Buried deep in the Patient Protection and Affordable Care Act (HR 3590; Pub L No. 111-148)1 are proposals to bundle acute and postacute payment into one payment for services provided to Medicare beneficiaries within the 30 days postdischarge from the acute care hospital. The concept of bundling payment appears to have gained sufficient traction that it will endure as a topic of debate.2,3

Bundling, or episode payment, has not been a part of the public debate about health care reform. Politicians rarely, if ever, mention it—in part because they know that the public is not easily engaged in technical issues of acute and postacute payment that are largely invisible to them. Yet, bundling acute and postacute payment represents one of the most far-reaching proposals for Medicare reform since 1983, when Congress authorized the use of diagnosis-related groups (DRGs) as the basis for classifying Medicare beneficiaries under a prospective payment system (PPS) for acute hospital care.

Bundling promises to reshape the way we manage a patient’s care over a given episode of care. It offers enormous opportunities to enhance patient care while reducing costs, but it also poses significant design challenges that, if not handled correctly, can have unintended effects and undermine patient well-being. I will examine these opportunities and challenges primarily, but not solely, from the perspective of postacute care, a major practice area for physical therapists. Most of the observations made here generalize to both the acute and postacute portions of an episode of care. In fact, with bundling, some of the distinctions between acute care and postacute care may begin to lose some of their meaning.

Growth of Postacute Care

Bundling acute and postacute payment is not a new concept.4 The concept surfaced in the mid 1980s in the aftermath of the new DRG-based PPS for hospital care.5 The DRG-based PPS applied only to the acute hospital stay, and it “exempted” postacute providers, such as:

  • Rehabilitation hospitals and units, known as inpatient rehabilitation facilities (IRFs) in the parlance of the Centers for Medicare & Medicaid Services (CMS)

  • Skilled nursing facilities (SNFs)

  • Long-term care hospitals (LTCHs)

  • Home health agencies (HHAs)

The exemption allowed postacute providers to continue to be paid on a cost basis, subject to certain limits. The exemption was meant to be only temporary, but it was not until the Balanced Budget Act of 1997 (BBA’97) that Congress authorized a PPS for postacute care and then went a step further by authorizing a separate PPS for each postacute venue to be phased in over several years (Tab. 1).

Table 1

Prospective Payment Systems for Postacute Carea

Feature Skilled Nursing Facilities (SNF-PPS) Inpatient Rehabilitation Facilities (IRF-PPS) Long-term Care Hospitals (LTCH-PPS) Home Health Agencies (HHA-PPS) 
Unit basis Per diem Per case/per hospitalization Per case/per hospitalization Per 60-day episode of care 
Case-mix adjuster Resource Utilization Groups III (RUGs III) Function-related groups (FRGs) or case-mix groups (CMGs) Diagnosis-related groups (DRGs) specific to LTCH patients Home Health Resource Groups
(HHRCs) 
Number of case-mix groups 53 92 CMGs × 4 Comorbidity subgroups/CMG = 368 groups 540 153 
Patient assessment tool Minimum Data Set (MDS) Patient Assessment Instrument (IRF-PAI) ICD-9-CM codes recorded on patient claims Outcome & Assessment Information Set (OASIS) 
Feature Skilled Nursing Facilities (SNF-PPS) Inpatient Rehabilitation Facilities (IRF-PPS) Long-term Care Hospitals (LTCH-PPS) Home Health Agencies (HHA-PPS) 
Unit basis Per diem Per case/per hospitalization Per case/per hospitalization Per 60-day episode of care 
Case-mix adjuster Resource Utilization Groups III (RUGs III) Function-related groups (FRGs) or case-mix groups (CMGs) Diagnosis-related groups (DRGs) specific to LTCH patients Home Health Resource Groups
(HHRCs) 
Number of case-mix groups 53 92 CMGs × 4 Comorbidity subgroups/CMG = 368 groups 540 153 
Patient assessment tool Minimum Data Set (MDS) Patient Assessment Instrument (IRF-PAI) ICD-9-CM codes recorded on patient claims Outcome & Assessment Information Set (OASIS) 
a

PPS=prospective payment system.

The 1983 and 1997 legislation had 2 major unintended effects on postacute care. First, the 1983 DRG-PPS exemption led to a proliferation of postacute facilities and programs and made it one of the fastest growing portions of the Medicare program (Tab. 2). In FY2008, the fee-for-service portion of Medicare spent $50 billion for postacute care apart from outpatient care.6 Amounts spent under the auspices of the Medicare Advantage program, which now enrolls about 24% of Medicare beneficiaries,7 remains unknown. The physical therapy profession has grown accordingly. In short, the DRG-PPS helped create postacute care as we know it today.

Table 2

Number of Postacute Facilities, 1985–2009 (In 4-Year Increments)a

Type   1985   1989     1993     1997     2001     2005     2009* 
Skilled nursing facilities 6,725         8,688         11,436         14,568         14,765         15,008         15,071       
Inpatient rehabilittion facilities 454         767         984         1,067         1,141         1,227         1,180       
Long-term care hospitals         86         89         113         194         273         385         427       
Home health agencies         *         *         6,497         10,444         6,976         8,205         10,568       
Type   1985   1989     1993     1997     2001     2005     2009* 
Skilled nursing facilities 6,725         8,688         11,436         14,568         14,765         15,008         15,071       
Inpatient rehabilittion facilities 454         767         984         1,067         1,141         1,227         1,180       
Long-term care hospitals         86         89         113         194         273         385         427       
Home health agencies         *         *         6,497         10,444         6,976         8,205         10,568       
a

Sources: OSCAR database, Centers for Medicare and Medicaid Services, MedPAC. Computed by the NRH Center for Post-acute Studies, Washington, DC, March 2010. * = data not readily available.

Second, as intended, BBA’97 initially curbed the growth of postacute care—especially SNF and home health care—and led to a decline in the demand for physical therapist services in the years immediately after BBA’97. Over the long term, however, BBA’97 hardened the distinctions between postacute settings by endowing them with their own patient assessment instruments and payment formulas. This has made it more difficult to serve patients seamlessly across settings as their needs change. It also has led to increased use of multiple postacute venues for the same episode of care because the payment clock starts anew with each new placement.810 Finally, it has resulted in more practice rules that limit the degrees of freedom that therapists have when trying to manage patients with complex problems creatively. These rules center on who may be admitted to certain settings; length-of-stay requirements; when therapy should be initiated; use of group therapy; utilization of therapy extenders; use of adjunct therapies; minimum number of therapy hours per day; and, above all, excessive documentation requirements to avert costly retroactive denials in the name of eliminating “waste, fraud, and abuse.” Although many of the rules have been created to restrain overutilization and inappropriate care, they also have created clinical straight jackets that limit creativity and innovation. Rules are rarely evidence-based; they have more to do with maintaining the artificial distinctions between settings of care, and less to do with the merits of actual patient care.

Across all settings of care, providers have viewed bundling with apprehension. Adapting to yet another payment regime seems daunting. Although the regulatory regime facing postacute providers has become increasingly complex over the years, providers have more or less adapted. They have trained staff in the art of compliance protocols and retooled their information systems around each new regulatory requirement. Providers have developed their clinical and business models accordingly, learning to live with the current regime and developing the workarounds where possible—and, by adaptation, have become invested in the system.

From a daily clinical perspective, institutionally based therapists and clinicians often chafe at the rules. They find themselves living in a “culture of compliance” where the focus has been on “compliance management” rather than “care management.” Managers and clinicians live in fear of retroactive denials and spend countless hours justifying placement decisions and past care decisions. They often feel shackled in providing what they believe is optimal care for the patient. It can be said that a culture of compliance suffocates; it removes the oxygen that care providers need in order to do what is best for the patient.

Bundling payment provides an unusual opportunity to shift from a culture of compliance to one that liberates providers to work together to do what is best, to be creative and innovative, and to look forward rather than backward. I believe that bundling can help unleash clinical creativity and help discover best practice—and save costs in a way that cannot be done in the current payment environment.

Seven Key Elements

We need to get bundling right—but how? Bundling entails 7 key policy choices11:

  1. Scope of services to be bundled. Most bundling proposals would bundle both acute and postacute payment into one payment. Some have argued that combining both acute and postacute might be too “heavy a lift” at the outset and that we may need to go to full bundling in stages. There is a great deal to be gained by bundling postacute payment alone—at least at the outset. Most proposals to bundle acute and postacute payment, however, apply only to Medicare Part A services. Part B outpatient services need to be made part of the postacute bundle to avoid cost shifting from Part A to Part B. Moreover, once acute and postacute payment is bundled, Part B physician payment also should be included.

  2. Duration. Most bundling proposals call for payments to be bundled for 30 days after discharge from an acute care hospital. I believe that the duration needs to vary somewhat with the type of health condition, otherwise it will be too easy to shift costs from one side of the 30-day window to the other side.

  3. Method of patient assessment. A uniform patient assessment system is needed across all acute and postacute venues. A uniform system is needed for postacute placement, clinical management, outcome measurement, and case-mix adjustment for both payment and outcome. A common language across all settings is needed to facilitate a common patient care culture across all settings. This will assist in communicating with patients and family members as well. If we want culture change and a shared patient culture, we need a common language.12 The CMS has commissioned the development of such a tool under the auspices of the Medicare postacute payment reform demonstration project13 that preceded the health care reform debate. The “CARE Tool” (Continuity Assessment Record and Evaluation), as it is known, remains the most promising step in this direction, but more is needed to make the tool less burdensome, more user friendly, and more precise across all levels of patient function. Computer-adaptive technologies offer a promising approach in achieving these features.14

  4. Method of payment and gain sharing. To work effectively, the payment system needs to (a) adjust for patient case-mix to avoid cherry picking (ie, selecting “easier,” lower-cost, higher-margin patients), and (b) include a significant pay-for-performance (P4P) component to avoid stinting (ie, short-changing services relative to patient need). A P4P component also will encourage upstream acute providers to work with downstream postacute providers. All providers need to have “skin in the game” for both payment and outcome. Financial gain sharing among providers can facilitate a shared stake in the patient’s outcome and foster mutual accountability. The payment system also should have an outlier payment policy to encourage providers to serve patients with unusual needs or unpredictable care trajectories.

  5. Selection of bundler or accountable entity. A bundled payment system implies that there is an overarching entity that (a) will be accountable for payment and outcome and (b) is prepared to share gains and losses with all provider stakeholders. Such an entity needs to have several important capacities, that is, ability to provide or contract for services, go at risk for payment and outcome, develop clinical pathways including discharge planning, establish quality standards, provide information technology and decision-support systems, and coordinate with community services.

  6. Choice of quality and outcome metrics. There are many quality and outcome metrics from which to choose, such as mortality, patient function, infection rates, medical complications, readmissions, discharge destination, and health-related quality of life. Some metrics apply to all patients, whereas others must be appropriate to the intervention and types of patients served. Regardless of the metrics chosen, they need to have adequate validity and reliability, offer precision at all ranges of illness and function, be feasible to collect, and be publicly available to all stakeholders, including patients, families, and health-plan subscribers. Ill-chosen and poorly-reported measures can have unintended effects.

  7. Use of case-mix adjustment. As already suggested, case-mix adjustment is needed for both payment and outcome. It is needed to create a level playing field and avert “gaming” by payers and providers (eg, selecting certain types of patients, selective reporting of patient outcomes that fail to reflect case-mix differences among payers and providers). Case-mix adjustment will make sure that high-need patients are well served and that payers and providers are not penalized for serving them well.

Regulatory Reform, Provider Autonomy, and Patient Choice

Getting each of these elements right is essential to the overall success of a bundling regime. Success also requires a new regulatory framework to operationalize the bundling concept. This regime should not merely build on top of existing regulations. In fact, Congress and CMS should wipe the slate clean, considering what might be carried forward while avoiding the tendency to jerry-rig the old system with new rules that would make the system even more cumbersome. Congress and CMS should consider eliminating some of the distinctions that currently exist between levels of care. If providers are at risk for both payment and outcome, they should be free to determine how best to move the patient along a continuum of care. Providers should be allowed to modulate the level of care within settings, not just between settings. Congress should consider, for example, eliminating the artificial distinctions in hospital-level postacute care that now exist with IRFs, LTCHs, and hospital-based SNFs.

Bundling payment is a game changer, and a key motivation for bundling is to save costs. The risk going forward is that each provider interest will hunker down to protect its turf in the name of preserving access for patients who need their services. This is understandable. The CMS track record of the last few decades has not been very good: policy changes have often been accompanied by a raft of regulations that have only limited the degrees of provider freedom. Regulatory changes that followed BBA’97, for example, have sought to more narrowly define each provider’s “sandbox.” Many regulatory changes have been blunt instruments that seek to accomplish what was not achieved with past payment reforms.

A vexing issue for physical therapists is the matter of patient choice and access. In most of its forms, bundling means limiting patient choice to providers who are represented in the bundle, but patient choice already is limited. Edelman of the Center for Medicare Advocacy argues that “patient choice in [today’s] postacute care is often illusory” and that “patients and family often, if not usually, follow physician or discharge planner’s recommendation.”15 Postacute choices are often made under duress, and short lengths of stay in acute care give patients and family members very little time to make informed choices. In short, bundling will limit patient choice, but patient choice is already quite limited except in cases of elective procedures (eg, joint replacement), where postacute services can be selected in advance of the acute stay.

Professional and trade associations are rightfully concerned that bundling may reduce the need for their services and undermine their business models. But this overlooks the opportunities inherent in the bundling concept. Bundling actually could increase the demand for therapy services, for example, if a provider network is held accountable for outcomes that speak to therapy goals. More than likely, bundling will “squeeze out” unnecessary utilization and reduce the need for certain kinds of services within a given episode of care. But more important, if done right, bundling can restore provider autonomy that has gradually eroded as payers such as CMS have “squeezed” providers in the name of utilization and cost control. The key is whether CMS and other payers are willing to let go of their rules in exchange for a payment system in which incentives are better aligned to achieve real value.

Innovation and Best Practice

If the incentives inherent in bundling are structured correctly—and that is a big IF—it should foster greater care coordination under the auspices of more integrated health systems. It also should unleash a race for best practice. Providers of all kinds will be strongly motivated to figure out what works and does not work and weed out interventions and care processes with little or no benefit; they will focus on resources that provide the highest probability of improving outcomes.16 Providers are smart and have learned to adapt their business models to any payment regime. Bundling offers the potential for a business model that is based not on market share, bed utilization, and cost recovery but on price, quality, and transparency—in short, a business model that is based on value.

I contend that a bundling regime that fosters competition on price, quality, and transparency is worth a thousand randomized controlled trials (RCTs) in the search for evidence-based practice. I say this because RCTs have a long gestation period, and there simply is not enough money in the entire federal health sciences budget to evaluate all the interventions and combinations of interventions now used or contemplated. One byproduct of a bundling regime will be more provider-sponsored research, because identifying what works and does not work is in the provider’s interest.

Grand Bargain

Providers of all kinds, including physical therapists, should attempt to strike a grand bargain with government and payers: Eliminate much of today’s regulatory infrastructure that has clinicians tied up in knots, and, in return, hold providers accountable for price and outcome. Or, if this is too radical or risky, come up with a model in which risks are shared between provider and payer. Bundling acute and postacute payment offers a framework in which such a grand bargain can be made. The role of government and payers should not be to constrain provider behavior but to create new rules for a level playing field that competes on price and quality or outcome.

For all its advantages, bundling is not a cure-all for containing the cost of acute care and postacute care. It contains costs within an episode of care. But bundling does not address whether a particular procedure is appropriate for a particular patient, and it will not automatically reduce the number of episodes. In fact, hospitals might try to “drive volume growth” by increasing the number of episodes.17

Fortunately, the Patient Protection and Affordable Care Act1 calls for a period of pilot testing and demonstrations prior to full implementation of a bundling regime. This is crucial, as the risk of unintended outcomes remains great. But the essentials of a bundling system are reasonably well understood, and it would behoove all stakeholders to take a step back to embrace the opportunities inherent in the bundling concept. My fear is that we will just muddle through, make compromises, and end up with a payment regime that could add to our health care system’s woes. Bundling represents one of the best opportunities to move the culture of health care from one of compliance to one of innovation and best practice, and it should be seized.

The author would like to acknowledge the many contributors who presented at the Conference on Bundling Post-acute Payment held on June 24, 2009, in Washington, DC. A copy of the conference report is available at www.postacuteconference.org.
The views expressed are solely those of the author and do not necessarily reflect the views of the National Rehabilitation Hospital, MedStar Health, or any other organization with which the author is affiliated.

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