3 Financial Challenges of Bundled Pricing

The concept of bundled pricing is gaining momentum as a reimbursement model designed to address demands for better health outcomes at lower cost. Promising to deliver a standardized set of services for a fixed price with specific quality commitments will create incentives for providers to align their efforts to contain underlying costs — something that is lacking in the current fee-for-service payment system. Better alignment will focus attention on such issues as overutilization, technology choices and inadequate coordination across the care continuum, which can drive meaningful change in cost and quality. In successfully adopting this model and achieving better care at lower cost, providers face the following three main financial challenges.

1. Understanding major cost drivers
Hospitals will have to develop a better understanding of cost drivers within the boundaries of a bundle of care. Every unnecessary or suboptimal resource used means a hit to the bottom line when the organization is committed to a fixed price.  

While hospitals have implemented cost reduction initiatives in the past, for the most part, these efforts haven't addressed the real cost driver in healthcare: clinical decision-making. To successfully develop a bundled pricing model will require a better understanding of the cost drivers within diagnostic and treatment processes. This has implications for both technology and broader analytic capabilities. Providers will need to capture and analyze integrated cost and quality data, structured to provide insight into improvement opportunities. That represents a change from what is typical, because in most settings, clinical and financial systems don't interface at all. Beyond the data and IT implications, managing against a fixed price calls for an analytic capability that in many cases will need to be developed. This is a crucial step, because credible analytics are key to successfully building consensus for change.

2. Better predictive care
Providers interested in developing bundled pricing will need to develop a systematic way to capture, represent and replicate what they learn about efficient clinical decision-making across the organization. Predictive care paths will allow them to do this.  

A predictive care path defines the critical actions and decision points across a patient's course of medical treatment. When optimally developed, care paths can provide the much needed link between clinical activities and their associated costs. They offer a tool that hospitals can use to gain control of their core production process, using data to collaboratively lower costs and improve outcomes.

3. Real-time reporting, monitoring and accountability

One of the profound changes implied by bundled pricing is the need for providers to routinely monitor utilization and outcomes, by diagnosis and by physician. To do this, both financial and clinical outcomes must be reported on a timely basis and presented in ways that clinicians can easily understand. Such reports will serve as a basis for dialogue about variances from financial and quality targets. These reports should also indicate whether charges and costs of treatment, by physicians in aggregate and individually, are in line with expectations. And, this reporting must happen on a real-time or near real-time basis in order to ensure that variation can be addressed in a timely manner.

Credible and intelligible reports are prerequisite to effective management of cost and quality, but not sufficient. An important capability that often requires development is the ability of mid-level management — department heads and clinical chairs — to initiate difficult conversations with clinicians about the impact of their clinical choices on cost and quality. Historically, administrative managers maintained a respectful distance from clinical decision making, and physician-managers only discussed clinical decision making with physicians after adverse events occurred.  

The idea that these areas would become routine topics for proactive review and discussion represents a significant change for many management teams, and may require role redefinition, new accountabilities and capabilities development. Monitoring and reporting clinical and financial data will not have an impact on managing variation in cost or quality unless someone is responsible for addressing this variation. In some cases, variation may be warranted — it may reflect advances in research, complications or comorbidities that need to be examined further. In other cases, variation may be unnecessary and discussion will need to occur with responsible physicians. In either case, developing bundled prices means that accountability for the management of cost and quality variation will need to be embedded in key clinical and administrative roles.    

Taking a proactive approach to a market in transition
Providers know how to sustain financial viability with the current discounted fee-for-service model. They need to prepare now for alternative payment models such as bundled pricing, because adapting will not be easy or quick.

This preparation must start by examining key cost drivers and then move to developing a process for systematically identifying opportunities to improve health costs and outcomes. For most organizations, this will require new infrastructure and accountabilities in key areas such as: reporting and analytics, revenue forecasting, cost structure analysis, profit and loss structure, financial risk analysis, billing and receivables and clinical management. Developing bundled prices with attached quality commitments may not be as simple as it sounds, but will ultimately align incentives for better health outcomes at lower cost.  

Michael N. Abrams., MA, is managing partner, and Rita E. Numerof, PhD, is president at Numerof & Associates, Inc. NAI is a strategic management consulting firm focused on organizations in dynamic, rapidly changing industries. For more information, visit www.nai-consulting.com. Mr. Abrams and Dr. Numerof can be reached via email at info@nai-consulting.com or by phone at (314) 997-1587.

More Articles on Bundled Payments:

Bundled Pricing: Strategies for Success
The Advantages and Disadvantages of CMS' Bundled Payment Initiative: 8 Responses
Opportunities in the New Bundled Payment Initiative

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