The Four Ps: Critical Success Factors for Bundled Care

Gary Ahlquist, Minoo Javanmardian, Igor Belokrinitsky, Anne Wong, and Amika Porwal, Booz & Co. -

Consumers and employers are increasingly demanding price transparency and insight into clinical quality. Bundled care, a delivery and payment mechanism that offers a single, flat price for all services associated with a medical procedure, will help to meet that need.

The concept of bundled care is flexible enough to fit into virtually any future care delivery model aimed at improving outcomes and patient experiences while also reducing costs.

Today, hospitals and health systems vary widely in their bundle development capabilities and approaches. However, if they are to create value from bundled care, executives will need to a systematic approach for evaluating their options. We have been studying care bundles for several years, and we recently completed a comprehensive survey of stakeholders in the U.S. health system regarding bundles ("Health Care Shifts from á la Carte to Prix Fixe," strategy+business, November 2013). The results indicate that the concept will be most successful when providers, payers and employers work together to develop the right product for their consumers/employees and design the offering to meet market demand.

A simple analysis of the 4Ps — product, price, promotion and placement — can help a health system executive identify the most promising bundles offerings for their organizational strengths. (A subsequent article will look at the capabilities that health systems need to create bundles.)

1. Which products should our health system offer in a bundled-care model?
To determine which bundled products to create, hospitals need to address a series of considerations, starting with the decision to focus on chronic or acute bundles. Thus far, national caliber systems — including the Mayo Clinic, Cleveland Clinic and Geisinger Health System — have chosen to launch acute bundles, with patients willing to travel for procedures such as joint replacement and heart surgery. By contrast, local hospitals and health systems may be better positioned for chronic bundles, which require interactions over a sustained period of time.

After determining whether to pursue chronic or acute bundles, hospitals will need to assess procedures, conditions and episodes of care, to determine how "bundleable" they may be. This depends on the clarity of the care paths in the procedure, which can be measured based on existing literature reviews (e.g., evidence-based medical publications), clinician input and the level of uncontrollable cost variance across patients. "Bundleability" is also driven by the elective nature of the procedure, which can be approximated by considering the percentage of patients that come through the emergency department.
For example, in oncology, certain cancer treatments are well-defined and likely candidates for bundled care, such as early-stage breast cancer or colon cancer. By contrast, late-stage lung cancer is not. Yet as care standards and pathways become more prevalent, these areas will continue to become easier to bundle.

In the next screen, the hospital will need to evaluate the resulting subset of potential bundles in terms of their attractiveness and feasibility of implementation. To gauge attractiveness, leadership teams should consider the potential returns that a bundle can provide. Specifically:

  • High controllable cost variance within an episode (as measured by inter- and intra-facility cost variance) indicates a high potential to reduce costs;
  • High market growth (and reasonable share) indicates revenue potential;
  • Size of value (measured by total per-episode revenue for the health system) and employer/payor interest (measured by percent of commercial payor spend with the health system) can indicate the bottom-line potential of shifting shares to the facility.


In terms of feasibility, the facility will need to determine which episodes it is best suited to bundle. First, to what degree are physicians aligned with the system? This can be determined by looking at the number of physicians in a certain sub-specialty and the percentage of cases from the top independent physician practices.
Second, systems need to understand their facility concentration. Episodes concentrated in a smaller number of facilities may be easier to bundle than episodes fragmented across the system. Finally, systems need to consider their own economics. What is their relative cost and quality position vis a vis their competitors for a specific episode? Systems can use better cost and quality positions to brand their products in the marketplace.

2. What price should we establish?
For most health systems, determining the price for a "care product" is a foreign concept. Systems have ingrained costing and billing systems that allow them to set prices for individual components of a service, which works well in a fee-for-service environment. But thinking about episodes as "products" requires a different approach to pricing.

There are various principles that health systems can use to determine which price to offer for a bundled product. At a minimum, prices for standalone products should cover the risk-adjusted system cost of care delivery (unless the system is choosing to use the bundle as a loss leader). This implies that the system will need to better understand its own costs, where cost variance is controllable or uncontrollable, and how patient risks influence the average cost of delivered care. By setting different risk tiers depending on patient health factors (e.g., comorbidities, age, BMI), a health system will start with a more accurate understanding of its costs and the risks it is taking on through the bundled price.

Beyond simply covering costs, health systems will need to consider the value they offer to customers or employers they work with, particularly relative to their competitors. Are there existing products on the market? What do their prices reflect or imply? Prices should also be driven by customer preferences. In the past, a low price may have signaled a less premium care product, which could have an adverse effect on share and volume. Yet our research shows that consumers are relatively price-sensitive. Of more than 1,200 healthcare consumers surveyed, 49 percent said they would be willing to accept a bundle that limited the hospitals they used — with almost 80 percent of those requiring a lower price (1-10 percent lower than existing coverage) or significantly lower price (greater than 10 percent lower than existing coverage) in order to accept the bundle. As one might expect, this willingness was significantly higher among respondents who pay a higher percentage of out-of-pocket costs.

In addition, health systems will need to determine whether to coordinate payments with payers and employers retrospectively or prospectively. In retrospective pricing and payment, a target budget is agreed upon for a particular bundle, but providers are still paid on a fee-for-service basis for individual components of the treatment. After all care is delivered, a reconciliation process occurs to determine how well the health system did in delivering against the target budget. This type of pricing is relatively easy to administer on an existing claims system. It reduces some risk and allows health systems to ease into bundled payments, as opposed to making steep investments in new pricing systems and analysis.

However, retrospective pricing requires an "adjustments" process to match FFS claims to pre-determined budgets. Any shared savings or penalties are calculated as the delta between the actual spend/cost and the target price. As a result, shared savings may plateau if target payments are reset year on year and providers are unable to increase efficiencies at the same rate.

Conversely, in prospective pricing, insurers pay a target price for the particular bundle to the health system in advance of treatment. While this mechanism is more difficult to implement, it incentivizes providers to work together to reduce costs. It also may enable health systems (and physicians) to preserve their margin in the long-term, as target prices may not be reset every year. Prospective pricing will also allow systems to publish a "price and features" menu for their products, encouraging patients to take an active role in the healthcare process.

And while prospective pricing entails some up-front investment, it will reduce administrative costs in the medium-to-long-term compared to the current FFS model (from, for example, reduced claims, billing and authorizations paperwork).
The right mechanism depends on the bundle being created. Prospective payments lend themselves well for acute bundles with well-defined episodes and limited variance, whereas chronic bundles, given the extended time period in scope, require a more flexible approach (e.g., per-member, per-month payments), which help both the payer and the provider manage their cash flow.

3. How should we promote the offering?
In order to drive market demand (whether from payers, employers or consumers), health systems will need to provide a clearly differentiated offering to the market:

  • Will we be considered a premium or a discount player?
  • What sort of services to consumers, employers or payors can differentiate us beyond price?
  • How will we meet the consumer preferences, and continue to adapt our products to meet them?
  • How will we help key stakeholders see the value in bundles? For example, can we help employers to understand the "beyond the price" benefits of bundles such as potentially improved employee productivity, lower disability payments, etc.?


In our survey findings, consumers showed clear agreement on the most attractive components of bundles: coordinated care, the ability to provide input in care decisions, transparent billing and a warranty. A large majority of consumers (~80 percent) prefer bundles to include coverage across all settings in the care continuum, from initial physician consultation to post-acute care and rehab — implying that incremental approaches may not gain traction in the market. Consumers also indicated that they don't want to travel (73 percent said they were willing to commute only locally). And they don't want to change their primary care physician.

Notably, our findings also found that consumers are reluctant to pay additional costs for discretionary services. And they are surprisingly unpersuaded by add-ons such as a healthcare concierge and coverage for travel and accommodation expenses.

4. Which channels should we use to place it in the market?
Health systems will need to determine how they will distribute their bundles — whether (for example) they are year-long chronic disease bundles that get offered to health plans, colonoscopy bundles that they market directly to consumers or hip replacement bundles marketed to employers. For bundles that are sold to payers or employers, health systems need to work with them to determine whether the bundles will be included as part of existing offerings or as an add-on product.

Finally, providers may choose to eschew the managed care partnership, and market bundles directly to consumers or employers (as they already do with services such as LASIK). The difficult here is that unless the procedures are truly elective, it will be immensely difficult to generate demand if patients have to pay more out of pocket for a service that is already covered in their insurance plan. (Notably, our findings show that consumers are more receptive to bundles that are offered by providers and employers, compared to those offered by health insurers.)

In sum, the current market for healthcare bundles is still in its earliest stages. Yet consumers indicate that they are ready. Forward-thinking hospitals and health systems that start now will give themselves a first-mover advantage in building and branding their bundled-care products. As the market solidifies, they also may be able to use their experience to influence how standards are set. The real question is whether organizations will seize this opportunity or let it pass to their competitors.

Gary Ahlquist, Minoo Javanmardian, Igor Belokrinitsky, Anne Wong and Amika Porwal, work in the healthcare division of management consulting firm Booz & Co.

 

 

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