Brian S. Parsley, MD


Published 11/1/2012

The Reality of Bundled Payment Systems

An AAOS Now Roundtable on member experiences

The AAOS Health Care System Committee (HCSC) is charged with addressing emerging issues at the interface between physicians and healthcare facilities—such as bundled payments—and with providing timely and proactive analyses of changes in the healthcare system that affect the practice of orthopaedic surgery. Recently, HCSC member Peggy L. Naas, MD, MBA, led a roundtable discussion that did both.

As vice president, strategies, for VHA, a national alliance of not-for-profit hospitals, Dr. Naas led the VHA bundled payment simulation project, which defined and designed a total knee replacement bundle and calculator. She was joined by the following AAOS fellows who have had personal experience with bundled payment systems:

  • Steven F. Schutzer, MD, an arthroplasty surgeon from Hartford, Conn., and medical director of the Connecticut Joint Replacement Institute (CJRI), is currently participating in a bundled payment program for primary hip and knee arthroplasty
  • Richard E. White Jr, MD, consultant in orthopaedic administration for Art and Health Services and the Lovelace Health System in Albuquerque, N.M., and director of the Medicare Acute Care Episode (ACE) Demonstration Project for bundled payments
  • Brian S. Parsley, MD, the first employed physician at a physician-owned hospital in Houston, Texas, and chair of the American Association of Hip and Knee Surgeons (AAHKS) health policy committee
  • Stephen J. Zabinski, MD, practicing orthopaedic surgeon in the Atlantic City, N.J., area, and a member of a physician panel developing a bundled payment plan for total joint replacement

Peggy L. Naas, MD, MBA

Steven F. Schutzer, MD

Stephen J. Zabinski, MD


Dr. Naas: Let’s start with some of the challenges that you have perceived with orthopaedic bundled payments.

Dr. Zabinski: I think the biggest challenge for the community orthopaedic surgeon is alignment. To be able to accept the risk associated with bundled payments and to be able to negotiate effectively with payers and employers, the average community orthopaedic surgeon must have a higher level of alignment—legally and strategically—with hospital payers. The hardest part is figuring out how to align with other doctors to form an entity that can really accept the risk and handle the legal work and the contracting associated with bundled payments.

Other challenges include finding surgical techniques that benefit patient outcomes and build in economies, standardizing protocols, and the creation of engaged ancillary services—medical, rehabilitation, and home care services—that are part of your vision for the total joint patient, which is better quality and more cost-effective care.

Dr. Schutzer: Our challenges were slightly different. We formed a limited liability company to manage the arthroplasty service line 2 years prior to implementing a bundled payment program. We faced unforeseen legal obstacles in forming the necessary alliances between physicians and our hospital. It was also a daunting task to contend with the issue of establishing fair market value for pricing the bundle and avoiding antitrust issues. I think that was my biggest surprise. In spite of the fact that we were doing the much needed work necessary to create patient healthcare value, the legal obstacles were extensive, time consuming, and costly.

Implementing these programs also necessitates undertaking a complete care redesign project, and costing out each step by using activity-based costing. It requires an enormous time and resource commitment. But overcoming the obstacles is both challenging and fun.

Dr. White: I think the ACE Demonstration Project sponsored by Medicare was much easier, in that the Centers for Medicare & Medicaid Services (CMS) defined the rules of the project and how it should be carried out without any initial physician input.

It included a waiver that allowed gainsharing of up to 25 percent above the usual and accepted fee for a Medicare total joint procedure. Initially, physicians were concerned about whether the 25 percent bonus was appropriate. But because it was predefined by CMS, there were no prolonged discussions or negotiations about it. The difference is that all of the risk is handled by the hospital. Physicians truly are not at risk at all in this particular bundled payment demonstration project.

The challenges were to get a group of physicians who previously had practiced in very different ways to standardize their care as much as possible. If physicians elected not to participate or weren’t willing to try to be more efficient and participate in standardized protocols, they just did not join the ACE Demonstration Project.

Dr. Parsley: I headed a task force monitoring the ACE bundled payment projects. I think part of the challenge is that the models are different with each hospital relationship and with each location. Just look at the differences among the plans represented by the participants in this roundtable. Some are physician-driven; others are hospital-driven projects where the physicians were brought in on board secondarily. I think that influences some of the early successes or the failures.

Dr. Naas: I think it’s a challenge for orthopaedic surgeons to have the direct knowledge, experience, and sophistication around the financial analytics. If you’re designing a bundle, you want to have very trustworthy partners to define the price point and services to enable the care redesign and successfully drive clinical improvement and efficiencies.

Given these challenges and barriers, what are the opportunities to participate in bundled payments?

Dr. Schutzer: I am an ardent supporter of value-based healthcare. Frankly, I think that the best years for arthroplasty surgeons are still ahead of us—if we can demonstrate to the payer community and other purchasers of health care that quality and value really matter—and if they align their interests with this movement, we will all succeed in generating value for our patients.

Prior to convening the implementation team for our bundled payment program in 2009, much of the preliminary work had already been completed. We had a robust total joint registry with more than 4,000 patients and clean data on their outcomes. Reasonable transparency between our surgeons and the hospital had already been established because we were managing the arthroplasty service line and had access to all necessary financials. At the end of the day, I think it’s also a chance to seize a business advantage. Obviously, it’s better for patients. And just doing that care redesign process has been enormously effective.

Dr. Zabinski: I think the opportunities are in marketing and being able to secure more of the total joint replacement market, which needs standardization and improvement in quality patient outcomes. But it’s also an opportunity to improve your patients’ satisfaction, your outcomes, and your revenue strength. I’m curious to learn what everyone’s accepting in terms of episode of care. In my particular model, it’s from the decision of surgery up to 90 days postop.

Dr. Schutzer: Eventually, there will be a menu of bundles, the specific terms of which can be negotiated with the various payers, employer groups, or other purchasers of healthcare products. We have operated on several early retirees who had been unable to obtain health insurance for their pre-existing arthritic hip or knee. These patients have a 90-day post-acute warranty for surgical site complications. On the other hand, the commercial contract that we signed with ConnectiCare—a local health insurer—limits the defined episode to just the acute hospitalization.

Dr. Zabinski: In our project, most of the money is spent in the surgical stay, which is easier to control, except for readmissions, which clearly are one of the biggest cost drivers.

Dr. Naas: What about other cost drivers? Skilled nursing facility use is a significant post-acute expense that can be managed, as well as implant selection, pricing, negotiations, and other care options that can be redesigned for efficiency.

Dr. White: Sometimes the Medicare payments for placement in an acute rehabilitation hospital or a skilled nursing facility and/or the use of home health care exceeds the combined bundle of Part A and Part B. Managing that is difficult and is probably best handled by a hospital system that owns its own acute rehab hospital and its own home healthcare agency.

Brian S. Parsley, MD
Richard E. White Jr, MD

Dr. Schutzer: I believe the market is going to flip to this type of payment structure for clean elective procedures, including total joint arthroplasty. I think the data coming out of the ACE Demonstration Projects are compelling and will force a shift to a value-based contracting methodology.

Dr. Parsley: Every orthopaedist should pay very close attention to the bundled payment programs. As a specialty, orthopaedics is ideal for a bundled payment package and total joints are the tip of the iceberg. The more we can learn about this now, even if we don’t actively engage in it, the better we’ll be situated when implementation occurs.

Dr. Naas: I think it behooves us as orthopaedists to look at care redesign. Under any payment model, the ideas of value-based payments, increased transparency around outcomes, and expectations of efficiency are key. We have opportunities to do better. Care redesign handles the transition, no matter what the payment modality.

Dr. Zabinski: The average practicing orthopaedic surgeon also needs to realize that, regardless of how much of a foothold bundled payments take, insurers are going to be directing patients to lower cost, higher quality, higher satisfaction providers. One of the great ways for orthopaedists to understand where they fit in that stratification of cost, outcomes, and patient satisfaction is to be engaged in a bundled payment project. It really will teach them whether aspects of their clinical or office-based practice and their support services are cost-effective and patient-effective.

Dr. White: The ACE Demonstration Project has clearly shown that bundled payments can succeed when applied to the high volume, high technology and intensity, and high cost diagnoses of primary and revision hip and knee replacements. They are less successful when applied to other diagnoses and procedures, with less potential for a gain-sharing advantage for the physician.

Bundled payments probably will work for spine surgery. But other orthopaedic or non-orthopaedic procedures won’t have as much room for savings.

Dr. Naas: Let’s look at the spillover effect of care redesign. If you embark on this type of care redesign, do you do care differently with other patients, depending on the contracting payer, or are you seeing value, no matter the payer?

Dr. Schutzer: Surgeons who participate in our bundle must sign an agreement that they will comply and follow the established protocols. So far, we’ve had 100 percent compliance. The same protocols are also available and used for most patients, even those who are not under a bundled payment contract. So, the spillover effect associated with implementing this program has been substantial.

Dr. Zabinski: The protocols that I implemented have also had a spillover effect to other commercial and even Medicare patients. In a smaller community, people talk about their joint replacement experience. The changes that I’ve made in one segment of my patient population have definitely flown over to other patients.

Dr. White: This gives us an opportunity to really define a type of care for all patients, not just Medicare patients. To maintain two different types of care paths would be so confusing. In our protocols, all patients in the ACE project went home or somewhere by or before the third postoperative day. That standardization across all total joint patients, I think, leads to a very good overall treatment plan.

Dr. Naas: Are there cost or quality outcome measures that have, in fact, demonstrated either reduced total cost of care or the clinical value of bundled payments?

Dr. White: I have data from two of the three ACE Demonstration Centers (Albuquerque, N.M., and Tulsa, Okla.). At both, the actual cost reduction for each case was approximately 10 percent. The contribution to the bottom line in terms of increased profitability in both sites improved or increased by 50 percent to 70 percent—a fairly significant improvement.

Dr. Zabinski: In comparison to the historical data for the group, the savings for hip replacement have been about 20 percent, and 15 percent for knee replacement. Half of that has flowed back to the providers engaged in the study. As for patient satisfaction, more than 95 percent of patients are likely to recommend their overall experience with their entire total joint replacement episode.

Dr. Schutzer: As a result of this work, we’ve increased our patient-driven Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) scores from the 84th to the 98th percentile. Our readmission rate went from about 6 percent to 2 percent. Our average direct cost per case dropped between 6 percent and 9 percent, and our average length of stay for primary total hip arthroplasty and total knee arthroplasty went from 3.3 days to 2.7 days. CJRI’s contribution margin also went up substantially.

So I believe we are generating increased healthcare value on the basis of demonstrably improved outcomes and reduced costs.

Dr. Parsley: This is why AAOS members need to become involved and knowledgeable. It’s important that members become the leaders, not the followers. From both the hospital and physician sides, establishing and developing a bundled payment program must address several concerns. Who basically has control? What are the mechanisms to control the costs? Who’s going to make those decisions? What is the gain-sharing opportunity? Who’s going to make that decision?

In all these examples, the physicians are leaders in that decision-making process, and I think that that’s a real key going forward.

Dr. Naas: I heard an orthopaedic surgeon say that he thought that the bundled payment was one of the most exciting opportunities available, despite all the people who are very anxious about it. He had a very interesting perspective. He said, “Where else can we actually sit down with our hospitals and other caregivers and help define all that is absolutely necessary to provide for the best possible outcomes for our patients?”

Dr. Parsley: In the care of the patient, we, as physicians, are still the last patient advocates in the system. If we don’t safeguard our role to control treatment decisions—even in the face of the current cost-containment pressures—then we’re not acting as we should as physicians.

For more on this topic, plan to attend the 2013 AAOS Annual Meeting Symposium C, “Accountable Care Organizations and Bundled Payments: Passing Trends or a New Paradigm?” on Tuesday, March 19, 2013, at 1:30 p.m. In addition, the Practice Management Symposium for Practicing Orthopaedic Surgeons will address “Bundled Payments and Negotiating Strategies,” among other topics.

Disclosure information: Dr. Naas—No conflicts; Dr. Parsley— ConforMIS; Nimbic Systems; AAHKS; Dr. Schutzer—Renovis, Journal of Arthroplasty; Dr. White—Zimmer; Ardent Health Services Lovelace Medical Center; AAHKS; Hip Society; Dr. Zabinski—No data available.

Terms to know
Bundled payment—
A single payment covering the entire package of services patients receive to treat a specific medical condition during a single hospital stay and/or recovery from that stay.

Episode of care—The set of services required to manage a specific medical condition of a patient over a defined time period.

ACE Demonstration Project—A 3-year demonstration project being conducted by the CMS to test the use of a global payment for an episode of care as an alternative approach to payment for service delivery. The global payment covers all Part A and Part B services, including physician services, pertaining to the inpatient stay for Medicare fee-for-service beneficiaries.

Gainsharing—Various types of financial arrangements between physicians and hospitals under which physicians receive cash payments for reducing hospital spending; the goal is to encourage the physicians to deliver quality care in a cost-effective manner.