Fair market value considerations for 6 steps of bundled payment program development

Bundled payment programs, like any other partnership between hospitals and physicians, are subject to fair market value and commercial reasonableness considerations. Matthew Milliron, a director with HealthCare Appraisers, discussed bundled payment initiatives through the lens of fair market value at the Becker's CEO + CFO Roundtable Nov. 8 in Chicago.

"There is a role for thinking about fair market value and commercial reasonableness throughout the development process, as you're going through the process of putting together these programs," Mr. Milliron said, before walking through the six steps of developing a bundled payment program and the fair market value considerations that come with each step.

1. Engage the participants. Early engagement with physicians is a key to success with bundled payments, Mr. Milliron said. In terms of fair market value, hospitals and health systems need to ensure that while selecting physician participants, they in no way considered the volume or value of their referrals.

"At this stage it may be time to consider if it makes sense to compensate these physicians for their program management or development contributions," he said. When doing so, organizations should look at reasonable market-level rates for those types of services.

2. Define the target population. Populations will not be the same for different bundled payment programs, and the payment rate should align with the population's payer source. A problem could arise if the population is Medicare-based, but a hospital is paying physicians at commercial-level rates.

Additionally, if a bundled payment program covers a higher-risk population, it could mean the program should support higher potential compensation for physician participants. "Risk and potential return should exhibit a strong positive correlation," he said.

3. Define the episode of care. It benefits appraisers when the episode of care is clearly defined, down to the individual CPT-code level, as many like to disaggregate the episode down to individual CPT code level, price it, and then re-aggregate it for comparison. "As you're working through the fair market value process, really having a [clearly] defined episode of care is going to be extremely beneficial," according to Mr. Milliron.

4. Develop a payment methodology. "The key thing here is to focus on what degree of downside risk are you going to place on physicians," Mr. Milliron said, keeping in mind that risk and reward should be equal to one another.

5. Establish the performance measures. Appraisers will want to see the baseline metrics and how the cost and quality targets relate to that baseline, according to Mr. Milliron, to figure out the likelihood that the performance targets will be achieved. "Relatively more difficult performance targets may support higher compensation from an incentives standpoint," he said.

6. Price the bundle. "I always encourage my clients to save pricing of the bundle for last," Mr. Milliron said, as it tends to be easier to price the bundle after going through the other five steps as opposed to "backing into" the other steps based on the set price.

It is also important for hospitals and health systems to not forget to incorporate overhead or set prices, like insurance, into the bundle price.

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