Target prices influence hospital participation and shared savings in medicare bundled payment program

Abstract

To reduce episode spending for twenty-nine predefined clinical conditions, the Centers for Medicare and Medicaid Services (CMS) implemented the voluntary Bundled Payments for Care Improvement (BPCI) Advanced Model program in 2018. Under this program, hospitals gain or lose revenue depending on their episode spending relative to target prices set by CMS. The relationship between target prices and hospital participation in BPCI Advanced is unknown, as are the financial implications for CMS. Using Medicare claims, we estimate that each $1,000 increase in target prices increased the probability of participation by 0.78 percentage points across all episodes. We then used Medicare claims before the start of BPCI Advanced to evaluate mean reversion, or the tendency for episode spending at individual hospitals to move closer to average episode spending over time, especially for hospitals having higher target prices. Hospitals with spending that was 10 percent more than target prices at baseline could expect spending to decline by 7.43 percent in the performance period, hospitals with spending that was 20 percent more saw spending decline by 9.80 percent, and hospitals with spending that was 30 percent more saw spending decline by 11.93 percent. Our findings suggest that CMS will end up paying substantial bonuses to hospitals that resulted from mean reversion rather than from meaningful reductions in costs.