Making Bundled Payments Work

The Future of Payment: Looking Toward Bundling

The future of hospital payments is moving towards the bundled payment model–and the Center for Medicare and Medicaid Services (CMS) is no different. They, like their private insurance cohorts, are making the switch to bundled payments because, according to research, bundled models tend to offer a better patient care experience, as well as save money in the long run. The CMS has a significant amount of experience with a very similar type of pay structure–and should capitalize on it to help these new patient models become even more effective. In this article, we’ll discuss:

  • CMS experience with bundled payments
  • What can we learn from DRGs
  • Future of setting prices
a doctor turns her laptop toward a patient, explaining the details of bundled payment
The CMS has extensive experience with another form of bundled payments-- Diagnostic Related Groups.

The CMS experience with bundled payments

Diagnosis Related Groups (DRGs)

The CMS–as well as private insurers–are at the forefront of a new era of patient care. They are starting to move away from the quantity based model, and towards a more value based approach. This means that more emphasis is placed on patient care and satisfaction-- as well as creating a better approach to payments. But this is not the first time the CMS has approached the bundled payment idea. For over 30 years, it operated Diagnosis Related Groups (DRGs)–which created fixed payments for specific surgeries and inpatient procedures.

DRGs caused a radical shift in how procedures were paid for, they helped to cap rising hospital expenses and gave an incentive for providers to become more efficient in their care towards patients. Other insurance companies quickly followed suit, and this became the norm for how patient’s procedures were paid for. The DRGs only covered those procedures that were done in the hospital, however, and did not cover outpatient care. This lead to a high number of readmissions due to lack of coverage outside the hospital.

New Bundled Payments

After moving away from DRGs, the CMS is again looking at bundled payments as the way forward when it comes to paying for medical procedures. Looking to expand on the DRGs, this new bundled payment would cover all the costs, inpatient and outpatient, that a member would incur for a surgery. They want to bring the cost down to a single price point which would be applicable to all hospitals, no matter where the procedure was done.

Bundled payments are used to encourage providers to strive for the highest value of care possible while keeping the cost low. It requires coordination on behalf of hospitals and outpatient care facilities, but the goal is to improve patient care experience. By working together, these facilities can ensure the patient is receiving the highest quality of care regardless of where the surgery takes place. This is an especially helpful model for some of the most costly surgeries–most of which require extensive post surgery care. It encourages healthcare providers to up their standard of care and continue to strive to limit the number of readmissions.

The Center for Medicare and Medicaid Services is taking the lead with this idea, and is piloting the following programs:

  • The Bundled Payment for Care Improvement Initiative (BPCI). There are four models that are being tested with providers to see if they can offer a higher quality of care with more coordination all at a lower cost to Medicare
  • Oncology Care Model. This is working to investigate that if by developing a new payment and delivery model, it would improve the effectiveness and efficiency of specialized care
  • Comprehensive Care for Joint Replacement (CJR). The most common inpatient surgeries are joint replacements, and this program is intended to analyze if better and more efficient care can be acquired

These programs are innovative and proactive–they are examining how to ensure better care gets to all patients. This is great news for patients who will need to have any of these–or a multitude of other–procedures in the future. So far the CMS has found that these bundled payment plan have many positive aspects to them:

  • The focus is on episodes of care that drive Medicare spending
  • Bundling Medicare Parts A and B, post-acute care services, and readmission promotes greater coordination
  • There is an extension of days beyond hospitalization provides incentives to improve the quality of care and reduce complications and readmission
  • Establishing requirements for quality monitoring to ensure patients receive efficient and effective care


A doctor reviewing an X-ray as he determines a treatment plan
Implementing the successes of the DRGs can help the CMS provide better patient care at a lower cost.

What Can We Learn from DRGs?

These innovations are a big step forward in focusing on patient care and reducing cost. But the CMS has a fantastic tool from which it can draw on-- it’s experience with DRGs. With 30 years of experience, there are certain parts to the DRGs that should influence how the CMS will move forward with the bundled payment plan. By implementing the lessons learned and successes from this initiative, the CMS can ensure that it is moving forward in the best possible way with bundled payments.

Lesson 1 - Set a benchmark payment

By establishing a single payment rate for a surgical service across the board, making adjustments for patient case mix and geographic cost of the procedure will allow providers to focus on improving quality and lowering cost. This will also help by removing a layer of administrative complexity-- one that is unnecessary and causes additional burdens to hospital administrators. With a single price, it is much easier to implement a bundled payment plan.

Lesson 2 - Update price benchmarks annually

BPCI prices for surgical procedures are currently updated quarterly-- when it would make more sense to have them updated annually. Providers are making investments in facilities, staff, and technology, to improve the value of care to patients. They should not have to worry about price adjustments to the cost of procedures four separate times per year. Doing a review annually makes more business sense, and can give providers more peace of mind that their budgets are going to cover the cost of care.

Lesson 3 - Reward the level of performance

The CMS currently has separate price targets for each hospital that provides a procedure and already includes a discount regardless of the level of effectiveness of care that hospital provides. By contrast, the DRG payments were fixed, and hospitals were rewarded with more payments based on their efficiency and value of their care. The CMS also has a shared savings structure which is based on the historic spending of the hospital on each procedure and tends to reward high-cost facilities instead of high efficiency ones.

Lesson 4 - Make provider participation mandatory

The DRGs worked so well across the country because participation in them was mandatory. By taking away the experiment mentality and making all hospitals participate will greatly increase the scope of the bundled payment plan. It will also make its implementation quicker, requiring hospitals to make sure they have the correct infrastructure in place will provide access to better patient care even faster.

a chart showing a jagged green line trending upward on a  tablet, which is placed on a table by a pencil and sheet of paper
Setting a national price for procedures is the best way to give incentive to hospitals to prioritize better patient care.


Future of Setting Prices

There is a model developed by the Dartmouth Institute-- the four quadrant analysis-- which shows how the CMS can create pricing based on actual costs while implementing the right kind of provider incentives. First, the CMS would need to identify providers that already deliver high-value care to their patients. They would then establish a single price for a bundle of any specific surgery or inpatient procedure. This would allow the CMS to avoid penalizing high-value providers for giving such a high level of care, but at the same time would provide a needed push to those providers that find themselves not up to the same standards.

By focusing on the single, national price for a procedure the strongest cost-savings potential will be provided.. This is due to the fact that with one bundled cost, there are no more high-cost providers. They would now operate under the same pricing plan as other hospitals, meaning they can no longer charge more for a surgery and perhaps provide a lower standard of care in the process. Now, they have an incentive to become a high-value provider.

The same logic goes for providers that offer services at a low cost. With one price, they are no longer rewarded just for having a lower cost for the same surgery as other providers. In addition, by adding a 5% quality withhold could possibly create even further incentive for hospitals in this situation to continue to improve their value-based care. Under this plan, all hospitals would receive 95% of the bundled payment for procedures-- but only those that had above average patient care would receive the additional 5% of the payment.

The Center for Medicare and Medicaid Services has a chance to implement a model of payment that will work to improve the quality of care a patient receives from providers. They should draw on what worked with DRGs as they continue to move towards a working bundled payment structure.

Posted on

March 15, 2019