Bundled payments are here to stay: arguably, they’re the most formidable result of health reform. It’s time for some straight talk about bundles.

Nothing in health reform is more substantive to system transformation than the bundled payment effort being advanced by the Centers for Medicare & Medicaid Services. Like accountable care organizations, such as those in the Medicare Shared Savings Program, a bundled payment program carries the potential for shared savings with Medicare, but also financial risks for provider organizations that choose to participate. And like the avoidable readmissions and value-based purchasing programs, bundled payments are being introduced as mandatory for selected hospitals and health systems.

The concept of bundled payments is simple. Bundled payment programs reduce care fragmentation and improve overall quality of care by aligning the financial incentives among all providers that touch a single episode. By encouraging coordination across multiple settings of care, errors are fewer, outcomes are better and efficiency gains realized.

That’s the theory. Medicare, the program that covers more than 55 million seniors, is betting big on bundles. Included in the Affordable Care Act, bundles have expanded as a focus of reform under the authorization of Medicare.

A recent study concluded that the Bundled Payments for Care Improvement Initiative has produced mixed results.

The preliminary analysis by the Lewin Group of 60,000 episodes of care initiated between October 2013 and September 2014, found that costs for orthopedic surgery were $864 less for bundled payment episodes, and were largely attributed to lower costs in post-acute settings. But for spinal surgery, costs were $3,477 higher among the 130 hospitals, 28 home health agencies and four medical practices in the study.

For proponents of bundles, it can be good news because they can offer a potential for cost reduction. Skeptics of bundles gain support as well, given that the study showed mixed results.

The movement is sizable and growing. Consider these variations on bundled payment already in the works or being planned:

  • Bundled Payment for Care Improvement Initiative: A voluntary program wherein hospitals may choose from one or many of 48 episodes of care in a bundled payment effort, with shared savings achievable based on historic “unbundled” costs. As of January 2016, the BPCI initiative had 1,448 participants, including 409 acute care hospitals, 700 skilled nursing facilities, 288 physician group practices and 100 home health agencies. Medicare, the leading proponent for bundles, believes they’re working: In its most recent report, it stated “promising results on cost and quality” in 11 of 15 clinical episode groups.
  • Oncology Care Model: A voluntary program for physician practices that targets chemotherapy and related care during a six-month period following the initiation of chemotherapy treatment. The oncology model is a three-part payment model, physician practices continue to bill fee for service and practices also receive a prospective per beneficiary, per month payment and have the opportunity to earn performance-based payments if they meet quality and cost goals. There are 195 practices and 16 payers participating in the Oncology Care Model, and CMS is also partnering with commercial payers in the model.
  • Comprehensive Care for Joint Replacement: Targeting the 400,000 total joint episodes with costs ranging from $16,500 to $33,000, the CJR program is a mandated bundle for five years, affecting 67 communities and about 800 hospitals.
  • Cardiac Rehabilitation Incentive Payment Model: Bundled payment models commencing in 2017 for high-quality, coordinated cardiac care in heart failure, coronary artery bypass graft bundles and cardiac rehabilitation. The heart failure and CABG bundles will be mandatory in 98 communities. Notably, in Years 3, 4 and 5 of these, savings or penalties up to 5 percent of costs will be calculated against regional baselines instead of limiting comparison to the local community. The cardiac rehabilitation bundle will be accessible in 45 markets.

With that in mind, here’s what health care leaders should know.

Bundled Payments:

  • Are central to Medicare cost containment: Medicare is doubling down on bundles. They allow CMS to force coordination of care with little financial risk to the program via shared savings arrangements linked to historic costs. And strategically, they expand the geography for cost calculus to regions, so that wider variability in utilization and costs are captured.
  • Are attractive to large employers: The concept of bundled payments makes sense to large employers who see it as a way to rein in costs for big-ticket items. Simply put, large employers will build on Medicare’s bundled efforts using reference pricing to channel employees to select providers.
  • Force hospitals to create tight networks with physicians and post-acute collaborators: Sharing risk in bundled payments is risky unless information systems, clinical processes and patient care coordination efforts across the continuum are in sync. Capital budgets, business relationships, clinically integrated networks and governance must adapt as bundles take center stage in payment transformation.
  • Might precipitate carve-outs by insurers: Some private insurers might take advantage of attractive bundles within a region to carve out certain episodes, or construct tiered benefits aligned with high-value episodes.

There’s no doubt that bundled payments will play a more prominent role in Medicare payment. The fact that participation in bundles by physicians will be recognized by CMS for purposes of rewarding physician participation in “alternative payment programs” (like those under MACRA) underscores they’re here to stay.

What’s unknown is how fast CMS will add mandatory programs, and how employers and insurers will piggyback these efforts.

Paul H. Keckley, Ph.D., pkeckley@paulkeckley.com, does independent health research and policy analysis and is managing editor of The Keckley Report. He is a member of Health Forum’s Speakers Express; for speaking opportunities, please contact Laura Woodburn. Marina Karp can be reached at marina.s.karp@gmail.com.