Health Reform

August 24, 2011
Bundled Payments and the Scars of Capitation
by Dan Diamond
California Healthline Contributing Editor

Congress may be shuttered for the summer, but Washington, D.C., is still
shaking. Well, metaphorically -- an HHS staffer assured California Healthline
that the Hubert H. Humphrey building was untouched by Tuesday's earthquake,
just hours after CMS' latest plan sent shockwaves through the health policy

The agency's announcement of the Bundled Payments Initiative was hardly
unexpected, but it does offer the potential to stir up long-established practice.

How Do Bundled Payments Fit in Reform?

Bundled payments -- which often go by other names, such as episode-based
payments -- turn the established fee-for-service model on its head. Rather than
pay individual providers for each incremental procedure, bundled payments try
to align reimbursement along an episode of care. Providers are then left to
carve up the "bundles" based on services rendered.

Some have said that bundled payments are at the heart of the Affordable Care
Act's effort to reduce health costs and improve quality. Perhaps that's fitting,
given that a pair of bundled payment projects involving heart patients are what
gave the model traction.

The model first caught the attention of policy wonks after a mid-1990s CMS
demonstration plan for heart bypass surgery patients reduced Medicare
spending by millions. But bundled payments moved into the national spotlight
after the New York Times' 2007 front-page story about Pennsylvania-based
Geisinger Health System's "surgery with a warranty" plan.

Geisinger's model aimed to address a perverse incentive: providers often
benefit financially by doing follow-up care. Instead, Geisinger offered its
ProvenCare system -- which included 90 days of follow-up treatment at no
additional cost -- to heart bypass surgery patients as a "guarantee of its
workmanship." Essentially, the organization would take a revenue hit for each
patient who needed to be readmitted.

CMS Offers Details

Under its new plan, the CMS Innovation Center is inviting providers to apply for
four broadly defined models of care; three models involve retrospective
bundled payments and the fourth would reimburse providers using prospective
payments. Applicants would propose the target price and have "great flexibility"
to select which conditions to bundle, set up the delivery structure and
determine how to allocate payments among participating providers, the agency

CMS officials have said that they expect "hundreds of providers" to join the
program. That would be a much more favorable reaction than some of the
ACA's other reforms have received.

For example, skepticism over CMS' proposed accountable care organization
model has kept many providers from applying to participate. Some hospitals
and health systems say that CMS is asking them to take too much risk to
become ACOs; meanwhile, consumer advocates warn that the model could
concentrate too much power in the hands of large health care organizations.

Advocacy organizations like the American Hospital Association have also
pushed back on other federal reforms to adjust payments, such as tying a
larger share of reimbursement to quality reporting.

But one point in bundled payments' favor: The CMS plan isn't calling for
transformative changes. Instead, the agency appears to have designed the
program with maximum flexibility in mind. The plan's range of models for
participants could be an "appealing notion" for member hospitals, AHA's Nancy
Foster told The Hill's Sam Baker. Foster added that hospitals realized the
current fiscal environment demands cuts and that bundled payments could
offer financial upsides for top performers.

California's Own Experience With Payment Models Could Be Boon

Another reason that CMS may be slow-pedaling its bundled-payment program
is that the model harkens back to the mid-1990s push for capitation -- and
many providers across the nation have dark memories of that effort. Many
hospitals and health systems sought to vertically integrate with physician
groups to receive larger, capitated payments, only to abandon their attempts
after finding such integration financially onerous and difficult to execute.

However, California providers fared better than most with capitation, partly
because the model took hold in the Golden State several decades ago. The
added years of experimentation in a less concentrated health care market
allowed organizations like Kaiser Permanente to pioneer care delivery systems
that were multidisciplinary and highly patient-focused. Meanwhile, state
hospitals learned how to operate under capitated payments to coordinate with
physicians and enhance revenue.

This track record may prove to be helpful ahead of coming payment changes,
experts suggest. "Physician groups that have experience with capitation may be
relatively well-positioned to receive bundled payments," a September 2009
California HealthCare Foundation report noted. CHCF is the publisher of
California Healthline.

Golden State providers' expertise in "monitoring and managing service use for
a designated set of enrollees could be transferable to a variety of payment
arrangements," the report added.

Meanwhile, California already has a number of organizations experimenting with
bundled payment models. The most high-profile effort is being led by the
Integrated Healthcare Association, which launched a bundled-payment pilot
program last year involving a number of state organizations. While organizers
cautioned California Healthline that the pilot was "only a piece of the puzzle" to
reform payments, its results will be closely watched as other Golden State
organizations weigh whether to join the new CMS initiative.

"Road to Reform" will be on a summer hiatus until September, although you can
follow breaking reform news on Twitter at @CalHealthline. Before we sign off,
here's a look at what else is making news across the nation.

Eye on the Courts

An ongoing debate over the ethical code of conduct that would determine when
a U.S. Supreme Court justice should be disqualified from hearing a case has
raised questions among health care interest groups anticipating the high
court's review of the federal health reform law. Supreme Court justices
individually decide whether to recuse themselves from a particular case, which
has "provoked a volley of criticism" from interest groups against some justices.
In recent months, some groups have questioned whether Justices Clarence
Thomas and Elena Kagan should be disqualified from reviewing health
reform-related cases because of potential conflicts of interest. Thomas' wife
actively and publicly opposed the overhaul, while Kagan served as U.S. solicitor
general in the Obama administration when the law was enacted (Totenberg, "All
Things Considered," NPR, 8/17).

Inside the Industry

A proposed standard health plan benefit form unveiled by HHS and CMS
officials last week has prompted questions from the insurance industry about
the costs and timing of implementing the form (Reichard, CQ HealthBeat, 8/17).
The six-page proposed standard form would feature information about available
health plans (Wilde Mathews/Adamy, Wall Street Journal, 8/17). A
spokesperson for America's Health Insurance Plans asked that the benefits of
the new standard form "be balanced against the increased administrative
burden and higher costs to consumers and employers." Noting that the form's
release was delayed by five months, he also requested that "the
implementation date also should be pushed back to give health plans sufficient
time to make the operational and administrative changes needed to create
these new documents" (Wall Street Journal, 8/17).
The National Association of Insurance Commissioners has warned the Office of
Personnel Management that language in the federal health reform law could
put multistate insurance plans at an advantage over smaller plans. In 2014,
OPM will contract with at least two health plans that will be sold in every state
health insurance exchange. According to NAIC, the law's language could create
two sets of rules: one for the multistate plans and one for other plans. For
instance, the language could be interpreted as exempting multistate plans from
additional consumer protections imposed by states, NAIC said (Commins,
HealthLeaders Media, 8/16).

In the States

Recently, Idaho Gov. C.L. Otter (R) said his state would accept federal funding
to establish a state health insurance exchange mandated by the federal health
reform law (Baker, "Healthwatch," The Hill, 8/22). The state has until Sept. 30 to
apply for a $40 million federal grant to establish an exchange on its own
(AP/Houston Chronicle, 8/22). However, Idaho lawmakers have been reluctant
to accept federal money associated with the health reform law, partly because
the state is involved in the multistate lawsuit that is challenging the
constitutionality of the law's individual mandate. Despite the opposition, Idaho
Insurance Commissioner Bill Deal said that ceding the administration of the
state's exchange to the government would "be very disruptive to the Idaho
marketplace and, particularly, with our domestic insurance companies and our
agents" ("Healthwatch," The Hill, 8/22).

Rolling Out Reform

In July, HHS granted an additional 106 waivers exempting organizations from a
provision in the federal health reform law that prohibits caps on health benefits.
The agency now has granted waivers to 1,472 organizations, which cover 3.4
million U.S. residents. The waivers granted in July will last for three years.
Meanwhile, HHS will permit organizations that received one-year exemptions to
extend them until 2014, when the reform law fully takes effect and prohibits
mini-med plans. HHS previously announced it will stop accepting applications
after September (Baker, "Healthwatch," The Hill, 8/19). Last week, CMS also
released supplemental guidance for health reimbursement arrangements,
which stipulates that HRAs with annual limits do not have to submit individual
applications for waivers (Norman, CQ HealthBeat, 8/19).

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certiorari to the united states court of appeals for the fourth circuit
No. 06–856. Argued November 26, 2007—Decided February 20, 2008
450 F. 3d 570, vacated and remanded.

[Professor Shaun Martin assisted in the successful briefing and argument of LaRue v.
DeWolff, Boburg & Associates, 128 S.Ct. 1020 (2008), an ERISA benefits case.]

Petitioner, a participant in a defined contribution pension plan, alleged that the plan
administrator’s failure to follow petitioner’s investment directions “depleted” his interest in the
plan by approximately $150,000 and amounted to a breach of fiduciary duty under the
Employee Retirement Income Security Act of 1974 (ERISA). The District Court granted
respondents judgment on the pleadings, and the Fourth Circuit affirmed. Relying on
Massachusetts Mutual Life Ins. Co. v. Russell, 473 U. S. 134 , the Circuit held that ERISA
§502(a)(2) provides remedies only for entire plans, not for individuals.

Held: Although §502(a)(2) does not provide a remedy for individual injuries distinct from plan
injuries, it does authorize recovery for fiduciary breaches that impair the value of plan assets
in a participant’s individual account. Section 502(a)(2) provides for suits to enforce the
liability-creating provisions of §409, concerning breaches of fiduciary duties that harm plans.
The principal statutory duties imposed by §409 relate to the proper management,
administration, and investment of plan assets, with an eye toward ensuring that the benefits
authorized by the plan are ultimately paid to plan participants. The misconduct that
petitioner alleges falls squarely within that category, unlike the misconduct in Russell. There,
the plaintiff received all of the benefits to which she was contractually entitled, but sought
consequential damages arising from a delay in the processing of her claim. Russell’s
emphasis on protecting the “entire plan” reflects the fact that the disability plan in Russell,
as well as the typical pension plan at that time, promised participants a fixed benefit.
Misconduct by such a plan’s administrators will not affect an individual’s entitlement to a
defined benefit unless it creates or enhances the risk of default by the entire plan. For
defined contribution plans, however, fiduciary misconduct need not threaten the entire plan’
s solvency to reduce benefits below the amount that participants would otherwise receive.
Whether a fiduciary breach diminishes plan assets payable to all participants or only to
particular individuals, it creates the kind of harms that concerned §409’s draftsmen. Thus,
Russell’s “entire plan” references, which accurately reflect §409’s operation in the defined
benefit context, are beside the point in the defined contribution context. Pp. 4–8.

450 F. 3d 570, vacated and remanded.

Stevens, J., delivered the opinion of the Court, in which Souter, Ginsburg, Breyer, and Alito,
JJ., joined. Roberts, C. J., filed an opinion concurring in part and concurring in the judgment,
in which Kennedy, J., joined. Thomas, J., filed an opinion concurring in the judgment, in
which Scalia, J., joined.
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