September 30, 2020 1:11 PM

Hospitals Participate in Federal Bundled Payment Program When in Their Financial Interest

Researchers explore the relationship between the Centers for Medicare and Medicaid Services financial incentives and hospital participation in a voluntary advanced alternative payment program.

drawing of hospital bed on lined paper
Illustration: Stephanie King

As U.S. health care costs continue to rise, the federal government has introduced programs that aim to reduce spending while maintaining quality and access to care for patients.

One such program is the Bundled Payments for Care Improvement (BPCI) Advanced program implemented by the Centers for Medicare and Medicaid Services, or CMS, in 2018. This program “bundles” payments to hospitals for health care services required to treat conditions, such as joint replacement, sepsis or stroke. In bundled payment models like BPCI Advanced, CMS determines the total allowable expenditures (target price) to provide care to patients affected with one of the eligible conditions, then participating hospitals or provider groups share in any savings or losses that result from the difference between this target price and actual costs. These programs shift accountability for the costs of health care services to providers.

Studies have shown bundled payment models to be a promising strategy to modestly reduce episode spending by limiting the use of post-acute care services. Yet, because hospital participation in the BPCI Advanced program is voluntary, CMS encourages hospitals to participate with financial incentives, which may diminish the program's overall efforts to reduce health care spending.

In an  article published in the September issue of Health Affairs, a University of Michigan Center for Evaluating Health Reform team led by Nicholas Berlin, M.D., M.P.H., and Andrew Ryan, Ph.D., M.A., examined the relationship between such financial incentives and hospital participation in the BPCI Advanced. Through analysis of Medicare claims and BPCI Advanced participation data, they found strong evidence that hospitals participate in voluntary payment models when it is in their financial interest to do so.

“Our findings underscore the challenges of designing financial incentives for voluntary payment models,” says Berlin, a plastic surgery resident and National Clinician Scholar at the U-M Institute for Healthcare Policy and Innovation. “Hospitals appear to weigh decisions about participation very closely and appear to select bundles for which they feel they will be most likely to gain revenue through shared savings.”

The team’s study found that hospitals that received higher target prices were more likely to participate in BPCI Advanced. These hospitals were also more likely to be higher spending hospitals. “These hospitals may be the ones that can reduce spending the most,” says Berlin.  

However, the study also showed that these hospitals are also more likely to experience natural reductions in spending due to a statistical artifact in which spending tends to move towards the mean or average level of hospitals over time.

Berlin explains, “This means that spending at these hospitals is likely to decrease during the performance period that CMS uses to determine payments or penalties for hospitals that participated in the program even without any meaningful changes in practice. Essentially, in the current BPCI Advanced program, CMS is likely to pay out substantial sums to hospitals that participated due to this statistical phenomenon alone.”

In their article, Berlin, Ryan and colleagues discuss the challenges of designing incentives for voluntary payment models and propose several solutions for CMS policymakers to adjust for mean reversion. One policy consideration outlined by the authors is making hospital participation in the BPCI Advanced mandatory to produce a more balanced sample of high and low-spending hospitals and help eliminate CMS losses from mean reversion.