The Centers for Medicare & Medicaid Services (CMS) May 16 announced a new hospital demonstration project to test the use of bundled payments for both hospital and physician services to improve the quality of care delivered through Medicare fee-for-service. CMS said the Acute Care Episode demonstration will use bundled payments "to better align the incentives for both types of providers leading to better quality and greater efficiency in the care that is delivered."

The demonstration also will test the effect that transparent pricing and quality information has on beneficiary choice and provider referrals for select inpatient care, the agency said in a press release.

The demonstration is available to applicants from Texas, Oklahoma, New Mexico, and Colorado.

As many as 15 providers will be chosen to participate in the demonstration, which will run from Jan. 1, 2009, through Dec. 31, 2011. Applications are being accepted until fall.

CMS said it expects the demo to result in better coordinated care for beneficiaries and to produce savings for the program, providers, and beneficiaries. It is unclear at this point how much savings the demo will yield.

CMS plans to award only one ACE demonstration site per market area on a competitive basis in the first year of the demonstration. Each demonstration site, or "Value-Based Care Center," will be selected and actively marketed by the agency to beneficiaries and referring physicians.

CMS said a bundled payment is defined as a single payment for both Part A and Part B Medicare services furnished during an inpatient stay. Medicare generally pays hospitals a single amount under the inpatient prospective payment system for all the care it furnishes to patients during an inpatient stay.

The physicians who care for the patient during the stay are paid separately under the Medicare Physician Fee Schedule for each service they perform, the agency said.

"The separate payment systems can lead to conflicting incentives that may affect decisions about what care will be provided," the agency said.

The procedures included in the bundled payment demonstration include 28 cardiac and nine orthopedic inpatient surgical services, CMS said.

"These elective procedures were selected because profit margins and volume have historically been high," the agency said. "[T]here is sufficient marketplace competition to ensure interested demonstration applicants[,] the services are easy to specify, and quality metrics are available for them."