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GAO-11-126R: 

United States Government Accountability Office: 
Washington, DC 20548: 

January 31, 2011: 

The Honorable Dave Camp: 
Chairman: 
Committee on Ways and Means: 
House of Representatives: 

The Honorable Frank Pallone, Jr. 
Ranking Member: 
Subcommittee on Health: 
Committee on Energy and Commerce: 
House of Representatives: 

The Honorable Pete Stark: 
Ranking Member: 
Subcommittee on Health: 
Committee on Ways and Means: 
House of Representatives: 

The Honorable John Shimkus: 
House of Representatives: 

Subject: Medicare: Private Sector Initiatives to Bundle Hospital and 
Physician Payments for an Episode of Care: 

In recent years, we and other federal fiscal experts--including the 
Congressional Budget Office (CBO) and the Medicare Trustees--have 
noted the rise in Medicare spending and expressed concern that the 
program is unsustainable in its present form.[Footnote 1] Concerns 
about the rising cost of health care are particularly pressing in 
light of evidence that suggests that greater spending does not 
necessarily translate to better health outcomes or higher-quality 
care. Medicare's fee-for-service (FFS) payment system may contribute 
to spending growth because it rewards volume of services regardless of 
the appropriateness, cost, and quality of those services. Under FFS, a 
payment is made for each unit of service based on the expected costs 
of delivering that service.[Footnote 2] For example, Medicare makes 
multiple separate payments for the services associated with a complex 
medical procedure performed in a hospital. It pays the hospital for 
the initial admission and any related readmissions; each physician 
involved in the patient's care, such as the surgeon and the 
anesthesiologist; and the skilled nursing facility for any related 
care immediately after hospitalization. Payments made in isolation in 
this way may give providers little incentive to coordinate the 
provision of care or to control the volume of services; in fact, each 
admission and readmission increases revenue for hospitals, and each 
visit and procedure increases revenue for physicians. 

"Bundling," under which a single payment is made for a group of 
services related to an episode of care,[Footnote 3] may promote closer 
integration of health care providers and hold them jointly responsible 
for the cost and quality of services. An episode of care may refer to 
all services, including hospital, physician, and other services 
related to a health condition with a given diagnosis from a patient's 
first admission, including any readmissions, through the last 
encounter for the condition, including postacute services such as home 
health, skilled nursing facility, and rehabilitation. Bundled payment 
arrangements effectively hold providers collectively responsible 
financially for the health care they provide to a patient. As such, 
these arrangements seek to promote coordination among providers and 
the integration of health care delivery.[Footnote 4] To the extent 
that bundled payment arrangements encourage providers to become more 
efficient in the delivery of care, these arrangements can also benefit 
providers financially. Any reductions in unnecessary care that result 
from bundling can improve the quality of care. 

Some studies of bundled payments in the private sector suggest that 
for certain services and in certain settings, bundling may lower costs 
and improve efficiency. For example, one private sector pilot project 
conducted in the early 1990s looked at the impact of bundling hospital 
and physician payments for knee and shoulder arthroscopic surgery, 
including a 2-year warranty from the surgeon. This pilot resulted in a 
decrease in total costs to the payers.[Footnote 5] A more recent study 
of Geisinger Health System's bundled hospital and physician payments 
for cardiac bypass surgery procedures found that 30-day clinical 
outcomes improved. For example, there was a reported statistically 
significant 12 percent increase in patients discharged to their home. 
Financial outcomes were also reported to improve, including a 5 
percent drop in hospital charges.[Footnote 6] 

Medicare first explored the use of bundled payments almost 20 years 
ago, implementing two demonstrations that lowered the cost of services 
provided to beneficiaries.[Footnote 7] Most recently, in 2009, the 3- 
year Acute Care Episode (ACE) Demonstration implemented bundled 
payments for selected inpatient high-cost cardiac and orthopedic 
surgery in four states in the Southwest. To improve the coordination, 
quality, and efficiency of services provided to Medicare 
beneficiaries, in the Patient Protection and Affordable Care Act 
(PPACA), the Secretary of Health and Human Services (HHS) is required 
to implement a national pilot program by January 1, 2013,[Footnote 8] 
for integrating services provided to beneficiaries during an episode 
of care. An episode of care may include inpatient, physician, and 
related services provided prior to, during, and following an admission 
to a hospital. The Secretary must develop payment methods that may 
include bundled payments for episodes of care. Medicare provider 
entities including a hospital, a physician group, a skilled nursing 
facility, and a home health agency may apply for participation in this 
pilot program subject to standards to be set by the Secretary. In 
setting the standards, the Secretary must ensure adequate beneficiary 
choice of providers under the pilot program. 

You asked us to examine private sector initiatives to bundle payments 
for an episode of care.[Footnote 9] We examined: 

* types of services for which private payers have bundled payments for 
an episode of care, 

* how private payers administer bundled payments, and: 

* the views of national payers, physician specialty societies, and 
experts on the feasibility of more extensive use of bundled payments 
in Medicare. 

Scope and Methodology: 

To describe types of services for which the private sector has bundled 
payments and how the bundled payment arrangements are administered, we 
interviewed the five largest national payers--Aetna, Cigna, Humana, 
UnitedHealth Group, and Wellpoint--and reviewed relevant materials 
provided to us by officials from these organizations.[Footnote 10] We 
also interviewed representatives of medical professional societies 
that had taken a public position on bundled payments, as well as 
representatives of other organizations that were identified in the 
literature as having experience with bundled payments to hear about 
their experience and get their views about the feasibility of bundled 
payments for Medicare.[Footnote 11] To learn about bundled payment 
initiatives developed by the Centers for Medicare & Medicaid Services 
(CMS)--the agency that administers the Medicare program--we 
interviewed agency officials and reviewed relevant CMS policies. Our 
findings are based on interviews with selected national payers and 
physician groups, and therefore they cannot be generalized to all 
payers and physicians. 

We conducted this performance audit from March 2010 through December 
2010 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform our work 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our research 
objectives. We believe that the information obtained, and the analysis 
conducted, provide a reasonable basis for any findings and conclusions 
in this product. 

Results in Brief: 

The five largest national payers stated that they have routinely 
bundled payments for solid organ and bone marrow transplants for over 
20 years, and a few had bundled payments for other services. The 
bundled payment for transplants generally included all hospital, 
physician, and ancillary services for the transplant episode, from 
evaluation through follow-up care. Two of the five national payers 
also have begun using bundled payments on a limited basis for other 
procedures. In 2009, one payer implemented bundled payments for 
bariatric surgery with providers in 22 states, and another payer 
implemented bundled payments for cardiac bypass surgery and other 
cardiac interventions in one hospital. 

All five national payers told us they generally signed a single 
contract with the hospital and physicians to bundle payments for 
transplants, and they processed bundled payments manually. The payers 
contracted with high-quality transplant centers that first met minimum 
volume and quality criteria established by national transplant 
organizations and were then willing to accept a competitive bundled 
payment rate. The payers typically signed a single contract, usually 
with large, urban teaching or tertiary hospitals and physicians who 
were either hospital employees or in hospital-affiliated practice 
plans. Payers paid the hospital, which then paid physicians and other 
providers. In addition, all five payers told us that both payers and 
providers processed claims for bundled payments manually because their 
claims systems were not designed to group hospital and physician 
claims related to an episode of care. 

Payers, representatives from physician specialty societies, and 
experts we interviewed stated that while bundled payments were 
feasible for Medicare, there were several obstacles to overcome. Among 
the factors noted that contributed to the feasibility of bundled 
payments in Medicare were that the ongoing Medicare bundled payment 
demonstration had increased providers' acceptance of bundled payments; 
and that bundled payments for transplants at the payers' centers of 
excellence resulted in savings--an important consideration in light of 
Medicare's financial challenges. Factors that could hinder wider use 
of bundled payments for Medicare included manual claims processing, 
which all five payers told us would be less viable for higher-volume 
services; that standard definitions for an episode of care do not 
exist; and that limiting provider choice under the selective 
contracting used for transplant networks may pose problems for 
Medicare FFS beneficiaries, who are used to a wide choice of providers 
since Medicare generally allows participation by all willing providers 
that meet certain standards. 

In its written comments, HHS stated that the report provided useful 
information for CMS as it takes steps to expand bundled payment 
programs. CMS added that it has already begun to address some of the 
challenges we noted, such as manual claims processing, in the ACE 
demonstration for bundled payments. 

Largest National Payers Bundled Payments for Transplants, and Some 
Have Started Bundling Payments for Other Services in Specific 
Locations: 

The five largest national payers told us that bundling payments for 
transplants is standard procedure and has been the industry norm for 
more than two decades. The five payers bundled payments for solid 
organ transplants--including heart, liver, kidney, and pancreas--and 
for bone marrow transplants. The payers told us there were several 
reasons they selected transplants for bundled payment arrangements. 
Transplants are high-cost procedures, which increases the potential 
for achieving substantial savings; they have clearly defined start and 
end points, which is a necessity in defining an episode of care; and 
they have well-established clinical protocols for care and well-
defined outcome measures. 

The five national payers told us that the bundled payment for 
transplants generally included all hospital, physician, and ancillary 
services for all phases of the transplant episode: evaluation; organ 
procurement; hospital admission for the procedure; readmissions; and 
follow-up care, which varied from 30 to 365 days. The payers told us 
that they typically did not adjust for the severity of the patient's 
condition beyond the inherent severity adjustment included in the 
Medicare diagnosis related group.[Footnote 12] Four of the five payers 
also told us that they had established outlier provisions to limit the 
financial risk to providers.[Footnote 13] The payers provided 
additional per diem payments when outlier thresholds, which were based 
on a limit of total days or a threshold of total charges for the 
episode, were reached. 

Two of the five national payers were moving toward expanding bundled 
payments to additional procedures. For example, one payer told us that 
in 2009 it had implemented bundled payments for bariatric surgery in 
selected hospitals in 22 states. This payment included all hospital, 
physician, and ancillary services: evaluation for surgery, hospital 
admission, and follow-up care for 180 days after discharge. The payer 
told us it had selected bariatric surgery for a bundled payment 
arrangement for reasons similar to those for transplants: it is a high-
cost procedure with clearly defined start and end points, and well- 
established clinical protocols for care. Another payer began using 
bundled payment arrangements in 2009 for cardiac bypass surgery and 
other cardiac interventions in one hospital. This payer told us that 
the bundled payment included hospital, physician, and ancillary 
services for the surgical procedure and follow-up care for 30 days 
after discharge. 

Four of the five payers told us that they were exploring bundled 
payments for other high-cost services, including cardiac and 
orthopedic surgery. Three payers told us that, as a first step in that 
direction, they had developed a "centers of excellence" approach to 
identify high-quality hospitals that provide these services. In this 
approach, health plan members are encouraged to use hospitals that 
meet volume, quality, and efficiency criteria specified by the payers. 
The payers told us they are interested in developing bundled payments 
for these additional services but certain implementation challenges 
would need to first be considered. 

National Payers Generally Contracted Jointly with Selected Hospitals 
and Physicians for Transplants, and Processed Claims Manually: 

All five national payers told us that they selected hospitals for 
their transplant network on the basis of criteria including volume and 
quality, experience, and availability of ancillary services. The 
payers said that to identify hospitals to include in the transplant 
network they first relied on minimum volume and quality criteria 
endorsed by national transplant organizations like the United Network 
for Organ Sharing (UNOS) and the Scientific Registry of Transplant 
Recipients (SRTR).[Footnote 14] Payers told us that the data included 
in these public registries on each hospital's transplant experience 
are risk-adjusted, that is, differences in patient demographics and 
severity of condition are considered so that fair comparisons can be 
made across hospitals. Payers also told us that they used their own 
additional criteria, such as evidence of an experienced transplant 
team; availability of ancillary and 24-hour support services; 
hospitals' quality assurance programs; and participation in clinical 
data registries, such as UNOS and SRTR.[Footnote 15] The payers told 
us that only about half or fewer transplant hospitals qualified for 
their national transplant networks; these were typically large 
teaching or tertiary hospitals located in urban areas. Payers examined 
hospitals' volume and quality data annually. 

After identifying hospitals that met volume and quality criteria, the 
five payers said they usually signed a single contract with hospitals 
and physicians, and that the hospitals and physicians determined how 
the payment would be disbursed. The payers said they contracted with 
hospitals that were willing to accept a competitive bundled payment 
rate.[Footnote 16] They said that a single contract could be 
negotiated because the physicians were either employees of the 
hospitals or were organized into hospital-affiliated practice plans. 
Payers generally made payments to the hospital in installments after 
each phase of the transplant episode; the hospital then paid the 
physicians. Payers did not typically get involved in decisions about 
how payments were allocated among participating providers. 

All five national payers said they had established financial 
incentives for patients to use the hospitals in the transplant 
network. Some payers reduced patients' copayments or coinsurance if 
they used hospitals within the network. One payer covered only the 
transplants performed at designated centers of excellence; if patients 
chose hospitals outside the network, they would have to pay out of 
pocket for the entire cost of the transplant. Because designated 
centers of excellence could be far from a patient's home, payers also 
usually helped pay travel expenses for patients and at least one 
family member.[Footnote 17],[Footnote 18] 

All five national payers told us that both payers and providers 
processed claims for bundled payments manually, not with an automated 
claims processing system, because automating the process would be 
difficult. Payers said that their claims systems were not designed to 
group hospital and physician claims related to an episode of care and 
to make a bundled payment for these claims instead of paying them 
individually. To facilitate manual processing of the claims for 
bundled payments, payers had a dedicated claims unit that identified 
and flagged all transplant-related claims as 'no-pay' to avoid paying 
twice for them. Several payers told us that they required providers to 
submit the claims for transplant services because payers needed to 
capture all encounter data to record and track the types of services 
being provided during the episode and determine how the bundled 
payment compared to billed charges. Payers also reviewed the claims to 
identify any potential quality problems such as stinting on care. 

All five national payers told us that the case managers they hired 
were key to ensuring the successful implementation of bundled 
payments. Payers assigned a dedicated case manager, typically a 
registered nurse experienced in transplant care, to patients 
throughout the transplant episode to help them navigate through their 
transplant experience. For example, the case manager explained the 
patient's transplant benefits, how the transplant network was 
structured, and the advantages of using a designated transplant 
center. The case manager also helped patients select the most 
appropriate center for their needs and medical condition, and 
explained the expenses covered by the travel benefit, if applicable. 
In addition, the payers told us that the case manager acted as the 
liaison between the patient and providers, coordinated services, and 
helped resolve any claims issues that arose.[Footnote 19] 

National Payers, Physician Specialty Societies, and Experts Described 
Factors Enhancing and Factors Impeding Medicare's Broader Use of 
Bundled Payments: 

Payers, representatives from physician specialty societies, and 
experts we interviewed told us that more extensive use of bundled 
payments in Medicare was feasible but that there were several 
obstacles to overcome. They described factors such as providers' 
growing acceptance of bundled payments that they believe enhance the 
potential for more extensive use as well as factors that may hinder 
it, including manual claims processing. 

Providers' Growing Acceptance of Bundled Payments, Medicare's Market 
Power, and the Potential for Savings Indicate Potential for More 
Extensive Use of Bundled Payments: 

Provider Acceptance of Bundled Payments and Increased Collaboration 
between Hospitals and Physicians: Some respondents we interviewed told 
us that providers were more accepting of bundled payments, and that 
increased collaboration between some physicians and hospitals was 
conducive to bundling. Some payers, researchers, and specialty 
societies' representatives told us that the ongoing ACE demonstration 
and the national pilot program in PPACA had increased providers' 
receptiveness to bundled payments because providers believe that 
bundled payments are likely to be implemented broadly in the future. 
Several payers and specialty societies also noted that some hospitals 
and physicians were collaborating to develop bundled payment 
arrangements. For example, a representative from the ACC stated that 
physicians at a major Ohio hospital had developed bundled payments for 
selected high-cost cardiac surgery procedures and were in the process 
of marketing the bundled payment arrangements to private payers. 
Similarly, a representative from AAOS told us that orthopedic surgeons 
at a hospital in southern California had collaborated with the 
hospital to develop bundled payment arrangements for certain high-cost 
orthopedic surgeries, which had been successfully implemented for a 
large employer group. 

Medicare's Market Power: Respondents mentioned Medicare's size as a 
plus in facilitating bundled payments. Several payers and some 
researchers and specialty society representatives told us that 
Medicare's size enables it to effect change, such as facilitating 
provider integration and encouraging provider investment in 
infrastructure to manage bundled payments. As one payer noted, 
Medicare alone can represent over half of a hospital's business, while 
all private payers combined would represent less than one-third, and 
any single payer a much smaller share. As such, providers may be more 
willing to make changes to support bundled payments for Medicare than 
for any single private payer. Respondents also noted that hospitals 
may be eager to contract in order to boost their volume, particularly 
if CMS contracted selectively with only high-volume, established 
centers. 

Potential for Savings: Interview respondents noted that bundled 
payments, coupled with their selective contracting approach, have the 
potential to produce savings--an important consideration in view of 
the financial challenges facing Medicare. Most of the five national 
payers stated that bundled payments for transplants at their centers 
of excellence resulted in savings and efficiencies. For example, one 
payer noted an average 4 percent reduction in total costs for 
transplants performed at its designated centers of excellence compared 
to a 15 percent increase at nondesignated centers, and several payers 
noted efficiencies such as reductions in total length of stay. Some 
specialty societies told us that there is potential for significant 
reductions in hospital costs--which is where most of the costs are 
concentrated--if bundled payment arrangements are used for 
cardiovascular care.[Footnote 20] In addition, a representative from 
one hospital in the Medicare ACE demonstration reported a 10 percent 
reduction in costs for orthopedic procedures stemming largely from the 
purchase of lower-priced medical devices such as orthopedic implants. 
This representative stated that the hospital and orthopedic surgeons 
were looking for ways to streamline their costs and improve their 
efficiency to maximize their potential for success under the bundled 
payment. 

Claims Processing System Limitations, Current Degree of Provider 
Integration, and Ongoing Management Requirements among Factors 
Impeding Medicare's Broader Use of Bundled Payments: 

Manual Claims Processing: All five national payers told us that manual 
claims processing would represent a significant challenge for any 
payer, including Medicare, particularly for high-volume services. The 
payers told us that automated claims processing systems do not exist. 
Payers have found it difficult to group hospital and physician claims 
related to an episode of care. The five payers stressed that the 
reason manual claims processing has worked for transplants is that 
transplants are relatively low volume. If bundled payments are used 
more widely and for higher-volume services, manual claims processing 
would be less viable for payers, including Medicare, and providers. 

Provider Integration: Most of the respondents told us that it was 
difficult to establish a single contract for bundled payments with 
hospitals and physicians. Most of the five national payers, specialty 
societies, and researchers told us that successful implementation of 
bundled payments requires that a single entity, composed of the 
hospital and its physicians, contract with payers to receive and 
distribute the bundled payment.[Footnote 21] Large tertiary or 
teaching hospitals likely have physicians who are either employees or 
in practice plans affiliated with the hospital, but respondents told 
us that most other physicians practice alone or in small groups making 
it more difficult to involve these physicians in bundled payment 
arrangements. One payer also noted that generally hospitals are not 
affiliated with the full range of postacute care providers such as 
rehabilitation, home health, and skilled nursing facilities and may be 
unwilling to accept risk in the bundled payment for care they do not 
provide. 

Standard Definition for Episode of Care: Respondents told us that 
standard definitions of an episode of care do not exist for the types 
of services that lend themselves to a bundled payment approach, and 
payers and providers are looking to Medicare to develop such 
definitions.[Footnote 22] All five national payers, the specialty 
societies, and some researchers we interviewed noted that bundled 
payments may not work well for all conditions because the services 
that make up an episode of care must be unambiguously defined. The 
five payers told us that one reason bundled payments have not been 
implemented more widely for other services is because the episode of 
care and the start and end points cannot be as clearly defined as they 
are for transplants. When patients have comorbidities, episodes may 
overlap, making it difficult to distinguish services that should be 
included in one bundle from those to be included in another. Some 
payers noted that providers have to tailor their systems to each 
payer's definition of an episode, which makes them reluctant to take 
on bundled payments, but if Medicare developed standard definitions, 
payers would adopt them. 

Case Management: The five national payers told us that the case 
managers they used to help patients navigate the transplant process 
and resolve any claims issues were essential for bundled payment 
arrangements, and that Medicare does not have case managers. They said 
that Medicare would need a similar case management function to 
implement bundled payments successfully. 

Public Data Registries: Some respondents we interviewed told us that 
reliable, publicly available data on the quality of transplants that 
help them identify high-quality providers do not exist for other types 
of cases but that Medicare could facilitate the development of these 
data sources. All payers told us that they relied on public patient 
registries developed by specialty societies or other organizations to 
identify high-quality transplant hospitals. Since the data are risk 
adjusted, it is possible to compare outcomes across hospitals. 
Specialty societies stressed that Medicare should rely on their data 
registries, where they exist, rather than Medicare claims data for 
risk adjustment. For example, representatives from the STS told us 
that Medicare should use their registry of cardiac bypass patients 
rather than claims data to develop risk adjustment for bundled 
payments because their registry is a comprehensive database, started 
in 1989, that includes data from more than 90 percent of cardiac 
surgery programs nationwide. The clinical data are collected from 
patient charts and include information on patient severity, 
complications, and mortality. These and representatives from other 
specialty societies believed that Medicare should facilitate the 
development of registries where they do not yet exist and require 
physicians to participate in existing registries.[Footnote 23] For 
example, a representative from the ACC stated that all physicians now 
participate in the registry they have developed on patients with 
cardiac defibrillators because Medicare will not pay physicians who do 
not participate in the registry. 

Benefit Structure: Some national payers and researchers we interviewed 
told us that Medicare's benefit structure and program characteristics 
may present challenges because a bundled payment is made up of both 
hospital and physician services, but the Medicare program makes 
payments separately for these services and has different deductibles 
and copayments for each. A Medicare bundled payment may therefore be 
more complicated for HHS to administer and track. Some payers told us 
that the financial incentives they offered-such as lower copayments 
and deductibles, and travel benefits--to encourage use of centers of 
excellence would be more difficult for Medicare to offer. 

Provider Choice: Some payers we interviewed also told us that their 
selective contracting approach may be problematic for Medicare, since 
Medicare generally is required by law to allow all willing providers 
that meet certain requirements and standards to participate in the 
program.[Footnote 24],[Footnote 25] Payers told us that for bundled 
payments they contracted with only the top-tier hospitals based on 
volume and outcome data, but some payers and researchers said that 
'leakage' of bundled payment services to noncontract providers, 
particularly for follow-up care, could occur in a FFS environment 
where beneficiaries are used to a choice of providers.[Footnote 26] 

Agency Comments: 

We obtained written comments from the Department of Health and Human 
Services (HHS) which are reprinted in enclosure 1. In its written 
comments HHS stated that the report provided useful information for 
CMS as it takes steps to expand bundled payment programs. While CMS 
agreed with the report's finding that manual claims processing is a 
factor that hinders Medicare's ability to expand bundled payment 
programs, it stated that it had worked with the Medicare 
Administrative Contractor (MAC) for the ACE demonstration to develop 
an electronic bundled payment claims processing system within the 
MAC's existing operation and plans to transfer this processing program 
to other MACs as it expands bundled payment programs. CMS added that 
electronic processing was possible for existing bundled payment 
programs implemented under Medicare because fixed payments, with 
identical Part A deductible and Part B coinsurance amounts, were set 
for each patient per hospital per diagnosis-related group. This also 
helped overcome the challenges presented by Medicare's benefit 
structure. In addition, CMS stated that its evaluation of prior 
bundled payment initiatives indicated that bundled payment programs 
themselves do not automatically result in increased volume to 
hospitals because patients tend to use hospitals where their 
physicians have privileges. However, as we stated in the report, 
respondents told us that bundled payments coupled with a selective 
contracting approach could increase volume for participating hospitals. 

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the date of the report. At that time we will send copies of the 
report to the Administrator of CMS and relevant congressional 
committees. This report also will be available at no charge on the GAO 
Web site at [hyperlink, http://www.gao.gov]. 

If you or your staffs have any questions about this report, please 
contact me at (202) 512-7114 or cosgrovej@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made major 
contributions to this report are listed in enclosure II. 

Signed by: 

James C. Cosgrove: 
Director, Health Care: 

Enclosures - 2: 

[End of section] 

Enclosure I: Comments from Department of Health and Human Services: 

Department Of Health & Human Services: 
Office Of The Secretary: 
Assistant Secretary for Legislation: 
Washington, DC 20201: 

January 14, 2011: 

James Cosgrove: 
Director, Health Care: 
U.S. Government Accountability Office: 
441 G Street N.W. 
Washington, DC 20548: 

Dear Mr. Cosgrove: 

Attached are comments on the U.S. Government Accountability Office's 
(GAO) draft correspondence entitled, "Medicare: Private Sector 
Initiatives to Bundle Hospital and Physician Payments for an Episode 
of Care" (GAO-11-126R). 

The Department appreciates the opportunity to review this 
correspondence before its publication. 

Sincerely, 

Signed by: 

Jim R. Esquea: 
Assistant Secretary for Legislation: 

Attachment: 

[End of letter] 

General Comments Of The Department Of Health And Human Services (HHS) 
On The Government Accountability Office's (GAO) Draft Correspondence 
Entitled, "Medicare: Private Sector Initiatives To Bundle Hospital And 
Physician Payments For An Episode Of Care" (GAO-11-126R): 

The Department appreciates the opportunity to review and comment on 
this draft correspondence. This correspondence provides a summary of 
findings from private sector bundling initiatives that the Centers for 
Medicare and Medicaid Services (CMS) will find useful as we engage in 
efforts to expand our bundled payment programs. 

CMS agrees with the GAO finding that processing claims manually is one 
of several factors that hinder Medicare's ability to conduct expansive 
bundled payment programs. During the initial Medicare bundled payment 
demonstrations for corollary artery bypass grafts and cataract 
procedures, we realized that continuing to process claims by hand 
would preclude a widespread application of the concept. A major goal 
of the current Acute Care Episode (ACE) Demonstration has been to 
develop an electronic bundled claims processing system that could be 
incorporated into the existing Medicare system. For that very reason, 
we restricted the solicitation of ACE applicants to the four States 
serviced by the Jurisdiction 4 Medicare Administrative Contractor 
(MAC), worked closely with that one MAC to develop an electronic 
bundled payment claims processing system within their existing 
operation, and continue to cooperate with them to refine the process. 
We then plan to transfer these electronic claims processing programs 
to other MACs as we expand bundled payment programs. 

In reference to the statement in the report that "...hospitals may be 
willing to contract (a bundled payment with Medicare) in order to 
boost their volume, particularly if Medicare contracted with only high-
volume, established centers," we would like to note that the 
evaluation of prior CMS bundled payment initiatives indicated that 
bundled payment programs, by themselves, did not automatically lead to 
increased volume from expanded market share for program participants. 
Also, to date, shared savings payments to beneficiaries under the ACE 
Demonstration have not led to significant volume increases for program 
participants. The fact remains that patients tend to go where their 
physicians advise them. and patients tend to choose hospitals where 
their physicians have admitting and practicing privileges, regardless 
of incentives available under bundled payment programs. However, as 
noted in the report, bundled payment program participants still have 
significant opportunities to implement efficiencies and increase their 
own savings. 

In the report, it was stated that "Medicare's benefit structure...may 
present challenges because a bundled payment is made up of both 
hospital and physician services, but the Medicare program makes 
payments separately for these services and has different deductibles 
and copayments for each." Although this statement is true of Medicare 
in general, we have addressed the challenges noted in the report for 
purposes of the bundled payment demonstration programs already 
implemented under Medicare. For those programs, the bundled payment is 
a fixed amount per hospital per diagnosis related group from which 
both the Part A deductible and the Part B coinsurance are deducted. 
The Part A deductible is a fixed amount while the Part B coinsurance 
is 20 percent of the designated Part B portion of the set bundled 
payment. Thus, the deductible and coinsurance are the same for every 
patient served in the particular hospital in the particular bundled 
payment episode, enabling the MAC to incorporate the processing of 
these payments into their electronic claims processing system. We 
would also like to note that bundled payment initiatives under 
Medicare are largely invisible to Medicare beneficiaries. While 
participating sites must meet specific program requirements including 
quality monitoring, they are not designated as centers of excellence. 
Fee-for-service beneficiaries remain free to choose any provider they 
wish regardless of whether the provider is participating in a bundled 
payment initiative. 

We look forward to expanding the application of the bundled payment 
concept within the Medicare program. An upcoming challenge will be the 
incorporation of post-acute services into the bundle. Post-acute 
services are an area where accountable care organizations with 
established relationships among various types of providers may play a 
key role. 

We would like to thank the GAO for all of its efforts and for their 
valuable insights provided in this report. 

[End of section] 

GAO Contact and Staff Acknowledgments: 

GAO Contact: 

James C. Cosgrove, (202) 512-7114 or cosgrovej@gao.gov: 

Acknowledgments: 

In addition to the contact named above, Phyllis Thorburn, Assistant 
Director; Iola D'Souza; Ann Tynan; and Elizabeth T. Morrison made key 
contributions to this report. 

[End of section] 

Footnotes: 

[1] GAO, The Federal Government's Long-Term Fiscal Outlook: January 
2010 Update, [hyperlink, http://www.gao.gov/products/GAO-10-468SP] 
(Washington, D.C.: Mar. 2, 2010); CBO, Budget Options, Volume 1, 
Health Care (Washington, D.C.: December 2008); and The Boards of 
Trustees of the Federal Hospital Insurance and Federal Supplementary 
Medical Insurance Trust Funds, 2010 Annual Report of the Boards of 
Trustees of the Federal Hospital Insurance and Federal Supplementary 
Medical Insurance Trust Funds (Washington, D.C.: Aug. 5, 2010). 

[2] In most instances, the unit of service is narrowly defined, such 
as a single office visit or a single test. However, in some instances, 
Medicare provides a single payment for multiple services furnished by 
a provider. For example, the hospital outpatient fee schedule includes 
payment for a primary service as well as other integral services and 
ancillary items related to that service, such as intraoperative 
services and imaging supervision/interpretation. 

[3] For purposes of this report, the term bundled payment refers to 
payment for services delivered by multiple providers for an episode of 
care that goes beyond a single day. Other types of bundled payments 
may exist, including a single payment for multiple services delivered 
by a physician to a patient on the same day. 

[4] The Commonwealth Fund Commission on a High Performance Health 
System, The Path to a High Performance U.S. Health System: A 2020 
Vision and the Policies to Pave the Way; and Robert E. Mechanic and 
Stuart A. Altman, "Payment Reform Options: Episode Payment Is a Good 
Place to Start," Health Affairs 28, 2, Web Exclusive (Jan. 27, 2009), 
[hyperlink, 
http://content.healthaffairs.org/cgi/content/abstract/28/2/w262]. 

[5] Lanny L. Johnson and Ruth L. Becker, "An Alternative Health-Care 
Reimbursement System--Application of Arthroscopy and Financial 
Warranty: Results of a 2-Year Pilot Study," Arthroscopy 10, 4 (1994): 
462-470. 

[6] Other outcomes also improved although these improvements were not 
statistically significant: readmissions dropped 9 percent and in- 
hospital mortality rates dropped by 100 percent. See Alfred S. Casale 
et al., "Proven Care: A Provider-Driven Pay-for-Performance Program 
for Acute Episodic Cardiac Surgical Care," Annals of Surgery 246, 4 
(October 2007): 613-623. 

[7] The Medicare Participating Heart Bypass Center demonstration, 
which ran from 1991 to 1996 in seven sites nationwide, implemented 
bundled hospital and physician payments for cardiac bypass graft 
surgery as well as all related readmissions to the hospital. The 
Medicare Cataract Surgery Alternative Payment Demonstration, which ran 
from 1993 to 1996 in three states, implemented bundled payments for 
outpatient cataract surgery procedures, including all follow-up care 
for 120 days after surgery. 

[8] Pub. L. No. 111-148, §§ 3023, 10308, 124 Stat. 119, 399-403, 941-
942 (2010). 

[9] You also asked us to explore options to ensure that the physician 
fee schedule appropriately reflects efficiencies occurring across all 
types of services that are commonly furnished together. We examined 
efforts by the Centers for Medicare & Medicaid Services (CMS) to set 
appropriate fees, and additional opportunities for it to avoid 
excessive payments, when services are furnished together on the same 
day, in GAO, Medicare Physician Payments: Fees Could Better Reflect 
Efficiencies Achieved When Services Are Provided Together, [hyperlink, 
http://www.gao.gov/products/GAO-09-647] (Washington, D.C.: July 31, 
2009). 

[10] Our preliminary research with local payers in several states 
showed that while efforts were under way to develop bundled payments 
in several markets, local payers had not implemented them yet. We 
therefore limited our study to bundled payment initiatives by the five 
largest national payers. 

[11] The medical professional societies included the American College 
of Cardiology (ACC), American Academy of Orthopedic Surgeons (AAOS), 
and the Society of Thoracic Surgeons (STS). The other organizations 
included the Center for Studying Health System Change; the 
Commonwealth Fund; Health Care Incentives Improvement Institute, a 
nonprofit organization that developed a bundled payment model known as 
the Prometheus Payment for selected services; the Integrated 
Healthcare Association in California (IHA), a nonprofit, statewide 
multistakeholder group that was in the process of developing bundled 
payments for selected surgical procedures; the Rand Corporation; and 
the Urban Institute. 

[12] Inpatient admission cases are classified into relatively 
homogeneous categories, called Medicare severity diagnosis-related 
groups (MS-DRG), that are based on a patient's diagnoses and treatment 
procedures, and may also take into account the severity of the 
condition. For example, MS-DRG 1 is a heart transplant with major 
comorbidities and complications, and MS-DRG 2 represents a heart 
transplant without major comorbidities or complications. 

[13] The payer that did not establish outlier provisions included in 
its bundled payment 30 days of follow-up care after the transplant 
compared with longer periods for the four other payers. 

[14] UNOS is a private, nonprofit organization that manages the 
nation's organ transplant system under contract with the federal 
government. UNOS maintains the database that contains all organ 
transplant data for every transplant event that occurs in the United 
States. The UNOS database contains current and historical data for 
individual transplant centers, such as annual transplant volume by 
organ. The SRTR is a national database of organ transplantation 
statistics developed by a nonprofit research organization to support 
ongoing evaluation of the scientific and clinical status of the 
continuum of transplant activity from organ donation and wait list 
candidates to transplant recipients and survival statistics. 

[15] A clinical data registry is a data warehouse used to collect 
information about patient demographics and clinical outcomes. In this 
correspondence, we refer to clinical data registries as registries 
that collect performance data on hospital-level performance for 
procedures such as transplants, cardiac interventions, and orthopedic 
surgeries. 

[16] These hospitals may be willing to accept lower payments because 
they are assured of higher volume with a limited network of providers. 

[17] Travel benefits had to be authorized by the employers with whom 
the payers contracted. 

[18] For example, one payer's travel benefit included up to $10,000 if 
the transplant center was at least 60 miles from the patient's home. 
The benefit covered expenses such as transportation costs, housing 
assistance for visits or hospital admissions, and meals. 

[19] Hospitals may also employ transplant case managers; however, 
these managers are only able to coordinate care once the patient is 
assigned to their hospital. They would not be able to explain 
patients' transplant benefit coverage or help patients choose a 
transplant center. 

[20] It has been noted that physicians also may provide potentially 
unnecessary services and that bundled payment arrangements help reduce 
such services. 

[21] Notably, for the Medicare ACE demonstration, CMS limited 
potential applicants to physician-hospital organizations, with at 
least one physician group and at least one hospital that routinely 
provide at least one of the two main procedures included in the 
demonstration. 

[22] Under PPACA, as part of the Physician Feedback Program, the 
Secretary must provide reports to physicians that compare their 
patterns of resource use to their peers beginning in January 2012. For 
purposes of these reports, the Secretary must develop an episode 
grouper that combines separate but clinically related items and 
services into an episode of care for individual patients, as 
appropriate. See Pub. L. No. 111-148, § 3003, 124 Stat. 119, 366-368 
(2010). 

[23] For the Medicare ACE demonstration, applicants that participated 
in clinical improvement programs or registries were given preference. 

[24] 42 U.S.C. §1395cc. 

[25] For example, in March 2007, CMS issued standards that transplant 
hospitals would need to meet to participate in Medicare. Among other 
criteria, the standards included minimum volume and outcomes, based in 
part on standards from UNOS and the SRTR. 

[26] Although participation in Medicare's transplant network is 
limited to certain hospitals that meet its minimum standards, HHS has 
not bundled Medicare payments for hospital and physician services for 
the entire transplant episode at these centers as the national payers 
have done. Thus, the issue of 'leakage' is not currently as critical 
for the Medicare program since Medicare beneficiaries are not required 
to obtain all their follow-up care at selected centers. 

[End of section] 

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