Improving Incentives Newsletter: Here’s How to Participate in CMS™ Bundled Payment Pilot

Improving Incentives Newsletter: Here’s How to Participate in CMS™ Bundled Payment Pilot

A Quarterly Publication of HCI3 Volume 1, Issue 3  |   September 2011


Here’s How to Participate in CMS’ Bundled Payment Pilot 

By Alice G. Gosfield

Alice G. Gosfield ( is a lawyer and founder of Alice G. Gosfield & Associates, P.C., in Philadelphia. She is also HCI3’s board chair.

Seeking to improve patient care through payment innovation, the federal Centers for Medicare & Medicaid Innovation (CMMI) announced its Bundled Payments for Care Improvement initiative in August. Model 2 of this initiative offers a fairly flexible approach to hospital-physician collaboration around DRG-based episodes. There can be as many or as few episodes as the applicants prefer, and they can be as broad or narrow in scope as the parties choose. Collaboration with other types of providers will be necessary to manage care effectively, but to what extent will depend on the clinical conditions the episodes address. For this article, we will discuss provider-based scenarios first, including how this initiative affects physicians and hospitals, other providers, and then its relationship to Stark and antikickback issues as well as the role of Conveners and Convener/Facilitators.

Physicians and Hospitals

To participate in Model 2 of the CMMI Bundled Payment Initiative, participants will need a vehicle to make payments to CMS for downside risk and to take and distribute payments from upside rewards. Because this model, by definition, includes hospitals and other providers, the following are four potential applicable scenarios:

  1. A co-management entity already exists
  2. A physician-hospital organization (PHO) exists
  3. A straight contract exists or is created from hospital to physicians
  4. A large physician group.

1. A co-management entity already exists. In many hospitals, co-management programs, particularly for cardiology and orthopedics, have been established whereby physicians participate in the ownership of an entity that is typically a limited liability company but other versions exist. This entity usually is structured to receive co-management payments from the hospital. Sometimes the hospital is also a shareholder, but almost always some governance structure has been established for allocating dollars among the participating physicians and
sharing upside benefits with the hospital. These entities that already exist can be
used as the “paymaster” for Model 2.

2. A physician-hospital organization (PHO) exists. Some PHOs have survived from the 1990s that have established governance structures, in which supermajority voting issues and the like were worked out years ago. The primary challenge for PHOs in Model 2 will be in allocating rewards funds received. Using the PROMETHEUS Payment Evidence-informed Case Rates can help PHO participants arrive at some of these decisions because their structure assigns services among hospitals and physicians and can help to estimate the portions allocable to each.

In both of these scenarios (when a co-management entity exists and in the case of a PHO), CMS wants assurances of the entity’s ability to pay when taking the financial risk of the potential downside loss. In each case, the existing entity could secure the requisite letter from its bank.

3. A straight contract exists or is created from hospital to physicians. In an increasing number of locations, where there is a dominant specialty group at a community hospital, these groups have entered into “leasing” arrangements where they let the hospital bill for their services while they get paid an agreedupon rate for their CPT work, and they also get paid for medical directorships, comanagement services, quality results, and the like. In many of these arrangements some provision exists to deal with innovative payment methodologies. These contracts can accommodate Model 2. 

A second version of the straight contract is where no such preexisting arrangements exist, but a group of otherwise independent physicians comes together in a clinically integrated network to contract with the hospital for the bundled payment initiative. As yet another alternative, this contract approach also can work under a more limited contract with a single physician group, such as cardiologists or orthopedists who are managing a limited number and scope of episodes, but are not otherwise leased to the hospital. 

Under all of these models, there will have to be an ongoing governance structure, although it could be informal. This structure will need the ability to manage the allocation of dollars from the upside rewards. For purposes of obtaining the requisite financial credibility to reassure CMS of the ability to repay any losses, the hospital can obtain a letter of credit and make it available as the financial entity receiving the dollars and contracting directly with CMMI.

4. A large physician group. Another scenario might involve a large, existing single or multispecialty physician group that has strong finances and that could be the recipient of the monies and contract downstream with the hospital for the hospital component of care. This arrangement would require a fair degree of sophistication. But in defined service lines (such as cardiology, oncology, and orthopedics) with bounded clinical issues, it could be possible to create an episode-based bundled payment that is sufficiently disciplined in its approach to lower the risk for the relevant parties. In this case, the physicians alone or the physicians and the hospital, can guarantee the repayment of losses.

Other Providers

In all of these scenarios, contracts will have to be entered into with other providers who may or may not be part of the risk-sharing proposition. The use of home health and other outpatient approaches to prevent readmissions will be an element that will be critical to the clinical and financial success of many but not all episodes. Therefore, the inclusion of such organizations can be managed contractually. In some instances, depending on the clinical focus of the episodes, the role of these providers may be so significant that it is worth including them in the upside rewards rather than simply paying them for services rendered. If so, including them in the rewards can be handled contractually. On the other hand, because Model 2 does not require any particular constellation of providers, the type of episode involved should drive the extent to which other providers share in upside or downside risk.

Stark and Antikickback Issues

In the Request for Proposals, CMMI has stated that it will “consider” waiving the application of the Stark and antikickback preclusions on hospitals providing financial benefits to referring physicians, among other things. The Office of the Inspector General has already issued an Advisory Opinion approving the distribution by a hospital to staff members of dollars received through a commercial pay-for-performance program. This is not precedent, but it means that the OIG can determine that the risks that the antikickback statutes are intended to avoid will not prohibit these kinds of arrangements when the basis for payments is ancillary toobtaining referrals. 

In point of fact, a fair degree of success under Model 2, as with other episode based models, will turn on avoiding readmissions and within the episode, preventing potentially avoidable complications (PACs). To explicitly establish goals for avoiding readmissions and preventing PACs might otherwise run afoul of the preclusion in the statute against a hospital paying physicians to reduce services, even off a baseline of overservice. 

In any application under Model 2, the parties will have to make the case as to why their proposal should be subject to waiver of Stark and antikickback prohibitions. Legalcounsel should be involved in crafting those arguments.

CMS Opens the Door for Conveners and Facilitators

CMMI has identified as potential awardees “conveners” of other providers. Where the convener enters into the agreement with CMS, it will receive the payment of the difference between the target price and fee-for-service payment upon episode reconciliation. It must assume financial risk for exceeding the budget. It also is expected to make payments to the participating providers as specified in contracts between the convener and those providers. A convener applying to be an awardee must specify in the application the financial arrangements that will allow the convener to bear risk. Under this model, a health plan, a freestanding not-for-profit organization, a consulting firm, or anyone who could demonstrate the requisite financial credibility could perform this function. There are virtually no limits on its application. This is the only role a health plan is permitted to play. 

In a different opportunity, CMMI also has identified facilitators. This is a subset of conveners in which the facilitator submits an application in partnership with multiple providers. The facilitator can serve administrative and technical assistance functions for one or more designated awardees. The facilitator/ convener would not have a direct agreement with CMS, bear financial risk, or receive any payment from CMS. On the other hand, the facilitator/convener could share in the financial risk or cost savings experienced by the designated awardees under contracts between the convener and the awardees. 

Whether Stark and anti-kickback issues will have to be confronted will depend on the relationship between the convener/facilitator and the providers and the financial terms that exist among them.


Editor’s note: In this article, we offer a presentation of scenarios and issues that are possible under CMMI’s Model 2 of the Bundled Payment Initiative. Readers should be aware that this article is not legal advice. For legal advice, readers should consult a knowledgeable health care attorney.