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“A Tale of Two Cities”— How Two Hospitals In Different Locations Chose Bundled Payment Strategies

DATE: July 23, 2013

Two hospitals recently reached out to the DataGen/Singletrack Analytics team regarding their strategies for success under the Medicare Bundled Payment for Care Improvement (BPCI) initiative.  These conversations revealed a contrast in decision points between the two hospitals, both of which are participating in the “Major Joint Replacement” episode family.  Because of the differences in their geography, demographics, post-discharge environment, and medical staffs, their strategies for success are quite different.

The first hospital is a large academic medical center located in a heavily populated northeastern city, which we will call Metropolis.  The hospital performs about 500 major joint replacement procedures each year and refers to a large number of different post-acute settings, including more than a dozen skilled nursing facilities (SNFs).  This hospital is participating in a number of other payment demonstrations and has system-wide payment-related physician initiatives underway.

Our second hospital is a 200-bed acute care hospital located in a small town in the northwestern U.S. that we will call Smallville.  This hospital is the sole community provider for its area, performs 100 to 150 major joint procedures each year, and has loose affiliations with its orthopedists.  BPCI will be the first major payment initiative of this type in which the Smallville hospital participates.

In working with us to analyze the episode data provided by the Centers for Medicare and Medicaid Services (CMS), the Metropolis hospital found significant utilization/cost variation among SNFs to which its patients are sent after discharge.  Given the dense population surrounding Metropolis, patients may choose from a number of SNFs.  About half of this hospital’s patients were referred for SNF services after discharge; but heretofore, no significant analysis had been performed to look for utilization/cost differences or to determine whether other cost drivers, such as readmission rates, also differed by SNF.  One of this hospital’s major strategies, therefore, will be to gain a greater understanding of its SNF utilization, identify facilities willing to develop best-practice post-discharge care patterns, and work with those providers to provide better coordinated care and clinical outcomes at a lower cost to Medicare.  Because they believe that they can shift the cost curve significantly downward and that the opportunities for cost reductions lie at the upper end of the cost range, the Metropolis hospital has chosen the 99th percentile risk track because it offers the greatest opportunity to create cost savings, although it also provides the lowest level of protection from risk.

The circumstances for the Smallville hospital are quite different.  Most of this hospital’s major joint replacement patients also receive their post-acute care in the SNF setting, but there is only one SNF in Smallville and there are limited, if any, alternative post-acute rehabilitative settings within the immediate catchment area.  Given that the readmission rates for joint replacements are low, the cost savings opportunities from reducing readmissions are also very limited.  This hospital has no other payment initiatives in place involving its physicians, and does not believe that there is enough potential to reduce Medicare costs to entice physicians to become actively involved in that effort.  While the hospital team is hopeful to begin a gradual process of increasing physician engagement, they believe the greatest opportunity for savings lies in reducing the hospital’s own internal costs of prostheses and other similar medical equipment and supplies.  This hospital’s major strategy is to provide Medicare with a 2% per episode discount as the price of participating in BPCI, in the hope that it can make up that discount through internal cost reductions.

Because of this, this hospital has selected the 75th percentile risk track for two reasons—first, because it does not believe that there are extensive opportunities for Medicare cost savings, and second, because the 75th percentile risk track yields a lower target price with a correspondingly lower discount amount to be paid to CMS.  The lower discount amount reduces the cost of participation in BPCI.

The significant differences between these two strategies illustrate the range of strategic lenses hospitals throughout the country will need to employ in order to address these new payment systems.  Participants must approach these initiatives based on their own specific circumstances, resources, and opportunities, and avoid attempting to apply solutions that have worked in other settings, but would not be feasible in their own.

Similarly, payers and regulators must understand how the diversity of environments affects participation in these programs and design initiatives that can function across these differences.

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