8 Tips for Hospitals Considering Bundled Payments for Orthopedics

Here are eight key considerations for bundling orthopedic payments from Mark Bogen, CFO and Senior Vice President of Finance at South Nassau Communities Hospital in Oceanside, N.Y. South Nassau doesn't currently participate in an orthopedics bundled payment program but is strongly considering how to engage the market going forward.

1. Build a friendly relationship with orthopedic groups.
It will be imperative for the hospital to have a friendly working relationship with one or more local orthopedic groups to ensure the bundled payment's success. "We are fortunate to have a significant and long term relationship with a large orthopedic group," says Mr. Bogen. "We've had lots of cooperation form our orthopedic groups working with us in regard to orthopedic implants and vendors. That's where the costs can get out of control."

In many cases, physician preference items can be among the most expensive. You must work with the physicians to limit preference items and promote uniformity in implant use.

"Have key physicians sitting with you at the table when you are working with implant vendors," says Mr. Bogan. "Even though we've done a good job of working together on implant pricing, vendors are arguing that certain items are not part of the negotiated contract and hitting us with list prices. Now we are renegotiating those contracts. Physician preference items are definitely key in having control over the ability to offer a discount for bundled payments."

2. Achieve physician buy-in for the plan.
Even if you already have a good relationship with orthopedic surgeons or groups in the community, you must take time to achieve physician buy-in for bundling payments before pushing forward with your plan. "Understand your relationship with the orthopedic group," says Mr. Bogen. "The closer relationship you have, the more it makes sense to bundle payments."

Providers must be able to offer services at a minimum of 3 percent off the total payment when bundling. Hospitals often expect the orthopedists to share in the 3 percent reductions on the pro rata basis.

"A lot of hospitals sit down with the orthopedic groups and tell them they have to take the same percentage hit as the hospitals," says Mr. Bogen. "Other hospitals may eat some or all of that discount and do it all themselves to get the orthopedists to play in this arena. They must be able to take the full hit on professional fees; if you can get the surgeons to buy in and help standardize on physician preference items, that may make up the hit hospitals have to take."

3. Figure out how to minimize implant costs.
One of the heftiest expenses in orthopedic surgery is the implant costs. In the past, insurance companies have met a wide variation of implant prices depending on the contract, but with bundled payments hospitals would receive the same compensation regardless of implant price.

"In looking at bundling of payments, when you are not only including the hospital stay but also the implants and surgical payments, you have to really scrutinize the implant price," says Mr. Bogen. Providers should be careful not to accept bundled payment rates that would be too low to cover all of their expenses when the implant is included.

4. Decide whether to include post-acute care in the bundle.
Patients undergoing orthopedic surgery have an extended period of post-acute recovery that hospitals must consider when they are deciding how to bundle their payments. Some hospitals may be able to cover this period in the "episode of care" while others may not.

"What has been really eye-opening across the board of the hospital side is how much the entire cost of the episode of care is really spent outside of the hospital or outside of the hospital's control," says Mr. Bogen. "That is true with orthopedics where traditionally there is so much post-acute care. You have ongoing care with physical therapy and rehabilitation."

If the hospital offers physical therapy and other post-acute services, it's easy to bring those into the bundle; however, patients may not want to use the hospital's physical therapy services. If the hospital doesn't have physical therapy, it can contract with an outside provider but it would be hard to guarantee all patients in the bundle would receive their services.

"We don't have a sub-acute rehabilitation unit at the hospital so all of our orthopedic cases go either home and have home care or they go to a rehabilitation stay at sub-acute rehabilitation units," says Mr. Bogen.

5. Post-acute care negotiations.
If you decide to include post-acute care in the bundled payment and don't have onsite physical therapy and rehabilitation, you'll have to negotiate with the post-acute care providers in your community.

"If you can find someone with a quality reputation and can be cost-effective, negotiate with them," says Mr. Bogen. "That's difficult on Long Island because people come from all over and many times those people prefer to go to a rehabilitation unit closer to where they live so we can't guarantee we'll push all volume to a single user. That's a consideration when a hospital is making a decision about whether they want to do hospital-only bundled payments or extended post-acute care for orthopedics."

6. Plan to reduce length of stay where appropriate.
Many orthopedic procedures are now being done through minimally invasive approaches that allow for a quicker recovery time and shorter length of stay. Some of these procedures can be performed on an outpatient basis, but many patients will still need inpatient stays to recover. Even when patients need to stay a few days in the hospital, plan accordingly so they won't be staying longer than is necessary.

"Knee replacements that are done on a Thursday could be discharged on a Saturday in theory," says Mr. Bogen. "The problem in New York is that discharging and transferring patients to a post-acute setting on the weekend isn't very easy. Many times beds are not available in the post-acute setting until Monday. Now you have the patients for an extra day or two."

Every extra day in the hospital wracks up more expenses, but the insurance company will only pay the negotiated fee for bundled payments, regardless of how long the patient stays. "Work with our orthopedist to look at operating hours and see if that can be changed as part of the cooperative nature of the situation," says Mr. Bogen.

7. Consider whether taking on risk jeopardizes a significant profit center.
Orthopedic services are often a significant profit center for the hospital, subsidizing other, less profitable specialties. If the bundled payment program would put a significant dent in those profits and jeopardize other service lines, the hospital may need to find another strategic plan going forward. However, providers must take on significant risk if they participate in bundled payments.

"You don't want to lose 3 percent or more of a significant product line, so make sure you aren't doing something too experimental," says Mr. Bogen. "At the same time, you are putting your head in the sand if you do nothing and delay the inevitability of bundled payments for an episode of care. That's a conundrum you have as an individual hospital, especially when orthopedics is a significant profit center and helps subsidize other areas of the hospital where there is no margin or a negative margin given."

8. Recognize bundled payments are the future.
Orthopedics is one of the most significant costs for payors, which means cost-reduction programs like bundled payments will become standard in the future. Medicare is currently working with hospitals for pilot bundled payment projects, but it's likely these projects will be expanded in the future.

"There is no doubt that Medicare, at some point, will have a somewhat mandatory payment system as it relates to orthopedics," says Mr. Bogen. "They are using the demonstration period to validate that it is possible to provide the same quality of care, if not better care, and pay a cheaper price. This is an opportunity for providers to work together on a risk-based reimbursement system that is definitely coming down the pipe at the federal level."

The risk isn't as significant with the Medicare program as with other programs across the country, so it could be a good place for hospitals to start. "Since the risk with Medicare isn't as great, that may be where we stick our toe into the water first," says Mr. Bogen. "This is an opportunity to control our own destiny for what I believe is inevitably going to come into play."

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