Published 5/1/2014
Andrew Osterman, MBA

Bundled Payments from the Specialist’s Perspective

A quiet revolution in episodic risk contracts—bundled payments—could have a significant impact on the role of specialists in the healthcare system. These contracts have the potential to not only improve outcomes for patients, but also benefit a specialist’s practice.

History of bundles
The term “bundled payment” is often used to describe a circumstance in which a single entity (typically a hospital) receives a single reimbursement for all care—institutional and professional—related to a clinical episode and is accountable for disbursing payments to associated providers. The term came into existence with the creation of the Acute Care Episode (ACE) Demonstration project in 2007.

ACE was able to show that episodic expenditures can be cut while maintaining or even improving quality. It was one of the most discussed pilot programs introduced by the Centers for Medicare & Medicaid Services (CMS) in the last 10 years. But for all the discussion, this program has two key limitations that are often overlooked.

First, the ACE program combined new incentive structures, new program reporting processes, and—most significantly—new workflow procedures. Hospitals have managed bulk reimbursements with transplant procedures for years, but the relative rarity of these events meant that each claim could be processed manually. Applying ACE’s bundled payment methodology to more common orthopaedic or cardiac procedures would require hospitals to invest in more employees for the revenue cycle department or more IT systems to support this new process.

Second, this workflow constriction limited ACE’s coverage strictly to the inpatient experience. Hospitals were not accountable for postdischarge care because there were no guidelines for submitting, routing, or processing these claims.

The Center for Medicare & Medicaid Innovation (CMMI) is attempting to build upon successes in the ACE project through its Bundled Payment for Care Improvement (BPCI) program. BPCI offers four payment models that allow providers to select varying degrees of workflow disruption and scope of risk. (For more information on the various models, see “Pros and Cons of Bundled Payment Participation,” AAOS Now, March 2014.)

The four models are based on what is included in the bundle. Model 1 is a retrospective model covering inpatient care only; model 2 covers inpatient care plus 90 days of postoperative care; model 3 covers only postoperative care; and model 4 is a prospective model covering inpatient care only.

Although model 4 is similar to the ACE program model, model 2 enables providers to participate without changing their current revenue cycle processes. That administrative simplicity and the increased opportunity for saving has attracted more than 60 hospitals to model 4; only 13 hospitals have chosen to participate through model 2.

The evolution of bundled payments
In model 2, providers and CMMI analyze the costs for a typical episode of care during a historical period. CMMI defines the care associated with the episode and sets the length of the episode at 90 days. After a year, CMMI will determine the average cost of care for recent episodes and compare it to the historic average. If the average cost of care of recent episodes is less than 98 percent of the historic analysis, the provider is issued a check for the difference. Otherwise, the accountable provider is responsible for paying the difference to CMS.

By leaving the revenue cycle intact and including both postacute care and hospital readmissions, model 2 is able to cover a greater portion of the episode of care. An analysis of cardiac episodes of care conducted by the consulting firm The Advisory Board Company shows that readmissions and postacute care comprise less than half of the total cost of care for an episode, but drive more than 94 percent of the total cost variation.

This variation in cost, even when controlling for risk, outcomes, and workflow disruption, has captured the attention of Medicaid plans across the country. Issues surrounding both pricing and attribution can make both accountable care organizations and patient-centered medical homes (PCMH) challenging to launch for a Medicaid population. Episodic programs may be more attractive in these situations.

No state has embraced this approach as much as Arkansas. Currently, the state is in the process of migrating all Medicaid and a significant portion of commercial reimbursement to shared savings programs centered on episodes of care rather than populations. Tennessee, Ohio, and New Mexico are all planning to replicate certain aspects of the program, and more than 10 other states are evaluating the methodology as well.

It should be noted that the Arkansas program is not actually a “bundled payment” program because no claims are bundled together. Instead, the term “episodic risk” more accurately describes the savings mechanism and may supplant “bundled payment” in other markets as well.

The attraction for specialists
Episodic risk contracting has three appealing aspects for specialists in general and orthopaedists in particular.

First, unlike population health programs, episodic risk programs presuppose the inpatient event. In population health programs like PCMH, expensive clinical interventions at the hands of specialists are events that should be managed down to reduce the total cost of care for that population. Episodic programs take these indexing events as a given and focus on postacute care and readmissions as paths to improved cost efficiency. Because both the number of procedures and their reimbursement remain untouched, episodic programs will have significantly less impact on the core fee-for-service revenue of a specialty practice.

Second, episodic risk programs recognize the specialist as the one driving improvements in clinical efficiency. Both PCMH and capitation programs typically appoint a general practitioner as the “quarterback of care” with expanded accountability for managing the costs of a population. Increasingly, these clinicians refer their patients to specialists whom they have identified as providing clinically efficient care. In episodic risk programs, the specialists are accountable for managing the episode and can direct patients to hospitals or rehabilitation facilities that deliver higher quality outcomes.

Last, episodic risk programs can increase specialty practice revenue. Improving episodic clinical efficiency starts with identifying those providers who do the best job of delivering high-quality outcomes and directing patients to them. Small things, such as a hospital’s ability to provide quality discharge instructions or a skilled nursing facility’s ability to ensure medication compliance, can drive significant variation in the total cost of care even though they are rarely clinically significant to the specialist.

Episodic risk programs provide specialists with both the data and the incentive to analyze that data and direct patients accordingly. This approach allows specialists to reap bonus payments for affecting utilization that would not contribute fee-for-service revenue to their practice in the first place. The specialists can therefore “pull” unnecessary reimbursement for postdischarge services up into the primary clinical event and reap bonus payments on top of their core practice fee-for-service revenue.

The unsustainable cost of health care in this country is forcing stakeholders to look at new reimbursement models as a way to both improve quality and efficiency within the system. Episodic risk contracting methodologies began as Medicare innovations, but are now popping up in Medicaid programs across the country. These contracts and the opportunities they afford should be of interest to the specialist community.

Andrew Osterman, MBA, is principal, payment transformation initiative, The Advisory Board Company, Washington, D.C.

Learn more…
For more information about orthopaedic participation in bundled payment programs and episodic risk contracts, attend the 9th Annual AAOS Practice Management Meeting, Sept. 12–13, 2014, in Chicago,