NOVATO -- Novato Community Hospital announced it is one of seven California providers to partner with the Centers for Medicare and Medicaid on bundled payments, an initiative under the Affordable Care Act that seeks to lower health care costs while improving quality.

Under the new model, known as the Bundled Payments for Care Improvement Initiative, the Sutter Health affiliate will enter into payment arrangements with CMS that focus on financial and performance accountability for care related to hip and knee replacement surgery, according to the hospital.

The "episode of care" that will fall under bundled payments includes the inpatient stay in the 47-bed acute-care hospital and all related services 30, 60 and 90 days after the hospital discharge. This is a three-year pilot project.

“For patients, this means a hospital is coordinating their care in a completely new way -- from the moment they enter the facility for joint replacement surgery through the crucial recovery time after they leave the hospital," said Grant Davies, CEO of Sutter Health's North Bay Hospitals.

The bundled payments  initiative includes four models of bundling payments, varying by the types of health care providers involved and the services included in the bundle. Novato Community is using the second model. Depending on the model type, CMS will bundle payments for services beneficiaries receive during an episode of care, encouraging hospitals, physicians, post-acute facilities and other providers as applicable to work together to improve health outcomes and lower costs.

The approach differs from how Medicare traditionally makes separate payments to providers for each individual service provided, rather than the entire episode of care and the outcome, according to the CMS. This method "can result in fragmented care with minimal coordination across providers and health care settings," the agency said.

It can also lead to payments that reward the quantity of services versus the quality and type of care. Bundled payments can help properly align incentives for providers to work together across all specialties,  in place of the current, disparate model, according to the CMS.

Providers participating in bundled payments will agree to provide CMS a discount from expected payments for the episode of care, then the provider partners will work together to reduce re-admissions, duplicative care and complications to lower costs through improvement, according to the CMS.

Today’s announcement marks the start of phase 1 of models 2, 3 and 4 of the bundled payments. In the first phase, from January to July of this year, more than 100 participants partnering with over 400 provider organizations will receive new data from the CMS on care patterns and engage in shared learning in how to improve care.

Phase 1 participants are generally expected to become participants in phase 2, in which approved participants opt to take on financial risk for episodes of care starting in July, pending contract finalization and completion of the CMS’ standard program integrity reviews.

“The objective of this initiative is to improve the quality of health care delivery for Medicare beneficiaries, while reducing program expenditures, by aligning the financial incentives of all providers,” said CMS acting Administrator Marilyn Tavenner in a statement.

The Novato hospital is well-positioned to benefit from bundled payments, according to Mr. Davies of Sutter Health.

“Novato Community Hospital is uniquely qualified to spearhead this effort because of its robust orthopedics program," he said in a statement. "It includes nine orthopedic surgeons with specialties in sports medicine, upper and lower extremity procedures, total joint replacement, integrated sports fitness and physical therapy, and strong relationships with community providers."

“Improving quality and lowering costs is the right thing to do for our patients and our community,” he added.