Medicare's New Bundled Payment For Joint Replacement May Penalize Hospitals That Treat Medically Complex Patients

Abstract

In an effort to reduce episode payment variation for joint replacement at US hospitals, the Centers for Medicare and Medicaid Services (CMS) recently implemented the Comprehensive Care for Joint Replacement bundled payment program. Some stakeholders are concerned that the program may unintentionally penalize hospitals because it lacks a mechanism (such as risk adjustment) to sufficiently account for patients' medical complexity. Using Medicare claims for patients in Michigan who underwent lower extremity joint replacement in the period 2011-13, we applied payment methods analogous to those CMS intends to use in determining annual bonuses or penalties (reconciliation payments) to hospitals. We calculated the net difference in reconciliation payments with and without risk adjustment. We found that reconciliation payments were reduced by $827 per episode for each standard-deviation increase in a hospital's patient complexity. Moreover, we found that risk adjustment could increase reconciliation payments to some hospitals by as much as $114,184 annually. Our findings suggest that CMS should include risk adjustment in the Comprehensive Care for Joint Replacement program and in future bundled payment programs.

Keywords: Health Economics; Health Reform; Health Spending.

EXHIBIT 1

Figure shows statewide variation in patient complexity. If risk-adjustment is implemented in the CJR model, hospitals that treat medically complex patients will receive additional reimbursement from CMS SOURCE: Authors’ analysis of data from the Medicare Research Identifiable Files, 2011–2013 NOTES: Each marker represents a hospital in Michigan. CMS-HCC risk scores reflect the medical complexity of the hospital’s patient population and incorporate age, gender, comorbidity, and dual eligible status and original reason for Medicare entitlement. Net difference is calculated by subtracting risk-adjusted reconciliation payments from unadjusted reconciliation payments. A negative net difference means that the hospital would expect a reduction in reconciliation payments with risk adjustment. Regional target prices were used to calculate reconciliation payments.

EXHIBIT 2

Reconciliations payments are significantly associated with average CMS-HCC risk scores when a regional benchmark is used SOURCE: Authors’ analysis of data from the Medicare Research Identifiable Files, 2011–2013 NOTES: Each marker represents a hospital in Michigan. Each hospital’s reconciliation payment represents the difference between target episode spending and actual episode spending divided by the total number of joint replacements performed. A negative reconciliation payment means the hospital must repay Medicare.