The Issue

Hospitals have an opportunity to participate in a new Medicare-sponsored program that aims to reduce healthcare costs by encouraging providers to work more closely together to coordinate care for Medicare beneficiaries. The program is called the Bundled Payments for Care Improvement initiative. It would pay all providers responsible for a patient's care for a specific condition a lump sum-called a bundled payment-for their collective care. This single payment would then be distributed among the providers. This approach differs from Medicare's current practice of paying providers separately for their services, which can result in redundancies and poor care coordination, as one provider may be unaware of what services another has delivered. This approach also caps the total amount a group of providers can be paid to care for a particular group of patients, creating the incentive for the providers to work together to control costs.

The major concern for providers is whether the benefits of participation outweigh the costs and risks involved.


This initiative is just one means by which the federal government will seek to improve the quality of healthcare delivery and reduce costs of care across the U.S. healthcare system. The initiative includes four payment models designed to encourage providers to work together to better coordinate care for patients, only three of which actually involve bundled payment arrangements. (Under the fourth, hospitals may choose to take an across-the-board discount for all services delivered and then offer physicians and other providers incentives to help reduce the hospital-related costs of care.)

Any savings achieved through improved coordination of care would accrue to Medicare, which would share a percentage of the savings with the providers, according to specified formulas. In this way, bundled payment is intended to give participating providers an incentive to deliver services more efficiently while maintaining or improving quality of care.

Only three of the payment models target care delivered in a hospital. Under two of these models, participating providers are free to identify which specific health conditions and services (e.g., heart bypass surgery or hip replacement) will be subject to receiving bundled payment.

Action Steps for Providers

Hospitals interested in pursuing one or more of the models must submit a nonbinding letter of intent and formal application to Medicare. The deadlines are fast approaching-with a nonbinding letter of intent due by Oct. 6 for one of the models-but applications also will be accepted next year from hospitals that wish to participate in the initiative's second year.
First, however, hospitals should carefully weigh the risks versus benefits of participating.

This process will require close study of each model's structure for sharing savings. The core financial question is whether the savings a hospital can generate will offset the combination of a discount in payment required by Medicare, the costs associated with administering the program, and the downside financial risk. It is likely the significant risk and limited financial benefit associated with the program will dissuade most hospitals from participating. Those that opt to participate will most likely be hospitals that already have in place the foundations for care coordination across providers.


Download the PDF version, read the full article or see more Board's Eye Views.

Publication Date: Wednesday, October 05, 2011

Login Required

If you are an existing member, please log in below. Username and password are required.



Forgot User Name?
Forgot Password?

If you are not an HFMA member and would like to access portions of our content for 30 days, please fill out the following.

First Name:

Last Name:


   Become an HFMA member instead