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How bundled payments really do work


One study shows that the way Medicare is paying for joint replacements is saving millions of dollars annually and keeping patients satisfied, too.

Participation in bundled payments seemed to be a “win-win-win-win”- meaning, a win for CMS, a win for patients, a win for the hospital, and a win for physicians, according to a new study published in JAMA Internal Medicine.


In an observational study of 3,942 patients who received joint replacement surgery at Baptist Health System, a network of five hospitals in San Antonio, lead author Amol Navathe, MD, PhD, assistant professor, health policy and medicine, Perelman School of Medicine, and colleagues found:

• For CMS, episode spending came down about $5,500 or 20.8%, e.g. from $26,785 to $21,208 per episode for joint replacements without pre-existing complications. Most of the hospital savings came from implants and supplies and most of the post-acute care savings came from decreased use of institutional care.

• For patients, there was no decline in quality-and perhaps even improvement (e.g., cases with prolonged length of stay dropped 67%).

• Baptist Health System achieved 25% of its own savings from internal costs, over and above Medicare savings, which shows the potential for this to be good for hospital profit margins. Baptist began experimenting with bundled payments in 2008. Over seven years, the hospital system has cut Medicare’s costs on hip and knee replacements by almost 21%.

• Orthopedists and hospitals do not focus on changing practices to save money until they are incentivized to do so in the Bundled Payment for Care Improvement (BPCI) program.

Medicare launched the mandatory Comprehensive Care for Joint Replacement bundled payment model in 67 urban areas for approximately 800 hospitals following its experience in the voluntary Acute Care Episodes (ACE) and Bundled Payments for Care Improvement (BPCI) demonstration projects. “Little information from ACE and BPCI exists to guide hospitals in redesigning care for mandatory joint replacement bundles,” the authors wrote.

According to Navathe, bundled payments pay a fixed price for an episode of services that starts at hospital admission (in this case for joint replacement surgery) and extends 30 to 90 days post discharge (30 days in this study). This includes physician fees, other provider services (e.g., physical therapy), and additional acute hospital care (hospital admissions) in that 30-day window.

“Managed care executives are accustomed to managing financial risk - and bundled payments are a growing mechanism to put risk on providers,” says Navathe. “Interestingly, until the physicians were aligned with the hospitals financially through gainsharing, the hospital was not able to drop internal costs-e.g., artificial joint implant costs-despite the financial incentive to do so under fixed DRG-based prospective payment.”

Furthermore, says Navathe, the design of the bundle really seems to matter-as internal costs dropped in the ACE program (that was limited to hospital costs only), but in the BPCI program, post-acute care costs also came down rapidly.

“This has implications for these executives as they think about risk-based contracting and the design of the contracts,” he says.

Next: Pros and cons



There are several pros and cons to bundled payments according to Navathe:


• Strong incentive to manage the cost of care while preserving quality.

• Focused incentives so more actionable for hospitals (than ACOs, for example).

• Gainsharing can align physicians with hospitals to unlock savings.

• Hospitals can win too (higher profit margins).

• Bundles can be added incrementally to cover a greater proportion of health spending.


• There is still an incentive to ‘do more’ because more episodes equal more reimbursement.

• There is an incentive to pick ‘easy’ cases (i.e., healthier patients).

• Bundles don’t automatically align with population health measures.


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