Performance Improvement 1996. Medicare Participating Heart Bypass Center Demonstration: Evaluation Design



This negotiated bundled payment demonstration was implemented in May 1991 by the Health Care Financing Administration (HCFA) as one of many cost-containment demonstrations launched in response to increases in Federal spending under Medicare. Its goal was to assess the benefits of a negotiated package pricing arrangement for heart bypass surgery with hospitals and associated physician groups that have capabilities and incentives to manage and coordinate the complex services needed for high-quality care. Participating hospitals and physicians accepted the negotiated global package price as payment in full. The evaluation of the demonstration focused on several factors including quality and appropriateness of care, savings to Medicare, savings to hospitals, changes in patient care and hospital management, and hospital competition and marketing. The study found that both Medicare and hospitals could benefit from this type of payment arrangement through reduced costs and better coordination of services while maintaining high quality of care.


This study examined the impact of a Medicare demonstration project to test the overall feasibility and cost-effectiveness of paying hospitals and physicians a single negotiated amount for all hospital and inpatient professional services associated with coronary artery bypass graft (CABG) surgery. Among the key questions assessed were the following:

  1. Could a fair and efficient process be developed for the government to negotiate discounts with providers that include both hospital and physician services?
  2. Did participation in the demonstration result in increased volume of bypass procedures for the centers?
  3. Did the overall level of appropriateness of patient care or the extent of disease among demonstration patients change over the term of the demonstration?
  4. Were there changes in physician or hospital management of patient care and services under the demonstration?
  5. How did participants market their selection as a demonstration hospital, and what impact did marketing have on case volumes? How did competitors respond?


Throughout the 1980's, Federal spending under Medicare increased at an average rate of 11 percent annually. Expenditures in hospital care increased threefold and spending on physician services increased fourfold during the same period. Every year, the government spends several billion dollars on inpatient care for coronary artery bypass procedures provided to Medicare beneficiaries. A major concern of both hospital managers and policymakers in controlling inpatient costs for high-technology procedures is the asymmetry of financial incentives faced by hospital staff versus physicians. Currently, hospitals are paid for bypass surgery on a per case basis, primarily within the Diagnosis Related Groups (DRGs 106 and 107). Except for extraordinary outlier costs, hospitals are paid a fixed amount regardless of the intensity of care provided each patient. Although surgeons, like hospitals, receive a bundled fee for inpatient services, other physicians, by contrast, are paid for every additional service they provide, including routine daily hospital visits and consultations. In addition, surgeons receive higher compensation for more complicated bypass surgeries. Moreover, physicians do not bear the hospital's financial risks of keeping patients in the intensive care unit longer or using more expensive pharmaceuticals. The rationale for the demonstration was that a global fee that includes physician services would align hospital and physician incentives and encourage physicians to use institutional resources in a more cost-effective manner.

The research demonstration was conducted from May 1991 through June 1996. HCFA ultimately selected seven hospitals to serve as demonstration sites during the term of the study. Selections were based on the completeness of the package of services each hospital was willing to provide Medicare beneficiaries under the demonstration, the quality of care provided by the hospital and its physicians, and the size of the discount the hospital and physicians were willing to accept for their services. The demonstration was implemented at four sites in May 1991: Saint Joseph Hospital of Atlanta, St. Joseph Mercy Hospital in Ann Arbor, the Ohio State University Hospital in Columbus, and Boston University Medical Center Hospital. In the spring of 1993, three more sites were added: St. Luke's Episcopal Hospital in Houston; St. Vincent Hospital and Medical Center in Portland, Oregon; and Methodist Hospital in Indianapolis.

Under the demonstration, participating hospitals and physicians received a global payment covering hospital and related physician services, including outliers, for each CABG procedure (DRGs 106 and 107). In each case, the negotiated rate represented a discount from what Medicare paid, on average, for these procedures. Depending on the package proposed by the individual hospital, the package of services also included pre- and postdischarge physician services and some cardiac rehabilitation services as well as readmissions within a specified time after discharge.

Selected sites received the designation of Medicare Participating Heart Bypass Centers and were encouraged to market their services to referring physicians and beneficiaries and to offer incentives to attract patients. Quality assurance was carefully monitored by HCFA as well as by project evaluators. Hospitals not participating in the demonstration continued to provide services under the traditional Medicare fee-for-service program, and Medicare beneficiaries were free to choose between demonstration and nondemonstration hospitals.

A two-phase evaluation strategy evolved. Phase I covers implementing the demonstration and evaluating the original four sites for a 2-year period while focusing on marketing, volume increases, quality of care, and developing and implementing the appropriateness model. In addition, the phase I evaluation gathered baseline data and first-year operational statistics for the three sites that began the demonstration in May 1993.


A 3-year evaluation contract was awarded to The Lewin Group and its subcontractor, Health Economics Research, Inc. After the first evaluation contract ended, a new evaluation contract was awarded in 1994 to Health Economics Research, Inc., which then continued the evaluation for the remaining 2 years of the demonstration.

An interdisciplinary group of economists, physicians, and marketing experts assembled a variety of databases and conducted numerous onsite interviews with participants as part of an extensive quantitative and qualitative evaluation of the demonstration. Methodologies included two quasi-experimental designs, time-series studies, case studies, surveys, and interviews. Several major literature reviews also were undertaken, including one on efficacy and risks of CABG surgery. A separate appropriateness study was conducted, in which an expert technical advisory panel was convened to help formulate a model of appropriateness indicators for CABG surgery. Information from the literature reviews and the appropriateness study was used to draft materials to assess quality of care at the demonstration sites.

Medicare claims were used to document national trends in Medicare bypass volumes, patient demographics, lengths of stay, mortality rates, and costs. Physician costs were broken into three categories: 30 days prior to bypass surgery, inpatient, and 90 days post-discharge. Prices negotiated with each demonstration site were compared with predicted Medicare prospective payment rates and physician inpatient outlays to determine the immediate savings from the demonstration. Market share savings also were calculated.

Every demonstration hospital provided a set of clinical information on each patient, including discharge status, risk indicators, admission priority, age, gender, and previous bypass operations. Additional information was provided on disease anatomy. The seven demonstration hospitals were compared extensively by using logistic analyses.


HCFA received over 200 letters of interest and preapplications from the initial request for participants in the demonstration, indicating that many hospitals are willing to work jointly with their medical staffs to develop the data necessary to submit a single proposed price. Of the four initial demonstration participants selected, the two nonacademic medical centers experienced statistically significant increases in Medicare bypass market shares. The third had a significant increase in market share, and the fourth had no increase.

In the first 2.5 years of the demonstration, total Medicare savings (Medicare program and beneficiaries and their insurers) were estimated at $17.6 million. Three of the four original hospitals were able to make major changes in physician practice patterns and in hospital operations that generated significant cost savings. Physicians in the three hospitals were able to quickly and dramatically reduce the length of inpatients' stay, substitute generic for brand drugs, and reduce unnecessary testing and other services. In the one hospital where surgeons resisted attempts to change practice patterns, costs continued to rise. The study found that alignment of physician and hospital incentives facilitated a closer working relationship between physicians and hospital staff.

One of the first four demonstration sites significantly reduced its patient mortality rate during the course of the demonstration. Most participating hospitals reduced intensive care unit stays by 1 full day and total hospital stays by 2 days. For the first 3 years of the demonstration, there was some evidence of a growing severity in case mix, including a higher percentage of patients over the age of 80 with comorbid conditions. Complication rates appeared to increase commensurately during this period. Nevertheless, these factors did not produce an upward trend in mortality.

The demonstration involved major changes in Medicare payment arrangements. According to providers, patients were satisfied with the single copayment amount. Hospitals, in general, were pleased with HCFA's prompt payment, which was received within 30 days by wire. Supplemental insurers responsible for paying patient deductibles and coinsurance amounts were uniformly displeased with the flat actuarial payment calculated by the government because it was incompatible with their computer systems, and patient policies differed in their deductibles, coinsurance amounts, and so forth. However, HCFA intentionally had calculated an artificial copayment amount that was comparatively low, intending to share the savings with the beneficiary--although in most cases, ironically, their supplemental insurers reaped the benefit.

Use of Results

By January 1996, more than 9,900 cases had been performed under the demonstration, with an estimated savings of nearly $38 million to the Medicare program. The demonstration has shown that it is feasible for Medicare to negotiate a bundled payment for an episode of care that represents an appreciable savings to Medicare while maintaining quality of care for the beneficiary. The demonstration also has shown that an all-inclusive global fee for both hospital and physician services can align incentives to encourage hospital managers and physicians to cooperate in using institutional resources in a more cost-effective manner.

The success of the demonstration has led to the inclusion of language in the President's 1997 proposed budget package calling for new legislation to implement negotiated bundled payment arrangements under the regular Medicare program. The experience gained from this demonstration has led HCFA to develop a new bundled payment demonstration that expands the concept to a group of orthopedic and a group of cardiovascular procedures. The Participating Centers of Excellence Demonstration for Orthopedic and Cardiovascular Services is expected to be implemented at selected hospitals beginning in mid-1997.

Agency sponsor:

Office of Research and Demonstrations

Federal contact:

Armen H. Thoumaian, Ph.D.
PIC ID: 5958 and 5958.1

Performer organization:

The Lewin Group, Fairfax, VA