Medicare's bundled payment pilot for acute and postacute care: analysis and recommendations on where to begin

Abstract

In the National Pilot Program on Payment Bundling, a subset of Medicare providers will receive a single payment for an episode of acute care in a hospital, followed by postacute care in a skilled nursing or rehabilitation facility, the patient's home, or other appropriate setting. This article examines the promises and pitfalls of bundled payments and addresses two important design decisions for the pilot: which conditions to include, and how long an episode should be. Our analysis of Medicare data found that hip fracture and joint replacement are good conditions to include in the pilot because they exhibit strong potential for cost savings. In addition, these conditions pose less financial risk for providers than other common ones do, so including them would make participation in the program more appealing to providers. We also found that longer episode lengths captured a higher percentage of costs and hospital readmissions while adding little financial risk. We recommend that the Medicare pilot program test alternative design features to help foster payment innovation throughout the health system.

Exhibit 1

Distribution of distinct post-acute provider referrals Source: Medicare acute and post-acute claims data. Notes: Unit of observation is acute care provider. Data come from Medicare 100 percent acute and post-acute claims for acute discharges in 2004. Figure includes acute discharges pooled across stroke, lower extremity joint replacement, hip fracture, congestive heart failure, and chronic obstructive pulmonary disease; and separately for hip fracture and stroke.

Exhibit 4

Fraction of 90-day post-discharge costs and readmissions, and coefficient of variation in total costs, by post-discharge day Source: Medicare and post-acute claims data, provider cost report data. Notes: Data come from Medicare 100 percent acute and post-acute claims. Costs were calculated using cost-to-charge ratios from provider cost reports. Coefficients of variation calculated using within discharging acute-provider standard deviation in total costs and adjusted for patient characteristics.