Key points

Introduction

Hip and knee arthroplasties are among the most common surgical procedures performed for Medicare patients; more than 400,000 procedures were performed in 2013, with a total cost of more than $7 billion. It is estimated that the prevalence of hip and knee osteoarthritis will increase by 18.2% by 2020 owing to the aging US population. The number of total joint arthroplasty (TJA) procedures will follow the trend, and is projected to reach 4 million procedures by 2030. Under the current fee-for-service (FFS) economic model of health care, financial reimbursements are partitioned for each service provided and billed as a separate service. This fragmented approach has led in part to an uncontrolled increase in national health care expenditures.

The average cost of arthroplasty procedures ranges from $16,500 to $33,000 across various geographic areas in the United States. This clear variation in cost is mirrored by a disparity in the quality of care and postoperative course. The rate of readmission, for example, varies significantly between geographic locations, adding to the financial burden associated with a single episode of care. Although Medicare reimbursements did not cover readmission within the first 24 hours after discharge, the estimated expenditure for unplanned rehospitalization exceeded $12 billion under the FFS system. In response, a greater emphasis on providing a continuum of care and establishing coordination between providers has been the focus in the design of new payment models. This vision is planned to be imposed through risk-sharing payment models that reward cost reduction and penalize overexpenditure, across the entire episode of care.

Under the Patient Protection and Affordable Care Act (ACA), the Centers for Medicare and Medicaid Services’ (CMS) Innovation was chartered to develop new models of health care delivery. Bundled payments can have a substantial effect on the national health care expenditures, with a projected decrease of 5.4%. This payment model imposes a preset single collated sum of reimbursement for the entire episode of care. As such, the total cost of care delivery will be reconciled against a fixed reimbursement for that episode, and the organization will realize either a savings or a loss. Shifting risk onto providers creates an incentive to improve health care efficiency, which includes improved collaboration and decreased fragmentation of health care delivery.

The development of bundled reimbursement models has also created a dynamic relationship between providers by means of gainsharing. Previously suppressed by the Department of Justice, gainsharing programs are now being incorporated into bundle payment strategies with CMS oversight. This scenario will create new opportunities for providers to realize benefits from high-quality care and create new strategies to leverage during contract negotiations. This review examines new developments in bundle payments, affordable care organizations (ACOs), and gainsharing agreements as they pertain to arthroplasty.

Historical perspective

The concept of bundling in health care services has been introduced as a proposed costs-saving approach. Between 1983 and 1987, the Reagan administration focused on CMS expenditures with the development of the prospective payer system. Reimbursement into diagnosis related groups allow bundling of inpatient-hospital costs into a single payment. A decade later, the 1997 Balanced Budget Act curtailed postacute care (PAC) costs with prospective payments. Both programs represent early attempts at bundling to decrease costs nationally, albeit the continuous fragmentation of care delivery. Providers were still reimbursed under the FFS model, which encourages providers based on quantity rather than quality of care and limits their ability to value the total cost for patient care. Patients received multiple bills from various providers involved in their care, which created an extremely complicated billing system. As costs continued to increase, CMS reimbursements continued to decrease and thus the costs were shifted to private insurers.

Throughout the late 1980s and 1990s, various programs that included some principles of bundled payment were initiated by CMS and some hospitals. Between 1990 and 1994, CMS trailed bundle payments with coronary bypass surgery. This approach increased savings for CMS from 1 side, and increased profits for physicians and hospitals from the other side. At the turn of the century, CMS designated Orthopaedics and Cardiac Centers of Excellence as a foundation for bundled payments. Hospitals also attempted bundling payments with orthopedic device manufacturers. The Lahey Clinic, in 1997, established a single price for arthroplasty implants, and decreased cost by 32% per total hip case and 23% per knee arthroplasty procedure. The implementation of ACA incited a new wave of pilot programs, among which the Prometheus Bundled payment program, created by the Health Care Incentives Improvements Institute, was the most prominent. As a pioneer, the program faced several challenges early on, raising concerns about the potential of dissemination on a nationwide scale. Most recently, in 2013, the Bundled Payment Care Initiative (BPCI) developed by CMS’s Innovation Center, created 4 models to compare different structures of retrospective and prospective bundled payments ( Table 1 ). Implementation of the various models occurred over 2 phases, including the preparation period in phase 1 and the accepted 2115 participants that entered phase 2. Phase 2 increases the risk sharing associated with loss and gains related to bundling of the episode of care. CMS has developed future pilot programs that will be implemented in the coming years, most notably the Comprehensive Care of Joint Replacement.

Considering a bundle payment service line

Developing a bundle payment service line for arthroplasty procedures requires investment and commitment from all providers and institutions involved in the process of care delivery. There are several considerations that must be addressed when contemplating the implementation of a bundled reimbursement model. First, participants willing to provide care and to commit to the success of the program should be identified. The involvement of administrators, nursing coordinators, anesthesia providers, physical and occupational therapists, discharge coordinators, and PAC leadership, among others, is crucial for the program. Financial and legal representation may also be required for negotiations between various providers. The next step is to determine the capability of an individual organization to undergo a transition into bundled payments. Health care systems that include physician network groups allow for the coordination of care and risk distribution among providers within the network. Increased risk by hospitals and physicians can lead to substantial losses in a poorly managed service line. As such, a thorough historical analysis of claims data within a provider group is essential to determine the success of model implementation. If a particular provider or service line has a trend of increased costs over several years, then a bundle payment plan would be detrimental to the organization. It is recommended that cost analysis of providers be historically neutral or down-trending before developing a bundle payment model. The American Association of Medical Colleges also recommends that a minimum volume of 100 cases per year is essential to reduce the effect of variability and outliers on bundles. Once the decision to implement bundle payments reaches agreement between various stakeholders, the focus shifts toward determining the components of the bundle.

Defining the bundle

TJA procedures are well-suited for bundled payments, because they satisfy several criteria for successful bundling. Arthroplasty procedures are highly prevalent, making cost analysis and interventions reliably predictable. Among Medicare cases, TJA accounts for 4.7% and consumes the greatest proportion of Medicare expenditures with costs reaching as high as 6.3%. The coefficient of variation for arthroplasty is 0.42, which is low relative to other medical conditions such as heart failure and shock (coefficient of variation, 0.80). This coefficient of variation allows for greater payment predictability while simultaneously representing enough variation to improve efficiency. Finally, major joint arthroplasty procedures have clear evidence-based guidelines, which are ideal for accurate and measurable outcomes.

Determining which patients are eligible for bundling in arthroplasty procedures can minimize risk of outliers. Patient risk factors for readmission, infection, and increased resource-consumption must be evaluated thoroughly in the preoperative period. Inneh and colleagues, analyzed the readmission rates, length of stay, and rates of reoperation in 5314 TJA patients. Patient risk factors associated with worse outcomes included prior genitourinary, circulatory, and respiratory conditions; an American Society of Anesthesiologists score of N2; advanced age; and prolonged operation time. Mental health conditions and the metabolic syndrome also demonstrated a strong predictive correlation with serious complications in TJA patients. Risk factors for surgical site infection after TJA include revision surgery, higher Charlson comorbidity index, and male gender. Our institution recommends considering bundling for primary unilateral arthroplasty procedures of patients with a body mass index of less than 35, an American Society of Anesthesiologists score equal to or less than 2, hemoglobin A1C of less than 7.9, and nonsmokers. Patients with higher American Society of Anesthesiologists scores, modifiable medical comorbidities, social factors, and psychiatric illness can be considered for the program once appropriate preoperative medical optimization has been conducted. In addition to protecting the organization from potential financial loss, this approach allows patients the opportunity to engage in shared responsibility in an effort to improve their health and outcomes.

Determining the length of episode

Defining the episode of care is another variable that should be assessed and defined to mitigate financial risks associated with an episode of care. Shorter episodes (ie, <30 days) reduce risk of postoperative complications by decreasing the window of potential exposure. However, shorter episodes also have lower reimbursement rates and smaller profit margins compared with longer 60-or 90-day episodes. With regard to TJA, the greatest proportion of cost lies within the first 30 days after the procedure and then decreases significantly. Thus, longer episodes are more attractive owing to the decreased rate of complications and increased profit potential. For percutaneous cardiac procedures, a 90-day episode was noted to have a 30% higher reimbursement when compared with a 7-day episode.

The BPCI model 2, which was selected as the framework for the Comprehensive Care of Joint Replacement program starting in 2016, uses a 90-day TJA episode, with the hospital admission day representing the start point. Early results from phase 2 demonstrate a decrease in length of stay from 4.6 to 4.3 days, and a decrease in PAC used from 66% to 47%. Although there was no change in mortality and 30-day readmission rates, emergency department visits within 30 days increased from 6.9% to 8.7%. Early results from the New York University Hospital for Joint Surgery, a model 2 BPCI participant, also revealed decreased readmission rates and cost throughout the 90-day episode. Although these are early and preliminary results, a 90-day episode for TJA procedures seems to present a reasonable option for risk management and predicting postoperative outcomes.

Pricing the bundle

The transition from FFS to a bundled payment system will entail a learning curve for both CMS and private payers. In the FFS model, services are marketed individually to payers and beneficiaries, which complicates the decision making process for consumers. Bundled payments, on the other hand, coalesce fragmented services into a single marketable entity introducing more competition into the market. Orthopedic TJA providers will be in a position to influence price setting owing to the high demand and predictive nature of the procedures.

The BPCI pilot programs use retrospective payments (models 1–3) and prospective payments (model 4) to establish reimbursement strategies. Retrospective payment models allow risk adjustment using the current FFS infrastructure, while also providing a method to reconcile outlier episodes of care. Prospective payments would require revamping internal accounting systems and is perceived as a high-risk approach by BPCI model 2 participants. Beneficiary characteristics should be risk-adjusted for more accurate price fixation. The Medicare severity diagnosis related group system in conjunction with the hierarchal condition category allows for more accurate prediction of cost for specific conditions and appropriate inpatient risk adjustment. Hospital characteristics, such as the percent of indirect medical education and disproportionate share hospital payments should also be received to further adjust payments. First, postacute setting accounts for the largest proportion of total cost, and thus demands that stratification considers place of discharge as well. The average CMS payment for 470 Medicare severity diagnosis related groups patients discharged to home health agency averaged $14,901, whereas it was $21,742 for those to SNF, and long-term care hospital episodes averaged $43,772. Therefore, bundles should also be adjusted retrospectively based on destination after hospital disposition. Model 2 of the BPCI uses risk adjusted payments, which are later reconciled against the CMS’s predicted price. Appropriate risk stratification with private payers will likely follow a similar approach. However, price settlements will have greater variation depending on the payer type. CMS reimbursements are inflexible and leave no room for negotiation or price manipulation. Private insurers will allow for greater manipulation based on market share, leverage, and economic outcomes. Surgeons can increase their leverage and market share through contracting in ACOs or physician networks. Independent surgical groups may remain independent, but are encouraged to partner with physician groups for greater leverage in contract negotiations.