How to Provide Care without going Bankrupt! (Understanding Risk in a Value-Based Care World)

This is part 3 of a multipart series for physicians learning to understand the economic reality of value based care. Part one, Don’t be Afraid of Bundled Payments! is here.  Part 2, Protecting Income in an Era of Payment reform, is here.


Value based care has gone from dream to reality. Accompanying this transition is a massive transfer of risk from third party payers to providers. We are, in essence, becoming insurers! Physicians have come to accept this new world, but are not in a position to truly understand it. The main reason is that we have never been trained to understand basic concepts in financial risk assessment.


The recent failure of Dartmouth-Hitchcock’s ACO is the best example. “We were cutting costs and saving money and then paying a penalty on top of that,” said Dr. Robert A. Greene, an executive vice president of the Dartmouth-Hitchcock health system. “We would have loved to stay in the federal program, but it was just not sustainable.” In the end, Dartmouth, which was a pioneer in creating the ACO model, improved quality and reduced Medicare spending on hospitalizations, procedures, imaging and testing. Nevertheless, they miscalculated the financial risk of the ACO and had to shut it down.


Why did some of the smartest physicians in the country fail? It may be that we are terrible at understanding and pricing different kinds of risk. For example, in the immediate aftermath of 9/11, the number of air passengers fell while the number of miles driven increased – even though driving is exponentially riskier than flying. This so-called “9/11 Effect,” prompted by a fear of further terrorist attacks and a wish to avoid long waits in airport security lines, had the unintended consequence of creating 2,170 additional traffic fatalities in the three months following the collapse of the World Trade Center. Clearly, travelers did not make their risk calculations are based on objective measures.

Protecting Income in an Era of Payment Reform (Bundle Payment Negotiation Strategies and Pitfalls)

In our previous article, we discussed how payment reform is leading to bundled payments, a single, predetermined payment that encompasses all aspects of an episode of care, which attempts to strike a balance between fee-for-service model and capitation.  We have been studying these issues closely and believe its important for all groups to understand future payment methodologies now.

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 set which we will begin to describe in the paragraphs below. Most providers and administrators will benefit from some skilled help to create, compile and utilize the data needed to negotiate and monitor the bundle. Contact us at to get started.


Points of Negotiation

In an era of bundled payments, it’s imperative that physicians become strong advocates in order to receive the compensation they deserve. Here are several factors to consider when negotiating a deal:

Risk Adjustment: All patients are not equal. Those with an increased risk for readmission or complications because of factors like age or comorbidities are more likely to require more of your services. Negotiate tiered rates that take into account patient variables.

Know Your Data: You went to school to be a doctor, not an actuary. Nevertheless, you need to have a solid understanding of the literature relating to the risks and outcomes of various conditions and treatments. The key to lessening your financial risk is being able to accurately predict your level of involvement.

Clearly Define the Episode: An episode of care that goes from surgery to seven days post-op should be paid at a different rate than one that extends to 90 days post-op. It’s imperative to agree on the definition of “episode of care.”

img_health_techBenchmarking in Gainsharing: The theory behind benchmarking is that you shouldn’t be financially penalized for another doctor’s less-than-stellar performance. For example, if surgeon X has higher (and more costly) complication rates that another, your gainshare of the savings pool should be greater. While collegiality might take a hit, benchmarking gainshare to performance is not only equitable, but it can lead to increased cost savings. If it’s clear to everyone that surgeon Y uses an approach that curbs costs, that approach can be implemented by others, thus increasing the savings pool and others’ gainshare. When negotiating your gainshare, consider a floor for hitting a minimum target (for example, being in the 85 percentile of a given performance metric) and bonuses for surpassing that target.

Transparency: Insist on transparency in how bundled payments are allocated (including the identities of each party), how payment will be apportioned, and how benchmarking data is collected and used.

Timing: There are a number of timing issues involved with bundled payments. The first – and most important – is the duration of the bundle. If it is a straight bundle, you can negotiate when you will receive your payment. If there is a gainsharing element, you can discuss the lag time for distribution of the savings pool.


Laying the Groundwork

Before you walk into negotiations, it’s important to understand your position relative to the positions of the other parties. “This is one area where groups can really use some help”, says Dr. Pierre of AnesthesiaStat Consulting. “I’ve seen deals become very unprofitable because a group did not do the proper groundwork ahead of time…. And this is not a physicians area of expertise” .

Most bundles are constructed on procedures that are easily protocolized and have less cost variation than “condition based” ones.  Here are a few examples:

  1. Cardiac Surgery/Cardiovascular Procedures
  2. Major Joint Replacements
  3. Hip and Knee Arthroscopy
  4. Carpal Tunnel Surgery
  5. Colorectal Surgery

For cases like these, it’s best to start by calculating your average revenues and cost (typically labor) for each procedure.  Depending on who you are negotiating the bundle (insurer vs. hospital), you may need to analyze your average reimbursement by procedure.

You will want to start with at least a year worth of data.  We would recommend the following list:

  1. Demographics
  2. Payer(s) information
  3. List of services provided per episode of care
  4. Billable units
  5. Average Anesthesia case time
  6. Anesthesia Case time by surgeon (a slow surgeon can make a case lose money)
  7. Average cost of care (median anesthesia compensation (include benefits) + overhead/total OR minutes= cost per minute)

There are other methods of estimating revenues and costs which we have employed when they provide transparency or added advantage.  At a minimum, you need to know your costs and get a good idea of volume to make sure you are covering your expenses.  As you mix fee for service with bundles, make sure your volumes are keeping up with both payment models to keep your numbers intact.  We have found that most groups need a lot of help in the beginning to get started, particularly with the volume conundrum.  In one example, under pressure from the hospital, a group bundled total knee replacements. In this case, they only had to account for the cost of labor.  The revenue per case value seemed to exceed the cost by a 15% margin.  Any profit, however, was more than offset by the decreased volume and the unreimbursed cost of 4 cancellations, three revision surgeries and a wound dehiscence.  The group ended up with a loss on the TKR’s for a six month period.  Faced with a full year of losses, they turned to help to renegotiate with their hospital.


Here are some issues to consider in assessing your leverage:

Know your goals and strengths: Have a clear vision of your short- and long-term objectives, as well as the unique value proposition you can deliver to your negotiating partner. Understanding your priorities will help you determine which points require steadfastness and which elements are more flexible. An inventory of your strengths serves as both a point of negotiation and a reality check. Always remember that 90 percent of something is better than 100 percent of nothing.

Value and competition: If you’re in a relatively large physician group in a relatively small city, you’ll have more leverage than a small group in a large city. On the other hand, if you have many Medicare patients and are part of an accountable care organization, you likely bring a lot of value to the organization. As a result, your position will be stronger. Research your competition to see the alternate paths available to your negotiating partner. This will prevent you from taking an unwavering stand on a point that isn’t an issue for your competition. In addition, keep in mind that your relative value may change depending upon your negotiating partner. For example, your value to a hospital might be different than your value to an insurer.

Allies and allegiances: Consider the outcome you want and determine who will help you best achieve your goal. Your allies might be other physicians, the hospital, the insurer, or your patients. Forming allegiances to get results is a sound strategy, but one that may have long-term implications. Remember that, over time, allies and allegiances can shift, so review each negotiation with a fresh mindset.



Negotiation Strategies

Knowing how to approach a negotiation is different from proficiency in the actual art of negotiation. Here are four negotiation methods that can help you achieve your goals.

Foot-in-the-door technique: Social psychologists call this compliance technique “successive approximations.” The theory is that it’s easier to get someone to agree to a larger request by first gaining their assent to a smaller request. Once you get the first “yes,” it’s easier to get subsequent agreements. In your negotiation, begin with the least contentious points and work your way up.

Door-in-the-face technique: Those who solicit charitable contributions know that once the request for a large donation is refused, it’s easier to obtain a small donation. It’s a concept called social reciprocity. If your negotiations are stuck in one thread, ask for more than you want in a different arena. Then back down and ask for what you actually want. There’s a good chance you’ll succeed.

Changing the subject: When negotiations flatline, take a break and then come back to a different topic. Once that topic is successfully settled, it will be easier to return to and get cooperation for more contentious point.

Side door tactic: If talks have stalled, it might be time for someone not on the negotiating team to step in. If salient points and potential resolutions are suggested by someone outside of the primary group, the opposing party may be more likely to listen.



Beyond Negotiations

The ability to negotiate your segment of the bundled payment is critical to obtaining just compensation, but so is the ability to create a paradigm shift. For example, orthopedic surgeons who have the ability to discharge joint replacement patients within 24 hours are beginning to move from hospital settings to ambulatory surgery centers. While not every patient is a candidate, those who are slash the episodic care cost by half while decreasing the potential for hospital-acquired infections. Hospitals are scrambling to address this outpatient migration trend, and surgeons and anesthesiologists are dealing with divided loyalties. Is it in doctors’ best interest to collaborate with a hospital to protect its patient volume or to develop innovative protocols that deliver value and, in the process, increase physician compensation?

When CMS proposed a rule to pay for outpatient knee replacements, American Hospital Association lobbyists effectively killed it. While the Ambulatory Surgery Center Association has recently tried to convince CMS to revive the rule, there’s no indication that change is in the offing. Yet a few private payers are agreeing to bundled payment outpatient joint replacements. In the meantime, some practice groups are dividing their patients between hospitals and ambulatory surgery centers, and some hospitals are opening their own outpatient centers and offering ancillary services like patient education programs to accommodate the trend. Yet the central question – partnership vs. competition – has not yet been resolved.



Bundled payments are the wave of the future, but you need to stay on your toes to ensure that you receive the compensation you deserve. In addition to having a thorough understanding of the potential points you can raise and honing your negotiation skills, it’s imperative that you understand every element of an agreement before signing on the dotted line. In order to maximize compensation, be on the lookout for game-changing opportunities. If you can find ways to slash costs, improve patient outcomes, or form strong alliances, you’ll be in the enviable position of garnering a larger slice of the proverbial payment pie.

It will take hard work and help from informed advisors like the physicians at, but you can make it work! Contact us today at to sign up for our newsletter, read our informative articles, or get the help you need.


Anesthesia Stat

Dr. Amar Setty     Amar Setty, MD


Dr. Harold Pierre     Harold Pierre, MD

Sally Smith




Tony Mira, “