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What Are Bundled Payments?

With the average cost of health benefits topping $12,000 per employee per year, employers are looking for ways to bend the cost curve without compromising employee health. Bundled payments offer one solution.

Also known as episode-based payments, these payments are part of reimbursement models that compensate providers for the value of the care they provide, not the volume. Properly executed, not only do they control costs for employers and workers, but they can also enhance care quality, improve clinical outcomes and create a more coordinated health care delivery system.

How Do Bundled Payments Work?

It may be helpful to think of a bundled payment as a prix fixe for health care vs. ordering a la carte.
Instead of being charged piecemeal for each individual service, payers pay a lump sum for the entire episode of care. That payment “bundles” everything together, from the initial consultation to all the procedures provided at the hospital or doctor’s office — even tests and lab work — to follow-up care such as rehab, physical therapy or skilled nursing facilities. The payment is based on the disease or medical issue itself, not on how the disease is treated, and it generally has to meet specific quality and patient satisfaction goals. The aim is simple: Align financial incentives with high-quality clinical outcomes.

This approach is designed to discourage wasteful care. If the episode’s spending on services is below budget, the providers can share in the savings — but if costs exceed the budget, providers may face a financial penalty. They can also face penalties for failing to meet quality and patient satisfaction goals. This encourages health care professionals to pay attention to costs (something they often haven’t been asked to do) and to work with other providers to ensure patients receive uninterrupted, high-quality care. This adds another layer of cost reduction: Working together across the continuum of care, providers can identify opportunities for savings, as well as for quality improvement and care coordination.

The payer reimburses the providers involved collectively using a negotiated set price based on various factors, including historical data. Each payer calculates the budget differently, but generally, here’s how it works:

  1. Begin with the fee-for-service payments for all services being bundled.
  2. Remove any deemed unnecessary.
  3. Add to the budget to deal with potential complications.
  4. Take that final amount and discount it about 3 to 5 percent.

A bundled payment isn’t appropriate for every condition; it makes the most sense for conditions with clearly defined treatment guidelines. Among the more common ones are heart attack, labor and delivery, joint replacement, urinary tract infection, congestive heart failure and stroke.

How Does Everyone Benefit?

Bundled payments show tremendous promise. They’re expected to account for 17 percent of payments by 2021, and that figure is only set to increase. By removing the incentive for providers to earn more money by performing more services, bundling payment encourages better coordination of care — replacing a fragmented approach with a comprehensive, collaborative one.

That’s important, because despite improvements in recent years, the health care system remains segmented. This lack of care coordination drives up costs and leads to poor health outcomes. By breaking down the silos and encouraging providers to coordinate patient care throughout an entire episode, bundled payments reduce division and compartmentalization.

It’s still early, but the evidence points to increased efficiency and improved outcomes. One study found that joint replacement surgery payment bundles for 3,942 Medicare patients saved roughly 21 percent per joint replacement care episode. Similarly, private payers have reduced unnecessary utilization and costs while still improving outcomes.

Medicare got the ball rolling with bundled payments. Today, it’s also becoming increasingly common among private payers, including Anthem. More small businesses have begun to offer at least one self-insured health plan option, and some large employers, recognizing the value of bundling, are directly negotiating bundle pricing, either individually or through multi-employer collaborations.

For employers, it’s all about bending the cost curve. For providers, bundling means increased efficiency and the potential to share in the savings. For patients, it means an enhanced experience, lower costs and better health outcomes. And that benefits everyone.

What are bundled payments?