July 1995 Bulletin

HCFA tests new payment method

Sets negotiated global price for episode of care

In an effort to further reduce Medicare costs, the Health Care Financing Administration (HCFA) initiated a demonstration project to test a new payment method—a negotiated package price which combines Part A and Part B payments for a single episode of care into a single payment to the hospital. The hospital, in turn, distributes the payment to all the providers involved in the provision of care, under an arrangement managed by the hospital.

To date, HCFA has conducted this demonstration project for coronary artery bypass graft (CABG) procedures and cataract surgery. The demonstration project will move next to joint replacement procedures, beginning in mid- to late 1996.

HCFA stated that the objectives of the CABG demonstration project were:

  1. To test the feasibility of using a fixed, all-inclusive reduced payment for hospital and physician services associated with uncomplicated coronary bypass surgery.
  2. To determine if prospective patients can be encouraged to receive care at a Medicare-designated hospital, and
  3. To assess, analyze and report clinical outcomes for participating patients.
  4. HCFA also asserted that "quality of care and outcomes are expected to improve, and total costs to the Medicare program and its beneficiaries are expected to decline."

In order to be considered for the CABG demonstration project, interested hospitals had to be performing at least 100 CABG procedures a year for Medicare patients. Interested hospitals also had to meet other criteria related to quality assurance and clinical outcomes.

Of the 744 hospitals solicited by HCFA for the demonstration project, 206 responded. Eventually, seven hospitals from around the country were included in the project.

Participating hospitals were expected to accept a global payment, based on the DRG and the RBRVS payment systems; require hospital pre-authorization for all CABG procedures; and carefully monitor quality assurance. They also were encouraged to market their services and offer incentives to attract patients.

Global payment

The most important feature of the demonstration project was the use of a negotiated global payment. This payment was negotiated by participating hospitals up-front with a discount to Medicare built-in. The payment was then distributed to all of the providers involved in the episode of care, under an arrangement with the hospital. Medicare saved money through the discounted fees and reduced administrative costs in having to process only one claim. The hospitals, presumably, made more money by coordinating care more stringently than would occur under the traditional fee-for-service system, in which the hospitals and other associated providers work more independently.

One of the most controversial aspects of the demonstration project has been the use of the term "Centers of Excellence." Participating hospitals have used the term as a marketing tool to draw more patients. HCFA officials involved in the project say that the use of the term is inappropriate and that participating hospitals are not necessarily better providers of care. However, HCFA administrator Bruce Vladek was reported to have used the term himself in describing the project, and the term has been used widely in other circles.

While the term Centers of Excellence may be just a marketing ploy rather than an official HCFA designation, its use in connection with this demonstration project raises some troubling questions: Is HCFA seeking to establish certain facilities as superior providers of care for certain procedures, without solid justification? Does HCFA want to eventually contract exclusively with these facilities, calling them Centers of Excellence, when all they have really done is accept reduced payment terms? For example, could there be HCFA-designated regional Centers of Excellence for total hip replacements, where all Medicare
patients in a given area would have to go for treatment? If there are, patients who need treatment might face severe access problems and limits on their choice of providers.

Use uncertain

Sources at HCFA involved in the project are not sure if the agency will someday contract exclusively with certain facilities for certain procedures. They also are not sure how the results of the demonstration project might be used in the future.

At the time of this writing, the final evaluation of the CABG demonstration project (which ended in 1994) is still in progress and results are not expected until at least the fall. Participating hospitals are currently reviewing the final report and making comments. However, even without all of the information, HCFA believes the CABG demonstration project was a success. More than $13 million was saved and indicators are that the quality of care at participating hospitals met or exceeded HCFA expectations.

This summer, HCFA is conducting its planning for extending the demonstration project to joint replacement procedures. Hip and knee replacements are both being considered, and may be included, beginning mid- to late 1996.

The Academy is concerned about how lower payments to participating hospitals might adversely affect patient care, although HCFA believes that the quality of care has been acceptable. More importantly, the Academy is concerned that HCFA may eventually contract exclusively with so-called Centers of Excellence for certain procedures, thereby excluding other equally qualified providers from providing care. This would greatly interfere with patient access and choice, not to mention the quality of care.

The Academy will closely monitor the demonstration project on joint replacements, and will be communicating with HCFA officials and other policy makers on the Centers of Excellence

- Reported by Rose Hepburn,
assistant policy analyst, department of health policy.

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