Thought Leadership

Top 10 Considerations in Developing a Bundled Payment Business Case

When deciding whether to pursue a bundled payment program, there are several questions hospital and health system leaders should address to evaluate and quantify the financial risk associated with bundling payments for clinical services.  A comprehensive business case must be developed to provide clear guidance for structuring the episode parameters and payment arrangements by identifying the critical success factors and acceptable risk corridors that will make the program financially viable for hospital, physician, and payer constituents.  Below are ten considerations healthcare leaders should take into account in developing the business case to assess the financial risk and opportunity of a bundled payment program.

1.  Selecting the right payer partner.  Building a strong foundation for any bundled payment program starts with selecting the right payer partner.  The right partner represents a payer with whom the hospital can collaborate on quality, care standardization, and cost reduction efforts.  At the core of this relationship is the exchange of information including sharing and processing of claims data.  Since most episodic bundles include services that occur or are influenced by events outside of the hospital (i.e., readmissions), the ability to evaluate claims data from a payer for utilization and costs for all services in the bundle is essential to managing the financial and clinical risk of the program.  The payer’s ability to quickly modify its claims processing methodologies is also critical to the speed of implementation for the program.  A financially viable bundled payment program is dependent on a hospital-payer partnership that is driven by data exchange and collaboration, and payer partners should be evaluated and prioritized accordingly.

2.  Selecting a service line.  When determining which service lines and services to include in the episode bundles, an early step should be ensuring sufficient volume exists to establish an accurate cost benchmark and effectively manage and mitigate risk of random or unjustified clinical variation.  Episodes that do not have adequate volume may be exposed to high risk of random variation, which could translate into unacceptable financial risk.  For many organizations considering bundling payments, the ability to realize “quick wins” within the program is important to creating buy-in among provider participants.  Therefore the clinical attributes of the episode should be considered as well since not all episodes present the same opportunity for clinical and financial success.  Numerous studies have demonstrated that surgical episodes (e.g., joint replacement procedures and coronary artery bypass grafting [“CABGs”]) have inherently lower inter-episode variability than medical episodes (e.g., congestive heart failure [“CHF”], chest pain), which can mitigate against results being materially impacted by random variation.  Additionally, costs for surgical cases are predominantly incurred in an acute care setting by hospital-based physicians, often with higher supply costs, which can present clear targets for future cost reduction efforts.  In contrast, improved outcomes and financial savings from medical episodes are typically less reliant on reductions in supply costs and more reliant on developing new care protocols, which can take longer to implement and convert into tangible savings.

3.  Structuring the bundle.  Another critical early decision point is determining the structure and scope of the bundle or episode parameters (i.e., episode depth and breadth). This includes defining the services and population to be included in the bundle as well as the duration of the episode.  The structure of the bundle will serve as the foundation for determining the bundled reimbursement.  It will also influence the provider partnership strategy (i.e., which post-acute providers will have the greatest impact on results) and gainsharing methodology.

4.  Assessing episode utilization.  Once the structure of a bundle has been determined, utilization of services across the entire episode, as defined by historical claims, should be reassessed.  This includes the procedural event that serves as the episode anchor, as well as other bundled services such as pre-admission services or related readmissions.  Assessing utilization patterns by service and by provider is critical to developing alignment strategies and evaluating financial risk.

5.  Identifying operational, clinical, and financial inefficiencies.  A key element of any bundled payment business case should be identifying the sources of variation and opportunities to reduce costs within individual episodes.  This can be achieved through a detailed analysis of supply costs, length-of-stay (“LOS”), and related readmissions.  Within each episode, metrics should be adjusted for case mix and severity, which helps mitigate the common argument, “our patients are sicker, that’s why our costs are higher.”  This analysis can be used to develop internal best practice benchmarks which can be used as an effective baseline for identifying inefficiencies and potential areas of risk and opportunity.

6.  Reducing cost and variation.  Through the use of appropriate, risk-adjusted external and internal benchmarks, organizations can identify the drivers of cost and variation within the episodes and estimate the potential savings that can be realized from redesigning care delivery and reducing variation.  The ability to manage and reduce variation through care redesign and process improvement methodologies (i.e., Lean process) is critical to ensuring the financial success of any bundled payment program.  By identifying the sources of variation, organizations can develop and implement initiatives to enhance care models and practice patterns, with the goal of improving quality while reducing costs.

7.  Comparing physician performance and variability.  The ability to successfully reduce variation within a bundled payment episode is directly linked to the ability to reduce variation within individual physician performance.  Using the business case to develop a scorecard with severity adjusted metrics for average LOS and variable supply costs per case for each physician can help identify internal top performers and areas of potential risk.  However, this is not enough to fully assess risk as variation within those results should also be considered.  As an example, two physicians with similar CMI-adjusted variable cost per case levels for CABG procedures may have different coefficients of variation.  If Physician B has a substantially higher degree of variation within their results, then Physician A should be considered the “lower risk” performer.  Assessing both the average results and the variation within those results can help identify the physicians that represent the best internal benchmark against which others physicians can be compared.

8.  Quantifying the financial opportunity and risk.  To project the incremental financial impact of pursuing a bundled payment program, the savings associated with reducing costs and variation within each episode need to be offset against the reimbursement discount that is typically required by the payer on the overall bundle of services.  In addition to the reduced revenue from the discount, the incremental costs incurred to implement and support the program also need to be identified.  Another consideration is that there may be a “halo effect” associated with implementing the program, whereby the care model enhancements and costs savings associated with a bundled payment program for one payer extends to similar cases from other payers, which can significantly contribute to the financial return potential.  The potential impact on market share should also be assessed in the business case projections.

9.  Testing sensitivity. The relationship between operational and clinical efficiencies and financial performance should be thoroughly stress tested to identify the primary drivers of risk within the business model.  Scenarios for testing sensitivity can include assessing the impact of negative shifts in market share, missing LOS and/or supply cost reduction targets, and increases in related readmissions.  By understanding which factors could have the greatest impact on financial results, organizations can identify where they should focus their risk management efforts.

10.  Engaging the team and effecting change.  Once the business case has been developed, it should not be used solely as a means to present a static financial assessment of the program.  Rather, it should be used as an educational and engagement tool to foster the collaboration and coordination among hospital management, physicians, and payers that is required to ensure financial and clinical success with a bundled payment program.

Properly utilized, an effective business case can serve as both a tool to quantify financial risk and a roadmap for how to mitigate and manage that risk.  The organizational quid pro quo for taking on a bundled payment arrangement with a payer can be a narrowing of the provider network for the financial risk the hospital sponsor assumes, which could potentially have a substantial impact on the market share and financial return for the provider participants.

Additionally, a financially successful bundled payment program can accelerate the integration and collaboration efforts of organizations and providers seeking to participate in new payment arrangements.  The CMMI Bundled Payment for Care Improvement Program, along with similar programs being proposed by commercial payers, are initiatives to be considered as mechanisms that facilitate gainsharing with physicians, which can be powerful tools for assuring the adoption of value-based care delivery models.

For more information on bundled payments, please contact Gregory Shufelt, MBA at 312.775.1712 or gshufelt@thecamdengroup.com.