Bundled Payments (Episode Payments)

Bundled payments limit costs of care by incentivizing providers to reduce the number of unnecessary services performed within one episode of care. However, bundling payments for all delivered services does not include an incentive to limit the number of episodes. This is important because overall costs of care may not be reduced if the number of episodes of care remains high.

Defining an episode of care requires identifying when the episode begins and when it stops. The starting point and end point may well expand beyond hospital stay. You must also define services included and excluded from reimbursement as well as foresee probable complications during follow up care. Above all, defining an episode requires an assessment of costs of care to appropriately assign compensation levels to participating providers.

If bundled payment leads to savings, providers may be able to distribute these savings among themselves as a form of gain–sharing. Gain–sharing arrangements are a form of financial incentive, where providers share savings they achieve if the actual total cost of care is lower than past costs.

In the CMS Bundled Payments for Care Improvement Initiative, gain–sharing payments to physicians may not exceed 50% of the amount that is normally paid to physicians for the cases included in the gain–sharing initiative.

Bundled payments were pioneered in 1980’s by physicians at the Texas Heart Institute who develop a payment package for cardiovascular surgery that covered all services and bundled physician and hospital charges into one flat fee. The payment package, called CardioVascular Care Providers, was originally offered to non–Medicare patients but once substantial savings were achieved the program was extended to cover care provided to Medicare patients as well. The achieved savings resulted from using a bundled fee that was lower than the sum of individual charges.

In 2006, Geisinger Health System initiated its ProvenCare program that paid a flat fee for coronary artery bypass surgery (CABG) and all related follow up care that was provided within ninety days after discharge. The program was successful in reducing readmission rates and was expanded to cover other episodes of care. Geisinger’s initiative served as a model for recent healthcare reforms and, in 2010, the President and CEO of Geisinger Health Plan, Richard Gilfillan, MD, was appointed the Acting Director of the Center for Medicare & Medicaid Innovation (CMI).

You can read more about the innovative profile of Geisinger’s ProvenCare program at AHRQ Health Care Innovations Exchange page.

Episode based payments had been widely used before the enactment of Medicare in 1965, for example, in the form of global fees for surgical services. More recently, episode payments have been used in the Hospital Prospective Payment System, Medicare Acute Care Episode demonstration and reimbursement for the end–stage renal disease care. Currently, the Center for Medicare and Medicaid Innovation is working on the Medical Bundled Payment for Care Improvement initiative.

The Bundled Payments for Care Improvement initiative tests four different “bundled” payment models to pay for care delivered to Medicare beneficiaries. The first three models are retrospective, which means that services are paid on fee–for–service bases and then the total payment for the episode is reconciled against the agreed upon target price. The fourth model is prospective payment, which means that participating providers are paid a single flat fee instead of fee–for–service payment. All four models bundle payments for services rendered by various providers (hospitals, physicians, and post–acute care providers) and in various settings (e.g. inpatient stay, office visit, and rehabilitation facility). This is a three year project that will begin in 2012.

Read more about the Medical Bundled Payment for Care Improvement initiative.

• Bundle payments with providers that you have worked well with in the past.
• Have a central organization to administer payments and claims.
• Establish your baseline costs. To do that you might want to meet with an actuary or discuss with a good practice manager.

For a more tips please see Chapter 6: Bundled Payments by Edgar Morrison, Jr. in the Evaluating and Negotiating Emerging Payment Options