On 9 January, the Centers for Medicare and Medicaid Services (CMS) announced a new payment model, Bundled Payments for Care Improvement (BPCI) Advanced, to provide higher quality and more coordinated care at a lower cost to Medicare for both inpatient and outpatient care.

Under the new bundled payment model, participants can earn incentives on 32 different clinical episodes if the cost for a healthcare provider’s episode of care is under a spending target that factors in quality. The model performance period for BPCI Advanced started on 1 October 2018, and runs through 31 December 2023. Therefore, bundled payments for episodes of care are a growing part of the shift toward value-based reimbursement that will increasingly affect the US medical devices market in the next five years.

The original BPCI initiative was a programme developed by CMS Innovation; through this programme, CMS partnered with hospitals and other healthcare providers to test the effectiveness of new payment and service delivery models. As of 1 October 2017, the BPCI initiative had 1,191 participants, including 306 acute care hospitals, in Phase 2 of the programme, known as the period of performance or “risk-bearing implementation” period (CMS, 2017). According to the Year 3 Evaluation and Monitoring Annual Report from the CMS, the evaluation of the BPCI initiative is far from complete, which makes it challenging to reach conclusions about the overall impact of BPCI. However, the direction the programme will take in the future is clear due to the announcement of BPCI Advanced.

BPCI participants are usually larger, as well as located in more urban and affluent areas, than providers that did not participate, indicating that the key accounts of medical devices companies are likely to be BPCI participants. In addition, healthcare providers are moving to the bundled payment model at different stages, with some adopting early and others waiting until the last minute. As bundled payments start to spread from ortho to cardio and beyond, GlobalData expects that the medical devices markets in more therapeutic areas will be affected during the next five years.

The value-based care models negatively impact the revenue and growth of the medical devices industry. The traditional fee-for-service model tends to increase unnecessary medical services because providers are incented to offer more services in return for revenue. In addition to decreasing unnecessary procedures and medical services in hospitals, BPCI is also intended to coordinate care between hospitals and other providers. This will reduce potentially unnecessary services, which will affect the overall volume of the US medical devices market. Additionally, pricing pressure is another key consequence of the shift to bundled payments, making the growth of the medical devices market slower than before.

The impact of value-based care varies between the different medical device markets. The BPCI initiative has seen various effects on different clinical episodes. The most notable impacts are on episode payments for major joint replacement of the lower extremity.

A study published in 2017 has shown that there was a decrease of $5,577 (20.8%) in total spending per episode of lower-extremity joint replacement surgery between July 2008 and June 2015 at San Antonio’s Baptist Health System, which was participating in BPCI (Navathe et al., 2017). Most of the hospital savings came from medical devices such as implants and supplies, which decreased to an average of $1,920.68 (29%) per case.

BPCI Advanced is likely to affect new devices markets that have technology that cannot clearly be demonstrated to have better outcomes and/or lower costs. In the long run, the key factor to win the market will be the cost effectiveness of devices. This means that manufacturers must add significant value to the overall clinical outcomes and meet quality metrics, especially the effectiveness of the procedure in a 90-day period after the procedure. Even if the new product receives regulatory approval, if it fails to demonstrate critical economic and clinical advantages against existing products, purchasing decisions can be significantly less favorable.

Manufacturers need to demonstrate value to a new and broader set of stakeholders, including hospital administrators, payers, employers, and patients as consumers for specific devices. Therefore, GlobalData expects this “proof-of-value” competition to become intense in the medical devices industry over the next five years.