A Primer on Bundled Payments

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August 30th, 2012

Bundled MoneyThe concept of bundled payments has been around since the early 1980s in the form of diagnosis-related groups (DRG) for inpatient care, comprehensive obstetrical care and many surgical procedures.  With the drive to reduce healthcare costs, coordinate care and improve quality, there is a renewed effort and discussion on the utilization of a bundled payment system for a wider array of procedures and diagnoses.

In the prevalent fee-for-service (FFS) system, a patient’s diagnosis and treatment of a medical condition generates multiple claims from the hospital or facility, physicians, specialists and others involved in providing the care. This payment structure creates incentives for providers and hospitals to perform more services without regard to overall quality or cost.

Bundled payments sidestep the inherent flaws of the FFS payment model. Under a bundled payment system, healthcare providers share one fee for an episode-of-care, with an episode defined as either a diagnosis or a specific procedure. With the current fee-for-service payment model all of the financial risk resides with payers. A bundled payment system transfers and distributes that risk to all of the parties (providers, facilities, etc.) involved in providing care for the predetermined fee. In essence, they are “sharing the risk” associated with the episode of care. If costs exceed the bundled fee providers share the loss, however, if the cost of care is less than the payment amount they keep and share the difference. This approach creates a financial incentive to provide coordinated care and eliminate the unnecessary use of resources.  Coordination may include the sharing of lab data and patient history or promote communication between providers to support delivery of the most appropriate level of care at the right time. Electronic health records and health information exchanges will play an increasingly important role in the widespread adoption of bundled payment initiatives.

Key Considerations for Implementing Bundled Payments

There are many issues and intricacies associated with bundling payments to medical providers. A factor to consider is how the payment will be allocated between the parties providing care.  One option is for physicians and hospitals to allow a third party, or a joint physician-hospital organization, to control and allocate the payment.  Alternatively, "virtual" bundling, can be used where the payer splits the bundled payment between all participating parties according to the predefined, negotiated terms.

Of key importance is the definition of an “episode of care”.   As mentioned earlier, an episode can be either a diagnosis or a specific procedure. A diagnostic episode may be classified as either acute or chronic and the bundled payment would cover all treatment for that diagnosis over a period of time. An episode related to a procedure would have a bundled payment for all services associated with that particular treatment or procedure. In this case, it is essential to define the range of providers and services that are included. For example, the bundled payment may include physicians (both primary care and specialists), devices (surgical implants, etc.), pharmaceuticals, non-physician staff, and facilities (hospitals, rehabilitation, etc.).

As one can already observe, the development and implementation of a bundled payment system can be very complex for all parties involved.  Below are just a few points that need to be considered.

  1. Defining the “episode of care” that is appropriate for a bundled payment, and creating case definitions that are consistent enough to be applied across varying payment arrangements.
  2. Whether or not the payer will pay a single entity or use virtual bundling.
    • If payment will be made to a single entity, when each party can expect to receive payment from that entity
    • Whether the physician will be given information sufficient to calculate independently bundled payment amounts and determine whether or not those amounts are appropriate
  3. How the basic bundled payment is calculated and how it will be apportioned between the participating providers.
  4. The duration of the bundle.
  5. Persuading physicians and other providers to adopt changes and alter their behavior.
  6. Reconciling bundled payment with regulations against self-referral.
  7. Accounting for patients changing insurance or geographic location during the defined treatment episode.
  8. How risk adjustment factors will be calculated and applied.

Bundling payments includes a number of variables to be considered, but can effectively replace the incentive for higher volumes with incentives to coordinate care and promote the appropriate utilization of the healthcare system.  By creating a system that is price transparent and highly integrated through the use of information technology, reforms to our current FFS system will promote informed decisions, increased savings and higher quality care.

PayerFusion is a Health Plan Administrator and Cost Containment company offering comprehensive solutions for self-funded employers and international payers.  Our health plan administration solutions are customized to meet the needs of our clients and include provider network design/support, policy design, full-service TPA, technology solutions/support and informatics.  Contact us for more information and to learn more about our health plan administration services