New TEAM Payment Model Brings Opportunities, Challenges for Surgeons and Hospitals

Surgeons practicing in hundreds of hospitals nationwide will see changes to the way Medicare pays for some of their patients starting in 2026.

Regulations finalized by the Centers for Medicare & Medicaid Services (CMS) in August 2024 included a new Transforming Episode Accountability Model (TEAM) focused on five surgical episodes. The new model will create opportunities for quality improvement and care redesign to achieve shared savings, but it also will include risk for losses to participating hospitals and potentially physicians. Initial analyses performed by Brandeis University and the Institute for Accountable Care (IAC) anticipate that up to two-thirds of participating hospitals will lose revenue under TEAM (see Figure below).¹

By understanding and implementing TEAM effectively, surgeons and quality partners stand to make substantial gains in care quality while reducing operating costs and receiving reconciliation payments from CMS. Conversely, hospitals and surgical teams who fail to prepare for the model could be in for an unwelcome surprise in 2026.

The ACS is currently exploring ways to help participants understand how they likely are to fare based on their current practice model and identify how best to prepare for success in the model. Here is what we know about the model so far and what the ACS is doing to prepare members and quality partner hospitals to succeed.

What Is TEAM?

TEAM is a new value-based bundled payment model. The model examines spending and quality at acute care hospitals for Medicare patients undergoing coronary artery bypass grafting (CABG), surgical hip and femur fracture treatment (SHFFT), lower extremity joint replacement (LEJR), spinal fusion, and major bowel procedures. The model will be mandatory in 741 hospitals² and spread throughout 188 geographic regions. TEAM begins on January 1, 2026, and runs through the end of 2030.

The model covers payment for episodes of care initiated when a patient is admitted to a hospital or undergoes a qualified operation in the outpatient setting and extends 30 days after discharge.³ The bundled payment will cover all items and services covered under Medicare Part A and B during the episode related to the anchor procedure or hospitalization. The risk structure of TEAM is designed to ensure cost savings by CMS, and its mandatory nature creates a heightened sense of urgency for included facilities to prepare.

Why Is TEAM Being Tested?

Healthcare spending in the US has increased from roughly $430 billion in 1970 by a factor of 10 to $4.5 trillion in 2022, and is projected to increase by more than 70% to $7.7 trillion in 2032.⁴ Increasingly, alternatives to the typical fee-for-service payment model have been sought to incentivize disease prevention and reduction in healthcare costs to slow the inflation in overall spending. These changes impact reimbursement and substantially change how patients, peers, regulatory bodies, and payers evaluate surgical care.

Nearly a decade ago, the US Congress passed the Medicare Access and CHIP Reauthorization Act (MACRA) in order to create a pathway toward value-based care. MACRA established the Quality Payment Program (QPP) to incentivize surgeons and other clinicians to focus on increasing quality and efficiency in traditional fee-for-service (FFS) Medicare and, ultimately, to transition to Advanced Alternative Payment Models (AAPMs).⁵

Participation in AAPMs can reward clinicians with incentive payments for performing well on quality and cost metrics and exempt them from certain CMS reporting requirements. An important feature of AAPMs is that the qualified participants must share a level of financial risk associated with participation. This feature is thought to incentivize participants to actively seek ways to lower the cost of providing care. That risk, however, is paired with quality incentives, which aim to push the quality of care delivered higher, thus providing a higher level of value to the care provided.⁶

One common type of AAPM is the bundled care model, which in its most basic level, combines reimbursements for charges for a defined episode of care into a single payment. Bundled payments can be applied either prospectively or retrospectively to either Medicare Part A charges (hospital services) or Medicare Part B charges (physician services); alternatively, it can combine payments for both Parts A and B.

CMS has tested several bundled payment models for surgical care in recent years, and currently two CMS models are in operation—the Bundled Payments for Care Improvement Advanced (BPCI-A) Model and the Comprehensive Care for Joint Replacement Model. Most previous models tested by the CMS Innovation Center have not resulted in net savings for Medicare, but some have reduced the cost of care without adversely impacting quality scores.⁷

For example, the BPCI Model (predecessor to the current BPCI-A) did reduce the cost of healthcare delivery for participants, but on average, CMS spent more money on incentive payments and administering the program than it saved in reduced charges. TEAM is built on the lessons learned from earlier models and is designed to overcome some of their perceived shortcomings to achieve meaningful cost savings while incentivizing better care coordination between hospitals and clinical teams.

Three Tracks for Participation

TEAM offers three tracks for participation with varying financial upside and downside risk levels depending on hospital characteristics.⁸ By bundling inpatient and outpatient care together, CMS hopes to facilitate increased cooperation between acute care hospitals, outpatient providers, clinicians, and skilled nursing facilities to improve on cost savings seen with BPCI-A. The quality score methodology has been updated, including more measures than the BPCI, although it still lacks true episode-specific outcome measures and patient-reported outcome measures for most episodes­—the addition of which may improve sensitivity for changes in patient outcomes under the model.

Under TEAM, hospitals, surgeons, and downstream providers continue to bill fee-for-service throughout the year. Before the beginning of the performance year, CMS issues preliminary target prices for each Diagnosis Related Group (DRG) for the health system to measure itself against. These preliminary episode targets are determined prospectively using regional prices for covered episode types and related DRGs during a weighted 3-year baseline (benchmark period), and are re-calculated annually.

CMS does additional manipulation, including capping these preliminary regional target prices at the 99th regional percentile, normalizing them toward the national risk-adjusted mean, and applying a trend factor to adjust preliminary prices in the direction that regional prices have trended in the benchmark period. The target price is further reduced by a discount factor of 2% for LEJR, SHFFT, and Spinal Fusion episodes and 1.5% for the CABG and Major Bowel Procedure episodes.⁹ This discount factor builds in savings for the Medicare program but means that participants will need to be more efficient to succeed.

The agency will carry out a retrospective reconciliation on claims after the end of each performance year. This process takes the initial preliminary target price and applies risk-adjustment factors and quality measures to generate a reconciliation price. The actual dollar amount billed for the episode during the performance year is then subtracted from the reconciliation amount, providing the model with its incentive to reduce costs.¹⁰ Table 1 on this page provides an example of how this reconciliation process might look for a theoretical hospital for one DRG across all five episode categories.

In this example, the hospital was inefficient and, on average, was more expensive in CABG, LEJR, spinal fusion, and SHFFT, but beat target prices in major bowel procedures. The combined effect is a net loss compared to the target. The fictional LEJR data will be carried through the rest of this article to demonstrate mechanisms contained within the model for reconciliation and quality adjustment.

Model Is Risk-Adjusted

Risk adjustment is calculated for each individual episode, with different components for each surgical category. This risk adjustment is composed of hospital characteristics, patient characteristics, and specific high-risk diagnosis codes that the patient may have received in the period 3 months prior to the episode start date. Coefficients for each risk factor are calculated annually by CMS through a national linear regression model to identify the expected marginal impact of each risk factor. The risk-adjusted reconciliation target prices are then normalized with national data from the participation year. A retrospective trend factor also is applied to account for increasing or decreasing prices.¹¹

Hospital Participation Tracks

Each of the three tracks have different levels of quality modification, final reconciliation modification, and eligibility criteria. Track 1 allows for upside benefit capped at 10% of the aggregate target price through reconciliation and quality modification with no downside risk. This is the default track for all hospitals in 2026 (performance year 1). Only safety net hospitals are eligible for track 1 in performance years 2 and 3.

Track 2 carries both a limited financial upside and risk for penalties which are capped at 5%. This track is available in performance years 2 through 5 for Medicare-dependent hospitals, rural hospitals, safety net hospitals, sole community hospitals, and essential access community hospitals. Track 2 is available for all hospitals for all performance years and is the default track for years 2 through 5 for hospitals that don’t qualify for tracks 1 or 2.

Track 3 carries the highest amount of financial risk during reconciliation, but also allows for the highest level of financial rewards with both capped at 20% of the aggregate reconciliation amount.¹²

Quality Score Calculation

After calculating the reconciliation amount, CMS applies a quality score modifier to change the final reimbursement or repayment amount. The components of the quality score are listed in Table 2 on this page. The raw quality measure scores are then scaled using national percentile metrics, including all TEAM and non-TEAM participants. The scaled quality scores of each measure are then weighted per institution and summed to determine the hospital’s composite raw quality score (see Table 3 below).¹³

For track 1, the quality score can adjust reconciliation payments by a maximum of 10% for a positive reconciliation amount or a minimum of 0% for a negative reconciliation amount. Similarly, the reconciliation amount in track 2 can be adjusted up to a maximum of 10% or a minimum of -15% and in track 3 up to a maximum of 10% or a minimum of -10%. These financial benefits and risks laid out in TEAM are applied by CMS at the hospital level but are allowed to be shared with providers (downstream participants) within the parameters set by the model. If downstream participants participate in gainsharing or loss-sharing agreements TEAM can qualify as a MIPS-APM or an AAPM, incentivizing participation by surgeons.¹⁴

Final Reconciliation Amount

After CMS calculates the reconciliation target price (as described in the risk adjustment section), they modify this price by multiplying it by the composite quality score percent modifier. This price is then subtracted from the original reconciliation amount to get the quality-adjusted reconciliation amount (QARA) (see Table 3 below). The QARA stop-gain and stop-loss capping is based on track. Track 1 reconciliation payments are capped at 10% gain and 0% loss against the aggregated reconciliation target prices (NPRA) (see Table 4 below). Track 2 is capped at 5% gain or loss. Track 3 is capped at 20% gain and 20% loss.¹⁵ This final amount is referred to as the net reconciliation payment amount and is paid to the hospital if positive or is owed to CMS if negative.

Bottom Line

The quality score is a tool that will help hospitals to benchmark themselves against other institutions and improve patient outcomes but ultimately, it is unlikely to make or break financial success under TEAM. Most of the revenue to be made or lost during reconciliation will come from staying under the preliminary target prices issued by CMS, and by having a favorable risk factor profile. The quality modification in the model serves to adjust positive reconciliation amounts downward (with higher quality scores causing decreased reductions in payments), or to adjust negative reconciliation amounts upward (with higher quality scores leading to increased reductions in payments owed back to CMS). Institutions that will be the most financially successful under TEAM will have to find ways to reduce costs of care in the inpatient and outpatient settings or postdischarge, while also achieving acceptable quality results.

The model also includes measures to help streamline the care continuum. Participants will be required to ensure primary care referrals upon discharge (and may partner with ACOs through gain/loss-sharing to encourage alignment of financial incentives), and the model eliminates the “3-day rule” for qualification for subacute rehab.

Finally, after model year 1, TEAM offers a long overdue voluntary decarbonization and waste reporting initiative with individualized feedback, as well as mandatory equity reporting. While the ACS has called for more meaningful quality measurement and other positive changes to the model, TEAM does represent a step toward the type of more patient-centered care for which the organization has advocated.

By creating shared goals and incentives for surgeons, hospitals, postacute care, and the full slate of physicians and clinicians involved in each care episode, the model has the potential to cut through the confusion created by myriad competing quality and payment incentives currently in place. If TEAM manages to focus facilities and providers on shared quality goals to succeed, it could create a powerful incentive for hospitals to invest in important patient safety and quality initiatives that are frequently not prioritized in fee-for-service payment models.

What’s Next?

Participating hospitals should begin preparing for the arrival of TEAM as soon as possible. While CMS has not yet offered definite rules on some of the finer details, surgeons and hospitals can take steps today to ensure success from day 1.

The first step is to gain an understanding of how the model works, which will dictate how well participants are able to anticipate its effects on their systems. Participants should begin to study their own case volumes to identify the areas and service lines most likely to be affected. For example, a hospital specializing in lower extremity joint replacement that does not have cardiac surgery should focus on understanding their patient demographics and individual risk factors that are associated with LEJR, as well as their performance on those quality components.

On the inpatient side, hospitals should begin to evaluate their care pathways for specific DRGs to identify opportunities for improvement. In the postdischarge phase of care, hospitals should begin to collaborate with postacute care facilities to engage in the same care analysis.

The ACS in cooperation with Brandeis University and the IAC has developed initial regional reports to help ACS members and quality partners understand how their facilities might be financially impacted based on the criteria in the IPPS final rule. The College also is exploring options for more detailed, individualized reports that would include estimates of the target prices for each eligible episode category, as well as risk profiles and quality scores for each quality partner. These reports would be generated based on claims data obtained from CMS’s Virtual Research Data Center and could be further broken down into individual quality score components, as well as provider-level information. The ACS will continue looking for ways to help its members and their hospitals succeed in the transition to team-based, value-driven care.

Dr. Geoffrey Hobika is a PGY2 surgical resident at the University at Buffalo in NY. He is spending his protected academic research time as an ACS Clinical Scholar and studying surgical health policy.

References

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