Information Statement

Package Pricing

This Information Statement was developed as an educational tool based on the opinion of the authors. It is not a product of a systematic review. Readers are encouraged to consider the information presented and reach their own conclusions.

Package pricing is a payment system in which a lump sum or bundled payment is negotiated between the payer and some or all providers for some or all of the services typically associated with a given procedure, including hospital, surgeon, anesthesia, radiology, and other provider services. The package price normally covers all pre-, intra-, and postoperative care, and also may include additional services outside of the hospital such as physical and occupational therapy. The payment is generally made to the hospital member of the team, which distributes it to all participating providers under a prearranged agreement.

Background

The package pricing concept has, so far, been applied to high-cost inpatient procedures, such as cardiovascular surgery. Although package pricing has not been common in orthopaedics, this situation is beginning to change. In late 1996, the Health Care Financing Administration (HCFA) plans to initiate a Medicare package pricing demonstration project for hip and knee replacement procedures. This three-year pilot study, if successful, could potentially lead to other package pricing arrangements for many other surgical procedures, both under Medicare and private payer systems. Under this specific project, the hospital will be the recipient of the package payment, and will be in charge of distribution of the payment to the participating providers.

Package pricing arrangements also can be developed between physicians and payers, where the physician is the recipient of the bundled payment. Physicians would then be in control of distributing payment to all providers including the hospital. Such arrangements have been developed by orthopaedic surgeons for arthroscopic procedures, as well as knee ligament and club foot surgery.

Payer Considerations

Package pricing arrangements can be advantageous to payers for a number of reasons.

• Package pricing simplifies the provider's billing and collection processing, since only a single bill is submitted.
• These arrangements transfer some of the financial risk from the payer to the providers.
• The payer is able to more accurately control spending by not paying separately for each service provided, some of which may be unexpected.
• Package pricing also may create savings for payers through direct price competition among providers.
• Package pricing simplifies the payer's contracting and claims payment processes, since only a single claim is processed.

Provider Considerations

As with all types of managed care contracting, the primary reason for a provider to enter into a package pricing arrangement is to protect or increase patient volume. While the payment for a package of services is fixed, the frequency of demand for those services is not artificially limited. However, there are several caveats of package pricing of which physicians should take special note.

• Package pricing arrangements generally do not provide the same level of exclusive access to the patient population as does capitation, but these arrangements usually offer patients some incentives, both financial and otherwise, to use the participating provider group.
• For certain high-cost procedures, where reductions in the average length of stay or other clinical efficiencies can be achieved without compromising quality of care, package pricing arrangements can potentially achieve cost savings. However, physicians should be prepared to share in the risk when costs exceed the budget targets.
• The better the provider team can assess its historic outcomes and perform its cost accounting, the greater certainty it can have of its ability to meet future cost targets.
• Because case cost risk is in large part related to unforeseen complications, physicians must focus closely on quality of care issues. Knowledge of one's own outcomes in terms of re-operation and complication rates during the proposed global period is crucial.
• The opportunity to objectively demonstrate consistently satisfactory outcomes should enhance the reputation of the provider team, and can lead to increased referrals of patients covered by other payers.
• Package pricing can create opportunities to work more closely with the hospital and with other providers. While some orthopaedic surgeons will welcome the opportunity to be part of a provider team, others may find that these other providers, especially the hospital, become excessively involved in patient care decisions. It is important to seek a new practice arrangement that results not only in quality patient care, but also in a satisfying and productive practice environment.
• It is important that the provider team design an internal payment system which compensates team members for their specific contributions to the care of the patient, and/or administration of the arrangement. The system should be designed by the entire team. so that each member understands the imperative of working toward mutual objectives.
• The service being considered for package pricing should be a well defined procedure and not subject to wide variation in costs.

Potential Risks

Package pricing contracts carry with them an element of financial risk. When developing a package price offer, the provider team should obtain as much claims and utilization data as possible, directly from the payer or from alternative sources whose reliability may be trusted. Beware of payers who cannot or will not provide accurate data. The provider team should consider managing its risk by seeking "outlier" or stop/loss provisions in a package pricing contract, and should work together to achieve new operating efficiencies.

While package pricing arrangements offer the opportunity for creative collaboration between providers, they must be developed within a regulatory environment which may be hostile to such collaboration. Anti-trust considerations are of special concern. The provider team is urged to pay careful attention to the legal and regulatory ramifications of its actions, seeking appropriate counsel in the development of its agreements.

The American Academy of Orthopaedic Surgeons(AAOS) believes that orthopaedic surgeons, and all members of the provider team, should carefully consider the above information before entering into negotiations regarding package pricing contracts. Above all, orthopaedic surgeons must scrupulously avoid agreements which contain the potential for conflicts of interest, and consistently aim to achieve high quality care and outcomes. The primacy of the physician-patient relationship must be maintained and respected at all times.

September 1996 American Academy of Orthopaedic Surgeons. Reviewed December 2007.

This material may not be modified without the express written permission of the American Academy of Orthopaedic Surgeons.

Information Statement 1013

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