Improving target price calculations in Medicare bundled payment programs

Abstract

ObjectiveTo compare the predictive accuracy of two approaches to target price calculations under Bundled Payments for Care Improvement‐Advanced (BPCI‐A): the traditional Centers for Medicare and Medicaid Services (CMS) methodology and an empirical Bayes approach designed to mitigate the effects of regression to the mean.Data sourcesMedicare fee‐for‐service claims for beneficiaries discharged from acute care hospitals between 2010 and 2016.Study designWe used data from a baseline period (discharges between January 1, 2010 and September 30, 2013) to predict spending in a performance period (discharges between October 1, 2015 and June 30, 2016). For 23 clinical episode types in BPCI‐A, we compared the average prediction error across hospitals associated with each statistical approach. We also calculated an average across all clinical episode types and explored differences by hospital size.Data collection/extraction methodsWe used a 20% sample of Medicare claims, excluding hospitals and episode types with small numbers of observations.Principal findingsThe empirical Bayes approach resulted in significantly more accurate episode spending predictions for 19 of 23 clinical episode types. Across all episode types, prediction error averaged $8456 for the CMS approach versus $7521 for the empirical Bayes approach. Greater improvements in accuracy were observed with increasing hospital size.ConclusionsCMS should consider using empirical Bayes methods to calculate target prices for BPCI‐A.