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July 2013 Volume 9 Number 11

Episode of Care Payments, Limits on the Provision Of Care, and the Impact on Behavioral Health

By Greg Heller, Young Ricchiuti Caldwell & Heller, LLC, Philadelphia, PA1

AuthorThe fee for service reimbursement model is on the way out, and reimbursement models that have the goal of more closely aligning reimbursement with either better patient care or cost savings (hopefully both) are on the way in. One mechanism that has received a lot of recent attention is a bundled payment system, in which a payment covers a specified set of services for a specified episode of care. CMS’s Center for Medicare and Medicaid Innovation (“CMMI”) is well along with its Bundled Payments for Care Improvement Initiative.2 Many managed care companies have implemented bundled payments for certain conditions and procedures, and are looking to expand the role of such payments.3

Getting incentives properly aligned and implementing a new reimbursement mechanism that reflects those incentives is, rather obviously, an enormous and ongoing challenge. One important part of this conversation – and something that has not received much attention to date – is the extent to which bundled payments can, in the absence of adequate oversight, be used as a tool that allows payors to affect provider behavior in a way that has a potentially adverse effect on patient care, and in a way that threatens mandated insurance benefits.

Reasons for Concern

On the public side, bundled payments have been, and will continue to be, developed and implemented in a way that is transparent, and that provides an opportunity for significant input from providers and patients. CMS’ Bundled Payments for Care Improvement Initiative seems a model for an inclusive process that gives a central role to provider input and patient care. Prices for retrospective bundled payments will be established by applying a discount to costs determined from historical data, so by definition the initial reference point is the standard of care as currently practiced.4

On the private side, however, the development of bundled payments is taking place with much less structured provider input, with no patient input, and with little or no regulatory oversight. This is not necessarily a good thing. Particularly in areas where a single private payor has significant market power, the use of bundled payments can become a tool for pushing reimbursement levels down to a level incompatible with quality care, and can be used to drive radical changes in care delivery that have never been endorsed, or even reviewed, from a clinical standpoint.

One particular type of bundled payment is an episode of care payment, in which a provider is paid a fixed price for all services provided to a patient to treat a particular condition during a set period of time. While acceptable and appropriate in theory, these payments can create powerful incentives for providers to change the care they provide. It is important that these incentives and possible consequences be understood.

For instance, one episode of care proposal recently reviewed in the behavioral health area would have covered all of the care that a patient received for a particular condition, over a set period of time. The payment was set at a level that would have covered roughly half the average length of stay for patients with that condition in that geographic area. If accepted, the proposal would have required the provider to do one of two things: either (a) significantly change its practice by cutting patient stay lengths in half, or (b) continue with its existing practice and incur significant financial losses. For present purposes, the point is not so much whether any change in practice brought about by financial pressure would or would not be medically sound; rather, the point is that any such clinical changes would have been driven, at least in part, by a change in reimbursement methodology and reimbursement levels.

There is a fundamental procedural point here that should not be lost. Any change in clinical practice would have been worked through a reimbursement schedule hidden from the eyes of consumers and patient advocates. Consumers and patient advocates do not typically review provider contracts. And even if a patient asked to see a provider contract the patient probably would not be allowed to do so, because reimbursement schedules are usually confidential, and providers are contractually barred from sharing them with patients.5 In addition, reimbursement schedules are not set forth, or even described generally, in policy documents provided to plan members and subscribers. If provider contracts are going to put direct pressures on clinical practice, those contracts should not be hidden from view.

In fact, in the presence of adequate market power, bundled payments might be seen as a way for health plans and health insurers to control utilization without incurring all of the costs, potential embarrassment, and liability exposure of traditional medical necessity review and the other mechanisms of managed care. Consider, for example, genome sequencing of a patient’s cancer. If (for example) preauthorization for genome sequencing is denied because it is experimental or investigative or not medically necessary, the denial can be challenged through administrative and regulatory appeals and ultimately in the courts, and patients and providers could press claims for coverage in legislatures and the media. Many insurers and health plans might have limited stomach for that fight. Far better to simply construct a bundled payment that covers a comprehensive set of services and care settings, and set reimbursement at a level that leaves no room for genome sequencing, or for any other new but expensive treatments. This bundled payment would relieve the health insurer or health plan from the costs, economic and otherwise, of grappling in some transparent way with a decision to cover or not cover new studies and treatments.

This would not, of course, relieve a provider from the need to confront the decision about whether to provide genome sequencing or a new treatment. And if it turns out that financial incentives contained in an episode of care payment or other bundled payment have (or are alleged to have) an adverse effect on a patient’s care, there is a liability risk for the provider. This is in some ways similar to the liability risk that health plans and health insurers have long lived with, but is also different in important ways. A healthcare provider, for example, would probably not have the liability protections that ERISA typically affords health insurers and health plans. The provider’s liability would become even more problematic if a plaintiff learned, during the course of civil discovery, that a provider had agreed to keep the details of an episode of care payment secret.

Bundled episode of care payments might also present challenges when new treatments emerge. Perhaps providers with remarkable foresight and sufficient market power will be able to establish reimbursement levels that leave room for innovative but costly new treatments. It seems more likely, however, that reimbursement levels will reflect the status quo at the time of contracting. Innovative treatments might therefore significantly change the economics for providers, and make the use of such treatments costly for providers.

These payments could also have the effect of undermining mandated-benefit insurance laws by including, within a particular bundled set, services and units of service that are otherwise required to be covered. For example, many health plans and insurers are required to cover certain neonatal diagnostic tests. An episode of care payment that covers all care for newborns could conceivably relieve a health plan or insurer of any obligation to separately cover these tests.

At the same time, if a bundled payment mechanism sought by a health plan or health insurer does threaten patient care or undermine a state mandated-benefit law, it can be difficult for providers to invoke the traditional tools of regulatory oversight. Absent careful attention, bundled payments can fall into a regulatory no-man’s land, because plans and insurers eager to avoid oversight can claim that these are simply reimbursement rates, which are sometimes understood to be beyond the reach of state regulatory regimes. Providers and their counsel may need to educate regulators about the relationship between bundled payments and patient care and other proper subjects of regulatory oversight. In the behavioral health contract referred to above, explaining standard of care implications to the payor and to regulators has been an important facet of ongoing discussions.6

Particular Concern, and Particular Tools, for Behavioral Health

The potential for problems posed by episode of care payments is particularly acute for behavioral healthcare. Reimbursement behavior has long had a powerful effect on behavioral healthcare, perhaps more so than in any other area of medicine. All too often, the setting and intensity of care can be driven as much by payor decisions as by the judgment of treating clinicians. Depending on the reimbursement level, an episode of care payment can make the continued provision of clinically indicated care unsustainable for the provider.

Behavioral healthcare providers do, however, have a powerful tool in the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 (the “MHPAEA”) and in that law’s implementing regulations.7 Under the MHPAEA, a health plan or health insurer cannot impose financial requirements or treatment limitations on mental health or substance use disorder benefits that are more restrictive than “the predominant treatment limitations [or financial requirements] applied to substantially all medical and surgical benefits covered by the plan (or coverage).”8 Furthermore, a health plan or health insurer is not allowed to impose “separate treatment limitations [or cost sharing requirements] that are applicable only with respect to mental health or substance use disorder benefits.” 9 Episode of care payments are treatment limitations subject to the MHPAEA, because the payment mechanism necessarily provides that if a patient is discharged by a provider and then returns within a set time period, the provider receives no further payment. For behavioral health, this kind of restriction is only allowed if the plan or insurer applies an equally restrictive or more restrictive limitation to “substantially all medical and surgical benefits covered by the plan (or coverage).”10 Application of this standard to episode of care payments is straightforward, because any episode of care payment implicitly, but quite clearly, covers a particular number of days or units of service. Invariably, these day or unit limits are more restrictive than the corresponding limits placed on medical/surgical services. This means that a health plan or health insurer with an episode of care payment mechanism for behavioral health will likely violate the MHPAEA.

Invoking the MHPAEA may present an enforcement challenge, because MHPAEA enforcement is very much a work in progress. But that hardly excuses compliance obligations, and behavioral health providers and payors alike should pay careful attention to these requirements.


Episode of care payments are not simply payment terms. They are powerful tools that implicate a range of overlapping and evolving statutory and regulatory regimes, and can potentially affect patient care and patient safety. Particularly on the private side, both providers and payors need to pay careful attention to these broader contexts, and to the opportunities and perils that this broader playing field presents.


Mr. Heller is an attorney with Young Ricchiuti Caldwell & Heller, LLC in Philadelphia. He represents patients and providers in a variety of healthcare-related matters. He can be reached at gheller@yrchlaw.com.


The Center for Medicare and Medicaid Innovation was created in Section 3021 of the Patient Protection and Affordable Care Act, which is codified at 42 U.S.C. § 1315a. Information about CMMI’s bundled Payments for Care Improvement Initiative is available on CMMI’s website, www.innovations.cms.gov.


See, e.g.,  Megan Burns and Michael Bailit, Bundled Payment Across the U.S. Today: Status of Implementation and Operational Findings, available at http://www.hci3.org/sites/default/files/files/HCI-IssueBrief-4-2012.pdf.


See, e.g., CMMI, Bundled Payments for Care Improvement (BPCI) Initiative: General Information, available at http://www.innovations.cms.gov/initiatives/Bundled-Payments/index.html.


Such a confidentiality restriction might well violate common statutory prohibitions against medical gag clauses. As a practical matter, however, once a contract is signed, it is hard to imagine either party to the contract challenging its legality.


As of this writing, the issue remains under review.


See Interim Final Rules Under the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008, 75 Fed. Reg. 5410 (Feb. 2, 2010) (codified at 29 C.F.R. pt. 2590, Treas. Reg. pt. 54, and 45 C.F.R. pt. 146). While these are interim final rules and not final rules, they have the force and effect of final rules until final rules are issued. See generally Coalition for Parity, Inc. v. Sebelius, 709 F.Supp.2d 10 (D.D.C. 2010) (dismissing a managed care industry challenge to the Interim Final Rules, and explaining the role and legal status of interim final rules).


42 U.S.C. §§ 300gg-26(a)(3)(A)(i), (A)(ii); see also 29 U.S.C. § 1185a(a)(3)(A)(i), (A)(ii).

942 U.S.C. §§ 300gg-26(a)(3)(A)(i), (A)(ii).
1042 U.S.C. §§ 300gg-26(a)(3)(A)(i), (A)(ii).

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