CMS’s Bundled Payment Initiative

August 23, 2011 | Appeals | Complex Torts & Product Liability | Health Services

Legal Bulletin

The Centers for Medicare & Medicaid Services (“CMS”) announced today that it is seeking applications from providers to participate in its Bundled Payments for Care Improvement (“BPCI”) initiative (more information about this program can be found at This is a program developed pursuant to the Affordable Care Act to accomplish the goals of healthcare reform, which are to improve quality of care and enhance efficiencies through greater integration, collaboration, and coordination among providers.

A bundled payment, also referred to as “episode-based payment,” is a risk-adjusted payment for all services related to a treatment or condition, typically spanning multiple providers in multiple settings. The single payment is then apportioned among the multiple providers, which may include a hospital, a physician group, a skilled nursing facility, and a home health agency. An “episode” can take many forms, from a single rate for all services relating to a particular procedure, combining hospital care and post-acute care, to all treatment of associated with a chronic condition for a defined period of time. Episodes of care have two major dimensions: (1) a clinical dimension, including what services or clinical conditions comprise the episode; and (2) a time dimension that reflects the beginning, middle, and end of an episode.

The BPCI program will test CMS’s four models of bundling payments:

  • Model 1 – Retrospective Acute Care Hospital Stay Only: The episode of care will include all hospital services, including physician services, provided to a beneficiary during an acute inpatient hospital stay.
  • Model 2 – Retrospective Acute Care Hospital Stay Plus Post-Acute Care: The episode of care will include hospital, physician, post-acute provider, and other Medicare-covered services provided during the inpatient hospital stay as well as during the recovery period subsequent to hospital discharge, whether to patient’s home or another care setting.
  • Model 3 – Retrospective Post-Acute Care Only: The episode of care will include hospital, physician, post-acute provider, and other Medicare-covered services beginning with the initiation of post-acute care services after discharge from an acute inpatient hospital stay.
  • Model 4 – Acute Care Hospital Stay Only: The episode of care will include all services furnished during the inpatient hospital stay. Under this model, CMS will make a single prospectively determined bundled payment to the hospital that will encompass all services to be provided, and all providers will get paid by the hospital form this bundled payment.

Models 1 through 3 involve retrospective bundled payment arrangements, wherein applicants to the program will propose the target price, which will be a discounted price for the total costs of an episode based on historical data. Participants will be paid for services under the traditional fee-for-service system. Then, at the conclusion of the episode, the total payments actually made by CMS will be compared with the target price, and any savings will be shared by CMS with the providers. Under Model 4, CMS will make a single, prospective bundled payment to cover for all services under an episode. Therefore, providers will incur the financial risk of losses under this model, if any.

Providers are allowed great flexibility under this BPCI initiative, from selecting the conditions to bundle, developing the delivery structure, to determining the manner in which payments will be allocated among participating providers.

As a general matter, participants in this program should take into account the following when structuring a bundled payment program:

  • Bundled payment programs should be targeted to conditions with the greatest potential to improve in terms of both quality and efficiency. These are high-volume conditions for which treatment and interventions are well established and supported by clinical guidelines. These are also conditions for which, despite established guidelines, actual treatment costs vary substantially. Therefore, in selecting the medical conditions suitable for bundle payment programs, it is important to consider (a) the existence of well-established guidelines for treatment; (b) high-volume conditions; and (c) substantial variation in treatment expenditure.
  • The key to a successful implementation of a system of bundled payments is to conduct a proper assessment of the utilization, costs, and risks associated with the provision of services in treating a medical condition. In other words, providers should consider (a) the cost and utilization profile of an episode; (b) the providers who will render services in any given episode; (c) the development of best practices and treatment protocols based on evidence-based guidelines; (d) the pricing and payment rates by participating providers; (e) the amount of bundled payment that will include bonus payments based on quality and outcome metrics; and (f) the development of quality assessment mechanisms.

Interested applicants for the BPCI program’s Model 1 must submit a nonbinding letter of intent by September 22, 2011, and applicants for Models 2 through 4 must make their initial submissions by November 4, 2011. Final applications must be received on or before October 1, 2011 for Model 1 and on or before March 15, 2012 for Models 2 through 4. (For more details on the application process, visit the Center for Medicare and Medicaid Innovation website at


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