Care‐coordination: Gain‐sharing Agreements in Bundled Payment Models

We study gain‐sharing agreements in a target price‐minimum quality payment system. Our work is inspired by the Centers for Medicare and Medicaid Services’ (CMS) Comprehensive Care for Joint Replacement (CJR) bundled payment model. In our model, patients receive care from a hospital and a post‐acute care provider. A third‐party payer establishes target levels for total billing by the hospital and provider, and a target on the overall quality of care. The hospital and provider receive fee‐for‐service (FFS) billings during an episode of care, defined as the period that starts with an admission of a patient to the hospital and ends 90 days post‐discharge. The hospital may also receive an incentive payment if total FFS billing by both parties is below the target price and total quality by both parties is above the minimum quality. The goal of the incentive payment is to encourage hospitals to enter into “gain‐sharing” agreements with providers. We model the interactions between the three parties. We show that while using a gain‐sharing agreement might be a “win‐win‐win” scenario for the three parties, good design of the payment scheme by the payer is essential to incentivize a hospital to participate in the bundled payment model (e.g., CJR) and sign a gain‐sharing agreement with the provider. Furthermore, we illustrate that a target price‐minimum quality bundled payment model would be more effective, in care‐coordination, in healthcare settings where the provider is much more effective than the hospital in reducing its billing.