Published 1/1/2015
Ross Taylor, MD, MBA

Measuring the Success of Bundled Pricing Models

Cost drivers and challenges facing orthopaedics

Because bundled pricing involves a single payment to provider organizations for a surgical service such as joint replacement, there are no contingency payments for prolonged hospital stays, hospital readmissions, or carve-out payments for implants. This forces providers to consider the factors that determine the cost of providing care (cost drivers) during an orthopaedic episode.

The four greatest cost drivers for an orthopaedic episode are hospital length of stay (hLOS), hospital readmissions, postdischarge services, and implant costs. Bundled pricing ties together quality and cost, because complications that increase hLOS or lead to hospital readmission after surgery not only increase episode expense, but also adversely affect patient outcomes.

Studies on the relationship between the presence of complications and hLOS in surgical patients have found that, in patients who underwent spine or joint replacement surgery, the presence of one or more complications can double the median hLOS. The most frequent complications that increased hLOS during orthopaedic episodes were pulmonary embolism or venous thromboembolism (VTE), pneumonia, and infections.

The risk of surgical complications may be reduced through the implementation of established evidence-based strategies to prevent surgical site infections (SSIs), VTE, and medical complications related to comorbidities. Adherence to AAOS Clinical Practice Guidelines on Preventing Venous Thromboembolic Disease in Patients Undergoing Elective Hip and Knee Arthroplasty has been shown to reduce the incidence of VTE.

The High Value Healthcare Cooperative, a consortium of high-performing hospitals, found that health systems with the lowest complication rates and shortest hospitalizations following knee replacement engaged patients in a multispecialty preoperative evaluation, as well as comanagement by anesthesia, internal medicine, and orthopaedics following surgery.

Hospital readmissions
Although some hospital readmissions following inpatient orthopaedic surgery are unavoidable, unplanned readmissions significantly increase episode costs, and may poorly reflect on the quality of surgical care. Unplanned hospital readmission following joint replacement nearly doubles episode costs, and readmissions account for 16.2 percent of Medicare hospital payments for hip fracture repair.

In a large cohort study of arthroplasty patients, the most common reasons for unplanned hospital readmission after surgery were joint-related infection, joint stiffness, and wound complications. Risk factors for readmission included revision arthroplasty, prior joint infection, cardiac valvular disease, diabetes with end-organ disease, and substance abuse, which suggest targeted preventive management of complications in these groups may reduce readmissions.

Postdischarge care
Postdischarge care constitutes 36 percent of the costs for knee and hip replacement episodes, and is the fastest growing component of spending associated with hip fracture repair. The chosen discharge setting has an impact on joint replacement episode costs.

When patients are discharged to a skilled nursing facility (SNF), episode costs average $5,520 more than when the patient is discharged to home under the care of a home health agency (HHA). Although certain patients may require an inpatient setting after acute care discharge, providers may reduce episode costs by discharging patients to home under the care of an HHA, provided the patient has sufficient support and is medically appropriate for the home setting.

The postdischarge setting also influences the risk of hospital readmission following inpatient orthopaedic care. Patients discharged to either an SNF or an inpatient rehabilitation facility have higher rates of hospital readmission after joint replacement. Because the postacute care setting has both direct and indirect impacts on episode costs, successful bundled pricing strategies require care coordination in transitioning the patient to the most appropriate setting.

Addressing hLOS and readmissions
The same postoperative complications that increase hLOS also increase the risk of readmission, which suggests that evidence-based protocols to reduce the rate of SSI, VTE, and complications related to comorbidities may also reduce hLOS and the rate of unplanned readmissions.

Multispecialty preoperative evaluation, as well as hospitalist comanagement, may reduce the impact of medical complications on hLOS, readmissions, and patient outcomes. Designated care coordinators, such as a physical therapist or nurse practitioner, should reduce readmission risk by directing patient education, communicating with postacute care providers, and arranging prompt postoperative follow-up with a primary care physician to address new or ongoing medical issues after hospital discharge.

Implant costs
Controlling costs under a bundled pricing model will require surgeons to consider implant choices more carefully. Implant costs for primary total knee replacement and primary total hip replacement vary widely—by as much as $10,000—even within hospitals. Prosthesis costs may constitute up to 87 percent of the hospital charges for joint replacement (
Table 1).

Such price variation is not always explained by implant quality, and episode costs may be reduced if the surgeon chooses the most cost-effective prosthesis. Pricing strategies such as price ceilings, single-vendor agreements, and single-price or case-price requirements can help control and reduce implant costs.

Although most orthopaedic surgeons acknowledge the importance of implant pricing, they frequently underestimate the cost of the implants they use. Furthermore, few surgeons are involved in negotiating implant contracts. Nonetheless, reductions in implant costs without compromising outcomes are possible. Implant savings may allow for more competitive pricing of the joint replacement, spine surgery, or hip fracture repair bundles.

Quality measures
Although bundled pricing creates incentives to prevent complications, quality measures are also included in episode-of-care contracts to encourage adherence to evidence-based care, while reducing incentives to stint on care. Such contracts must specify the quality measures used to adjust payments, and the hospital-physician partnership must ensure that the participating physicians have the ability to optimize outcomes around such measures through application of evidence-based protocols.

Challenges ahead for bundled pricing
The broad implementation of bundled pricing faces several challenges. These include anti-trust laws, challenges to physician-hospital alignment, patient protections, achieving economies of scale, and payment reform preferences.

Federal anti-trust laws—Federal anti-trust laws strictly limit the ability of physician-hospital networks to negotiate price agreements, such as those required in a bundled pricing contract. Nonetheless, several models allowing for collective fee negotiation have been approved.

Approved models require the physician-hospital network to be both financially and clinically integrated. Financial integration involves the sharing of risk between the hospital and physicians; and the requirement for such risk sharing may be satisfied inherently through bundled pricing. Clinical integration requires ongoing programs to monitor quality and utilization, while rewarding the provision of quality and adherence to evidence-based practices.

The federal anti-kickback statute, physician self-referral prohibitions, and the civil monetary penalties law combine to restrict the ability of hospitals, physicians, and postacute care providers to integrate in ways necessary to create care efficiencies. Provider organizations will require legal guidance when proceeding with bundled-pricing contracts.

Physician-hospital alignment—Bundled pricing requires physician-hospital alignment and the orthopaedic surgeon must assume a leadership role in cost-containment, surgical safety, and quality assurance. Because most orthopaedic surgeons practice independently and are not hospital-employed, models of physician-hospital alignment such as physician-hospital organizations or contract arrangements between practices and hospitals may be necessary for bundled pricing to succeed.

Patient protections—Patients require significant protections as well. Payment reforms must promote quality, or otherwise such strategies represent only cost controls, without regard to patient outcomes. How quality is defined and measured and what processes and outcomes will be rewarded are continuing to evolve.

Risk-adjusted allowances for nonpreventable complications must be incorporated into bundled pricing agreements to prevent the exclusion of patients with significant comorbidities, as well as those who require procedures with higher care costs, such as revision arthroplasty. As several models have already shown, payers and providers do not always agree on the definition of nonpreventable complications.

Economies of scale—Bundled pricing depends upon economies of scale for success. The Center for Medicare & Medicaid Services recommends a minimum threshold of 100 to 200 cases per year within a bundle for successful risk management. Furthermore, significant investment in infrastructure is required to manage quality data, and to distribute payments. Bundled pricing may not be right for smaller orthopaedic groups or hospitals.

Competing models of payment reform—Lastly, payers may favor other models of payment reform over bundled pricing. Bundled pricing may reduce the costs associated with orthopaedic care but it will not reduce the broader utilization of orthopaedic services at the population level. Payers may be concerned that providers will increase episode volume if bundled pricing results in significant shared savings.

Orthopaedic surgery episodes are the single greatest Medicare expenditure and are consuming an increasing share of healthcare dollars without encouraging commensurate quality improvements. Bundled pricing provides payers the opportunity to reward cost-efficient, quality orthopaedic care, while providing orthopaedic surgeons with the opportunity to demonstrate quality and cost leadership and to share in the savings as a result of these efforts. Most importantly, patients may benefit from lower costs, improved quality, reduced complications, and fewer readmissions as a result of the quality incentives and care coordination created through bundled pricing.

Entering into an expanded episode of care contract requires an understanding of the mechanics of bundled pricing, as well as an understanding of the challenges this model has experienced. Bundled payments encourage care coordination by providers, hospitals, and postdischarge entities to provide high quality, cost-efficient care designed to maximize measurable patient outcomes, minimize complications, and reduce readmissions.

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

His disclosure information, including potential conflicts of interest, can be accessed at www.aaos.org/disclosure.

Editor’s Note: This is the second in a series on bundled pricing for orthopaedic services. The previous article covers the increasing importance of bundled pricing in healthcare reform and the application of bundled pricing to orthopaedics. This article examines measures of success and challenges facing bundled pricing models.

Graphic: Three phases of care


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