented at scale and across all types of providers and patients.

CMS’s evaluation of the models will examine quality during the episode period, after the episode ends, and for longer durations such as one year mortality rates. CMS will examine outcomes and patient experience measures such as mortality, readmissions, complications, and other clinically relevant outcomes. The evaluation will include both quantitative and qualitative data and will use a variety of methods and measures in assessing quality. The outcomes examined will include: claims-based measures such as hospital readmission rates, emergency room visits rates, and the amount of care deferred beyond the 90-day post-hospital discharge episode duration; HCAHPS satisfaction and care experience measures; and functional performance change scores from the patient assessment instruments in home health agencies and skilled nursing facilities. In addition, CMS plans for the evaluation to include a beneficiary survey that will be used to assess the impact of the model on beneficiary perceptions of access, satisfaction, mobility, and other relevant functional performance measures.

In addition to the formal evaluation, CMS is proposing continuous monitoring of arrangements between participants and collaborators and auditing of patients’ medical records to allow early detection of and intervention in any quality concerns.  


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