Comments by HHS Secretary-Designate May Portend More Mandatory Bundles

by Jonathan W. Pearce, CPA, FHFMA

Most followers of Medicare bundled payment initiatives are familiar with the history of the "mandatory" programs. First initiated with the Comprehensive Care for Joint Replacement (CJR) program implemented during the Obama administration, these programs required all hospitals within the specified Metropolitan Statistical Areas (MSAs) to participate. This program was followed up by the announcement of the Episode Payment Model (EPM), which was scheduled to take effect in July 2017. However, then-Representative Tom Price led a large group of Republican representatives to write a letter disputing CMS's legal authority to create these types of mandatory programs. When he later became Secretary of HHS, Dr. Price had little choice but to scale back or eliminate these programs, reclassifying half of the CJR MSAs as "voluntary", and eliminating the EPM program entirely. At that point, many of us believed that mandatory programs would be off the table throughout the remainder of the Trump administration.

However, as reported recently in the New York Times, the nominee for HHS secretary Alex Azar suggested a potential reversal in this policy, commenting before the Senate Finance Committee that “If, to test a hypothesis around changing our health care system, it needs to be mandatory as opposed to voluntary, to get adequate data, then so be it.” With this comment, Mr. Azar recognizes that Medicare demonstration projects, whose purpose is to assess the effect of rules that may be later applied to all hospitals, cannot be effectively tested on an entirely voluntary group.

This is true for several reasons. First, hospitals will only elect to participate in a demonstration project if they believe that they can be successful. They evaluate the structure of the program, the tasks necessary to achieve success, the means by which financial success are determined, and numerous other factors, and will assess the opportunity for their particular institution to succeed. This necessarily biases the group of participants, which will influence the results of the demonstration.

In addition, voluntary programs can't evaluate payment models whose targets are based on regional average episode costs; they must instead base targets on each individual participant's historical cost. This is because no organization would participate in a voluntary program in which the targets were already established below that organization’s cost. If a regional cost target was established at the median episode cost of the region, only hospitals whose cost was below the median would participate. All of those hospitals would create financial surpluses, and the "demonstration" wouldn't really demonstrate anything. (This is the current situation in the voluntary MSAs for the CJR program – hospitals whose cost exceed the regional average are terminating participation in the program.) Therefore, voluntary bundled payment programs must base their targets on each hospital’s historical cost.

So several programs that were once considered dead may arise again at some point during the Trump administration. Perhaps we’ll even see a re-emergence of the “Episode Payment Models” program for which a final rule had been issued, only to be cancelled after Dr. Price became HHS Secretary. If so, CMS will be able to test a wider variety of payment methods on a more comprehensive and less biased participant population.