On the upcoming April Fool’s Day, (no we’re not kidding), 800 hospitals throughout the U.S. serving 25% of the Medicare population, will be mandated to join the Comprehensive Care for Joint Replacement (CJR) payment model.
This is the first mandated value-based payment model from CMS (Centers for Medicare and Medicaid Services). The model holds hospitals financially accountable for the outcomes of hip and knee replacements from surgery through recovery.
The CJR follows the Bundled Payments for Care Improvement (BPCI) program, which was rolled out in 2013. That program was voluntary and offered 48 different clinical episodes and 4 different treatment models participants could choose from. The CJR is essentially a mandatory roll-out of Model 2 from the BPCI in the episode of major joint replacement of the lower extremity.
CMS expects the program to save taxpayers $343 million over the first five years.
Where Will Savings Come From?
Where will the savings come from? Hip and knee makers are nervously asking if this will simply be a way for hospitals to demand more price cuts from them.
Not to worry, yet, says Jeffries LLC analyst, Raj Denhoy.
After analyzing the CJR and discussions with clinicians and consultants, Denhoy and his team wrote that fears the program will worsen implant pricing “are misplaced.” Almost all of the initial cost savings will focus on post-acute care, not inpatient care.
This outside-the-hospital focus makes incremental pressure on orthopedic prices unlikely, says Denhoy. “We fully expect hospitals to continue to focus on improving their internal costs and efficiencies, and pricing of implants will continue to be negative, but we don’t believe that CJR will increase those efforts over the near-term.”
Here’s why.
Post-Acute in the Crosshairs
The biggest variation to CMS in the price of a joint replacement is the path patients take through post-acute care, particularly since post-acute care represents approximately 50% of the bundled costs for an acute patient incident or encounter. Whether patients go home after surgery or to SNF (skilled nursing facility) or other intensive care facility can swing the cost of the episode wildly.
The CJR model sets a target price for each hospital for delivery of a hip or knee surgery, including the inpatient surgery and the doctor’s fee, as well as 90 days of post-acute care. CMS will continue to pay for services under the fee-for-service system, but will compare actual prices paid to target prices on an annual basis. Hospitals that come in under the target can receive a bonus and those over, will pay back to CMS.
The overwhelming majority of efforts under CJR will be to reduce these post-acute care costs. Inpatient costs, according to Denhoy, will be less important in the early phases of the program.
That’s because CMS still pays under a fee-for-service model in CJR, with a true-up at the end of the year. Because most inpatient costs are already bundled into a DRG (diagnosis-related group) payment, underlying savings are mostly invisible to CMS.
There are two major payments CMS makes for the inpatient portion of the procedure: the DRG, which covers the hospital based costs (OR time, implant, blood, supplies, in patient stay, etc.) and the CPT code for the physician fee, which is the payment to the doctor to do the surgery. As an aside, Denhoy said it was his understanding that the CJR episode will not include pre-operative imaging that is needed for patient specific implants, like those from ConforMIS and others.
He points out that outpatient costs are much more granular, and days in a SNF or inpatient rehab, for example, are billed on a per use or per day basis. Reducing the use of higher cost outpatient services and limiting readmissions provide the best opportunities to demonstrate progress against CMS mandated targets.
Post-Op Costs
According to 2006 CMS data cited by Denhoy, the cost for a Medicare patient in the first 30 days post-discharge for a joint replacement can vary from $12, 000 to $27, 000 based on the pathway through the post-acute care process.
Traditionally, the most variable costs are incurred by patients requiring extended post-surgical surveillance and/or care at SNFs. “According to several studies analyzing the individual cost drivers under MS-DRG 470, the estimated cost for SNFs in the 90-day post-acute window was nearly $4, 700, or approximately 19% of the total episodic, using 2013 statistics. Although length of stays and charges varies by case, the average charge for post-acute orthopedic care services ranges from $300 to $400 per day, ” said Denhoy.
Using the midpoint ($350) on the total SNF fee of $4, 700 suggests an average of just over 13 days of care using 2013 data.
That, found Denhoy, means total savings can range anywhere up to nearly $2, 500 under scenarios of where the total number of SNF in-days is reduced by up to one week.
Bundles Change Behavior
Denhoy’s numbers are supported by an initial report on the first phase of the BPCI, where CMS showed that patients were using different levels of post-acute care before and after a health system adopted bundled payments. For the program broadly and also for the specific episode of joint replacement, the use of SNF and other high cost rehabilitation declined.
“When looking at hospitals that participated in the BCPI initiative, in orthopedics specifically, the change in post-acute discharge to institutional centers was even more significant, ” added Denhoy.
In a recently published paper of 721 patients at the NYU Hospital for Joint Disease treated under the BPCI (Iorio R, et al, Early Results of Medicare’s Bundled Payment Initiative for a 90-Day Total Joint Arthroplasty Episode of Care, J Arthroplasty (2015), http://dx.doi.org/10.1016/j.arth.2015.09.004), the authors showed discharges to inpatient facilities decreased from 71% to 44%—a reduction of 43%— and readmissions occurred in 80 patients (11%), which was slightly lower than before implementation.
According to the paper, NYU achieved its improvements partially through clinical care coordinators that were hired to manage the entire 90-day episode of care. They were responsible for preoperative counseling and followed BPCI patients postoperatively when discharged to home with services or at inpatient facilities to ensure coordination of care throughout the 90-day episode of care. NYU also achieved savings on internal hospital costs (implant, length-of-stay, OR time, intensive care unit, and consultant utilization, evidence based utilization interventions) compared to baseline.
Moving the Risk
Another reason prices won’t be pressured, is that hospitals can design plans to share the downside risks posed by CJR with its collaborators. As with incentives, Denhoy notes these arrangements must be officially made between the hospital and the collaborator before the annual CJR period begins (April 1st of each year 2016-2020). Furthermore, the hospital will be solely responsible for making repayments to CMS. The hospital can then coordinate repayments with its collaborators.
This collaboration between providers also raises new Stark law questions and hospitals have asked Congress to revisit the law. We’ll cover that concern in a future article.
Hip and Knee Pricing
Denhoy predicts pricing will remain challenging, but not more so because of CJR. He says hip and knee pricing remains in the negative 2-3% range, but does not expect it will get much worse in the intermediate term because of CJR. He adds that hospitals “will remain under pressure to improve internal efficiencies—and CJR will keep the pressure on—but over the next two to three years, those pressures should not get worse.”
Hospitals, however, will incur the costs of rolling out the CJR program and these added costs could be offset by reductions in other inpatient expenses, like implant costs. “Similarly, should hospitals find that they are unable to meet cost targets they could look to offset penalties by reducing internal costs.”
Orthopedic companies could become involved in these programs by helping with the implementation of CJR or even sharing some of the risk. “Longer-term, should hospitals find that they are unable to control costs, the practice of joint replacement could continue to consolidate into fewer institutions—giving these fewer, but larger, practices additional leverage in pricing discussions, ” continued Denhoy.
Hospitals could also cherry-pick patients and shy away from treating patients with higher risks of complications, readmissions, etc., which could cause some disruption in volumes.
SNFs Snuffed Out
Because of this focus on post-surgery, one health care finance expert, David Friend, M.D., MBA predicts that one in four SNFs will close, while medically advanced SNFs will flourish.
Needham analyst Mike Matson is not as optimistic as Denhoy. When the CJR program was announced, Matson said he thought that since CJR would allow gainsharing, the proposal would increase implant pricing pressure.
“As with prior bundled payment programs, CJR allows hospitals to establish gainsharing, which allows the hospitals to share either internal cost savings and/or the CJR reconciliation payments with surgeons for up to 50% above their Physician Fee Schedule payments. With gainsharing, we think hospitals would be able to reduce implant costs by consolidating vendors, since they would now have the ability to incentivize surgeons to switch implant brands, ” wrote Matson.
What the Wall Street analysts are telling us is that pricing pressures will continue for device makers, but the pressure is likely to come because CMS’s changes in payment models will probably create fewer buyers with greater purchasing power.
