Health Reform WK-EDGE Medicare’s new joint replacement pilot program creates winners, losers
Tuesday, March 22, 2016

Medicare’s new joint replacement pilot program creates winners, losers

By Greg Russo, a director at Berkley Research Group, LLC, in Washington, D.C., and Daniel Hettich, a partner at King & Spalding, LLP

This article is adapted from the February 2016 edition of the Reimbursement Advisor, a monthly newsletter from Wolters Kluwer Legal and Regulatory, U.S.

Providers of joint replacements are close to undergoing a large scale experiment by Medicare: testing whether paying for these services in a revolutionary way will affect materially the cost curve while improving quality (see Mandatory joint replacement payment model will hold hospitals accountable, November 24, 2015).

Of course, there are caveats with the Comprehensive Care for Joint Replacement (CJR) program, as there always are with a program implemented by Medicare. The program does not affect all metropolitan statistical areas (MSAs). Instead, only 67 MSAs are included in this demonstration. This is reduced from the initially proposed 75 MSAs.

The CJR program also does not affect all hospitals in an MSA as it excludes any hospital not paid on the inpatient prospective payment system (e.g., hospitals participating in the Bundled Payments for Care Improvement Initiative). Lastly, the program covers only two joint replacement Medicare severity-diagnosis related groups (MS-DRGs): (1) MS-DRG 469, for major joint replacement or reattachment of lower extremity with major complication or comorbidity, and (2) MS-DRG 470, for major joint replacement or reattachment of lower extremity without major complication or comorbidity.

Even with these caveats, the Medicare CJR program still stands to revolutionize a significant portion of the market. In 2014, MS-DRG 469 and MS-DRG 470 accounted for 5.74 percent of Medicare spending to short-term acute care hospitals, which is the setting where the greatest level of spending for these services occurs. After short-term acute care hospitals, Medicare spends the second greatest amount on these services when paying skilled nursing facilities (SNFs).

In 2014, 7.20 percent of Medicare spending to SNFs related to MS-DRG 469 and MS-DRG 470. In addition, even providers not in one of the 67 MSAs included in this demonstration should pay attention to this program and how it is implemented as CMS has located its legal authority to enact this program in Section 3021 of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148), which created the Center for Medicare & Medicaid Innovation (CMMI).

Although Phase 1 of a CMMI initiative is always a limited pilot program, such as what CMS has enacted with the CJR program, Phase 2 allows "the [Department of Health and Human Services] Secretary … through rulemaking [to] expand [successful pilot programs] (including implementation on a nationwide basis)" (ACA sec. 1115A). If this model is successful, CMS could decide to roll out similar bundled payment models for other common Medicare procedures such as coronary artery bypass grafting (CABG). After all, CMS has made no secret of its goal to tie 50 percent of Medicare provider payments to alternative payment models by 2018.

Overview of CJR Program

On April 1, 2016, (not January 1, 2016, as CMS initially proposed), bundled payments for two of the most common Medicare procedures, hip and knee replacement surgeries, will become mandatory for hospitals in 67 MSAs. These 67 MSAs cover about 25 percent of total joint surgeries nationally, and virtually all "subsection (d)" hospitals in those geographic regions will be required to participate in the proposed five-year model. Each of those hospitals that perform a lower extremity joint replacement (LEJR) surgery will be accountable for the "episode" of care cost, which would begin at the time of surgery and end 90 days after discharge.

During the five-year model, all providers of these services will receive their ordinary Medicare payments under the inpatient prospective payment system (IPPS), the physician fee schedule, etc., but there will be a "true-up" at the end of the year. Each hospital will receive a bonus or penalty based on the difference between the target price set by CMS under a complex methodology, described in detail later in this article, and Medicare's actual 90-day episode of care spending for the hospital's LEJR cases.

Hospitals will not be subject to penalties during the first year of the program, and all bonuses and penalties will be subject to a cap. The cap on bonuses will be 5 percent of the target price in Year 1 and Year 2, 10 percent in Year 3, and 20 percent in years 4 and 5. The cap on penalties starting in Year 2 will be 5 percent of the target price and move to 10 percent in Year 3 and 20 percent in years 4 and 5. (Potential penalties for certain rural hospitals will be capped at lower amounts, namely, 3 percent in Year 2 and 5 percent in years 3 through 5.)

To receive a bonus payment, however, a hospital will need to do more than merely keep its 90-day episode of care spending below the target amount; it also will need to meet three quality performance measures that assess:

  1. Complication rates associated with the LEJR procedures;
  2. Readmission rates associated with the LEJR procedures (30-day, all-cause risk-standardized); and
  3. Patient satisfaction survey results (specifically the Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) surveys).

Although one would expect that hospitals with unusually high readmission or complication rates likely would have high 90-day episode of care spending, and so would not qualify for a bonus payment under the CJR program anyway, the HCAHPs survey result does add a unique hurdle to receipt of CJR bonus payments. Hospitals must keep their LEJR costs down while also keeping their LEJR patients happy.

Although only hospitals are held financially accountable by CMS for the cost of the 90-day episode of care, CMS acknowledged that hospital payments make up only about 50 percent of the total 90-day episode of care payment. Hospitals will, however, be allowed to enter into limited financial arrangements with "collaborators." Collaborators are other Medicare-participating providers that furnish care and participate in joint replacement care redesign activities, such as surgeons, SNFs, home health agencies (HHAs), rehabilitation facilities and therapy providers.


The design of this program will create winners and losers. If a hospital facility and its care partners outspend other hospitals in their census division, these providers will lose money providing joint replacements because they will be above the target price. On the other hand, hospitals and their care partners that spend less than the target prices will "win." The San Francisco-Oakland-Hayward MSA is projected to be the biggest "winner" in Year 1, with an average gain of $18,170 per episode, while the Montgomery, Alabama, MSA is projected to be the biggest "loser" in Year 1, with an average loss of $6,541 per episode.


The full ramifications of this episode-based payment experiment will not be known for some time. Hopefully, it will provide a reasonable and effective methodology to bending the cost curve while also improving the quality of care. While this is a potential, there are also potential negative ramifications.

For instance, hospitals could cease to provide joint replacements if they fall above the target prices. This would further consolidate the market for joint replacements. Although one could argue that this might create centers for excellence, there is the offsetting danger that certain providers will develop a monopoly, thereby leading to increased prices.

There is the additional danger that some hospitals or providers may seek to delay care so that it does not begin to impact the costs associated with the 90-day episode. While CMS has taken steps to monitor such gamesmanship, only time will tell whether those safeguards are sufficient.

Despite these uncertainties, one thing is clear: The CJR program represents an unprecedented new phase in CMS's effort to shift from paying for the quantity of services provided to paying for the quality and efficiency of services provided. As such, this program likely is a harbinger of what's to come.

Attorneys: Daniel Hettich (King & Spalding, LLP)

Companies: Berkley Research Group, LLC

IndustryNews: NewsStory DemonstrationProjectNews InpatientFacilityNews MedicarePartANews MedicarePartBNews OutpatientFacilityNews PhysicianNews ProviderPaymentNews QualityNews

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