Exploring Potential Benefits and Drawbacks of Acute-Care and Post-Acute Care Payment Bundling

April 6, 2009

The current congressional fervor to overhaul the U.S. health care system has some policy makers discussing how to change the way post-acute providers, including LTACHs, home health agencies, skilled nursing facilities, inpatient rehabilitation facilities, and outpatient-based hospital rehabilitation facilities are compensated for treating Medicare beneficiaries. One solution proposed by President Barack Obama, the Congressional Budget Office, and certain congressional leaders is to bundle payments for acute care and post-acute care services provided within the first thirty days after being discharged from an acute care hospital. This listserve briefly discusses this proposed solution and explores some of its pros and cons.

In 2008 the Congressional Budget Office (CBO) released a report to the House and Senate Committees on the Budget providing an expansive list of options for reducing Federal health care spending. In its report, the CBO proposed bundling acute care and post-acute care services into one payment as a way to “reduce federal outlays by an estimated $0.7 billion over the 2010-2014 period and by almost $19 billion over the 2010-2019 period.” Under the proposed bundled payment system, acute-care hospitals would receive a bundled payment and would contract with post-acute care providers for their services. Bundling would require acute care hospitals to be responsible for all levels of care provided outside the hospital setting, thus requiring them to act like third-party insurers in some respects. Hospitals would be required to determine how much post-acute care a patient needs and the best ways to provide that care. They would also be required to make decisions about a patient’s continuing care needs, as well as the appropriateness and quality of care.

President Obama’s 2010 proposed budget lends further support in favor of the CBO’s proposal, and the Administration appears poised to compel delivery system modifications through aggressive bundled payment policy changes. The proposed budget suggests that using bundled payments, together with a “combination of incentives and penalties,” should decrease hospital readmission rates for Medicare beneficiaries.

Opponents, however, argue that it would be difficult to craft an acute care and post-acute care bundled payment system for the following reasons:

  1. A person’s post-acute care needs may be completely different from the reason for a hospital admission. In short, it may be difficult for an acute care hospital to appropriately and accurately determine post-acute care payments based on the diagnosis at admission.
  2. Providing a fixed payment based on diagnosis creates an inherent financial incentive for acute care hospitals to underserve the most severely impaired patients.
  3. Acute care hospitals would be required to manage costs for all post-acute care services. As a result, hospitals would take on the role of coordinator of care and risk bearing entity in a given area. Post-acute care providers, especially smaller providers, may not have the organizational muscle to negotiate favorable reimbursement rates with their local acute care hospital that controls the flow of post-acute care services.
  4. Relying on acute care hospitals as the focal point for post-acute health care is contrary to the trend toward community and home-based care, which often reduces length of stay.
  5. Bundling may propel acquisitions of post-acute facilities by acute care hospitals as they attempt to better manage their spending throughout the post-acute care spectrum. It may be increasingly common to see ICU, telemetry, medical/surgical, inpatient rehabilitation, LTACH, SNF, and hospice care services provided under a single umbrella organization or located in a single building — thereby creating a “supermarket” approach to healthcare.
  6. Acute care hospitals would likely have to establish hefty reserves to insure against the possibility that post-acute care payments might exceed their financial means.

The bundling model has been proposed many times since the early 1980s as a measure to control escalating post-acute care costs, decrease preventable acute care readmission rates, and increase Medicare cost savings, but has never received broad support — until now. In a year in which legislators appear to have the political appetite to enact substantial healthcare reform, this bundling proposal deserves the attention of post-acute care providers. Carefully crafted legislation that takes into consideration the reimbursement needs of post-acute care providers could produce an entirely new, workable model. It will be important, however, for all parties to be represented at the negotiation table since the potential pitfalls associated with the bundled delivery system may have unintended, adverse financial consequences for some post-acute care providers.

Please contact one of the authors or a member of the Senior Care Team if you have questions about post-acute care bundling.