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PREPARING FOR MANDATORY MEDICARE BUNDELED PAYMENTS Western Michigan Healthcare Financial Management Association November 18, 2016

©2015 RSM US LLP. All Rights Reserved. Presenters 3 Chris Milligan, MBA Director, Health Care Consulting Shahzad Dastgir MD Manager, Health Care Consulting

©2015 RSM US LLP. All Rights Reserved. Agenda Overview Payment Models Financial Risk Pricing Methodology Payment Methodology Administration Strategy 4

©2015 RSM US LLP. All Rights Reserved. OVERVIEW Bundled Payments

©2015 RSM US LLP. All Rights Reserved. What Are Bundled Payments 6 Beneficiary care payment model that creates incentives for the implementation and coordination of care redesign between hospitals and other providers, where providers assume financial and performance accountability for a particular episode of care. In a bundle, the payer applies the price cut across every episode of care Medicare gets the cost savings upfront based on a blend rate of hospital specific and region data. In the proposed Comprehensive Care for Joint Replacements (CCJR) model, the acute care hospital that is the site of surgery would be held accountable for spending during the 90 day episode of care. Participant hospitals can earn performance-based payments by reducing expenditures and meeting quality metrics.

©2015 RSM US LLP. All Rights Reserved. Fee-for-Service vs Bundled Payments Fee-for-Service: Traditionally, Medicare makes separate payments to providers for each of the individual services they furnish to beneficiaries for a single illness or course of treatment. Results in fragmented care with minimal coordination across providers and health care settings. Payment rewards the quantity of services offered by providers rather than the quality of care furnished. Bundled Payments Providers are reimbursed a set fee for an episode of care, rewarding providers for improving the coordination, quality and efficiency of care. The lump sum payment is shared among participating providers Has the potential to reduce Medicare expenditures while preserving or enhancing the quality of care for beneficiaries. 7

©2015 RSM US LLP. All Rights Reserved. Why The Push For Bundled Payments In 2013, Medicare spent more than $7 billion on hospitalizations for hip and knee replacement surgeries. Medicare spends $16 - $33K per patient for the surgery, hospitalization, and recovery from hip and knee replacements. Cost vary based on the provider and location of service, the quality and cost of these surgeries vary greatly. Rate of complications such as infections or implant failures after surgery can be more than three times higher at some facilities than others, causing readmissions and more cost. Model is designed to hold hospitals accountable for the quality of care they deliver from surgery to recovery. Provides a shared risk/reward environment. 8

©2015 RSM US LLP. All Rights Reserved. Why The Push For Bundled Payments 9

©2015 RSM US LLP. All Rights Reserved. PAYMENT MODELS Bundled Payments

©2015 RSM US LLP. All Rights Reserved. Bundled Payments Care Improvement Initiative (BPCI) Models Model 1 Retrospective payment model where episode of care is defined as the inpatient stay in the acute care hospital. Medicare pays the hospital a discounted amount based on the payment rates established under IPPS. Medicare continues to pay physicians separately for their services under the Medicare Physician Fee Schedule. Model 2 Models 2 and Model 3 involve a retrospective bundled payment arrangement where actual expenditures are reconciled against a target price for an episode of care. The episode includes the inpatient stay in an acute care hospital plus the post- acute care and all related services up to 90 days after hospital discharge. 11

©2015 RSM US LLP. All Rights Reserved. 12 Model 3  Episode of care is triggered by an acute care hospital stay but begins at initiation of post- acute care services with a skilled nursing facility, inpatient rehabilitation facility, long-term care hospital or home health agency.  Under these retrospective payment models, Medicare continues to make fee-for-service (FFS) payments; the total expenditures for the episode is later reconciled against a bundled payment amount (the target price) determined by CMS. A payment or recoupment amount is then made by Medicare reflecting the aggregate expenditures compared to the target price. Model 4  CMS makes a single, prospectively determined bundled payment to the hospital that encompasses all services furnished by the hospital, physicians, and other practitioners during the episode of care, which lasts the entire inpatient stay.  Physicians and other practitioners submit “no-pay” claims to Medicare and are paid by the hospital out of the bundled payment. Bundled Payments for Care Improvement Initiative Models

©2015 RSM US LLP. All Rights Reserved. 13 Bundled Payments for Care Improvement Initiative Models

©2015 RSM US LLP. All Rights Reserved. Previous and Concurrent Bundled Payment Models Medicare used Acute Care Episode (ACE) demonstration project to develop CCJR model. A 3-year demonstration used a global payment for a single episode of care as an alternative approach to payment for service delivery under traditional Medicare FFS. Episode of care was defined as a combination of Part A & B services to Medicare FFS beneficiaries during an inpatient hospital stay for any one of a specified set of orthopedic MS-DRGs (469 & 470). 100% target price was calculated on hospital specific historical data and were not required to meet quality measures. The discounted bundled payments generated an average gross savings to Medicare of $585 per episode for a total of $7.3 million across all episodes 14

©2015 RSM US LLP. All Rights Reserved. Services Bundled Into Payment HHA services Hospital outpatient services Independent outpatient therapy services Clinical laboratory services Durable medical equipment (DME) Part B drugsHospice Physicians' services Inpatient hospital services (including readmissions) LTCH services IRF servicesSNF services 15 Bundled Payment

©2015 RSM US LLP. All Rights Reserved. CCJR Model Design Participant hospitals held accountable for the quality and cost of a episode of care Coordinate care among hospitals, physicians & post-acute care providers CCJR episode will continue for 90 days following discharge (Part A and Part B) Medicare sets target episode prices every year for each participant hospital All providers continued to be paid under the FFS payment system At the end of a model performance year, actual spending for the episode would be compared to the Medicare episode target price for the hospital. 16

©2015 RSM US LLP. All Rights Reserved. FINANCIAL IMPACT Bundled Payments

©2015 RSM US LLP. All Rights Reserved. Economic Effects Performance Year Medicare Initiative Implementation Medicare Cost/Savings 1No financial risk to providers$23 million 2Introduce downside risk to providers $29 million 3$43 million 4Transition to regional target pricing $50 million 5Performance/Quality Metrics$53 million 18

©2015 RSM US LLP. All Rights Reserved. Sources Of Financial Risk The Medicare proposal is hospital-centric. Under the CCJR model, only the hospitals would be rewarded or penalized depending on the outcomes of the procedure. Direct physicians & post-acute care providers participation limited, creating potential conflicts between providers instead of collaboration. The model eliminates use of outpatient sites for these surgeries. Thus opening up the potential for increased consolidation within health care. While the proposed model provides financial incentives for hospitals to avoid-post-surgery complications, it does not vary payments to those hospitals with the severity of the patient’s condition Broad DRGs targeted by the program include procedures unrelated to replacing a hip or knee. This could contribute to higher total costs of care and result in hospitals being penalized unjustly for those unrelated procedures. Final payments not reconciled until the end of the year, which means that providers are paid as usual and any rewards or penalties are not proximate to their performance. 19

©2015 RSM US LLP. All Rights Reserved. Who Is Affected CMS has proposed to implement the proposed model in 75 geographic areas, defined by metropolitan statistical areas (MSAs). Exempt from Participation: − Non-MSA counties were not eligible for selection. − Facilities participating in Model 1 or Phase II of Models 2 or 4 of BPCI initiative for LEJR episodes − Hospitals outside these geographic areas would not be able to participate. 20

©2015 RSM US LLP. All Rights Reserved. PRICING METHODOLOGY Bundled Payments

©2015 RSM US LLP. All Rights Reserved. Proposed Episode Price Setting Methodology Set different target prices for episodes anchored by MS-DRG 469 versus MS-DRG 470 to account for patient and clinical variations that impact hospitals' cost of providing care. Use 3 years of historical DRG specific Medicare payment data grouped into episodes of care to ensure hospitals are incentivize based on historical utilization and practice patterns Blend together hospital and regional historical CCJR episode payments, transitioning to regional pricing over 5 years to incentivize hospitals to furnish high quality and efficient care. 22

©2015 RSM US LLP. All Rights Reserved. Proposed Episode Price Setting Methodology Normalize for provider-specific wage adjustment variations in Medicare payment systems when combining provider-specific and regional historical CCJR episodes. Apply a discount factor to serve as Medicare's portion of reduced expenditures from the CCJR episode, with any remaining portion of reduced Medicare spending below the target price potentially available as reconciliation payments to the participant hospital where the anchor hospitalization occurred 23 DRGTotal Medicare Provider Payments for all episodes Total Episode Target Price Savings/Loss 47010,000,0007,500,0002,500.00

©2015 RSM US LLP. All Rights Reserved. PAYMENT METHODOLOGY Bundled Payments

©2015 RSM US LLP. All Rights Reserved. Payment Methodology 5 performance year retrospective performance test model with continued Medicare FFS payment systems. After the completion of a performance year, actual episode payment data would be calculated and payments allocated accordingly. Actual payment would be reconciled against established CCJR target price, with consideration of additional payment adjustments based on quality performance and post-episode spending. The amount of this calculation: − if positive, would be paid to the participant hospital as a reconciliation payment. − If negative, we would require repayment from the participant hospital if the CCJR target price is exceeded. Discount Factor for Losses: Year 1: No risk Year 2: 1% Year 3-5: 2% Caps on Losses: Year 1: No risk Year 2: 10% Year 3-5: 20% 25

©2015 RSM US LLP. All Rights Reserved. Payment Methodology Proposal to make reconciliation payments to participant hospitals that achieve quality outcomes and cost efficiencies relative to the established CCJR target prices in all performance years of the model Under this proposal, Medicare would not require repayment from hospitals for performance year 1 for actual episode payments that exceed their target price in performance year 1 Phase in the requirement that participant hospitals whose actual episode payments exceed the applicable CCJR target price pay the difference back to Medicare beginning in performance year 2 There is a limit to how much a hospital may gain or lose based on its actual episode payments relative to target prices. Also rules in place to further limit the risk of high payment cases for all participant hospitals 26

©2015 RSM US LLP. All Rights Reserved. Payment For Services That Extend Beyond the Episode Example: beneficiary in a CCJR episode is admitted to a SNF for 15 days, beginning on Day 86 post-discharge from the CCJR hospitalization. The first 5 days of the admission would fall within the episode, while the subsequent 10 days would fall outside of the episode. Medicare payment for included episode services would be prorated so that only the portion attributable to care during the episode is attributed to the episode payment when calculating actual Medicare payment for the episode. For non-IPPS inpatient hospital (for example, CAH) and inpatient PAC (for example, SNF, IRF, LTCH, IPF) services, payments would be prorated based on the percentage of actual length of stay that falls within the episode window. For HHA services that extend beyond the episode the payment will be prorated based on the percentage of days, starting with the first billable service date and through and including the last billable service date within the CCJR episode. 27 Day 1 Day 90 Day 100

©2015 RSM US LLP. All Rights Reserved. Proposed Pricing Adjustment for High Payment Episodes Given the broad proposed LEJR episode definition and 90-day post-discharge episode duration proposed for CCJR, protections are in place for hospitals variable repayment risk, especially high payment episodes, The mean episode payment amount is approximately $26,000. 5% of all episodes are paid at two standard deviations above the mean payment or greater, Target prices will be based on the facility’s individual episode target within the performance year and will be capped at two standard deviations above the mean. 28

©2015 RSM US LLP. All Rights Reserved. Payment Processes CCJR Reconciliation Report for performance year 1, if the CCJR Reconciliation Report indicates the reconciliation amount is positive, CMS would issue a payment, in a form and manner specified by CMS, for that amount to the awardee within 30 calendar days from the issue date of the CCJR Reconciliation Report For performance year 1, if the CCJR reconciliation report indicates a repayment amount, the participant hospital would not be required to make payment for that amount to CMS, hospitals will not be held financially responsible for negative NPRAs for the first performance year. Propose to phase in the requirement that participant hospitals whose actual episode payments exceed the applicable CCJR target price pay the difference back to Medicare beginning in performance year 2 through 5. 29

©2015 RSM US LLP. All Rights Reserved. ADMINISTRATION Bundled Payments

©2015 RSM US LLP. All Rights Reserved. Quality Measures & Reporting Requirements Three hospital-level quality of care measures for the CCJR model. − Total Knee and Hip 30 day readmission − HCAHP Survey Measures will be used to test the success of the model in achieving its goals and to monitor for beneficiary safety. Results to be reported on Hospital Compare Web site. Facility voluntary submission of data would possibly make further discounts eligible. 31

©2015 RSM US LLP. All Rights Reserved. Data Sharing Process Share data with participant hospitals upon request (starting January 1, 2016) throughout the performance period Share upon request both raw claims-level data and claims summary data by service line with participants. Provide hospitals with up to 3 years of retrospective claims data upon request that will be used to develop their target price. Requested Data will be provided within 60 day time frame, and will be updated quarterly. 32

©2015 RSM US LLP. All Rights Reserved. Beneficiary Protections Beneficiary Notification:  Must be notified of the bundled payment model (CCJR)  Beneficiary must participate if qualified (based on location and criteria)  Can select provider  Can select not to share individual data Beneficiary Criteria:  Medicare is Primary payer (enrolled in Part A & B)  Not enrolled in managed Medicare plan (i.e. Medicare Advantage)  Beneficiary can not be qualified for Medicare based on ESRD criteria  Not covered under United Mine Workers of America plan 33

©2015 RSM US LLP. All Rights Reserved. Waiver of Medicare Program Rules Waivers of certain Medicare program rules are necessary to make reconciliation payments to or recoup payments from participant, these will include: − Home Visit Waiver: Beneficiary cannot be homebound, max 9 visits − Telehealth Waiver: No geographic or originating site requirements − SNF waiver: No 3 day rule, must be >3- star SNF facility 34

©2015 RSM US LLP. All Rights Reserved. Dispute Resolution: What Can’t Be Appealed There is no administrative or judicial review for the following: − The selection of models for testing or expansion − The selection of organizations, sites or participants to test those models selected. − The elements, parameters, scope, and duration of such models for testing or dissemination. − Determinations regarding budget neutrality − The termination or modification of the design and implementation of a model − Decisions about expansion of the duration and scope of a model 35

©2015 RSM US LLP. All Rights Reserved. Dispute Resolution: What Can Be Appealed The following is a non-exhaustive list of the matters that would need to be first adjudicated by the calculation error process:  calculations of reconciliation or repayment amounts;  calculations of NPRA  any calculations or percentile distribution involving quality measures that we propose could affect reconciliation or repayment amounts In order to access the dispute resolution process, the hospital must have timely submitted a calculation error form. If the participant hospital does not timely submit a calculation error form and the participant hospital is dissatisfied with CMS's response to the participant hospital's notice of calculation error, the hospital would be permitted to request reconsideration review. 36

©2015 RSM US LLP. All Rights Reserved. STRATEGY Bundled Payments

©2015 RSM US LLP. All Rights Reserved. How To Mitigate Financial Risk Majority of saving opportunities will be in post acute care, requiring key coordination with PAC providers. Analyzing historical data in a meaningful fashion to identify all areas for cost savings and quality improvement measures. Implementing quality measures for early identification of readmission patient populations. Developing strategic gain share options with all providers (physician groups and PAC providers) Accurately capturing high outlier group. Preparing for appeals process. 38

©2015 RSM US LLP. All Rights Reserved. Opportunities To Pursue Care Redesign Review historical cost by provider for all areas of TKA / THR Based on this analysis, revise pricing for all aspects of the procedure (nursing, anesthesia, general surgery, rehab, etc). Complete on-going audits to ensure cost and reimbursement is in line with bundled payment Complete quality audits to minimize post-op complications and reduce readmissions. 39

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©2015 RSM US LLP. All Rights Reserved. References MLN/MLNMattersArticles/downloads/se0441.pdfhttps:// MLN/MLNMattersArticles/downloads/se0441.pdf