Response to the Implementation of the FFS and Capitation models.
“HHS has set a goal of tying 30 percent of traditional, or fee-for-service, Medicare payments to quality or value through alternative payment models, such as Accountable Care Organizations (ACOs) or bundled payment arrangements by the end of 2016, and tying 50 percent of payments to these models by the end of 2018.” The above statement was made in 2015 by the U.S. Secretary of Health and Human Services in the Perspective section of the New England Journal of Medicine.
The problem with this “goal” and general approach can be illustrated by focusing on Joint Replacements as an example. Orthopedic procedures are a illustrative means to expose the changes effectuated and its concomitant effects in reimbursement. The reason for this is that joint replacement is one of the most common procedures performed among Medicare beneficiaries, the Comprehensive Care for Joint Replacement (CJR) model therefore represents the most unorthodox move by CMS toward alternative payment models and as such comparisons can be made between the various models of repayment.
Today, healthcare payers have multiple ways to reimburse providers for performing medical services that move away from the traditional and more costly fee-for-service reimbursement system. Two such possibilities include capitation payment and bundled payment models. Within orthopedic procedures, bundled payments are also spurring innovation indirectly in creating situations where for example in Twin Cities Orthopedics (Minneapolis), where joint-replacement care is done in outpatient surgery centers and nearby recovery centers, rather than in a traditional hospital.
Using capitation payments, providers are not reimbursed for every service completed as in the fee-for-service payment model and instead, shared savings programs reward physicians for lowering the cost of care as well as improving quality. The way quality is measured depends upon health outcomes, patient satisfaction, and clinical compliance. There are a few underlying problems with capitation payment, - for a summary please reference . To that end, what has been found is that paying for an episode of care through bundled payment models instead of reimbursing individual services provides greater care coordination among medical teams. In the past, surgeries relied on bundled payments since multiple experts complete various procedures during a procedure.
On April 1st 2016, the Centers for Medicare & Medicaid Services (CMS) implemented the Comprehensive Care for Joint Replacement (CJR) model. This basically meant mandatory episode-based bundled payments to 800 hospitals across 67 metropolitan statistical areas. 
Under the CJR model, all providers - hospitals, physicians, post-acute care providers - continue to receive standard fee-for-service payments from Medicare for all claims from admission through 90 days after discharge. Then as a means of analysis, CMS compares 90-day episode payments at these participating hospitals against a “target episode price” based on historical spending for this procedure. What this means is that hospitals receive additional payments of their actual 90-day episode spending (and that of their affiliated physicians and post-acute care providers) is less than the target, but will be required to pay CMS back if their episode spending exceeds this metric and these are basically referred to as reconciliation payments. The whole point to this is also to implement region-based target pricing with an eye towards reducing episode payment variation resulting from disparate practice patterns (e.g., post-acute care utilization) across geographic regions.
The biggest problem however, according to Ellimoottil et al, in a paper published Feb 2017 in Health Affairs, that while differences in hospital episode spending are driven by variation in service utilization, it is also a fact that payment differences can reflect the disparities in patient complexity (i.e., the hospital case-mix). This means, patient-specific factors such as age, medical comorbidities, functional status, etc., which are known to impact episode spending.
Looking at > 23K Medicare beneficiaries, the study found that region-based target pricing actually resulted in reduced reconciliation payments to hospitals that treat medically complex patients. Furthermore, using the risk adjustment algorithm with CMS-HCC risk scores, estimated reconciliation payments were now substantially increased for hospitals that treat high complexity patients and reduced for hospitals that treat low complexity patients. The amounts of the payments in terms of magnitude was similar to the incentive payments received by hospitals through CMS’ Hospital Value-Based Purchasing program - meaning, a substantive amount.
The study convincingly makes the case that risk adjustment needs to be factored in. Regardless of the model of reimbursement, namely, FFS, Capitation,etc., the bottom line is that risk-adjustment variables beyond the CMS-HCC model that are predictive of episode cost, and those that reflect the underlying severity of illness can be relatively easily obtained from administrative claims. In addition, there is a history of CMS utilizing risk adjustment in a number of other performance programs (e.g., Medicare Spending Per Beneficiary, Hospital Compare measures, Hospital Readmission Reduction Program).
Ellimoottil C, Ryan AM, Hou H, Dupree JM, Hallstrom B, Miller DC. The new bundled payment program for joint replacement may unfairly penalize hospitals that treat patients with medical comorbidities. Health affairs (Project Hope). 2016;35(9):1651-1657. doi:10.1377/hlthaff.2016.0263.
 H. (2017, January 30). Are Bundled Payment Models or Capitation the Better Choice? Retrieved February 06, 2018, from https://healthpayerintelligence.com/news/are-bundled-payment-models-or-capitation-the-better-choice