Published 3/1/2014
Thomas G. Friermood, MD; Brian McCardel, MD; Peggy L. Naas, MD, MBA

Pros and Cons of Bundled Payments Participation

Issues orthopaedic surgeons should consider

Healthcare costs in the United States have increased markedly during the past two decades. Physicians and policy makers alike realize that changes in how health care is delivered and paid for are necessary. As Brandon D. Bushnell, MD, points out in this issue (See “Developing a Bundled Pricing Strategy” on page 16), bundled payments are a possible solution with significant promise.

A bundled payment is a single payment for all services related to an episode of care. Medicare includes several examples of bundled payments, including the diagnosis-related group (DRG) payment to hospitals—a single payment to cover all the expenses associated with a hospitalization—and the global surgical physician fee covering 90 days of postoperative follow-up.

The bundled payment concept works well for orthopaedic surgery procedures, many of which have clearly defined episodes of care and similar related usual expenses. Bundled payments differ from capitation payments in that providers are only at risk for the defined episode of care and any related complications or readmissions during that period.

Orthopaedic bundles are being developed for inpatient procedures such as total joint replacements as well as for outpatient procedures like anterior cruciate ligament reconstructions and rotator cuff repairs. Most bundles include preoperative care, postacute care, and any complications for up to 30 days before and up to 90 or more days after the surgical procedure. The benefits of bundles are in aligning incentives to avoid complications and to deliver care efficiently and in a coordinated fashion across the continuum of care.

Consumers and bundles
Consumers like the idea of a single payment. Surgical patients frequently complain of their confusion when they receive “a bundle of bills” from the hospital, surgeon, anesthesia, medicine, therapy, and others.

Bundled payments also enable the patient to understand the total cost up-front and allow them to compare providers on price, convenience, and other services. This transparency is very compelling in an era of high-deductible health plans. Another welcome development is the necessary creation of comparable quality metrics that patients can understand and use. Patients can see what they are buying and at what price.

Payers and bundles
For insurance companies and purchasers, musculoskeletal care is generally either the largest or second-largest cost segment in a skyrocketing cost environment. Total knee replacement costs (hospitalization, professional fees, and postoperative rehabilitation) constitute the largest single line item for the Centers for Medicare & Medicaid Services (CMS). Although the consensus is that fee-for-service (FFS) won’t go completely away, it will be a progressively smaller part of the payment mix for health care, as payers pursue alternative payment schemes that reward “value.”

Bundles shift the risk of cost management to the provider. With nearly 1 million joint replacements performed each year in the United States, bundles enable purchasers to know what costs will be up front and to align provider incentives with their own.

Orthopaedic surgeons and bundles
With bundled payments, orthopaedic surgeons may see potential for improved revenue if the surgeon and facility can control costs, which can include preoperative, inpatient costs and those incurred postdischarge for up to 30, 90, or some other specified number of days. Providers who demonstrate better value may also benefit as insurance companies drive business their way.

Primary care groups in shared risk arrangements may also direct referrals to providers who demonstrate better value, which can enable a provider or facility to gain market share. Bundling requires validation of quality care and will require engaged surgeons to have more influence or control over the entire episode, driving efficiency and quality outcomes.

Results of orthopaedic bundling programs to date
The first widespread orthopaedic bundling program—the Acute Care Episode (ACE) program, launched by CMS in four states in 2009—is the prototype for the current Bundled Payment for Care Improvement (BPCI) program. A few other demonstration projects have data available. Each of these has had some success and some issues.

The ACE program only applied to Medicare FFS patients, and savings were calculated only for the duration of the hospitalization, although the subsequent “risk period” for readmissions was 90 days. Under the program, up to 25 percent of the savings went to the surgeon and up to 50 percent of the savings went to the patient. In each case, costs decreased, and most surgeons were able to collect the maximum in shared savings.

In a separate educational example, the Integrated Healthcare Association—a collaborative of insurers, physician groups, and hospitals in California—was awarded a grant by the Agency for Health Research and Quality to implement a bundled payment program. Although initially all parties expressed interest, multiple issues emerged that diminished the scale and timeliness of the project and made it harder to derive generalizable conclusions. Participants were surprised to discover the difficulties in agreeing on such things as the length of episode, appropriate testing, the level of discount, the extent of patient steerage, criteria for exclusion vs. risk-adjustment, payment systems unprepared to handle bundling, and regulatory constraints.

The general success of the ACE program encouraged CMS to initiate the Center for Medicare and Medicaid Innovation Bundled Payment for Care Improvement (CMMI BPCI). The BPCI has four models based on what is included in the bundle—inpatient only (retrospective model 1; prospective model 4), for inpatient plus 90 days of postoperative care (model 2), or for postoperative care only (model 3) (Fig. 1).

Model 2 seems to have the most applicants and is a retrospective program that includes all costs for the acute care hospital stay plus costs for the postacute care for a defined time period. Most experts believe postacute care costs offer the greatest opportunity for expense management in the federal BPCI program.

Large, integrated healthcare systems, single specialty orthopaedic groups, and other organizations can participate in the BPCI program. Consultants and entities called “Awardee Conveners” can assist independent orthopaedic groups in participating. Any orthopaedic surgeons considering participation in such a program should seek legal counsel experienced in structuring bundled payments.

Participants in BPCI model 2 develop a “bundled price” for all the services associated with a defined episode of care. This price is based on the participant’s historical costs over the past 3 years. Providers bill and collect a standard fee for services, with a quarterly reconciliation to determine if any savings over the contracted discounted price were realized.

Commercial bundled payments
Multiple insurance companies and employers are interested in commercial bundled payments. Some large employers such as Lowe’s and Walmart have developed bundled payment programs that also limit the participating sites. Other commercial programs seem to be smaller pilot programs.

Commercial bundled payment programs offer more flexibility for providers than the federal BPCI program. The provider can negotiate with the commercial payer to include or exclude specific services in the bundle. Certain comorbidities could be excluded and the definition of when a bundle starts and stops may be negotiated. Steering patients to a provider to increase the provider’s volume and market share may also be part of the agreement.

Concerns for orthopaedic surgeons
With all bundled payment arrangements for total joint replacements and other orthopaedic procedures, surgeons will need to pay close attention to current and total costs as well as to inefficiencies of process, length of inpatient stay, and implant costs (see
Table 1).

Postacute care costs such as appropriate utilization of skilled nursing facilities (SNFs) and home health are critical to understand and manage. Some of these services, which can amount to considerable dollars, have traditionally not been in the control or even awareness of the operating surgeon. However, a significant portion of the 90-day bundle price is postdischarge: Postdischarge care accounts for up to an average of 50 percent of inpatient costs and up to 85 percent of the variability in episode costs.

The lack of control that most surgeons have over this phase of care puts the success of a bundled payment arrangement at potential risk and requires collaboration and partnering with other providers. Because many programs (including BPCI) insist that no restrictions are placed on the beneficiary’s choice of postacute care providers, cost figures may be estimated but not controlled.

The focus of any bundled payment arrangement must be on maintaining and improving quality metrics and outcome measures and avoiding expensive complications. The start-up and administration of bundled payments is difficult and costly, and the bundle needs to include coverage for this. Bundled payments require the investment of time, effort, and expense to coordinate care with all the interested parties—from the hospital, surgeons, and other physicians to the SNFs, therapists, and home health agencies.

Groups that are considering developing a bundled payment program must obtain accurate cost, quality, and outcome data. These data need to be specific for the demographic group involved. Medicare data will be different than commercial data. The data must include all costs associated with a specific DRG. Unfortunately, most physician groups and hospitals do not have these data.

The potential for bundled payments
Bundled payment programs enable purchasers and providers to develop a shared value proposition of increased quality, efficiency, and coordination of care for an entire episode of care. Bundled payments have the potential to moderate healthcare costs and increase healthcare value. Payers, purchasers, providers, and patients must all be involved to create a sustainable program.

Other contracting and payment arrangements—such as clinical integration, hospital reference pricing, and accountable care organizations—may need to be integrated into bundled payment contract models over time. In the meantime, orthopaedic surgeons can develop the necessary data, skills, and collaborative relationships to understand the potential opportunities that may be available in the new marketplace.

Thomas G. Friermood, MD; Brian McCardel, MD; and Peggy L. Naas MD, MBA, are members of the AAOS Health Care Systems Committee.

Learn more about bundled payments
The AAOS Health Care Systems Committee is sponsoring a free webinar, Bundled Payments: Opportunities and Considerations for Orthopaedic Surgeons, on Tuesday, March 25, at 8:15 p.m. ET. To register and get more information, visit

Bottom Line

  • The bundled payment concept works well for orthopaedic surgery procedures, many of which have clearly defined episodes of care and similar related usual expenses.
  • Multiple insurance companies and employers—as well as the federal government—are interested in bundled payment arrangements. Commercial agreements may have more flexibility than federal programs.
  • Establishing a bundled payment program requires accurate cost, quality, and outcome data—and may not be as easy to do as previously thought.

Froimson MI, Rana A, White RE, Marshall A, Schutzer SF, Healy WL, et al. Bundled Payments for Care Improvement Initiative: The Next Evolution of Payment Formulations
AAHKS Bundled Payment Task Force. J Arthroplasty 28 Suppl. 1 (2013) 157–165.

Additional Information
IHA article
: Williams T, Robinson J.
Bundled Episode-of-Care Payment for Orthopedic Surgery: The Integrated Healthcare Association Initiative. Integrated Healthcare Association (2013).