This post is the second of a two-part series that examines hospital medicine payment models. Part one focused on hospital subsidies. Here in part two, we address the payor side of the revenue equation.

Healthcare Costs in U.S. on the Rise

The United States has the highest health spending based on Gross Domestic Product (GDP) share among developed countries, yet has the lowest life expectancy and highest mortality rates. Specifically, health-related GDP in 2020 is at nearly 18 percent, a number that is expected to rise to one-fifth of total GDP by 2028.

This severe cost-versus-quality mismatch has not gone unnoticed by the federal government. Reducing costs while improving quality is a major initiative for the Centers for Medicare & Medicaid Services (CMS).

Value-Based Care Plans Designed to Lower Costs

Fee-for-service payment models, which reimburse hospitals for the number of services provided, have been a major catalyst towards the oversaturation of healthcare costs in the United States—and they have no connection to quality. 

"In hospital medicine, when a patient comes in with pneumonia, we get paid based on procedures and length of stay," said Gary Guidry, Executive Vice President Hospital Medicine Operations, SCP Health, in an interview. "Everything we do has a fee associated with it. Quality is not factored into the outcome so far as payment is concerned." 

Conversely, the value-based care model, born out of the 2010 Patient Protection and Affordable Care Act (ACA), pays hospitals based on how effectively providers decrease the total cost of care, while also improving quality. It is the model driving the future of medical care in the United States.

To reduce costs in keeping with ACA guidelines, CMS developed several innovative payment and service delivery models based on the value-based structure, some of which are built around bundled payments, explained below.

Bundled Payment Models

The bundled payment methodology combines payments for physicians, hospitals, and other healthcare provider services into a single bundled amount, which is calculated based on the expected costs of all items and services the patient receives during a single episode of care. 

Bundling payments motivates healthcare providers to supply services more efficiently, coordinate care more effectively, and improve care quality. That’s because CMS transfers part of the risk—the technical risk (i.e., risk related to care production), which is under the included providers’ control—to the hospital.

With bundled payments, providers have financial incentives to control the cost of the bundle because they either keep the savings or incur the cost of overruns if expenses differ from the fixed payment. 

“We are responsible for a 90-day period for certain diagnosis-related groups (DRGs),” Guidry explained. “If we go over that target price, we have to pay Medicare for taking care of that patient. There is risk and reward for the value-based program we're in, and we get to share up or down based on the quality of care that our providers and company deliver to that patient.”

He illustrated the concept this way: 

"Sepsis is one DRG and one of our bundles. CMS has set a target price for the average cost of sepsis for a particular market. SCP Health has a price we have to come in under to share in those dollars. If we go over that price, we have to pay Medicare for taking care of that patient."

Dr. Rachel George, Clinical Executive Vice President and Chief Medical Officer, SCP Health, said in an interview that much of the cost in bundled payment programs is the result of post-acute care.

“The total cost of care for a patient for the 90-day window includes the type of facility they go to and for how long,” she said. “The type of post-acute facility is what drives the majority of the costs. A long-term acute care (LTAC) facility is the most expensive. After that, it’s inpatient rehab, then skilled nursing facilities (SNFs), and then home care.”

Dr. George explained that one way SCP Health cuts costs while maintaining quality involves post-acute care length of stay.

“Medicare pays for a patient’s stay at an LTAC or SNF for a certain number of days, so, invariably, patients tend to stay for the duration,” she said. “Now, we're partnering with these facilities and thinking consciously about what the patient needs.”

Of the many bundled payment programs, two, in particular, are worth discussing: Comprehensive Care for Joint Replacement (CJR) and Bundled Payments for Care Improvement (BPCI).

Comprehensive Care for Joint Replacement

CJR was one of the first bundled payment models to come out of CMS. It was designed to support better and more efficient care for people undergoing the most common inpatient surgeries for Medicare beneficiaries: hip and knee replacements.

This model tests bundled payment and quality measurement for a care episode to encourage hospitals, physicians, and post-acute care providers to improve quality and coordination throughout the care continuum.

The model began on April 1, 2016, and will run through the end of 2020.

Bundled Payments for Care Improvement

BPCI was a 5-year plan that put the risk of a 90-day stay on the physician who admitted the patient. The plan launched in October 2013 and was sunset at the end of Q3 2018, to be replaced by its current cohort BPCI Advanced.

According to CMS, the initiative consisted of four broadly defined models of care, which linked payments for the multiple services patients received during an episode of care.

Bundled Payments for Care Improvement Advanced

This payment model is a new iteration of BPCI. It started immediately upon the conclusion of BPCI and is slated to finish at year-end 2023. 

The BPCI Advanced (BPCI-A) model aims to support and encourage clinicians to redesign care delivery by adopting best practices, reducing variation from standards of care, and providing a clinically appropriate level of services for Medicare patients throughout a care episode, CMS says.

Differences Between BPCI & BPCI-A

There are a few differences between the first version—now referred to as “BPCI Classic”—and BPCI Advanced. Becker's Hospital Review highlighted ten as the most important:

  1. All participants will be responsible for 90-day bundles;
  2. There are fewer DRG exclusions;
  3. Under BPCI-A, up to 10 percent of payments are at risk for quality performance. (There was no quality component in BPCI classic; quality was first introduced in CJR, Becker's points out.);
  4. There is now only a single track for treatment of outliers under BPCI;
  5. Downside financial risk will be effective immediately rather than phased-in;
  6. Participants will get the same data, but less often;
  7. Target prices will be set prospectively instead of at reconciliation;
  8. BPCI-A qualifies as an Advanced APM through MACRA, providing physician group practices and hospitals with employed physicians with an incentive to participate;
  9. Beneficiaries in a Next Generation or a Track 3 MSSP ACO will be excluded;
  10. Physician group practices always take precedence, which means hospitals could lose more episodes.

How HM Programs Can Support Bundled Payment Cost Reduction and Improve Care Quality

Hospital medicine programs (and the hospitalists that staff them) can cut costs and improve quality for bundled payment programs, such as BPCI-A, in three ways: ensure accurate case mix, maximize value-based performance improvement, and reduce LOS.

Ensure Accurate Case Mix Index

By capturing the severity of a patient’s illness, hospitalists can assign the correct DRG to a patient, ultimately prompting a more accurate (and improved) case mix index.

Maximize Value-Based Performance Improvement

Medicare payment for services rendered is dependent on improved clinical quality through attention to CMS’s value-based programs. Effectively managing the HM program enables hospitalists to maximize performance on measures that reflect quality metrics.

Reduce LOS

The best way hospitals can improve their financial standing is by making beds available to admit additional patients. It is essential, then, that hospitalists manage patients well and discharge them as soon as there is no longer a clinical need for that bed.

How COVID-19 Changed the Payment Landscape

Both Dr. George and Guidry weighed in on the effect COVID-19 has had on the healthcare bundled payment landscape. 

“The pandemic has resulted in changes to healthcare law that have definitely impacted these programs,” Dr. George said. She cited the three-midnight rule as one example:

“There's a rule that a Medicare patient has to be admitted to the hospital for three-midnights before Medicare will pay for them to go to an SNF. The new law has removed that rule. Now, patients can go to an SNF much sooner.”

She added that because skilled nursing facilities became such a hotbed for COVID-19, patients were often sent to higher (and more costly) levels of care, such as LTACs and inpatient rehab.

Another effect, according to Guidry, also had to do with SNFs. 

“All of our SNFs closed their doors and didn't allow our follow-up representatives to monitor and manage those patients,” he said. “We lost some visibility as to the length of stay in those facilities, which will impact outcomes in our participation in the (BPCI Advanced) program.”

Dr. George also noted the effect COVID-19 has had on hospital readmissions. 

“Readmission rates have been lower because people were afraid to come to the hospital, not because they didn’t need care,” she said, concluding that we’re “still trying to evaluate what all these moving parts mean for the total cost of care for these patients.”


Hospitals rely on revenue from private and government payors to fund hospital medicine programs and subsidize any shortfall out-of-pocket. That means they must get creative to find new revenue sources among decreasing reimbursement and increasing regulations. That’s where SCP Health can help.

One hundred percent of our client hospitals qualify as high-performance providers and are eligible for up to 4x upward payment adjustment factors, leading to boosts in revenue for your hospital. That includes growing Medicare revenue with value-based payment incentives from our patient engagement strategies and programs to reduce hospital readmissions penalties.

If your hospital needs help finding new revenue sources or transitioning to value-based and other new care models, give us a call at (800) 893-9698 or email us at (insert email address)