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Bundled Payment: Learning From Our Failures

August 5th, 2014

Seeing “IHA” and “Fails” together in the title of an article in the nation’s premier health policy journal was not an outcome that we anticipated when the bundled payment initiative described by M. Susan Ridgely et. al in the August issue of Health Affairs was launched.

The key objective of the Integrated Healthcare Association (IHA)’s initiative was to implement over 20 payer-provider bundled payment contracts, resulting in completion of more than 500 bundled cases within the first two years of the project. During the third year of the project, researchers were to conduct both a clinical and an economic evaluation to test how bundled payments affect the quality and cost of care, in conjunction with an implementation evaluation to determine the scalability of this approach.

Looking back, these targets seem highly optimistic; but at the pilot’s launch, both IHA and its stakeholders had a number of reasons to be confident. The pilot was well funded by a three-year grant from the Agency for Health Research and Quality (AHRQ), building on two rounds of planning and feasibility work over four years funded by the Blue Shield of California Foundation and the California HealthCare Foundation. In addition, there was a high level of interest and enthusiasm among a core group of providers and health plans that had a prior history of collaboration in a California physician pay for performance program.

As we approached the end of the second year of the pilot, only a few contracts had been executed between plans and providers, yielding a small number of bundled cases completed. Although some progress was being made on additional contracts, it was clear that we would not achieve the quantitative goals we had envisioned. We shared this status update with AHRQ, which had funded our demonstration and evaluation.

Recognizing that we were unlikely to execute the targeted number of contracts within the grant period, AHRQ suggested that we focus our efforts on another component of the grant-funded activity: supporting the researchers conducting the implementation evaluation, fully documenting all that could be learned from this experience, and broadly disseminating the results. In that way, other payers and providers could benefit from our experience and make more rapid progress on their own bundled payment initiatives.

While it is difficult to acknowledge and accept failure, particularly in a widely-read and well-respected public forum such as Health Affairs, “learning from failure” must be more than just a platitude in the high stakes of health reform. To be clear, we agree that the process and outcome of this pilot were accurately described by the evaluators. However, it is important that the results be interpreted not as a death sentence for bundled payment, but as an early, hard-fought battle offering important lessons.

As the implementation team, we were very interested in the evaluation’s “Lessons for Future Bundled Payment Programs” that could be shared with others – and somewhat disappointed with the brevity of the findings. Project staff and partners worked diligently on each of the issues identified by the evaluators (e.g., “identify technical solutions for administering bundled payment”); the issues, efforts undertaken, and results are described in detail in Wesley Kary’s excellent white paper.

The problem isn’t that we didn’t anticipate these somewhat obvious issues; the problem is that they are very hard to solve in a collaborative way that works for all of the partners in a voluntary initiative. Indeed, then-IHA staffer Emma Dolan’s blog post describes the real-time challenges faced by the project team as the demonstration entered its second year. In the spirit of providing specific guidance to those interested in pursuing this pathway, we offer a few hard-won recommendations.

Start Retrospective, Then Transition to Prospective

A key implementation decision, not highlighted by the evaluators, is whether to adopt a prospective versus a retrospective payment model for bundled payment. The IHA initiative chose the former — prospective payment is well established in California, and stakeholders involved in the pilot felt that a retrospective payment approach (in which fee for service claims would continue to flow and be reconciled later to determine shared savings) would not fully test the impact of bundled payment.

Any bundled payment model requires considerable effort by clinicians and hospital administrators to redesign the approach to care delivery, but a prospective payment model also faces off against existing legal, regulatory, insurance benefit design and claims payment systems in ways we did not fully appreciate.

Prospective bundled payment raised numerous concerns for California regulators charged with protecting consumers, including whether providers were assuming insurance risk, how existing copayments and coinsurance would be applied, and whether consumers should be made aware of the payment arrangement. Nor did we anticipate the difficulty commercial payers would face adjudicating prospective bundled payments.

Based on our experience, we recommend that those interested in testing bundled payment consider initially testing the bundled payment model using a retrospective payment approach. As reported in a recent issue brief by HCI3, retrospective payment is the most common approach currently in use, easing the regulatory and administrative burdens in the early going. It also offers the advantage of developing a reliable financial baseline from which a prospective payment amount can be fairly negotiated. Importantly, this recommendation should not be interpreted as backing away from prospective bundled payment as the ultimate goal; rather, it is a practical, transitional step.

Put Care Redesign at the Center of Bundled Payment Implementation

Bundled payment is generally touted as a promising example of payment innovation — but the true benefit of bundling payments derives from reengineering care delivery, not from combining separately paid line items into a single tab. Bundled payment provides the impetus, but the work of care redesign must follow if the promise of bundled payment is to be realized: reductions in unnecessary care, reductions in readmissions, lower risk and complication rates for patients, and improved patient function and outcomes.

This important work can only be successful with strong clinical leadership backed by committed management. This formula was effectively demonstrated by the Hoag Orthopedic Institute. Hoag was an active participant in the bundled payment demonstration that undertook a major initiative to redesign care for total hip and knee replacement aimed at both improving care and ensuring that bundled payments would cover the costs of these procedures.

Care redesign requires significant attention, and can easily be overwhelmed by the myriad of other administrative details necessary to implement bundled payment. It is with this challenge in mind that, in its own Bundled Payment for Care Improvement (BPCI) initiative, Center for Medicare and Medicaid Services (CMS) has put equal emphasis on the care redesign and administrative aspects of bundled payment.

Target Markets in Which Bundled Payment Represents a Significant Step Forward

It may be tempting to look at the results reported by Ridgely et. al and conclude that if a group of experienced innovators can’t make bundled payment work in California, where prospective payment is historically embedded, its prospects seem dim elsewhere. In reality, the deep experience in the California market with prospective payments — capitation in particular — worked against the pilot.

In order for HMOs to participate in the initiative, they would have had to unwind existing capitation arrangements to allow for prospective bundled payments. This essentially limited participation in the demonstration to PPO contracts. In addition, California providers and health plans were deeply engaged in the development of Accountable Care Organizations (ACOs) and related contractual arrangements. Total population management, the holy grail of the ACO movement, was a more logical extension of existing capitation payment arrangements. To some organizations, particularly non-hospital based physician organizations, bundled payment appeared to be a distraction.

In many areas of the U.S., where the health care delivery system is highly fragmented and reimbursement remains largely on a fee-for-service basis, bundled payment offers a more immediate on-ramp to value-based payment. For example, the state of Arkansas tackled retrospective bundled payment as its initial foray into value based payment based in part on a relatively fragmented delivery system with low risk-bearing among provider systems.

Follow the Leader: CMS

One of the IHA demonstration’s core limitations should be familiar to anyone who has ever championed a voluntary initiative: it requires agreement from multiple partners, each with a small slice of plan membership and patient population. This underscores the importance of Medicare as a driver of bundled payment, based on its large enrollment and high utilization rates – particularly in procedures such as joint replacements, a favorite target of bundled payment. Commercial payers often follow Medicare’s lead, and strong leadership from CMS is essential to catalyze the investment of commercial payers in large-scale bundled payment implementation.

Fortunately, CMS has clearly indicated that bundled payment is an important element of its value-based purchasing strategy. This much is clear from CMS’s implementation of the ACE Demonstration Project and the more recent and larger-scale Bundled Payments for Care Improvement. Further evidence of this leadership is the under-the-radar national implementation of bundled payment by CMS for dialysis. This initiative has offered extensive results, both positive (lower costs, decline in heart attacks and strokes) and negative (higher blood transfusions initially at certain locations), as recently articulated by Jonathan Blum as he departed CMS.

For bundled payment to take hold on a national scale, CMS must stay the course with these initial efforts and ultimately develop a standard set of bundled payments, ideally prospective. This will take time – and there will certainly be other initiatives with disappointing results along the way.

Owning Our Failure – And Our Contribution

For those of us who have worked on this initiative, the sting of failure has long since worn off, replaced by a commitment to sharing both our tangible materials and our insights.

Among them, the demonstration project:

  1. Catalyzed payers and several established technology vendors to develop and test payment software to accommodate bundles, inspiring at least one national health plan to test and implement new software for this purpose.
  2. Activated interest among California provider organizations and health plans in clinical integration and value-based payment strategies.
  3. Prompted state regulators in California to articulate their concerns with prospective bundled payment, which in turn helped others understand and anticipate regulatory issues in their respective states.
  4. Produced ten well-vetted and fully-specified bundles, available to serve as a starting point for other innovators attempting to define and implement bundled payment.
  5. Created specifications and methods to analyze retrospective cost data to understand episode costs and price bundled payments.
  6. Produced contracting models and templates which have been used by payers in their own bundled payment initiatives.
  7. Engaged leading provider organizations in the important and difficult process of care redesign.

Notwithstanding the failure label, we believe the demonstration was a success in some significant respects. Contracts were signed, and patients seen; providers were paid prospectively for clearly-defined episodes of care, and this activity has continued beyond the end of the demonstration project. In spite of the challenges, a policy roundtable that we convened at the close of the initiative generated clear consensus among participants that the effort was worthwhile – and that payers, providers, and policy makers should continue to pursue bundled payment.

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7 Responses to “Bundled Payment: Learning From Our Failures”

  1. Dr. Amita Rastogi Says:

    Health Affairs has an important responsibility to publish perspectives in the correct light. It would have been nice to have Dr. Tom Williams and Jill Yegian’s perspective published side-by-side in the same issue of Health Affairs. Health Affairs is an important Health policy journal that we all read with respect and it is a shame when only one side of the story is made available in the published copy.

  2. Joane Goodroe Says:

    IHA’s efforts were NOT a failure. Instead, there is greater understanding of the road blocks that exist in moving to bundled payments with a diverse group of providers and payors. Current bundled payments in the commercial market have worked, but they involve one payor and one hospital at time. In my experience, confidential bundled payment pricing in the commercial market is essential. In addition, providers want to see a potential for volume growth for the extra effort. Payors want guaranteed savings. Medicare’s effort is working for several reasons that would have been hard to duplicate in the IHA effort. A hospital’s largest payor is usually Medicare. Sometimes more than 50% of the volume in orthopedics is Medicare. This makes it easier for providers to determine the benefit of moving to bundled payments compared to risk. Secondly, Medicare’s payment for services is not negotiated. Instead, providers are working from current reimbursements with guaranteed savings to Medicare. Although there is financial risk in the Medicare project, providers have engaged to have the opportunity to align incentives to drive clinical change. In the current commercial market, there is too much fragmentation in pricing and volume for a large multi-payor and provider effort to succeed.

  3. tom Wilson Says:

    I am the Managing Director of the Monterey Peninsula Surgery Centers (MPSC). We have 5 facilities in Monterey and Santa Cruz counties performing over 15,000 surgical cases annually including THA, Partial and TKA, and major spine surgery. MPSC was invited to participate in the IHA Bundled Payment Pilot program in the second round approximately 12 months after the initial launch. Within about 4 months we executed a bundled payment agreement with Blue Shield of California modeled after the IHA prototype. During the remaining 18 months of the program, MPSC performed over 100 bundled joint replacement and/or repair surgical cases generating an estimated 40% savings to BSC and their members. There were neither infections nor hospitalizations with any of these cases.
    The IHA program has generated lasting results. We currently bundle 45 different case types including total joints replacements, cervical fusions, lumbar laminectomy, hysterectomy and thyroidectomy with two commercial carriers and self-paying patients. Last year we performed over 500 bundled cases.

    Bundled payments work well for us and the payers/patients, because it is driven by the surgeons who control about 80% of the cost of medicine (what, where, how and when, etc.). Under the IHA contract, the providers are placed at risk for readmissions and other related complications. Since the surgeons own the facility, the financial incentives are aligned to encourage all providers to adopt best practices (including standardization of supplies) yielding the greatest overall value. This reduces complications, drives down the cost of expensive implants and other supplies as manufacturers will reduce price for increased market share. The IHA pilot clearly demonstrated that ASCs will rapidly adopt bundled payment programs and this methodology is among the best strategies to control the costs of elective surgery.

  4. Andrea Ducas Says:

    Thank you for this fantastic post, Tom & Jill.

    I agree with Harold, this should absolutely be required reading for anyone undertaking a payment change effort.

    Your lessons are highly consistent with what we’ve been learning through our investments at RWJF: payment and delivery system reform must go hand in hand; local market characteristics (among other characteristics) should very much be a determining factor when zeroing in on the best payment and delivery change “bet; and, importantly, these efforts don’t unfold overnight. They require substantial time to both understand baseline data and inform reasonable benchmarks and goals, but also to establish trust and a shared sense of responsibility for the work. We are learning every day about how especially important access to reliable data is in order to inform and empower both payers and providers, and help ensure a glidepath to successful transformation work.

    I’ll go ahead and take advantage of the captive audience here to share a fabulous piece that Bailit Health Purchasing put together for us last fall on the many facilitators and barriers to payment reform:, and throw out a mini commercial for some of the resources and lessons coming out of our grantmaking–we’ve experienced more than our share of failing forward opportunities. Interested folks can find that information here:

  5. Harold Miller Says:

    Tom Williams and the IHA staff deserve everyone’s thanks for taking on the task of designing and implementing a significant change to the current, broken payment system. Rather than just talking about payment reform, they actually did it, and rather than making minor tweaks to the fee-for-service system and calling it payment “reform,” they took on a much more fundamental redesign of payment, not only bundling payments to multiple providers but adding a warranty to help protect patients against complications. Moreover, they did it through a collaborative effort between payers and providers in order to find a win-win approach rather than the win-lose approach that is pursued all too frequently around the country today.

    The lessons they learned and shared as well as the information and lessons described in the excellent paper by Susan Ridgely and her colleagues will be invaluable to physicians, hospitals, employers, health plans, and patients around the nation as they move forward on efforts to truly change payment for other types of conditions.

    It is unfortunate that the IHA project is being labeled a “failure,” however, since IHA did not fail to achieve agreement among multiple stakeholders about what a better payment model should look like, and it did not fail to actually implement that payment with at least some providers and payers. What failed was the willingness of enough payers and providers to participate in order to achieve the critical mass of change needed to support a significant redesign in care.

    Tom’s blog post should be required reading for payers, providers, and policy-makers everywhere. But I disagree with one point: bundled payment – or any kind of payment reform – should not be the impetus for changes in care. Care redesign should be the impetus for payment reform. Many physicians and hospitals know how services to patients could be redesigned to improve quality and lower cost, but current payment systems create insurmountable barriers to implementing those changes, either because they don’t pay adequately or at all for services that would improve care for patients or because they financially penalize doctors and hospitals when they do change care. Payment reform should be designed to remove the barriers to changes in care that are designed by physicians and hospitals, not to simply combine services together in bundles and hope that something different happens. In some cases, bundled payment for a procedure may be the answer, in other cases, a condition-based payment that allows a choice of procedures would be better. Too many payers today are implementing pay-for-performance, shared savings, and “value-based payment” systems with no effort to understand what is really needed to improve care or to fix the true barriers in current payment systems.

    The IHA project deserves applause for recognizing that care redesign and payment reform must go hand in hand. The most unfortunate thing about the project is that physicians and hospitals who identified ways to improve care could not implement them for patients who could benefit because the payment changes were not implemented by enough payers.

  6. Thomas Reid MD PhD FACP Says:

    We keep repeating an effort expecting a different outcome. Bundling must be shelved for good.

  7. Sarah Thomas Says:

    Kudos to the IHA team for sharing perspectives and lessons from its bundling projects. Innovation calls for multiple failures and to learn from them and these insights will be invaluable for payment innovation projects going forward.

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