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The Payment Reform Landscape: Bundled Payment

July 2nd, 2014

Getting a good deal for a package price is something we’re all familiar with as consumers.  In health care, that might mean creating incentives for health care providers to improve the continuity and coordination of care, leading to better patient outcomes and lower costs. Paying for a set of services, not “per unit of care delivered’ under the fee-for-service model, is typically called bundled or episode- based payment.

Bundled payment is a single payment to providers or health care facilities (or jointly to both) for all services to treat a given condition or provide a given treatment. Unlike some of the other payment reform models I’ve discussed on Health Affairs Blog, such as pay-for-performance, bundled payment asks providers to assume financial risk for the cost of services for a particular treatment or condition, as well as costs associated with preventable complications.

Payments are made to the provider on the basis of expected costs for clinically defined episodes that may involve several practitioner types, settings of care, and services or procedures over time. When designed to improve value, bundled payment should include clear quality metrics focused on desired clinical outcomes that providers must achieve to maximize their payment.

Today, most bundled payment models are “retrospective,” meaning payers pay providers after they have delivered the care. From a transitional perspective, this makes it possible to build bundled payment on a fee-for-service base, “trueing up” when the episode is over.  This means that the inflationary incentives inherent in fee-for-service are part of the mix. In the future, it is likely that we will pay providers their bundled payments prospectively, making upward or downward adjustments at the end for outliers, quality lapses, and other factors.

How common is bundled payment?

CPR’s 2013 National Scorecard on Payment Reform revealed that, within the commercial market at that time, just 1.6 percent of payments flowed through bundled payment models. However, we know that use of bundled payments is growing in both the public and private sectors. The Centers for Medicare and Medicaid Services (CMS) Bundled Payments for Care Improvement (BPCI) Initiative will pilot bundled payments in almost 100 settings (ranging from hospitals to nursing homes) over the next three years, and the program is expanding further. Both Tennessee and Arkansas are working to implement multi-stakeholder episode-based payment initiatives.

Arkansas, for example, created the Arkansas Health Care Payment Improvement Initiative for both Medicaid and commercial payers for five episodes: perinatal; attention deficit hyperactivity disorder; upper respiratory infection; total joint replacement for both hips and knees; and congestive heart failure. Medicaid and commercial insurers will identify the providers responsible for a patient’s care and then reimburse them for the cost of the episode (retrospectively). Quality data will be collected as well, with an opportunity for shared savings and shared risk depending upon the provider’s performance. The program is just beginning and results are not yet available.

In the private sector, a growing number of health plans are experimenting with bundled payment. PROMETHEUS Payment, Inc., a non-profit bundled payment initiative of HCI3, may be the most well-known of the performance-based bundled payment programs. Developed in 2006, it assigns evidence-based case reimbursement rates (ECRs) to common conditions including depression, type 2 diabetes, and congestive heart failure, as well as common procedures such as total joint replacements and deliveries. A single ECR covers all inpatient and outpatient care associated with a given condition. Several payers and health care systems are still in the early stages of using the Prometheus model to implement bundled payment programs.

Does bundled payment improve the quality and affordability of care?

No widespread study has been completed in the private sector about the quality impact or savings derived from bundled payment.  However, there are some specific small studies that demonstrate its potential impact.

In 2011 CaroMont Health and North Carolina’s largest health insurer, Blue Cross and Blue Shield of North Carolina (BCBSNC), implemented a bundled payment arrangement based on the PROMETHEUS payment model for entire knee replacement. The bundle includes the pre-surgical period of 30 days prior to hospitalization, the surgery itself, and most follow-up care within 180 days after discharge from the hospital. In a one-year pilot, BCBSNC saved about 8 to 10 percent on average per-episode cost.

Geisinger Health System has implemented a unique performance-based bundled payment system called ProvenCare, developed as a way to reimburse providers for coronary artery bypass graft surgery (CABG). ProvenCare achieved notable results for CABG surgery, including a 10 percent reduction in readmissions, shorter average length of stay, and reduced hospital charges. Since the program’s inception in 2006, Geisinger has added the following diagnoses to ProvenCare: elective coronary angioplasty (PCI); bariatric surgery for obesity; perinatal care; and treatment for chronic conditions.

In the public sector, CMS is expanding its use of this payment model with the Bundled Payments for Care Improvement (BPCI) Initiative. Under BPCI, started in 2013, organizations enter into payment arrangements that include financial and performance accountability for episodes of care. CMS has had a good track record with bundled payment; over the life of the ACE Demonstration and Heart Bypass Center Demonstration, Medicare saved $42.3 million on bypass patients treated in the demonstration hospitals.

How and when is bundled payment most likely to work best?

As Rand succinctly explains, when looking at bundled payment models, “Savings will depend on the design of the payment system, the particular services that are bundled, and the performance of the participating system before implementation.” Clearly some types of care, such as a joint replacement, or labor and delivery, lend themselves to the model better than others because they are common and have easily identifiable start and end points.

Not every provider system is well-equipped to participate in a bundled payment arrangement. Some providers have experience with taking full financial risk and can engage in that approach right away. These providers may be more centralized and vertically integrated, and therefore capable of managing a full episode of care in a coordinated fashion. Where providers are decentralized, it may work best to start with a shared savings payment arrangement and work toward bundled payment as the delivery and coordination of care becomes more seamless.

Benefit design matters too. Providers are more likely to organize around bundled payment if they think they will be rewarded with more cases. Benefit designs such as reference pricing, centers of excellence, and co-insurance differentials can help encourage consumers to use providers in bundled payment arrangements. In a paper CPR authored with the Health Care Incentives Improvement Institute (HCI3) last year, we discussed the potential savings that could come from pairing reference pricing with bundled payment arrangements.

While payment methods are usually a matter of discussion for health care providers and the health insurance carriers with whom they contract, some employers and other health care purchasers are getting directly in the game. These purchasers must consider their organization’s culture regarding employee choice of provider; the level of internal resources they have to devote to arranging a direct contract with providers; and how modest or aggressive they want to be in seeking cost savings.

What is next?

Bundled payment has real potential to improve care coordination and quality and reduce costs. Unfortunately, it isn’t quick or easy to implement. Anecdotally, we know that today’s providers and health plans are not well equipped to bundle their claims. Today, identifying and paying for care bundles is a largely manual process, slowing the adoption of this model.

To help employers and other purchasers think through the steps required, CPR has just released a How To Guide for implementing a total joint replacement (hip and knee) bundled payment program. While the Guide is designed to help employers and purchasers, it addresses many of the issues discussed here and may be helpful for plans and providers to peruse as well.

When we release our next National Scorecard on Payment Reform this September, we expect to see a jump in the percent of commercial dollars flowing through bundled payments. This would be encouraging, since bundled payment, if well-constructed and implemented, typically improves the value of health care.

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1 Trackback for “The Payment Reform Landscape: Bundled Payment”

  1. Just What Are "Bundled Payments?" - @BCBSNC
    November 7th, 2014 at 8:37 am

5 Responses to “The Payment Reform Landscape: Bundled Payment”

  1. Robert Burney MD Says:

    For an example of a bundled payment system that has been working for years, look at elective cosmetic surgery. you might also look at the medical tourism industry.
    This will never work unless it is prospective and based on price competition–send out an RFP. That means, of course, you have to define carefully what service you are requesting and the expected result. The providers will be at risk for any complications and will not be paid if the expected result is not achieved.

  2. David Sloan Says:


    A couple of points with regards to your comments:

    1. Ashley pointed out that several bundled payment models have failed. That’s true, but that doesn’t mean it’s a bad system. It just means that some models don’t work for certain reasons. You find the reasons it didn’t work and you improve. That’s the process of innovation, and some failure rate should be expected in the process.

    2. If we all agree that healthcare costs are too high, and that the goal of bundled payment is to lower costs, then shouldn’t it be a good thing that hospitals try to find cheaper options? I mean, isn’t that the way any consumer-based system should work? Obviously you don’t want to utilize options that are dangerous, and you don’t want to compromise overall quality (which is why you measure) but if there is no financial pressure to pursue lower costs somehow, then why would anyone find or develop reasonable options? Bundled payment is a means of applying that pressure.

    3. Your point about the unequal partnership between independent physicians and the hospital is an important one, but that sounds like a problem with specific set-ups. Payment of the docs shouldn’t be the last item on the ledger, as you’ve suggested. I wonder, in the systems you’ve seen, if the docs directly employed by the hospital experience the same issue? If not, then this sounds more like an issue of an independent physician-hospital power struggle issue, and not a problem with bundled payment as a model per say.

  3. Andrew Tompkins Says:

    Ashley hit the nail on the head. This is just another tweaking of the system, like ACOs, that doesn’t have much proven benefit. As long as we continue to have a model where the payer is separate from those delivering care healthcare costs will continue to rise. Lord knows we don’t want the government in control of all of this (see ACA rollout, VA scandal, etc), so either a single payer system that is run by physicians/nurses/policy experts or one where hospital systems have their own health insurance would be the way to go. I prefer the former since it wouldn’t potentially make the independent physician controlled by the hospital system.

  4. john Ratelle Says:

    I am working with several ortho groups using bundled payments and adding a complication risk coverage inside the bundle to create a true bundle that employes can then purchase for both the medical benefits and workers’ compensation programs. This is a trend that is getting the TPA’s and Payor’s challenged in how to process claims and it also reduces their charges for medical bill review services, so they are slow to embrace.

  5. Ashley Elder Says:

    The article does not reveal the fact that several bundled payment trials have failed, many of which took years to implement in the first place. It also does not reveal the negative relationship it can have on independent doctors and patient outcomes.

    Because hospitals receive the payments for services under bundled payment programs, they are in total control of the disbursement of these funds. Independent doctors, who choose to work with hospitals under bundled payment programs, are at the mercy of the hospital for reimbursement and have limited control on when they get paid for services rendered.

    Under this payment program, the doctor is under the hospital’s authority. Participating doctors have minimal control over many aspects of the management of care such as: the quality of care provided by the hospital staff, hospital staffing levels, cleanliness of the facility, infection rates, purchasing, and hospital administration costs. A doctor can do everything correctly, but if adverse effects result from something under the control of the hospital, part of the risk shifts back to the physician. Doctors are paid from what is left of the reimbursement after overhead, staffing, and costs associated with the procedure. At times, this can result in significantly reduced payment for the doctors.

    Hospitals are incentivized to reduce costs. Hospitals can take advantage of their leverage over doctors to encourage the use of cheaper drugs and supplies for the sole purpose of saving money, rather than using those that have proven positive outcomes.

    Hospitals cannot appropriately control their inefficiencies and as such shift additional financial and medical risk to the doctor. At the end of the day, bundled payments do not equate to better care for patients or a mutually beneficial relationship between hospitals and independent doctors.

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