A Look at the Two Sides of Bundled Payments

November 12, 2019

Why some health plans have mixed feelings on adopting bundled payments and what it can become.

If the U.S. healthcare system ever successfully completes the transition to fee for outcomes in lieu of our current system of fee for volume, bundled payments are likely to play a key role.

The theory behind bundled payments is solid: Pay providers a risk-adjusted fixed amount to treat a certain medical condition-regardless of the number of services they deliver-and allow them to share in any savings when costs are below that amount. As a result of this payment structure, providers will be incentivized to deliver high-quality care that keeps patients healthy at a low cost.

However, while bundled payments have certainly shown some potential in this regard-particularly for some non-urgent surgical procedures-the healthcare industry has yet to identify the correct bundled payment contracting strategy and methodologies that will scale to widespread adoption.

The reasons for the collective resistance to scale bundled payments vary, and include a lack of standard definitions for bundles, risk aversion, and a dearth of available resources for providers. Regardless, the uneven progress toward successfully implementing bundled payments presents a significant opportunity for the industry to fine-tune its approach to fully take advantage of this promising alternative payment model.

Where bundled payments stand today

For providers, the biggest change from the status quo associated with adopting a bundled payments model stems from possibly assuming more financial risk around patient outcomes. Along with the opportunity to share in savings when costs fall below the target payment amount comes the alternative: the risk of covering overruns when costs exceed the target amount due to complications or readmissions.

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Under a bundled model, payments to providers may be prospective, or more commonly, retrospective. In a typical retrospective model, providers receive their usual fee-for-service (FFS) payments, and the total FFS payment for the clinical episode is reconciled against a predetermined risk-adjusted target price after a given time period. Providers that deliver care for less than the target amount receive a reconciliation payment, while providers that exceed the target price may owe a reconciliation payment to the payer.

The exact makeup of services that fall within each bundle, which is referred to as an episode of care, vary by condition such as pneumonia or a procedure like a knee replacement. A 2018 article in NEJM Catalyst provided the following definition: “An episode of care involves the entire care continuum for a single condition or medical events, such as joint replacement or labor and delivery, during a fixed period. It includes all acute and post-acute care delivered by hospitals, physicians, skilled nursing facilities, and other providers participating in a care pathway.”

Thus far, the vast majority of experimentation around bundled payments has happened within Medicare. Two of the more prominent initiatives, Bundled Payments for Care Improvement (BCPI) and Comprehensive Care for Joint Replacement (CJR), have exhibited mixed results.

BPCI, which involves bundles for provider payments for up to 48 medical conditions and procedures, has proven more effective when applied to surgical procedures, as opposed to medical conditions. Studies have shown that BPCI participation reduced hospitals’ per-episode costs of care without affecting mortality, readmissions, or related emergency department visits.

However, BCPI evidence on bundled payments for medical conditions, as opposed to procedures, is less promising. A 2018 study of five common conditions-congestive heart failure, pneumonia, chronic obstructive pulmonary disease, sepsis, and acute myocardial infarction-found no significant changes in cost or quality between participating hospitals and a control group.

Alternatively, studies of the CJR model, which pay hospitals based on DRG coding a bundled payment for hip and knee replacements, have documented reductions in per-episode spending with no adverse effect on healthcare quality. Hospitals that achieved savings tended to be larger, with a higher volume of procedures, were more likely to be nonprofit or a teaching facility, and be integrated with post-acute care facilities.

Surgical procedures may be more appropriate for bundled payments because these episodes of care are fairly routine with wide variation in cost under FFS arrangements. Additionally, health outcomes are easy to measure because these patients are generally healthy, with few complex health conditions that muddy results.  However, to see a transformative change in the healthcare delivery system, we need to develop tools that allow episode analytics and payer-to-provider agreements to extend into more complex and chronic conditions, such as diabetes, behavioral health, COPD and asthma, to truly bend the unsustainable cost growth curve we are on.

What’s causing mixed results in bundled payment programs?

A number of disparate but equally plausible factors explain the wide variation in success under different bundled payment programs. First, healthcare is local, and not one methodology can account for the nuances of every regional network. For example, wide variation exists between urban and rural hospitals in terms of patient social determinants of health (SDOH), usage, provider size, and level of integration and spending.

Additionally, many providers may be hesitant to embrace bundled payments due to past negative experiences with other alternative payment models. For example, providers in geographic areas that have had a high amount of managed care penetration, entered into non-risk adjusted capitation or pay-for-performance agreements, may have had difficulties and, therefore, could be slow adopters. We need to provide these users with increased data transparency, episode-based analytics and actionable insights that elevate the trust that they understand the agreements, risks and opportunities on a timelier basis as they move forward into an outcomes-based environment. 

Further, many contracts around quality improvement over the past decade have created a higher burden on smaller physician offices. Solo and small practice models may not fit well into alternative payment model contracts, due to the staff having less training with complex healthcare contracts and higher turnover rates in the back office. For these practices, managing data and contracts around alternative payment models could require significant investment in retooling IT staff and software.

Finally, multiple bundled payment model definitions continue to plague the marketplace. Lack of standardized episode definitions and quality metrics lead to eroded trust and limited transparency. Episode definitions need to be developed in collaboration with physician groups and societies so they can have buy-in as coding changes, procedures evolve, and technology improves. In addition, these definitions must be separated from the business of healthcare and transparent to stakeholders so quality measures and analysis can be used to refine and improve them over time.

Once united around transparency and standardized episodes, bundled payment programs will be poised to fulfill the promise they’ve shown in early pilot programs.

Matthew Beatty is the director of analytics at Payformance Solutions, a leading provider of value-based reimbursement solutions and services. Kevin Mehta serves as chief technology officer.