Don’t Be Afraid of Bundled Payments!

As fee for service payment arrangements fade with healthcare reform and financial risk shifts from payers to providers, anesthesiologists must become adept at a new style of negotiation. The bundled payment framework – a single, predetermined payment that encompasses all aspects of an episode of care – attempts to strike a balance between the unsustainable fee-for-service model and the one-size-fits-none capitation approach.

Healthcare executives, according to a survey by KPMG reported in Becker’s Hospital CFO, are pessimistic about value based contracts. Forty-five percent of surveyed executives expect a decrease in profits. Healthcare providers expect a modest (25%), significant (21%) or steep (6%) decline in profits. Nevertheless, with proper help and guidance, there does not need to be any fear.

Its imperative to understand a critical and unique dilemma: You will need to negotiate for and against your physician colleagues, administrators, and insurance companies in order to come out ahead! This is a special skill that is a dramatic departure from business-as-usual.


banner_contactInitial forays into bundled payments date back to the mid-1980s, when the Texas Heart Institute charged flat fees for cardiovascular surgeries. Medicare initiated a trial of bundled payments in the early 1990s, when it created a demonstration project that paid a flat rate for coronary bypass surgery and related readmissions. In the mid-2000s, a Pennsylvania health

system began to charge insurers a flat rate that included bypass surgery and any necessary follow-up care for 90 days post-surgery. Soon after, the Centers for Medicare and Medicaid Services (CMS) conducted another bundled payment demonstration project for orthopedic and cardiovascular surgeries.

img_health_techIn 2010, the Affordable Care Act created the Center for Medicare and Medicaid Innovation (under CMS), which in turn launched the Bundled Payments for Care Improvement (BPCI) initiative. This pilot program encompasses four models of bundled payments. The first model is for episodic care at an acute care hospital for an inpatient stay. Under this model, Medicare continues to pay physicians separate from instutions.  The second and third models are retrospective. Medicare makes fee-for-service payments but then compares the total price for episodic care against a bundled target price and either pays or recoups the difference. This second model applies to an inpatient hospital stay, while the third model applies to post acute services, such as skilled nursing, home health, and rehabilitation. The fourth model is a truly bundled approach, covering soup to nuts (including physician payments) for an inpatient stay. In this model, the physician  submits a “no pay” claim to Medicare but is paid from the bundle.

Under the BPCI initiative, participants are divided into two groups: Awardees and Episode Initiators. Awardees are those that assume financial liability for the spending associated with an episode of care. Episode Initiators – such as hospitals and physician groups – trigger episodes of care but don’t bear the burden of financial risk (unless they also happen to be Awardees). Forty-eight different episodes of care – ranging from spinal fusion to coronary bypass to joint replacement – are being tested. Some Awardees are participating in a single type of episode, while others are participating in a range of episodes.

In November 2015, CMS issued a rule mandating bundled payments to 800 hospitals for knee and hip replacements. Called the Comprehensive Care for Joint Replacement (CJR) Payment Model, it will cover about a quarter of the surgeries for which Medicare currently pays. This five-year CMS test will use the second BPCI payment model, in which actual costs are compared to a bundled episodic care payment, and then CMS pays or recoups the difference. Under this program, the episode of care is defined from admission to 90 days post-discharge.

The CJR is not a true bundled payment.  Basically, all providers continue to operate as they do now by performing services and collecting in a fee for service model.  At the end of the year, the hospital is charged a penalty or given a bonus based on the grand total of all the payments made.  Ultimately, the hospital bears the risk of the system.  They may try to pass this on to providers, but it is not done by the payer.  Thus, it is not a true bundled payment but more of a pay-for-performance system.  The truth is, this can actually discourage innovation.  Let’s say, for example, that better monitoring or a home based rehab/nursing program could provide a good outcome.  This service is not paid for by medicare.  Thus, there would be little incentive to implement it– even though it could save money.  In a true bundle, the providers would work together to create programs like this to avoid utilization of services.  Also, the retrospective nature take the providers “skin out of the game”.

CMS isn’t the only player making the transition toward bundled payments. State-run programs are taking a cue from the BPCI initiative (and receiving support from CMS). Self-insured employers are contracting with health or hospital systems for specific types of surgeries and procedures. And an increasing number of big name insurers are pursuing bundled payment contracts for a range of conditions and treatments.

Bundled payments have distinct advantages. From the payer’s perspective, it reins in superfluous tests and procedures; from the provider’s perspective, it doesn’t extract a capitation penalty for patients who have chronic conditions. Yet, for physicians – especially anesthesiologists and surgeons – bundled payments present significant compensation challenges. At one end of the spectrum is the potential for working “off the clock” when a patient has complications requiring subsequent surgeries and you’re receiving a single payment for episodic care. At the other end is the issue of being compensated fairly – day in and day out – for the services you provide. Put another way, you must advocate for yourself in order to get the slice of the bundled payment pie that you rightfully deserve.



images-2As of April 2016, BPCI had 321 Awardees and 1201 Episode Initiators. Notably, there are only ten participants in the fourth model, where the physician is paid from the bundle and submits a Medicare “no pay” claim. An annual report from February 2015 (the latest available) reported that engaged physicians championed BPCI’s Model 4, both as a program and in selecting episodes of care. It noted that financial opportunities topped the list of Awardee rationales for participating in this fourth model, including the ability to employ a technique called gainsharing. Gainsharing promotes coordinated and efficient care by passing along cost savings to providers. While each Awardee allocates gainsharing as it wishes, one reported calculating monthly internal cost savings (ICS), adjusting for readmission expenses, and then placing half of the ICS into a savings pool. Payments from the pool are distributed (to individual physicians or groups) monthly, but with a 45- to 60-day lag. Because this model is prospective, gainsharing only occurs when cost savings are realized.

Bundled payment arrangements with entities other than the federal government can include gainsharing, yet it’s important to keep in mind that federal laws prohibit certain types of gainsharing financial arrangements. One of the concerns about the CJR Payment Model rule was that it didn’t waive the Anti-Kickback Statute or Stark Law. In response, CMS and the Office of Inspector General issued a notice outlining the process for obtaining waivers. Keep in mind that, while there are federal carve-outs that allow gainsharing, always ensure an agreement’s legality prior to entering into it.

One must also consider applicable state laws that introduce their own complexity. In Maryland, for example, the state Self Referral Law is more restrictive than national prohibitions. Efforts to open up the law to bundle payments have led to competing bills from hospitals, corporations and coalitions of specialty groups each looking to carve out or oppose “profit centers”. Its not certain, at the moment, what compromise will look like.

In our next article, we will discuss details and strategies from expert negotiators to create the ideal bundle. It will take hard work and help from informed advisors like the physicians at, but you can make it work! Contact us to sign up for our newsletter and ask for an advance copy of “Bundle Payment Negotiation Strategies and Pitfalls”.


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Anesthesia Stat

Dr. Amar Setty     Amar Setty, MD


Dr. Harold Pierre     Harold Pierre, MD

Sally Smith


Ayla Ellison, “Majority of healthcare executives expect finances to suffer in move to value-based contracts” Beckers Hospital CFO, June 21, 2016

The Center for Healthcare Quality and Payment Reform, “