Medicare's New Bundled Payment For Joint Replacement May Penalize Hospitals That Treat Medically Complex Patients

In an effort to reduce episode payment variation for joint replacement at US hospitals, the Centers for Medicare and Medicaid Services (CMS) recently implemented the Comprehensive Care for Joint Replacement bundled payment program. Some stakeholders are concerned that the program may unintentionally penalize hospitals because it lacks a mechanism (such as risk adjustment) to sufficiently account for patients' medical complexity. Using Medicare claims for patients in Michigan who underwent lower extremity joint replacement in the period 2011-13, we applied payment methods analogous to those CMS intends to use in determining annual bonuses or penalties (reconciliation payments) to hospitals. We calculated the net difference in reconciliation payments with and without risk adjustment. We found that reconciliation payments were reduced by $827 per episode for each standard-deviation increase in a hospital's patient complexity. Moreover, we found that risk adjustment could increase reconciliation payments to some hospitals by as much as $114,184 annually. Our findings suggest that CMS should include risk adjustment in the Comprehensive Care for Joint Replacement program and in future bundled payment programs.