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Bundled Payments (Episode Payments)

Understand how bundled payments can lower health care costs. 

Bundled payments

Episode payments and bundled payments combine fees for separate services into a single payment for all services rendered during a defined episode of care.

Bundled payments are different from basic episode payments in that they cover services delivered by multiple providers. Payment to one of the providers depends on the cost of services delivered by other providers.

Providers have to determine how to divide the single payment amongst themselves.

Defining an episode

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.

Bundled payments limit costs of care

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.

Gain-sharing
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.
Private Payer Demonstrations

Bundled payments were pioneered in 1980s. Physicians at the Texas Heart Institute developed 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. Once substantial savings were achieved, the program was extended to cover care provided to Medicare patients as well.

In 2006, Geisinger Health System initiated its ProvenCare program. ProvenCare paid a flat fee for coronary artery bypass surgery (CABG) and all related follow up care that was provided within 90 days after discharge. 

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).

Public Payer Demonstrations

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.

The Center for Medicare and Medicaid Innovation is working on the Medical Bundled Payment for Care Improvement initiative.

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

Tips for Bundled payments
  • 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.

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