Bundled Payments: A Bundle of Questions

Theo Koury , MD

President of Vituity

Published September 01, 2012

Bundled payments are the future, whether we like it or not. Even states who led the legal challenge against the ACA, such as South Carolina, have already implemented the concept of bundled payments. While it sounds great for cost savings and patient care, the details of how it will work are just now slowly emerging, and this is where it gets interesting.

A bundled payment is a predetermined payment for a defined “episode of care.” Doing this for a group of medical services is intended to reduce costs and to make the coordination of care across physician specialties and the hospital more efficient. Intuitively it makes sense that bundling payments could solve some of the inefficiencies of silos in healthcare. It creates substantial incentives for all involved healthcare providers and hospitals to organize each state of their process—diagnosis, treatment, recovery—as efficiently as possible with a single party taking responsibility for the allocation of resources. It also provides a financial incentive to avoid any complications and to create the most efficient team possible. Having physicians and hospitals communicate more directly with each other in order to coordinate an integrated approach for payments will theoretically lead to improved care quality as well as cost savings.

While this sounds good in principle, there are important questions that remain to be worked out. For example, what is the exact definition and specifications of an “episode of care?” Will there be room for negotiation and adjustments with CMS? Will ED services be covered? As of right now, the ED does not appear to be part of bundled payments in any of the ongoing pilot programs. It will be complicated to apply bundled payments to Emergency Services primarily because visits to the ED are usually the result of a complication or ”failure” of the service rendered through the “episode of care,” of which the ED had no control over. However, emergency services are not necessarily indefinitely free from this reimbursement option.

Another fascinating question is how risk stratification will be applied. Risk stratification refers to the probability formula used to determine the risk of complications for each surgical or medical intervention. Not all patients receiving a hip replacement will have the same outcome probability. The outcome is highly dependent on the underlying disease(s) a patient may have as well as social habits, geographical location and so on. For example, a diabetic and hypertensive patient is at greater risk for surgical complications than an otherwise healthy patient. If that patient were to get a post treatment infection, it would have large financial consequences for the providers and hospital since the bundled payment is a predetermined fixed amount. Therefore, it does make sense to base the bundled payment on a patient’s risk probability. However, in order for bundled payments to work, decisions regarding risk stratification will have to be made at the local level because risks for various interventions and medical conditions vary widely from region to region. Furthermore, as an institution develops its risk stratification, it can extend the stratification so far that it eventually creates enough categories of risk for just one type of intervention that the result is a reimbursement plan mimicking fee for service and defeating the purpose of bundled payments.

At the end of the day, risk stratification will determine what bundled payment the involved institution will receive for a specific individual undergoing a particular episode of care, and ironically, ultimately determine the success of the bundled payment program at the involved institution. So far, bundled payments are being used primarily in pilot programs for orthopedics and cardiovascular services. In order to prevent bundled payments from turning into bungled payments, we will all need to follow developments closely to learn as much as possible from the successes and failures experienced at current pilot institutions. At the same time, we need to begin thinking about how services across the Acute Care Continuum might ultimately become involved. If approached, providers in the Acute Care Continuum should be ready to develop their own models rather than wait until they are assigned. I look forward to all the exciting discussions ahead.

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