The Time for Providers to Embrace Bundled Payments is Now

Sachin JainBy Sachin Jain

Regulatory and market-driven forces are rewriting the healthcare playbook as the industry strives to improve access, reduce cost and enhance quality throughout the system. Providers, in particular, are being challenged by growing reimbursement pressures and an increased focus on accountability, all of which are forcing the industry to embrace a more sensible value-based model. At the same time employers and governmental payers are insisting on adopting radical measures as their medical spend is reaching an unsustainable level and consumers are demanding a heightened customer experience in healthcare similar to what they are accustomed to from other hospitality industries.

The confluence of all of these factors has created nothing short of a perfect storm from which new approaches have begun to emerge relative to the way healthcare is purchased and delivered. The most promising approach is the growing movement toward bundled payment arrangements. And it’s no wonder. If properly designed and executed, all key stakeholders benefit greatly from this common-sense approach to healthcare cost and accountability.

Bundled payments group together the multitude of services associated with a certain health “episode,” condition or procedure – such as hip replacement, knee replacement or coronary bypass – and provide those services for one all-encompassing and pre-negotiated price that promotes both financial and performance accountability. Such an approach turns on its head the traditional “fee-for-service” model of separate payments to hospitals and physicians for each of the individual services they furnish. Not only is the antiquated fee-for-service model costly and cumbersome, but for too many years has wrongly rewarded quantity of services provided rather than quality of outcomes.

Momentum Toward Bundled Payments

While a bundled payment approach has always made sense, it is only now taking hold thanks to the Bundled Payments for Care Improvement (BPCI) initiative developed by the Centers for Medicare & Medicaid Services (CMS) Innovation Center. Created by the Affordable Care Act to test innovative payment and service delivery models, the BPCI initiative has shown the potential to reduce Medicare, Medicaid or Children’s Health Insurance Program expenditures while preserving or enhancing the quality of care for beneficiaries.

Already more than 400 hospitals are taking risk under bundled payment arrangements. Most significantly nearly 800 additional hospitals will be joining this group on April 1 as a result of Medicare’s Comprehensive Care for Joint Replacement initiative, which calls for mandatory bundled payments for joint replacement in 67 markets across the country. Together these hospitals constitute more than 20 percent of all hospitals in the United States, and that does not even include providers that are independently implementing bundled payments for non-CMS initiatives. 

It is estimated that by 2018 50 percent of all Medicare reimbursement will be tied to value-based models; and, as we all know, where Medicare leads the rest of the industry and the commercial sector typically follow. Bundled payments are no exception. We are already witnessing some of the nation’s more progressive self-insured employers such as Boeing, Walmart and Lowe’s (among others) embracing bundled payment models as a way to provide value-based benefits to their employees. The experience of these early adopters has shown that bundled payments generate significant value that benefits all key stakeholders involved – employers, employees and providers.

Benefits of Embracing Early

Providers, more than ever, need to be receptive to bundled payment arrangements and welcome the true value it brings. Early adopters will be able to improve outcomes, lower internal costs, and increase market share by steering volume away from the competition. Geisinger Health System, one of the early adopters of bundling, increased its contribution margins by 18 percent while gaining market share with its very first bundled payment program.

Adopting a bundled payment approach can lead to new distribution channels for providers, including selling bundles directly to self-insured employers. Direct contracting with employers not only generates incremental volume but also significantly improves cash flow and reduces administrative overhead. From our experience almost every provider that starts gaining maturity in bundled payments wants to contract directly with self-insured employers, but few are currently doing so. Leading hospitals, such as Cleveland Clinic, Mayo Clinic and Scripps Health, are already achieving success in productizing and selling bundles directly to employers.

What the End State Might Look Like

With the weight of CMS behind it, bundles are destined to replace the current ICD and CPT codes as the new unit of reimbursement, bringing much-needed efficiency and transparency to healthcare purchasing. This transition has started with planned surgical procedures and is expected to expand to chronic and primary care over time.

The implications on providers are becoming increasingly apparent. In the new paradigm where providers are at risk, most will need to identify specific bundles or service lines and develop them into true “Centers of Excellence” where their clinical quality and patient experience set them apart from the competition. These specialized “Centers of Excellence” will aggregate demand by steering volume away from traditional all-specialty, low-quality hospitals. Hoag Orthopedic Institute and MD Anderson Cancer Center are successful examples of this emerging strategy.

Bundled payments is a model that helps achieve the triple aim of lowering healthcare costs, improving access to high-quality care, and creating an exceptional patient experience. It is now time to embrace its virtues.

Sachin Jain is chief executive officer of Carrum Health, the leader in connecting self-insured employers with local and national Centers of Excellence under bundled payment arrangements.

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