ACE: Adventures in Bundled Payment

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With a bundled-payment pilot program instituted by the Patient Protection and Affordable Care Act set to begin in 2013, it is interesting (and perhaps instructive) to look at a three-year CMS project nearing its endpoint—the Acute Care Episode (ACE) Demonstration1 for orthopedic and cardiovascular surgery—through the eyes of one participating radiology practice. It was purely by chance that Phil Russell, MBA, CEO of South Texas Radiology Group (San Antonio) first learned that Baptist Health System, San Antonio, had submitted a bid to be one of five hospital systems participating in the program. After Baptist Health System announced that it had been awarded the contract, a meeting was called to explain to all providers how they would be affected.

The program is testing the use of bundled payment for a selected set of inpatient episodes of care for orthopedic and cardiovascular procedures. In all, 28 cardiovascular DRGs are included, ranging from cardiac-valve and other major cardiothoracic procedures with cardiac catheterization and multiple complications to cardiac-pacemaker revision (except device replacement without complications). Nine orthopedic DRGs are included; they range from bilateral or multiple major-joint procedures of the lower extremity with multiple complications to knee procedures without postdischarge occurrence of infection and without complications.

According to CMS,1 the project’s purpose is to align hospital and physician incentives for improved quality and efficiency of care. Another stated purpose is to test whether the provision of price and quality outcome information affects the choices made by Medicare beneficiaries about where to have their procedure done. In addition, the program employs a shared-savings element, but in this case, it is the patient, not the provider, who receives the incentive payment from the government. At Baptist Health System, it ranges from $84 to $1,199, depending on the DRG involved.

The carrot for physicians—including cardiologists, orthopedists, radiologists, anesthesiologists, and hospitalists providing services to ACE patients at Baptist Health System—is receiving 100% of Medicare’s allowable fees, not the customary 80%. If the hospital delivers care for less than the bundled rate and succeeds in meeting specific quality measures—including ensuring that antibiotics are administered an hour prior to surgery and stopped 24 hours later—it keeps the additional money as profit.

Unfolding in Texas

In the San Antonio market, ACE was rolled out using radio spots alerting patients to the fact that if they used Baptist Health System for a heart procedure or joint replacement, they would not only be excused from copayments, but also would receive as much as $1,199 as an incentive. Russell admits some discomfort in knowing that his tax dollars were used for radio spots, although ultimately, the cost to the government is less than is typical for the 37 DRGs in the ACE program.

“The hospital bid some number that was less than the standard Medicare payment, and some portion of that difference, which was pure savings for CMS, was then the bounty, if you will, that was paid to these individual patients,” he notes. According to the Washington Post Wonkblog,2 Baptist Health System bid about 5% less than the typical rate. In order for the hospital to make up for the discount—and cover the additional 20% that it paid physicians, plus incentives that surgeons were eligible for if they achieved certain quality levels—it had to find savings in supply costs, Russell speculates.

“We are getting 100% of the Medicare allowable, whereas CMS usually pays 80%—so for the physician, there is an arbitrage, which is coming out of the hospital’s pocket,” he explains. “The hospital has to make that up (plus something else), and my understanding is that the overwhelming majority—perhaps all of the money that it was counting on—was going to come by way of reduced supply cost.”

Squeezing the Suppliers

Russell believes that Baptist Health System assembled the orthopedic surgeons and stipulated that participation in ACE was contingent on, for instance, deciding on two kinds of knee prostheses that the hospital would then bid out to the vendors at a discount. “If they are making money on it, they must have done a tremendous job squeezing the supply vendors,” Russell notes. In fact, about 90% of the efficiencies the hospital achieved came from savings in supply costs, according to Michael