Published 3/1/2014
Brandon D. Bushnell, MD

Developing a Bundled Pricing Strategy

Creating the bundled price requires transparency, cooperation

In the traditional fee-for-service reimbursement model for health care, each “part” of an episode of care is billed individually. Under the “bundled pricing” concept, however, all aspects of the episode of care are pooled into a single price that covers the whole “bundle” of services and products.

Bundled pricing is not new to the American consumer; examples can be found in food service (extra value meals), travel packages (air/hotel/entertainment), and communication services (telephone/cable/Internet). In fact, bundling is not even new to health care. In the pre-Medicare era, patients would often receive a single bill for “professional services,” with no additional description of its components. In the last half-century, however, healthcare billing has become its own industry—with a dizzying array of codes, modifiers, rules, regulations, and (of course) headaches.

Orthopaedics has a history of leading the way in bundled pricing. In the early 1990s, Michigan orthopaedist Lanny L. Johnson, MD, published a seminal pilot study of an “alternative reimbursement system” successfully implemented at his local hospital. The Centers for Medicare & Medicaid Services created orthopaedic “Centers of Excellence” in the early 2000s as an indirect method of bundling services and payments. Several additional public and private ventures have formed in recent years with orthopaedics as the focus of bundled pricing arrangements, and the trend seems to be taking off. (For more information on bundled pricing in orthopaedics, see “Pros and Cons of Bundled Payments Participation.”)

Creating the bundle
In orthopaedic surgery, the process of creating the bundle begins with a detailed definition of the “episode of care.” Unlike primary care or chronic specialty care, encounters in orthopaedic surgery often fit nicely into a universally agreed upon “episode” (
Table 1). The “global period”—comprising the preoperative evaluation, the surgery itself, and 90 days of postoperative after-care—has long governed surgical finances and creates an easy starting point for bundling “episodes.”

The next step is to define the participants. Ideally, a single-source provider (such as a major health system or hospital) will manage all aspects of an episode of care—including surgery, equipment, therapy, medications, inpatient care, and outpatient follow-up. Many large single-source providers, such as Vanderbilt University in Nashville, Tenn., have selected orthopaedic surgery projects as their pilots for bundled payments.

Most markets, however, do not have a true single-source provider; every part of the episode of care is handled by different local and regional providers. Significant negotiations must therefore occur to determine not only who does what but also who gets paid what within the bundling arrangement. Because bundling arrangements usually result in a single payment to a designated recipient, the various participants must decide who that primary recipient will be and how the money will then be divided thereafter. This step creates opportunities for both collaboration and controversy and is probably the single most important step in the entire process.

Participants must also define the protocols or care pathways that guide the provision of products and services. Ideally, these pathways will be predictive in that they follow the same steps and lead to the same results every time. In orthopaedics, due to the lack of high-level evidence in support of many common practices, significant variation may exist in terms of individual preferences and habits. Although clinical practice guidelines and appropriate use criteria may serve as initial templates, ultimately, pathways must be adapted to the local circumstances to maximize individual buy-in.

The next step in creating an orthopaedic bundle is to evaluate the resources needed to provide the care. As the earlier steps are completed, many of these resources can be clearly identified. The bundling team may want to set up a resource-management division to coordinate the computer systems, materials, finances, and other logistical aspects.

Because a bundling arrangement forces providers to take on roles traditionally filled by claims administrators, having staff with appropriate experience and training is essential. Resource managers must also be able to function in the world of fee-for-service, because a lengthy transition period between the current and future models is likely.

In addition to resource management, successful bundling also depends on outcomes management. In a bundled-pricing system, outcomes are defined by the concept of “economic and clinical value” (ECV). Orthopaedics leads many other specialties in defining the clinical component of ECV through patient-centered scoring systems. Although applying clinical scores in a bundling situation remains a controversial and ongoing process, the AAOS has done a great deal of work on translating clinical outcomes into value.

The economic component of value may be harder to quantitate. Several recent studies have investigated the large-scale socioeconomic value of ACL reconstructions, rotator cuff repairs, and other procedures, but identifying the individual-level value of such surgeries remains a difficult task. Ultimately, it is the combined value—both clinical and economic—that will matter most in measuring outcomes.

The final step in bundling is setting the price. Although the line-item prices of the individual pieces of the bundle may have baseline references, the bundle represents a new entity in which the value of the whole is different than that of its parts. Many initial pricing attempts will likely overshoot or undershoot the ideal price point, so constant observation, feedback, and maintenance are critical. As the market for bundling expands and becomes more sophisticated, so likewise will the process of price setting.

Implications of bundled pricing systems
Bundled pricing represents a true game changer in healthcare finance and as such, the transition will not likely happen overnight. Instead, an extended interim period of mixed arrangements (part fee-for-service, part bundled, part other) is likely. Among the relatively certain implications of increased bundling in the orthopaedic marketplace are the following:

  • Shifting responsibility for risk management from payer to provider—Providers who engage in bundling arrangements will assume financial risk for profit or loss based on the price of their bundled product.
  • Shared responsibility for cost control among team members—Members of a bundling endeavor will have a vested interest in each other’s contributions and will thus be motivated to minimize risk-generating behavior from teammates.
  • Alteration of traditional incentives—Under fee-for-service arrangements, volume has often been most providers’ primary concern. In a bundled arrangement, other incentives such as quality or cost-savings may trump volume as the primary driver of behavior.
  • Creation of competition along different lines—Traditional competition may be based on geography, customer service, and perceived clinical reputation or quality. With bundling, competition will be based on the highest ECV for the lowest price.
  • Increased transparency—Bundling’s emphasis on total price of a care episode will enable payers, providers, and patients to have better understanding of the true costs of care.
  • Legal ramifications—Because bundling arrangements will involve new partnerships and cooperative agreements, contract law will be challenged and expanded. Likewise, challenges to bundles as monopolistic may arise if groups that bundle can drive out groups that do not.

The concept of bundled payments in health care is an idea whose time is ripe. Many inherent aspects of orthopaedic surgery make it ideal for early experiments with bundling, and interest in developing bundling arrangements is increasing across the country. With appropriate setup and management, bundled pricing can be beneficial to all parties involved and will likely grow in popularity and prevalence.

Brandon D. Bushnell, MD, is vice-chairman, department of Orthopedics and Sports Medicine, Harbin Clinic, LLC, Rome, Ga. He can be reached at brad.bushnell.md@gmail.com

Bottom Line

  • Under a bundled payment arrangement, the costs of all aspects of the episode of care are pooled into a single price.
  • Creating a bundled payment arrangement requires that orthopaedic surgeons consider several issues, including resource management, care pathways, outcomes management, and coordination of care.
  • Bundled payment arrangements shift the responsibility for cost management from the payer to the provider and will alter competitive realities.
  • The legal and financial ramifications are considerable; practices considering such arrangements should seek appropriate counsel.

Johnson LL, Becker RL: An alternative health-care reimbursement system: Application of arthroscopy and financial warranty. Results of a 2-year pilot study. Arthroscopy 1994;10(4):462-470.