Ring 4: Bundled Payments

Physicians in the U.S. have been rewarded for many decades with a payment system referred to as “fee for service”. This payment system paid the doctor a fee for each service or portion of service delivered to a patient. For example, when a patient has an annual physical exam, the doctor was paid a set fee for the exam, another fee for the EKG, another fee for the x-ray of the “shoulder that hurts”, another fee for the flu shot, etc. The more the doctor does to the patient, the more the doctor is paid.

Doctors are now being nudged into a transition where they will accept a fixed fee for allocated work. Under the current fee-for-service system, doctors get paid more for doing more. Under an Episode-based payment or a Bundled payment, there is one fee, and no more money for additional effort, tests, or hospital stays. This creates a powerful incentive for doctors to weigh the cost-benefit of a prescribed treatment, device, or other intervention.

The expected outcome of this transition is not to get doctors to work less. The additional patients with insurance coverage (due to “Obamacare”), and increased efficiencies needed in the healthcare system, will require physicians to see more patients. Instead, a shift to bundled payment is expected to reduce cost to the system, because doctors actions have cost consequences beyond their direct labor. Making doctors somewhat accountable for the cost of lab testing, medical devices, length of hospital stays, and post-discharge rehabilitation, will change the doctors’ orders and prescriptions…

• On the negative side, if the patient receives more care than the case management protocol required, the provider receiving the bundled payment must produce the extra funds to cover the additional costs.
• On the positive side, if the patient can be diagnosed and treated with fewer tests and treatments, and attain targeted quality outcomes, this will yield a lower cost, and the profit left over on the fixed payment can be retained.

As you know, payment bundles are not new, and have been a part of reimbursement since Diagnosis Related Groups (DRGs) were enacted in the mid 1980s. DRGs bundled the services required for the patient’s hospital stay, per the physician’s diagnosis. More recently, Medicare End-Stage Renal Disease (ESRD) patients were moved from a fee-for-service payment to a single episode based payment for their care. Additional disease categories are being planned for bundling. To ensure that episode-based/bundled payments do not cause providers to restrict access to care, the Centers for Medicare and Medicaid Services (CMS) are promoting a long-term demonstration program.

This demonstration program is the Bundled Payment for Care Improvement (BPCI) Initiative. Under this initiative, providers have signed up with the CMS “Center for Innovation”, and now receive a single payment for a defined episode of care. Some of the bundle models are “pre-acute” and some are “post-acute” episodes. These bundles can range from 30, 60, or 90 days. The BPCI is testing the bundled payment in a variety of disease states. There are four payment models that providers could chose from, but all allow for “gains”, or savings, to be shared among participants. This means that the bundle “owner” can pay other providers portions of the profits retained without violating Medicare anti-inducement laws.

Having one single payment for the delivery of evidenced-based healthcare services by providers, theoretically, should produce the most cost-effective care. Commercial payers are also experimenting with these episode-based programs, and many providers are adopting the bundled payment “option” offered by the insurance companies to slow reimbursement cuts and grow patient volume. In most cases, providers are able to significantly cut costs from the care episode and improve profitability for sharing.

The Medicare BPCI program is designed to allow CMS to learn what are the more effective care patterns, and which are not. Heart disease, stroke, and other high volume hospitalization and follow-on rehabilitation disease states are being transformed by this program. The next expected outcome of the BPCI initiative is new reimbursement structures for Orthopedics and Oncology. The Oncology BPCI program is being rolled out currently, while the Orthopedic programs are already running in pilots, and nearing completion.

Many of these payment gains come at the expense of suppliers, with demands for lower pricing/more concessions. Suppliers should consider adapting to Episode-Based Payment, and offer their solutions aligned to the bundled concept. For example, how does your solution:

• speed the diagnosis/improve the accuracy of diagnosis
• improve workflow, patient experience, align w/hospital’s evidence-based protocols
• measurably reduce the overall cost of delivering care to patients

If a positive impact is apparent with your solution, BPCI will be good for the business. If there is not a positive cost impact available, price cuts and fierce competition should be expected as bundled payments become the majority of healthcare reimbursement over the next several years.

By:

Sam O’Rear

Total Innovation Group, Inc. Senior Partner

and

Gunter F. Wessels, Ph.D., M.B.A.

Total Innovation Group, Inc. Practice Principal, Parter

To Read more about 5 Rings of Healthcare Reform℠ see other Blog post below:

• Ring 1: Value-Based Purchasing
• Ring 2: Readmission Reductions
• Ring 3: Electronic Medical Records / Information Technology
• Ring 4: Bundled Payments
• Ring 5: Accountable Care Organizations (ACOs)