The Benefits of Bundled Payments

bundled zip ties

If you’re a supply chain leader and you can help implement a bundled payment program, it’s hard to find a reason not to do it. A program that is focused on creating mechanisms to affect physician preference and improve alignment can make a huge impact.

As part of the Patient Protection and Affordable Care Act (PPACA), the Centers for Medicare and Medicaid Services (CMS) presented the “Bundled Payments for Care Improvement” initiative. The program creates a series of positive incentives that encourage provider innovation in cost reduction, clinical integration and care management.

The program has four versions, called models. The models function by taking a discount and focusing on creating cost efficiencies. Gains can be shared among providers, but losses are limited by a fixed discount and normal billing. The focus of the program is to create cost efficiencies through alignment. In past demonstration programs, the outcomes have been very good.

Some facilities reduced episode costs by as much as 70 percent.

The first three bundled payment models are retrospective payment arrangements where providers are paid a discounted Medicare fee-for-service rate. Model 4 is based on prospective payments. Providers may choose to implement more than one model.

Providers apply for participation in the program by doing analysis and defining “care-episodes,” which can be virtually any high-volume inpatient episode.

How the Models Work

With Model 1, the episode of care is an inpatient stay in a general acute-care hospital. Doctors and hospitals are paid as normal (physicians under Part B, Hospitals under Part A), but at a negotiated discounted rate for the episode. The discount rate is determined through analysis and the establishment of a target price for the episode. Procedures and cases are then performed over the demonstration period (at least one  year).

During the program period, if the provider hits or performs better than the target price, gains can be shared. These gains will come from cost reduction.

For example, if a joint replacement surgery is currently reimbursed at $7,500, but the provider, in collaboration with physicians, determines that the total case can be done for $6,500, that price could be offered. If accepted, procedures would be performed and the hospital would be paid the negotiated rate, $6,500 in this example.

Physicians would be paid their professional fee (also discounted). However, if the cost of the procedure is driven down to $5,000, the hospital could legally share those cost efficiencies with physicians.

With Model 2, the episode of care involves an inpatient stay and post-acute care for a minimum of 30 or 90 days after discharge (at the provider’s election). The aim of this model is to produce savings by reducing cost in two episodes, opening the opportunity to apply a potentially more costly intervention in the acute-care setting that reduces downstream costs. Overall savings can be shared among providers.

Model 3 focuses on post-acute providers and aims to reduce readmissions. Savings can be shared among providers.

It’s important to remember that many of these case categories are marginally profitable or already unprofitable. Taking reduced reimbursement would therefore seem like a bad idea. However, if coordinated action could have an effect on costs, and the prohibition against paying physicians to change their behavior is lifted (as under this program), opportunities abound. Right now, using a less costly procedure tray, implant and more conservative intervention are all uninteresting to many physicians since their reimbursement incentives are aligned with the opposite behavior. Similarly, exposing the health system to the claimed benefit of a more expensive intervention in one setting that reduces costs in another is also possible. For example, robotic surgery has higher acute-care costs, but claims lower downstream costs.

Model 4 is the only prospective model in this program. This model establishes a comprehensive bundled payment upfront. CMS proposes to pay a single fixed amount for all services by all providers during the stay. The hospital would pay the physicians and all other providers out of the bundled payment and submit “no pay” claims to Medicare for record-keeping purposes.

Overall, the bundled payment demonstration project seeks to do two things:

1. Allow providers to use their own financial resources to re-shape physician and partner organization behavior without violating fraud and abuse regulations.

2. Allow the CMS to learn from provider innovations in coordination, clinical integration and patient care management.

The program sets up a safe zone for experimentation and allows sophisticated providers to raise the bar for everyone by demonstrating best practices. It also opens the door for greater alignment between physicians and their host facilities to drive down cost.

The CMS intends to use these innovations to structure future payment systems. By allowing the provider community the opportunity to participate in the evolution of more efficient payment systems, rather than oppose arbitrary cuts, the CMS is attempting to mitigate resistance. Participating in the development of our shared future is recommended—and prudent.

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Author Information

Gunter Wessels, PhD

Gunter Wessels, PhD

Wessels is a partner at Total Innovation Group Inc., a consulting firm specializing in healthcare. Clients of his firm include policy makers, payers, providers, group purchasing organizations and supplier companies, both in the United States and internationally. More Articles by This Author »

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