In healthcare, provider payments are moving away from fee-for-service (FFS) payment and toward value-based models, where an increasing amount of healthcare dollars flow through different types of alternative payment models (APMs) that tie payments to quality and efficiency rather than solely to the volume of services provided.1 One form of value-based payment is a bundled payment.
This paper is a primer on bundled payments and explores a variety of healthcare industry perspectives on their use.
What is a bundled payment?
A bundled payment is a fixed-price agreement for a predefined episode of care, commonly consisting of a procedure and all related services or all care for a medical condition. In a bundled payment, the responsible entity (commonly a provider) assumes some financial risk for the episode costs that exceed the fixed price. Because payment for an episode of care is not linked to the number and types of services rendered within the episode, a bundled payment incentivizes providers to coordinate care in order to improve efficiency and quality of all included services. Key care management strategies within bundled payments include eliminating services that do not contribute to positive outcomes and increasing the efficiency of services, which includes choosing cost-effective care settings.
Which organizations use bundled payments? And why?
Value-based payment approaches are tailored to a responsible entity’s capabilities and degree of influence over healthcare expenditures. For example, a primary care organization or an integrated delivery system has a high degree of influence over a large proportion of total healthcare expenditures for a set of individuals and, therefore, may be willing to enter into value-based payment agreements for the financial responsibility for the total cost of care of an attributed population (e.g., shared savings models, global capitation, etc.). In contrast, specialty provider organizations have lower degrees of influence over total healthcare expenditures for attributed populations. By focusing on specific procedures or medical conditions and defining an episode of care, bundled payments provide a way for specialty provider organizations to engage in value-based payment in a manner that is aligned with their influence over healthcare expenditures.
The types of organizations designing and implementing bundled payments are diverse, but they generally share the goals of reducing medically unnecessary variation in care and enhancing the quality of services during a clinically appropriate time period that are related to common high-cost procedures and conditions. Below are descriptions of organizations that typically participate in bundled payments.
Bundled payment participation: Organizations transferring financial risk
Centers for Medicare and Medicaid Services (CMS)
CMS is currently testing a variety of bundled payment models for providers caring for Medicare fee-for-service (FFS) beneficiaries. The types of episodes included in CMS’s bundled payment models span surgical procedures and medical care, including oncology. As of early 2023, provider participation in the large majority of CMS models is voluntary rather than mandatory.
Medicare Advantage organizations (MAOs)
MAOs use bundled payments for in-network providers caring for members enrolled in their Medicare Advantage products. A provider’s participation in an MAO’s bundled payment arrangement is typically voluntary. Because of the similarities in the demographics of individuals covered under Medicare FFS and Medicare Advantage, MAOs may use CMS’s episode specifications as a starting point for how their bundled payment arrangements define an episode of care.
Commercial health plans
Commercial health plans use bundled payments for in-network providers caring for members enrolled in their commercial products (e.g., individual and group, fully insured and self-insured). Provider participation in a commercial health plan’s bundled payment arrangement is typically voluntary. The demographics of members enrolled in commercial products differ from those covered by Medicare FFS and Medicare Advantage and, as a result, commercial health plans typically invest the time and resources needed for designing episodes of care relevant to their members (e.g., maternity). Additionally, the degree of variation exhibited in commercial payment rates presents additional challenges and opportunities for both commercial health plans and providers. One such opportunity is modifying member cost sharing to create incentives for members to seek care from providers participating in bundled payment arrangements.
Some state Medicaid agencies have implemented bundled payments for providers caring for Medicaid beneficiaries and/or members enrolled in a plan offered by a Medicaid managed care organization (MCO). For example, Arkansas,2 Ohio,3 and Tennessee4 have each developed programs requiring providers to participate in bundled payments spanning multiple specialty categories, and Colorado5 has developed a voluntary program focused on maternity episodes. Like commercial health plans, Medicaid organizations may design episodes specific to their covered populations’ characteristics.
Bundled payment participation: Organizations taking financial risk
Provider organizations can participate in bundled payments designed by payers (CMS, MAOs, commercial health plans, etc.), but some have designed their own bundled payment arrangements for episodes that have been constructed to align with their unique capabilities and clinical pathways. Provider organizations negotiate participation in these bundled payment arrangements with payers (as well as self-insured employer groups via direct contracting).
Conveners are third-party organizations (not providers or payers) that generally take on financial liability from payers for the performance of provider participants in bundled payment programs. These organizations typically facilitate coordination among participants, oversee care redesign efforts to help achieve savings, apportion downside financial risk to participants, and bear some (if not all) of that risk. In exchange, they have the opportunity to receive episode savings payments. They may offer bundled payment network management and provide software tools and reports that enable providers to organize and finance delivery efficiencies. Conveners, common in CMS bundled payment models, can encourage participation in bundled payment models by allowing providers to share financial risk with another entity.
Bundled payment participation: Other organizations shaping uptake
Self-insured employer groups and “point solutions” vendors
Aside from healthcare providers who may develop bundled payment arrangements in which their own self-insured employee health plans are participating and large employers that directly purchase bundled care for their employees through selected providers (e.g., designated centers for lower extremity joint replacement or cardiac surgery episodes), most self-insured employers typically do not design and implement their own bundled payments. They are, however, a driving force in creating demand for value in healthcare purchasing, and their participation in these arrangements can be passive or active. An example of passive participation is when an employer plan’s third-party administrator (TPA) has implemented bundled payments with in-network providers in the TPA’s network in a manner that may not be apparent to the self-insured employer or its members. An example of active participation is an employer engaging with a “point solution” vendor. These arrangements may involve incentives for members (such as reduced cost sharing) to use preferred providers participating in a bundled payment arrangement (although the consumer may not be aware of the underlying financial arrangement).
“Point solution” vendors in this context are organizations that have designed bundled payment programs and have contracted with multiple provider organizations to participate in their networks. They often focus on a particular subpopulation or chronic conditions (e.g., diabetes or obesity). Access to this network is marketed to self-insured employer groups separately from their TPAs’ provider networks.
Workers’ compensation insurers and vendors
The medical portion of workers’ compensation (WC) benefits represents about 50% to 60% of total WC benefits and, consistent with the cost of medical services, continues to trend at rates higher than inflation. While WC insurers can develop networks of provider organizations, they often lack the scale and data to manage these networks as efficiently as health insurers. Additionally, the medical cost of an episode in WC is often significantly higher than the same episode in healthcare. To address this issue, WC insurers and vendors have begun collaborating with healthcare providers to establish benchmark bundled payments for common types of WC episodes (e.g., musculoskeletal injuries). These providers agree to lower prices in exchange for increased volume and the opportunity to be paid for delivering efficient, high-quality care. It’s important to note that, in some states, employers cannot direct care.
What are the considerations for designing and implementing bundled payments?
Bundled payments are complex and require input and ongoing feedback from stakeholders with clinical, actuarial, policy, financial, operational, and technological backgrounds. Key considerations for designing and implementing bundled payments are further described below.
Perspective: Provider-led vs. payer-led?
There are plenty of examples of bundled payment development being led by providers and payers. The type of organization leading the bundled payment effort, however, influences the program’s design and operational parameters. Providers leading the effort are likely to prioritize creating episode definitions that align with their clinical strengths and capabilities that lead to high-quality, efficient care and optimized health outcomes, whereas payers are likely to prioritize episode definitions with high-volume and financial methodologies intended to both lower the cost of care and improve quality.
Breadth of definition
Defining the scope of episode services is essential for the successful implementation of bundled payments. Identifying the procedures or medical conditions of interest that are the episode focus is typically straightforward and can be based on analysis of claims data to identify the potential episode volume and material variations in the cost of care attributable to the procedure or condition (e.g., the cost of total knee replacement in inpatient versus outpatient settings).
Identifying the services that are considered related to the episode procedures or medical condition (commonly based on claims data alone), as well as the appropriate duration of an episode of care, is typically referred to as creating the episode definition. This is a more subjective exercise requiring a substantial degree of clinical expertise and analytic capability and may be subject to the limitations of relying on claims data (e.g., no clinical information from the medical record, imprecision in provider reporting of diagnosis codes on claims, etc.). Episodes that are narrowly defined provide stability and predictability for providers but limit the financial opportunities for both payers and providers related to improving the efficiency of services. Episodes that are more broadly defined may provide greater opportunities to improve efficiency and quality but are more likely to result in taking on financial risk for services that are not tightly linked to the episode focus. Organizations should be aware of this trade-off between breadth of definitions and financial incentives.
Another consideration for the breadth of an episode definition is whether prescription drugs are included. Drugs can play an important role in managing episodes of care (particularly for episodes focused on medical conditions), but drug pricing dynamics are complex and thus providers may have difficulty understanding and taking financial responsibility for prescription drugs.
Procedures vs. medical condition focus
Bundled payments for episodes centered on procedures can create incentives for providers to eliminate wasteful services and choose cost-effective care settings for the procedure. These types of episodes are initially appealing to providers, payers, and other interested organizations because the procedure and related services included in the episode definition are generally overseen primarily by the operating specialist, as the scope of episode care is typically closely linked to the procedure itself. However, payers may be concerned that procedural episodes may not provide incentives for providers to most appropriately select patients for procedures or to intensify medical management that may potentially avoid procedures altogether. To address concerns about potential overutilization of elective procedures that may result from the provider opportunities presented by bundled payments, bundled payments for episodes centered on medical conditions for which a procedure is one treatment option among others can help to address this risk. Condition-based episodes typically identify and include services that are considered beneficial to reducing the need for surgery and directly incentivize lower rates of procedures, which are typically high-cost services that contribute substantially to the episode cost for medical conditions.
Prospective vs. retrospective methodologies
There are two fundamental designs for bundled payments, which have significant implications for price-setting and the role of quality:
- Prospective, which involves known up-front prices for an episode and concurrent identification of patients eligible for bundled payments.
- Retrospective, which involves reconciling episode costs against bundled payment price targets for patients who may not be identified as being in an eligible episode until the end of a bundled payment performance period.
Prospective designs have the potential to be more transformative by aligning patient incentives to use participating providers (e.g., by waiving cost sharing), but they are more administratively complex than retrospective designs.
As organizations explore prospective versus retrospective approaches, they should consider whether they have the necessary administrative capabilities, such as:
- Claims processing: Retrospective approaches may continue to rely on traditional FFS payments with periodic transfers of savings and losses, whereas prospective approaches may require substantial overhauls to claims adjudication processes, which could have significant downstream implications on other processes that rely on adjudicated claims (e.g., pricing and contracting).
- Reconciliation: Both retrospective and prospective approaches may require periodic evaluation to determine providers’ financial and quality performance and to settle savings and losses between the payer and the provider.
- Maintenance of episode definitions: The claims-based codes (diagnosis, procedure, revenue, etc.) underlying an episode definition will change over time for a multitude of reasons, including the creation and deletion of codes by the code maintainers that occurs multiple times during a year and stakeholder feedback about episode definitions.
Accounting for healthcare system changes over time
The healthcare industry is constantly evolving and responding to external forces (e.g., a global pandemic, revised evidence-based clinical guidelines). As a result, value-based payment programs will evolve and change if goals and incentives are to remain appropriately aligned. At the same time, bundled payments, especially those with broad episode definitions, will need to maintain flexibility to address any unintended impacts.
What are the keys to success?
Our experience in supporting organizations in designing and implementing their bundled payments has yielded several elements which we believe are keys to success, including:
- Defining and measuring success
- Using benchmarking to support bundle selection and design
- Using analytics for monitoring and management
Meaningful attention to these issues from the earliest stages of bundled payment conceptualization and implementation adds value to participants by facilitating alignment on core objectives, high engagement, early financial and quality success, and maximal flexibility in responding to implementation challenges.
Defining and measuring success
The success of bundled payments will likely mean different things to different organizations. Some organizations may prioritize financial results above all else, whereas other organizations may emphasize patient outcomes. Most organizations will want to achieve both objectives. Having a clear framework for defining and measuring success is essential. It helps with:
- Articulating an organization’s value proposition
- Creating discipline to guide ongoing decision-making
- Garnering ongoing organizational support
Benchmark data can come from a variety of sources, including government-maintained databases, a payer’s book of business, and proprietary databases constructed by vendors and consultants. By aggregating medical and prescription drug claims and capturing the total cost of care for patients of interest, benchmark data can be used to explore various questions relevant to bundled payments, such as:
- How common are certain procedures or medical conditions?
- What sites of service have been used to perform procedures and/or treat medical conditions?
- What services are most commonly happening in proximity to a procedure or diagnosis of a medical condition? Do these services appear to be related to the procedure or medical condition?
- If an episode of care is constructed around a procedure or medical condition, how much variation in cost exists? Are there clear opportunities to increase the efficiency of services, e.g., eliminate wasteful services, substitute less costly services, or change sites of service?
- How does a prospectively determined bundled payment price compare to a status quo FFS amount?
Answering these key questions will be helpful in identifying the types of episodes of care that would be most appropriate for a bundled payment arrangement and providing a foundation upon which financial expectations could be set.
Provider organizations continue to invest in their technology and analytics capabilities but often have difficulty with visibility into services their patients receive from unaffiliated providers. They may also struggle with the timeliness of claims data and the lack of usability of claims data to inform individual patient care decisions. Organizations engaged in bundled payments may have a higher chance of success if they can supply participants with analytics that give timely visibility into the following types of information:
- Episode characteristics: Volume and costs (for historical and performance periods), site of service, codes triggering the episode, quality metrics (e.g., complications).
- Patient characteristics: Age, diagnosis codes, indicators of socioeconomic status (e.g., eligibility for Medicaid).
- Financial information: Bundled payment price targets, risk adjustment factors, outlier exclusions, reconciliation detail.
As the demand for value in healthcare purchasing continues, the increased interest and use of bundled payments will likely continue. Because they are often viewed as a “middle ground” between the “low risk” of traditional FFS payments and the “high risk” of full capitation, some organizations see bundled payments as a steppingstone toward taking on risk in value-based payment. Bundled payments may provide a feasible approach to specialist engagement in value-based payments, as well as provide an opportunity for other organizations to showcase their unique capabilities and clinical pathways. Carefully considering the design and implementation elements in combination with the keys to success described above is important for all organizations participating in bundled payments.
1 Health Care Payment Learning and Action Network. APM Measurement Effort. Retrieved March 22, 2023, from https://hcp-lan.org/apm-measurement-effort/2022-apm/2022-infographic/#:~:text=payments%20accounted%20for%3A-,TRENDS%20OVER%20TIME,-Since%20its%20inception.
2 Arkansas Department of Human Services. Episodes of Care. Retrieved March 22, 2023, from https://humanservices.arkansas.gov/divisions-shared-services/medical-services/helpful-information-for-providers/manuals/episode-prov/.
3 Ohio Department of Medicaid. Episode-based Payments. Retrieved March 22, 2023, from https://medicaid.ohio.gov/resources-for-providers/special-programs-and-initiatives/payment-innovation/episode-based-payments/episode-based-payments.
4 Tennessee Division of TennCare. Episodes of Care. Retrieved March 22, 2023,, from https://www.tn.gov/tenncare/health-care-innovation/episodes-of-care.html.
5 Colorado Department of Health Care Policy and Financing. Bundled Payments. Retrieved March 22, 2023, from https://hcpf.colorado.gov/bundled-payments#:~:text=The%20bundled%20payment%20program%20is,within%20an%20episode%20of%20care.
What are bundled payments and how can they be used by healthcare organizations?
With the CMS, Medicare Advantage organizations, Medicaid organizations, and health plans experimenting with bundled payments, we offer a primer and perspectives.