Springer Publishing Company is excited to share Part 2 of a three part series on navigating bundled payments for the healthcare professional. Susan J. Penner, RN, MN, MPA, DrPH, CNL, and author of, Economics and Financial Management for Nurses and Nurse Leaders, Second Edition, 2013, and adjunct faculty at the University of San Francisco School of Nursing and Health Professions, explains below how you or your institution should consider bundling a payment.

Part 1 of this three-part series explained how bundled payments encourage providers to work together and improve quality.  This post provides an overview of an evidence-based case rate (ECR) that is used to budget for bundled payments, and to estimate shared savings among providers across an episode of care.

Table 1 presents an ECR for a total hip replacement without complications, and assumes a length of stay of four days.  The charges and savings (or loss) are reported for all the providers over the episode of care.  The physician fees represent the surgeon’s charges.  The pre-op, operating room (OR), post-anesthesia care (PACU) and nursing are all billed to the hospital.  The hospital also bills for physical therapy (PT) and discharge planning, although these services do not add to the patient’s length of stay.  The rehab unit is a skilled nursing facility operated within the hospital and is included in the hospital charges.

In 2015, the hospital relied on volume-based payment for total hip replacements, and on average, the providers lost $800 per case as reimbursed by Medicare.  When the hospital moved to bundled payments in 2016, surgeons had incentives to work more efficiently, reduce complications and standardize the use of high-quality but less costly medical devices, thus improving care and saving money.  The hospital increased PT and discharge planning, thus reducing preventable readmissions and saving money.  In addition, patients were transferred to the less costly rehab unit for the last two days of recovery, further reducing hospital costs while maintaining high quality services. By working together, these providers reduced their costs to $31,500, or $3,500 less than the $35,000 Medicare reimbursement.

Table 1.  Evidence-Informed Case Rate (ECR), Total Hip Replacement, 2016.

 penner_table

 *By transferring patients to the rehab unit for the last two inpatient days, the hospital saves $3,500 per case ($20,000 nursing in 2015 - $16,500 nursing and rehab in 2016).

Where do these savings go?  Medicare retains half of the savings, keeping health care costs under better control and saving taxpayers money in the long run.  The hospital and physicians negotiate that the physicians keep 10% of the savings or $350 per case, and the hospital keeps the remaining 40% of the savings or $1,400 per case.  Providers reduce costs, improve the quality of care, and everybody wins, including the patient.

This is an optimistic scenario.  What happens if costs are over budget?  Bundled payment are a form of risk sharing, requiring providers to accept a portion of the overall loss.  For example, if the surgeons fail to effectively manage their costs and charges, they may end up losing a portion of their budgeted reimbursement.  The incentive of shared savings and the penalty of shared risk help motivate providers to do better, not just more.

This is a simplified scenario.  Home health care could be included, and the rehab facility might be a separate provider.  Both these agencies would negotiate their share of savings and risk.  However, this example should give you an idea of what a bundled payment looks like, how it is estimated, and how savings and risk are shared among providers across a patient’s episode of care. Think about how your institution, agency or practice might operate using this innovative financing strategy.

The third post in this series discusses the expansion of bundled payments and the impact bundled payments may have on you and where you work.  More information is available at the CMS.gov Bundled Payments for Care Improvement Learning & Resources Area website.  My book is also a resource for learning more about bundled payments and other health care finance topics.  Watch for the next post in this series!