Bundled payment

What Is Bundled Payment?

A bundled payment, also known as an episode-of-care payment or case rate, is a single, all-inclusive payment made to healthcare providers for all the services associated with a specific medical condition or course of treatment over a defined period. This payment structure falls under the broader category of Healthcare Finance, representing a shift from traditional models. Instead of paying individual providers separately for each service rendered, the bundled payment covers the combined costs of eligible services and supplies, such as treatments, tests, and procedures, across multiple providers involved in an "episode of care." The goal of bundled payment initiatives is to encourage greater coordination among providers, improve the overall quality of care, and ultimately reduce healthcare costs.

History and Origin

The concept of bundled payments in the United States healthcare system gained significant traction as a strategy to address rising costs and fragmented patient care. Medicare, the U.S. federal health insurance program, has a long history of experimenting with such payment models dating back to 1983 with the introduction of the inpatient prospective payment system (IPPS), which paid hospitals a fixed amount per inpatient stay based on diagnosis-related groups (DRGs).²⁰,¹⁹

However, the modern push for bundled payments intensified during the Obama administration, aiming to transition the healthcare system towards value-based care. A significant step was the creation of the Bundled Payments for Care Improvement (BPCI) initiative by the Centers for Medicare & Medicaid Services (CMS) Innovation Center in 2013. This voluntary program aimed to test various episode-based payment models to deliver higher quality, more coordinated care at a lower cost to Medicare.¹⁸,¹⁷ The initiative involved hospitals, physician groups, and post-acute care facilities.¹⁶ Subsequent programs, such as the Comprehensive Care for Joint Replacement (CJR) initiative in 2016, further expanded the mandatory application of bundled payments for specific procedures like hip and knee replacements in certain areas.¹⁵

Key Takeaways

• A bundled payment is a single, predetermined payment covering all services for a specific medical condition or episode of care.
• It encourages coordination among hospitals, physician services, and other providers.
• The primary goals are to improve the quality and efficiency of care while reducing overall healthcare spending.
• Providers share in potential cost savings if care is delivered below the target price, but also assume financial risk if costs exceed it.
• Bundled payments are a key component of the shift towards value-based care in many healthcare systems, particularly within Medicare.

Interpreting the Bundled Payment

Interpreting a bundled payment involves understanding its scope, the services included, and the defined period it covers. Unlike traditional reimbursement methods where each service is billed separately, a bundled payment represents a fixed budget for an entire "episode." For example, a bundled payment for a joint replacement might encompass the initial hospitalization, surgical fees, anesthesia, rehabilitation, and any related readmissions for a specified number of days post-discharge.

Providers participating in a bundled payment arrangement must manage the total costs of care within this single payment. If the actual cost of delivering care for the episode is less than the bundled payment, the providers can retain the difference as a gain. Conversely, if the costs exceed the bundled payment, the providers absorb the loss. This structure incentivizes providers to streamline care pathways, reduce unnecessary services, and improve coordination to stay within the allocated budget while maintaining or enhancing patient outcomes. The target price for a bundled payment is typically based on historical costs, often adjusted for patient severity and local factors.

Hypothetical Example

Consider a patient undergoing a hip replacement surgery. In a bundled payment model, the health insurer (payer) and the healthcare providers (hospital, surgeons, anesthesiologists, physical therapists, etc.) agree on a single, predetermined bundled payment of, say, $25,000 for the entire episode of care. This episode might be defined as starting with the inpatient hospital stay and extending for 90 days post-discharge to include all related services.

The hospital receives the $25,000 bundled payment. It is then responsible for allocating funds to all involved providers—the orthopedic surgeon, anesthesiologist, nursing staff, rehabilitation services, and any necessary post-acute care facilities. If the total actual costs for the patient's care during this 90-day period come to $23,000, the providers collaborating on this episode would realize a $2,000 savings, which could be shared among them as a financial incentive for efficiency and coordinated care. However, if complications arise and the total cost reaches $28,000, the hospital and its partners would absorb the $3,000 loss. This hypothetical example illustrates how bundled payments create shared accountability and drive providers to manage resources effectively throughout the patient's treatment journey.

Practical Applications

Bundled payments are primarily applied in the healthcare sector as a strategy to control costs and improve care coordination. They are commonly seen in elective procedures and chronic disease management, where the scope of treatment can be more predictably defined.

Key areas of application include:

• Surgical Procedures: Bundled payments are widely used for procedures like joint replacements (hip, knee), coronary artery bypass grafts (CABG), and spinal fusions. These procedures have a clear beginning and end, making them suitable for episodic payment.
  *¹⁴ Maternity Care: Some health systems and insurers implement bundled payments for maternity care, covering prenatal, delivery, and postnatal services for a specified period.
• Cardiovascular Conditions: Programs often target specific cardiac events or conditions, aiming to manage the entire course of care, from acute treatment to rehabilitation.
  *¹³ Government Healthcare Programs: Medicare has been a significant driver of bundled payment adoption through initiatives like the Bundled Payments for Care Improvement (BPCI) and the Comprehensive Care for Joint Replacement (CJR) programs, demonstrating their commitment to value-based purchasing., ¹²T¹¹hese programs aim to reduce fragmentation and reward efficiency in care delivery.

¹⁰These applications underscore how bundled payments incentivize providers to work collaboratively across different settings—from acute care hospitals to outpatient clinics and rehabilitation centers—to deliver efficient, high-quality care.

Limitations and Criticisms

While bundled payments offer a pathway to improved care coordination and potential cost savings, they are not without limitations and criticisms.

One primary concern is the potential for providers to assume significant financial risk. If the actual costs of a patient's care episode exceed the predetermined bundled payment, the providers absorb the loss. This can create an incentive to avoid treating complex or sicker patients, as their care might be more expensive and unpredictable, potentially leading to financial losses for the provider.

Anot⁹her criticism revolves around the administrative complexity involved. Accurately defining the scope of services included in a bundled payment episode, distinguishing between bundled and non-bundled services, and setting appropriate target prices can be challenging and administratively burdensome for healthcare organizations. If th⁸e payment is set too low, providers may be undercompensated, while a payment set too high might not yield meaningful savings for payers.

Furthermore, critics suggest that bundled payments, by incentivizing cost reduction, could inadvertently lead to the underuse of necessary services or a reduction in the quality of care if providers prioritize cost containment over comprehensive patient care. However, studies have generally found that bundled payments maintain or improve quality, particularly for procedures like lower extremity joint replacement.,

⁷B⁶undled Payment vs. Fee-for-Service

Bundled payment and fee-for-service are two distinct payment models in healthcare, each with different implications for providers and patients. Under a traditional fee-for-service model, providers are paid separately for each service they perform, such as a doctor's visit, a laboratory test, or a surgical procedure. This approach directly links reimbursement to the volume of services delivered. In contrast, a bundled payment provides a single, predetermined sum that covers all services associated with a specific medical condition or episode of care over a defined period.

The fundamental difference lies in the incentive structure. Fee-for-service financially rewards the quantity of services, which can lead to fragmented care and potentially unnecessary tests or procedures. Conversely, bundled payments incentivize providers to coordinate care, increase efficiency, and focus on overall patient outcomes within a fixed budget. This encourages collaboration among different providers who might traditionally operate in silos. While fee-for-service offers providers less financial risk per individual service, bundled payments shift some of that risk (and reward) to the providers for the entire episode, encouraging more holistic and cost-effective delivery of care.

FAQs

What is an "episode of care" in the context of bundled payments?

An "episode of care" refers to the entire set of services and supplies needed to treat a specific medical condition or perform a procedure for a patient over a defined length of time. For example, an episode for a hip replacement might include the surgery itself, the hospital stay, follow-up visits, and physical therapy for 90 days after discharge.

⁵Who benefits from bundled payments?

Bundled payments aim to benefit both payers (like health insurance companies or Medicare) and patients. Payers can potentially achieve cost savings by reducing unnecessary services and improving efficiency. Patients may benefit from better coordinated and potentially higher-quality care, as providers are incentivized to work together for optimal outcomes.,

###^{4 3}Are bundled payments mandatory?
Some bundled payment models, particularly those introduced by CMS, have been voluntary, allowing providers to opt-in. However, others, like certain phases of the Comprehensive Care for Joint Replacement (CJR) model, have been mandatory for hospitals in specific geographic areas., The ²t¹rend indicates a growing interest from payers to implement more bundled payment initiatives.

How do providers manage the financial risk in bundled payments?

Providers manage the financial risk in bundled payments by carefully planning the entire course of treatment, implementing efficient care pathways, negotiating favorable rates with suppliers, and focusing on preventing complications and readmissions. They often use data analytics to understand historical costs and identify areas for improvement. This proactive approach helps them stay within the predetermined budget for the episode of care.