We recently interviewed Marian Jennings and Dan Grauman on bundled payments. What follows are excerpts from those interviews.
Dan Grauman: A bundled payment is a new payment mechanism called for in the Affordable Care Act, the Bundled Payment Care Initiative (BCPI). Essentially, it is a payment for a specific episode of care over a specific amount of time. Think of it as a budgeted dollar amount that a hospital, physicians and other providers will get for an episode of care. An episode is typically defined as an event that takes place around a hospitalization, beginning with treatment usually three days before the admission, all the way through either 30, 60 or 90 days post discharge.
So there are two determining factors that define an episode of care. First and foremost is the type of procedure, or type of condition, or illness, and always focused around a hospitalization. The second key determinant is time—whether it’s 30, 60 or 90 days.
The payer, Medicare in particular, has a lot of historical data about what has happened to patients with those conditions or those particular illnesses. So the payer can define a target amount based on the history of what it has paid for that type of patient over, for example, a 30-day period. This is essentially the only way the payer can practically define an episode and expect a group of providers to work to that target.
Of course, the financial incentive in a bundled payment program is to try to provide care in a more efficient, coordinated way so the total costs add up to less than the pre-established targeted amount. Providers can’t really do that unless they themselves have historical data they can examine to see how they have been treating these patients.
Significant Shift from the Traditional Payment Model
Marian Jennings: In the historical fee-for-service model, physicians were paid separately from the hospital for services. We’re moving to a model where physician and hospital payment is becoming integrated, such as in a bundled payment. This really changes the fundamental relationship between the organization and its physician enterprise or its physicians. The relationship changes based upon the fact that these parties now need to work together in new ways in order to reap financial rewards for performance.
Under the new models, the ability of the hospital to be cost effective and the ability of the physicians to have a care protocol that is efficient and effective and high quality for the patient are both necessary ingredients for financial success. So, the underlying predicate of how do you make these relationship work has to do with building trust with your physicians. We can no longer view them as just a consumer or members of our medical staff, we have to view them as partners in redesigning care. This requires that the parties get together and acknowledge, embrace the fact that everything is up for discussion: how we would have to change; how do we deliver a high quality product to patients at a lower cost.
Right now it’s difficult for the hospital and physicians to get together, identify opportunities to reduce cost, and reward the physician for it unless you have a particular gain-sharing program in place that has been approved by the payer. So it’s a very cumbersome process and most organizations have not pursued it. The bundled payment allows the hospital and physicians to work together, to find ways to deliver more cost effective quality care, where the physicians can partake in the bonuses that accrue based upon that performance.
But there are a number of underlying conditions that are required. One is that the hospital and the physicians are able to generate the necessary information, concurrent information, to be able to effectively manage the care of patients. They must have information available and shared by and with partners in the doctor’s office, the hospital, home care agencies, long term care facilities, rehab facilities, or others to manage the cost of the care across a 30 or a 60 or a 90 day period.
So, it is a fundamentally different mode of payment because the organization, the hospital and the physicians working together, are now at financial risk for managing care for up to a 90-day period, including a whole array of providers, some of which may be independent from the hospitals or physicians themselves.
Many hospitals and health systems have been mandated by Medicare to use a bundled payment at least for comprehensive joint replacement, in 2016. You may not be one of those hospitals, but that doesn’t mean you shouldn’t be considering how to work with physicians in new ways to prepare for such payment. It is clearly coming down the pike. Medicare alone has more than 48 different episodes it is considering bundling. It has demonstration projects in place—everything from congestive heart failure to diabetes. Many people think things like obstetrics, certainly coronary disease, as well, of course, orthopedics, and others, are ripe for this bundling approach.
Preparing for Bundled Payments
Marian Jennings: What should you think about doing as an organization if you have not been mandated to accept the bundled payment? You should look for a demonstration project, whether you go to the federal government, through the CMS innovation project, or whether you actually approach Blue Cross or Aetna, or Humana or whatever private insurer you have in your market. Let them know you want to experiment with a bundled payment and ask if they will be your partner. They may say no, but they may say, yes.
One of the benefits is that it allows you to gather data on the cost of an episode of care that you do not have on your own. That is, you only know what happened at the hospital and with your physicians. You wouldn’t know if the patient went to a provider affiliated with your competitor, or went to home care, or went outside of your organization to receive another related service during the timeframe involved. So through collaboration with a payer, you get information and you can start to educate yourself. You can start to work with the physicians to see the patterns and identify best practices.
The idea of experimenting in a way that is relatively safe, meaning that the likelihood of a financial disaster is little, is really a very, very important approach in thinking about accepting a bundled payment in the future.
How the Payment Mechanism Works
Dan Grauman: One of the complexities in fully understanding the bundled payment concept is that sometimes the providers continue to get paid on a fee-for-service basis, even when they’re operating under a bundled payment model. This is just a practical consideration. Providers submit bills and Medicare adjudicates them. And then, retrospectively, Medicare does the accounting. It adds up what it actually paid on a fee-for-service basis, and it compares it to the pre-established target amount for that episode of care. Medicare then determines whether there was a gain or a loss.
However in the BPCI Program that was baked into the Affordable Care Act, there was an option to get paid a prospectively determined fixed dollar amount for the entire episode. So if the hospital sponsored the program it would get the full amount for a certain episode of care ahead of time, $30,000, or $40,000 or $50,000, and then it would have the latitude as to how to pay the providers when the episode was triggered.
So it was a fixed amount up front. Not many sponsoring hospitals have chosen this method. Most chose to just get paid on a fee-for-service basis, and then retrospectively do the accounting, determined by how they performed relative to the targeted amount for that episode of care.
Impact on Care Protocols
Dan Grauman: The bundled payment program provides an opportunity for physicians and hospitals to treat patients in a better, different way than perhaps than they did in the past. Sometimes it’s driven by the hospital, where the hospital executives have a keen interest in trying to provide care in a more practical and efficient way. The hospitals are often a sponsor of the program, so they’re kind of driving the process and they have typically the most upside financially if gains are generated when compared to that targeted price.
There are other times, however, where physicians may be the drivers and the sponsors of the program. They have a keen interest in generating savings and participating in those savings. In all situations, it provides a great opportunity for all of the stakeholders and the participants in making the decisions about how and where the care is provided. It provides great opportunities for those folks who sit around the table to review those data, and together decide how to modify and alter the care protocols and the patterns of care that are rendered to these patients.
Marian Jennings: If you think about the incentives for the hospital and physicians and any collaborative partner around a bundled payment specifically, they are to find the most cost effective setting that will address the patient’s need. So, in addition to saying, well, we want to anticipate and have predictability around care, particularly post-hospitalization care, we also need to get out of our old paradigm that care needs to be delivered face-to-face, and identify what could be provided virtually. What could be provided in home care versus rehab? What could we do with what’s called pre-hab, preparing the patient, strengthening them before they actually have the encounter so that their need for services after their hip replacement, for example, are minimized?
So, virtual care, new models of care, lower cost alternatives, use of a nurse practitioner versus a physician, really the need to redesign the entire care along that whole episode, will be paramount.
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