When a patient undergoes an episode of care, Medicare and most commercial payers reimburse the hospital, surgeon, and postdischarge providers using separate and unique payment systems. For example, when a surgeon performs a total hip replacement (THR), the hospital is reimbursed based on the medical severity adjusted diagnosis-related group (MS-DRG) code for major joint replacement. Separately, the surgeon submits charges based on the current procedural terminology (CPT) code for hip replacement. Providers and institutions caring for this patient after discharge through a home health agency, inpatient rehabilitation, or skilled nursing facility are reimbursed separately as well.

This fragmented system of charges and payments does little to promote quality, cost-efficient, coordinated, or patient-centered care. For instance, if sepsis were to develop and the THR patient required mechanical ventilation, the hospital payment could more than double. Physician payments increase as well due to consultations from a pulmonologist or infectious disease specialist. Although complications may be unavoidable in many cases, payers are increasingly unwilling to pay for care based on the volume of services provided per-episode.

Both Medicare and private payers have launched several projects that bundle all payments to providers and facilities for an episode of care, regardless of the presence of complications, supply costs, and readmissions. Unlike the fragmented system of payments in the current fee-for service system, bundled pricing creates common incentives across settings to deliver coordinated, patient-centered, quality care at the lowest cost. This emerging payment system has the potential to profoundly affect the delivery of orthopaedic care in the United States.

Why is bundled pricing important?
Orthopaedics consumes a large and growing proportion of healthcare resources. More than 1.1 million people underwent joint replacement in 2012, and demand for joint replacement is expected to increase 10 percent to 15 percent annually. Furthermore, payments for orthopaedic services vary considerably, seemingly without any correlation to quality of care.

Studies on the variability in Medicare payments for inpatient procedures have found that payments to hospitals for back surgery varied by an average of $18,762, while payments for hip fracture varied an average of $10,615 (Fig. 1). Such large variations in payments for treatment of similar conditions suggest that hospitals have considerable room to improve cost efficiency.

Variations in the quality of care are also of concern to payers, policy makers, and patients. Several authors have demonstrated that significant differences exist between surgeons and institutions in adherence to quality processes, as well as in outcomes following orthopaedic procedures. Bundled pricing encourages the universal provision of quality orthopaedic care by rewarding the adherence to evidence-based care guidelines, while holding providers and hospitals cost-accountable for complications and readmissions.

Bundled pricing is one of several payment reforms outlined in the Affordable Care Act. Bundled pricing realigns the incentives of payers and providers toward providing healthcare value to patients.

Economist Steven Porter defined value in healthcare as quality divided by cost. Quality in orthopaedics may be defined as the delivery of safe, effective, patient-centered musculoskeletal care. Bundled pricing creates incentives for orthopaedic surgeons to provide such care, and surgeons, in partnership with hospitals, surgery centers, and other providers, assume financial liability for the cost and quality of that care.

The orthopaedic surgeon is central to the success of bundled pricing. Although fee-for-service payments to orthopaedic surgeons for procedures such as hip fracture repair and spine surgery constitute less than 13 percent of inpatient surgery costs, surgeons control the provision of resources within an episode that determine both cost and quality.

Implant selection, implementation of evidence-based measures to prevent complications, chosen discharge setting, and care coordination before, during, and after hospital admission are among the resources that affect episode costs and are in some way under control of the surgeon. Successful bundled pricing requires quality, cost-efficient, and coordinated orthopaedic care, which requires the leadership of the orthopaedic surgeon.

How and why bundled pricing works
The service “bundle” is the basic unit of bundled pricing—the package of supplies and services associated with a specific disease or surgical procedure that is required to provide care for a patient for a prespecified period of time, or episode period. Such a bundle of services creates an expanded “episode-of-care” that spans all settings and providers and may include preoperative care, hospitalization, and care during the postoperative period.

For example, Medicare’s Bundled Payments for Care Improvement (BPCI) project defines 16 orthopaedic bundles. Each episode of care begins 3 days before surgery and ends 30, 60, or 90 days after discharge. Unlike the current payment system, surgeries are warrantied, and readmissions or surgeries related to the index procedure during the episode period incur no additional charges and are covered by the bundled payment. Bundles may include physician and hospital care, implants, pharmaceuticals and medical supplies, as well as postdischarge care related to the surgical procedure (Fig. 2).

Payment for a bundle of services is termed an “evidence-informed case rate” (ECR), and is the contracted amount per service agreed to by the provider organization on a per-episode basis. This amount is based on historic reimbursement, minus a predetermined amount (typically up to 5 percent of historic payment), which is shared among physicians, the hospital, and post-acute care (PAC) facilities and providers when savings are realized.

Bundled payments may be determined either prospectively or retrospectively. Prospective bundling involves the distribution of a predetermined payment to the hospital or provider organization, which then distributes payments to the surgeon, hospital, and PAC providers. Should care efficiencies and quality benchmarks be achieved, each stakeholder receives an agreed-upon proportion of the savings. If savings are not realized, losses are shared.

Retrospective bundling involves the reconciliation of fee-for-service expenditures with the ECR after the episode has concluded, and the distribution of savings or the exacting of repayment occurs later. Both models require providers to reduce the cost of care below the ECR to achieve savings.

Risk adjustments and quality incentives are vital in bundled pricing to prevent the exclusion of patients with comorbidities and stinting on care. Because the average Medicare episode payment is nearly twice as high for beneficiaries with more than one chronic condition than for those without, the ECR must be risk adjusted to account for the increased likelihood of complications in sicker patients, and an allowance for predefined “preventable complications,” such as surgical-site infections (SSI), must be defined. Quality measures and incentives are included in bundled pricing agreements to ensure adherence to evidence-based care and to promote quality outcomes.

Both public and private bundled pricing models have been developed in recent years. These include the Geisinger Health System plan for cardiac and joint replacement surgeries, the Medicare Acute Care Episode demonstration project, and the Bundled Payments for Care Improvements Project. Part 2 of this series will examine the factors contributing to the success or failure of bundled pricing models, as well as the challenges these models face.

Ross Taylor, MD, MBA, is in private practice at Coastal Orthopaedics in Conway, S.C. He can be reached at macrotubule@gmail.com

Editor’s Note: This is the first of two articles on bundled pricing for orthopaedic services. This article covers the increasing use of bundled pricing in healthcare reform and the application of bundled pricing to orthopaedics. A subsequent article will cover measures of success and challenges facing bundled pricing models.