Bundled Pricing: Strategies for Success

The spiraling costs of healthcare have pushed the entire system to the brink. To make matters worse, healthcare quality in the United States lags behind other developed economies. This has precipitated a backlash demanding both better care and lower cost. Although the main focus of reform legislation was on improving access through regulation of healthcare insurance, it has implications for the healthcare delivery industry that require truly innovative change. Fee-for-service payment is being openly challenged. The Patient Protection and Affordable Care Act authorized ongoing experimentation on alternative payment mechanisms that could profoundly alter market dynamics for healthcare delivery.  Delivery organizations must now choose to dramatically challenge key assumptions about the care they deliver, or risk their financial viability.  

Most hospitals have learned to manage financially with the discounted fee-for-service model that's been in place, but that's history. At this point hospitals are facing a payor mix in which government's share is increasing, while its reimbursement rate continues to shrink. To make matters worse, private payors — no longer free to ride the cost curve up — will more than ever be following government's lead. With nowhere to turn to recover its losses on government reimbursement, the sector needs to develop new ways to manage costs, and to make good on demands for increased quality.  

One answer is alternative payment models, specifically bundled payment.  Traditional approaches to cost management won't be up to the job, and anyway, providers may not have a choice — bundled payment may become a competitive requirement, and for most institutions, the decision to provide services in this way requires a paradigm change.

Traditional approaches to cost reduction — and their flaws
For more than a decade, as payors have increasingly squeezed revenues, hospitals aggregated into systems to maximize their leverage with payors and suppliers and "squeeze back" on reimbursement and supplies. Periodic headcount reductions served to bridge hard times, reducing employee loyalty and the attractiveness of the work environment in the process. Beyond that, reducing headcount doesn't eliminate work, and the resulting over-extension of remaining staff often compromised quality.  In the old model, quality failures often meant 'rework' mostly paid for by payors; in the new model, rework is a non-reimbursed expense to the hospital.

Ultimately, the "low hanging fruit" has already been picked by most healthcare systems. Success going forward will require truly transformative change.  

Why will bundled payment models do any better?
Promising to deliver a standardized set of services for a fixed price with specific quality guarantees will finally force care providers to align their efforts to contain underlying cost drivers. Such issues as overutilization, technology choices and inadequate coordination across the care continuum can drive meaningful change in cost and quality — but only if providers are uniformly focused on these outcomes, without the distortions caused by the current fee-for-service approach.  A concurrent focus on development of a differentiated clinical value case will ensure a balanced approach that doesn't forgo quality and safety for the sake of economic efficacy. Such efforts require major paradigm shifts in thinking at the top, and new competencies and focus within the management infrastructure.

So how do we get there?

Healthcare executives that want to prepare for bundled pricing models will need to take these five steps:

1. Examine their current economic and clinical value proposition: healthcare delivery organizations will need to identify their own strengths and gaps. This will help identify where to start, what services are already delivering good outcomes and where practices can be improved.  

2. Identify cost drivers in key services: Clinical, technical and process elements all factor into the total cost of healthcare. Providers will need to create the infrastructure to address inefficiencies and identify necessary variability from unnecessary.

3. Develop predictive care paths: Predictive care paths should capture key decision points that have an impact on costs and outcomes, and include differentiators that set the delivery organization apart. They should be patient-centric, mapping care from the patient's perspective across the episode.  These will need to be implemented across the continuum of care to help track variability in cost and quality.

4. Collaborate with payors: In order to move reimbursement away from episodic care, providers implementing bundled pricing will need to collaborate with payors. By examining the economic and clinical value of the services included in the bundle, and systematically capturing key differentiators, providers will be able to make a strong value case for the care they deliver to payors.

5. Continuously monitor and update bundled services: This includes both internal monitoring for compliance and external review, to ensure that their organizations stay current with ongoing research. This will help guarantee that the bundles of care continue to deliver better care at lower cost.

Healthcare executives must prepare now for new payment models, because adapting will not be easy or quick. They will have to implement integrated, systemic changes to remain viable. Times of transition can be extremely challenging — but also extraordinarily rewarding for those who seize the opportunities.

Related Articles on Bundled Payments:

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

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