At Geisinger Heart Institute in Bloomsburg, Pa., unraveling the mysteries of bundled payment was a breeze compared with what other health care organizations will face. The institute has offered bundled payments for cardiac surgery since 2005, and Alfred Casale, M.D., who is chairman of surgery and co-director of the cardiovascular service line, says establishing the process was relatively painless because the organization employed the cardiologists and other clinicians involved, and because Geisinger Health Plan owned the hospital and had a robust electronic health record system.
For most hospital leaders, setting a bundled price on an episode of patient care will be much more complex. Administrators and their physician partners must collect reams of patient data, spend hours identifying best practices and develop teams of clinicians to run these programs. Unlike Geisinger Heart Institute, they are likely to contract with physicians they may or may not employ and work with health plans with which they are otherwise unaffiliated. For everyone, including Casale's organization, bundled payment represents a different way of thinking and poses significant challenges.
Aligning financial incentives
Hospitals and health systems have several reasons to pursue bundled payment. For one, the Centers for Medicare & Medicaid Services support the approach, approving more than 500 organizations for its Bundled Payments for Care Improvement initiative in January. Other hospitals want to replace fee-for-service payment and move toward full-risk contracting. Still others see an opportunity to align incentives by contracting with physicians and health plans so that all parties are working to improve care quality, eliminate unwarranted variation and lower costs.
"Bundles facilitate the alignment of incentives for providers to work together across the continuum of care, resulting in the collaboration of partners across all specialties and settings to maximize quality and efficient care," says Mike O'Boyle, president and CEO, Parallon Business Solutions, a consulting firm. "For those hospitals and physicians that have not had experience with population health, bundled payments are mechanisms to allow for their evolution into shared-risk arrangements."
Framing the issue
• Momentum is building to replace the fee-for-service payment system with one that emphasizes value over volume. Bundled payment is one strategy being tested by hospitals around the nation.
• Bundled payments require hospitals to align incentives by contracting with physicians and to share risk. But many providers are not yet ready to determine a fixed cost for an episode of care.
• Hospitals will need historical data on care for patients with similar medical situations as well as analytical data on what to pay individual clinicians.
• Early adoption of bundled payment may be an advantage for hospitals by solidifying their place in the market and attracting docs and insurers.
Under bundled payment, a hospital and physicians assume the financial risk for delivering all care for one price for one patient episode over a set period — usually 30, 60, 90 or 120 days. Most bundled payment programs today are for acute care episodes, such as hip or knee replacement or spine or cardiac surgery. Some health plans are making bundled payments to providers for patients with asthma, diabetes, cancer and other chronic conditions. In these cases, the episode of care is usually for one year.
"Bundled payments are incredibly effective in transforming care because they focus providers on areas where there are unwarranted variations and realizable savings," says Jay Sultan, associate vice president and general manager of payment reform at the TriZetto Group, a consulting firm. "Bundled payment brings alignment with physicians that allows hospitals to cut their variable costs and reduce postsurgical complications, pharmacy costs and length of stay."
Managing the financial risk is the key challenge of bundled payment because hospitals and physicians guarantee to deliver all services for each patient's full episode of care, including any complications. In this way, bundled payment comes with a guarantee: The physicians and hospitals cover the costs of postsurgical infections or the need for rework or a readmission.
"If a hospital and the physicians are unable to successfully work together to reduce the average cost of the episode, they would be at risk for those costs above the negotiated budget," O'Boyle explains.
Working through uncertainty
The at-risk nature of bundled payment may leave hospital administrators feeling somewhat unsure about how to proceed, as Casale did in 2005. "We were preparing a presentation for the board of directors about bundled payment, which Geisinger calls ProvenCare," he says. "We decided to offer one price for a package of services to include everything from the first office visit through the surgery and for 90 days postsurgery."
Institute leaders had two and a half years of data that showed what GHP paid for coronary artery bypass grafts. They also knew that related complications tended to occur within four weeks of the operation and that by 90 days, 99 percent of all complications had occurred. That's why they set the episode duration at 90 days.
"Then we had to set a price," Casale says. "We had never done this and our presentation was the next day. There was no calculus or even any science involved. We just took the average cost and decided to charge half. At the board meeting the next morning, we said, 'Give us half of the average charges in a package price and we'll immunize you for the cost of care for any related complications at a Geisinger facility for 90 days.' "
Since then, the program has worked so well that it was cited as an example of the effective use of evidence-based protocols in the Institute of Medicine's report, Best Care at Lower Cost: The Path to Continuously Learning Health Care in America, published last September. The report shows that Geisinger cut operative mortality by 67 percent and length of stay by 1.3 days. Revenue minus expenses improved by more than $1,900 per case and the cost per case dropped by 4.8 percent. Also, GHP had a 23 percent increase in profit for each episode of cardiac care, the IOM reports.
Although the results are dramatic and demonstrate how physicians armed with data and a willingness to assume risk can effect change, Geisinger is not representative of the kinds of bundled payment arrangements hospitals typically make with physicians and health plans. Health plans are unlikely to send unaffiliated hospitals the data they need on costs and complications. Without that data, hospitals may find it difficult to analyze past expenses because most hospitals do not have a true understanding of the cost of episodes of care, O'Boyle says.
"Many hospitals have yet to determine the best process to allocate fixed costs to an episode to determine a fully loaded cost per episode," O'Boyle says. "Most hospitals will need to undertake a process like activity-based costing to understand their costs per episode. That costing process will need to include all care providers and settings, which can be cumbersome and time-consuming."
Most hospitals have not changed their revenue-cycle management process for many years and have systems that are not designed for bundled payment, says Shannon Dauchot, Parallon's senior vice president of corporate operations and client relations. Most payers don't have the systems they need to make bundled payment work either. "That means hospitals might have to use spreadsheets to collect all the numbers they'll need," she says. "By starting small, they can sort through each bundle until they figure out what can be automated. But we're not aware of a one-size-fits-all system that does all that because every bundle and every group of providers will be different."
Indeed, when collecting the data it needed for bundled payments for hip and knee replacements, Crozer-Keystone Health System used spreadsheets.
"We spent an incredible amount of time and resources looking at financial modeling and getting people to help us do the modeling for bundled payment," says Susan L. Williams, M.D., Crozer-Keystone's senior physician for clinical integration. "Starting in 2008, our strategy was to build primary care around patient-centered medical homes, and so we had a fair amount of experience with collecting the data and building the data systems required to pull out quality metrics on individual physicians or physician groups for bundled payment. And, our finance people are great at calculating costs. But marrying all the data on costs and quality has been a journey."
Elizabeth Jaekle, Crozer-Keystone's vice president for business development, agreed. "There is a level of nuance that we had not counted on with bundled payment," she says. "Our cost accounting system was not set up to facilitate bundled payment or any kind of gainsharing because it collected data in aggregate and averages, which is fine for most of the work we do. But when you're compensating for quality improvement, you need to measure the rate of change and differentials at an actual point in time."
Most cost accounting and information systems are not oriented to measure and report such data. "So, first we had to use spreadsheets to collect what we needed and then we put the data into various working documents that we could evaluate," Jaekle adds. "From there, you can start to put together the infrastructure to automate these systems."
Overcoming these hurdles helped Crozer-Keystone learn enough that CMS approved its application in January to implement bundles for hip and knee replacements under the BPCI.
Hospitals also face challenges in collecting data on each provider who will deliver care in a bundle, says Joseph J. Fifer. Before he became president and CEO of the Healthcare Financial Management Association last June, Fifer was vice president of hospital finance at Spectrum Health in Grand Rapids, Mich., where he implemented four bundled payment programs.
"Collecting all the data elements that span across multiple providers might be a bigger hurdle to clear than the accounting issues," he says. "There aren't any systems today that can easily gather data on a patient-specific basis and that span the entire episode of care from the first primary care visit to the last exam. By its nature, bundled payment covers everything, meaning you have to include costs for post-acute care, rehabilitation and physical therapy."
Having the data on costs and quality is critical to the success of a bundled payment initiative, agrees James T. Caillouette, M.D., surgeon-in-chief at Hoag Orthopedic Institute in Irvine, Calif. Hoag has a bundled payment program for hip and knee replacement surgery. "The key to success or failure hinges on alignment with the participating physicians," he says. "Everyone needs full cost transparency because you are going to be accountable for the cost of care in a way that you have never before been accountable. Typically, this kind of accountability is difficult because hospitals and health plans are not readily going to share their costs with physicians and other providers."
Before allowing its doctors to participate in the bundled payment program, Hoag examines physicians' past results. "We're looking for costs, infection rates, outcomes and the reasons behind any readmissions. You have to set the bar high because those who can achieve that bar will participate in the bundle and those who haven't achieved that bar need to work toward it so they can participate," Caillouette says.
For Hoag, gathering information on its physicians is relatively easy because the institute is a collaboration between the orthopedic physicians and Hoag Memorial Hospital Presbyterian.
When separate entities develop bundled payment initiatives, collecting information from outside providers can be difficult, says Caroline Steinberg, vice president of trends analysis for the American Hospital Association. "Hospitals have never had any information on what happens to patients outside their doors," she explains. "There are a lot of tricky issues with bundled payment because hospitals have never taken on responsibility for care across the continuum."
Not only does the hospital need historical data on care for similar patients so that it can decide what to charge, it also needs to know how much to pay each individual physician and other clinicians delivering care in the bundle.
Collecting that data for each episode of care is just part of the solution. "The real trick to make bundled payment work is that information must be readily available to the various providers on a need-to-know basis virtually in real time as opposed to what we have now," Fifer says. "You're pricing based on last year's numbers but you're doing the surgery this year and paying out on this year's numbers. Making all the data available in real time today is a huge challenge."
Fewer heads in beds?
Once a hospital standardizes care and cuts lengths of stay, it could create a new problem: reduced revenue. That's leading some observers to question whether bundled payment works against a hospital's best interests. "If we go down this path in any material way, what does that mean about how many beds we need?" Fifer asks. "What does it mean for the pure existence of many hospitals, especially those in small, rural communities?"
Becoming an early adopter may be one answer. "The hospitals that are the first movers get an advantage by seizing the opportunity to acquire volume," TriZetto's Sultan says. "Bundles for cardiac or orthopedic surgery can be the most profitable cases in hospitals, making them crucial for hospital success. Plus, getting a higher fee in a bundled payment is a profound financial incentive for surgeons to refer patients."
Early adoption has another advantage. "Bundled payment not only allows hospitals to transform the delivery of care, but also to solidify their place in the market," Sultan says. "Once the program is running smoothly, other physicians, such as oncologists, will want to develop bundles. And health plans may start coming to you as well."
Joseph Burns is a freelancer writer in Falmouth, Mass., specializing in health care strategies.
How bundled payment differs from global payment
Both bundled and global payment systems provide financial incentives for hospitals and physicians to deliver better care and control costs. Though similar, the two forms of reimbursement differ in significant ways.
Bundled payment is for a specific set of services, such as an episode of care for hip or knee replacement or all services for one year of care for a patient with asthma or diabetes. A hospital and physicians would work together to care for a health plan's patients and may share in any savings if costs are lower than a specified target. The providers also are required to care for patients who have complications during the episode of care, usually 30 to 120 days for acute conditions or a full year for chronic care.
Global payment, also called capitation, is for all care for a patient for a month or a year. Physicians are responsible for all primary care to these patients and may share in any savings at year end. Hospital and specialist care may or may not be included in the global budget.
For Blue Cross Blue Shield of Massachusetts, choosing bundled or global payment hinged on the willingness of physicians to accept financial risk, says Deborah Devaux, senior vice president of network & service integration. "We've seen how the various bundled payment approaches are being implemented. But for acute conditions, we already pay a fee based on diagnosis-related groups, which is a form of bundled payment," Devaux explains. "For surgery, we also pay a DRG."
Under its global payment initiative, called the Alternative Quality Contract, BCBSMA pays provder organizations for all care delivered to a patient for a year. Physicians can share any bonuses with the affiliated hospitals, Devaux says. She believes the AQC allows the Blues plan to control costs more closely than it could under bundled payment while also providing an incentive for quality improvement.
"The AQC creates an environment where hospital administrators have to consider how to support physicians in avoiding unnecessary admissions, readmissions and emergency room visits," she says.
Plus, for patients with multiple chronic conditions, bundled payments may require multiple bundles, which can be confusing and may lead to global payment anyway, she adds.
Physician-hospital integration is key
When contracting for bundled payment, Blue Cross and Blue Shield of Florida closely examines the legal entities in its bundled payment contracts, says Andy Marino, the health plan's vice president of network development.
Since March 2011, Florida Blue has had a bundled payment program for laparoscopic radical prostatectomy surgery with Mobile Surgery International and two bundled payment programs for knee replacements. One is with the Mayo Clinic and one is with the Florida Orthopaedic Institute.
"It's easy for us to contract with the Mayo Clinic because Mayo's physicians and the hospital facility are fully integrated," he explains. Florida Orthopaedic Institute is similar in that it employs anesthesiologists and has an outpatient surgery center. "Therefore, it can bring the facility component all under one tax identification number," Marino says.
Although hospitals have asked Florida Blue about bundled payment, not all are ready to do so. "A hospital needs to be able to take a lump sum payment and then pay some of those dollars to the surgeon and everyone else involved in the care," he explains. "But if they don't have the legal structure to do that, then it creates problems for us."
Report outlines steps for facilities adopting bundled payment
A January issue brief from the American Hospital Association, Moving Towards Bundled Payment, explains the steps hospitals and health systems would take to develop such programs. By examining how to define an episode of care and how to evaluate the distribution of costs across service lines, the brief offers a starting point and guide for hospital administrators in how to manage costs, risk and unwarranted variation.
"Understanding where the costs are concentrated helps identify where cost-reduction opportunities are likely to be found and where partnerships with other providers or specific types of interventions may be most important," the brief states.
"Bundled payment comes down to the opportunity to improve quality and efficiency," says the report's author, Maulik S. Joshi, Dr.P.H. President of the Health Research & Educational Trust and senior vice president of research at the American Hospital Association, Joshi calls bundled payment a vehicle to manage financial risk and care across various care delivery settings. "The triggers that allow bundled payment to succeed are improved quality and improved efficiency. As a natural artifact of those two aims, you have to address unwarranted variation and you have to address care coordination," he says. Bundled payment also gives hospital administrators a new and perhaps more complete view of the full continuum of care than they normally have. "The fact that hospitals have not looked at the continuum of care is not a knock on hospitals. It's just a reality," Joshi comments.
Another issue that may be new to hospital administrators is the link between risk and high levels of unwarranted variation. "The ability to identify, understand and eliminate variation in care practices will be critical to success under bundled payment," the report adds. Hospitals that measure variations in cost may be better able to manage risk. For example, the report shows how the difference in costs between the 25th and 75th percentile (the interquartile range) for a percutaneous cardiovascular procedure with drug-eluting stent is approximately $3,251, or about 28 percent of the median episode cost. But the same difference in costs for chronic obstructive pulmonary disease is about $3,884, or 80 percent of the median episode cost. Administrators may want to select episode types that have enough variation to provide opportunities for cost-reduction, but not so much variation that they pose excessive risk to the organization. "We are still early in our ability to measure risk," Joshi explains. "Therefore, maybe it's better to figure out why the variation is so high rather than put it into a bundled payment program."
Report: Replace fee for service
In a report issued in March, the National Commission on Physician Payment Reform called for replacing fee for service with other payment models. Health systems should embrace accountable care organizations and patient-centered medical homes that reimburse doctors through fixed payments and shared savings, and adopt bundled payments for patients with multiple chronic conditions and who need in-hospital procedures and follow-up, the report states, but adds, "bundled payment faces a number of practical difficulties: defining what is in the bundle; finding ways to divide payment among participating physicians; determining what to do when some physicians involved in the care do not share in the bundled payment; and factoring in the health status of patients (risk-adjustment)." Visit http://physicianpaymentcommission.org.
Resources and tools
For provider organizations seeking to overcome these problems, the Health Care Incentives Improvement Institute offers toolkits, implementation guides, case studies and sample agreements at www.HCI3.org. The site contends the term "bundled payment" inadequately explains the concept. "Fully understood, [bundled payment] is a means of rationally reconceiving the relationship between health insurance and health care, re-engineering care processes to make patients the center of the medical universe and establishing new and powerful feedback loops that transparently make price and quality information ubiquitous," HCI3 adds.
Capitation vs. bundles
The Robert Wood Johnson Foundation last fall published a report on a debate over whether capitation or bundled payment is the best way to control rising health care costs. Francois de Brantes, executive director of HCI3, explained the strengths of bundled payment. Robert Berenson, M.D., a fellow at the Urban Institute and a former commissioner of the Medicare Payment Advisory Commission, outlined the benefits of global payments and other alternatives, such partial capitation and shared-savings. The report is available on the RJWF web page at www.rwjf.org.