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Bundled Payment: Managing Risk by Managing Variability

Article · December 29, 2015

Willie Sutton’s quote, “I rob banks because that’s where the money is,” gained its place in infamy because it is logical, rational, and therefore, makes sense. If one is looking for an opportunity to bend the cost curve, to provide value by optimizing both quality and cost, and to do this through a risk-sharing contract, it makes perfect sense to look for disparities in both care and costs that occur in high-volume conditions or procedures.

The premise of a “bundled payment” is to aggregate a number of care delivery services around an episode of care and to develop a contractual agreement between the payer and the provider(s) such that reimbursement is set a priori irrespective of actual cost. As such, bundles are meant to reduce costs to payers and employers. But an equally, if not more important, objective is to concomitantly decrease variability, resulting in more predictable costs.

At first glance, it would seem that high variability constitutes a deterrent to constructing a bundle. In reality, however, variability should be viewed as a significant opportunity — an opportunity to recalibrate care pathways and costs toward a higher level of consistency, predictability, and profitability. Given that bundles represent vehicles for risk-sharing payers, employers, and their network providers, high variability presents an opportunity for health care financial arbitrage.

∑(Variability) × Volume = Opportunity

In creating a bundle, how could we magnify that opportunity? Through our experience in creating transplant, orthopedic, and medical bundles, we find that common principles apply to all bundles:

  • First, one must define the bundle by aggregating longitudinal clinical phases of care (e.g., a total joint replacement, beginning from the preoperative surgical consult and ending 90 days post surgery), each with high variability, bracketing services within an episode (e.g., professional, inpatient and outpatient facilities, and post-acute services) that can be packaged into a “bundle.”
  • Second, once the episode is defined, the next step is to construct a payment structure that leverages the reduction in variability in resource utilization. The goal is to financially reward clinical accountability where providers are willing to bet on, and own, their performance risk.

How Can an Organization Manage Variability?

Reducing variability within episodes of care through utilization management has been the industry standard for transplant surgery for over two decades, providing a blueprint for other disciplines. Orthopedic and cardiovascular surgeons have recently begun managing similar episode(s) of care in the commercial space, designing patient-centric, predictable episode products delivered by clinicians with a culture of accountable business ownership. In all of these examples, episodes are managed by providing consistent care that follows accepted guidelines with predictable outcomes and costs. To help manage variability, most bundles would include these elements:

  1. Disciplined care redesign: Implementing institutional guidelines — including systemic care redesign, if needed — is necessary to ensure consistency of care and patient experience. For certain programs, consideration may be given to limiting participation in bundled payment products to individual providers who can reliably manage variability for all patients through disciplined care plans, with little if any deviation.  Not only is this a financial risk–mitigation strategy, but it is also a lever for physician engagement as excluded providers align around institutional initiatives to gain entrance into the product.
  2. A culture of accountability: Maintaining discipline around care redesign requires developing a culture of provider accountability. This cultural commitment is essential and can be achieved through monitoring of unjustified deviations from consensus care plans, disciplined utilization management, and leadership-driven expectations around quality-improvement activities.  This is likely to result in the consistent application of data-driven, evidence-based treatment algorithms, in a manner that is agnostic to payer and contractual agreement.
  3. Bundle-breakers and stop loss: Cases that are judged to fall outside the “normal” — typically because of significant comorbidities outside the expected prevalence for the specific population or because they fall outside specified indications — should be considered “bundle breakers.” For these, a default payment structure can be designed as fee for service (FFS). Alternatively, such cases could remain included in bundles — but only if either stop-loss insurance or re-insurance can be secured by the provider or bundled administrator.

The Dissenting Opinion: “Why Poke the Skunk?”

Dissenters may point out that variability in resource utilization and costs around an episode of care may result from variations in clinical care and other variables (comorbidities, stage of disease, socioeconomic status, and access to care, etc.) that are difficult to predict and outside the clinician’s control. Therefore, they say, one size (i.e., one bundle) does not fit all, and high variability presents as a deterrent to normalization.

In addition, dissenters say, building an episode composed of cumulative periods of high variability compounds the difficulty in managing episode risk. Finally, high cost might actually translate into high reimbursement. So, dissenters ask, “Why poke the skunk?”

The New Health Care Marketplace

While many contemporary fee-for-service arrangements may incentivize high variability in cost, it is becoming increasingly clear that managing variability may be necessary for providers to protect and maintain market share, especially as narrow networks evolve. This is being hastened by many developments:

  • The Patient Protection and Affordable Care Act, including the creation of the Center for Medicare & Medicaid Innovation (CMMI), is designed to achieve the Triple Aim through increased provider accountability.
  • Commitment by the Department of Health and Human Services to the expansion of value-based delivery (VBD), shifting from volume-based FFS to fee-for-value (FFV) models tying 90% of all Medicare FFS payments to value or quality by 2018, and 50% of all Medicare payments to quality or value through alternative payment models. As evidence of this commitment, in July 2015, the Centers for Medicare & Medicaid Services (CMS) announced the launch of the Comprehensive Care for Joint Replacement, a mandatory orthopedic bundled payment program proposed for 75 geographic areas defined by metropolitan statistical areas (MSAs).
  • The Medicare Access and Children’s Health Insurance Program (CHIP) Reauthorization Act of 2015 includes two new FFV mechanisms to replace FFS — an Alternative Payment Model (APM) program and the Merit-Based Incentive Payment System, favorable incentives for adoption of the APM track. CMS’s Office of the Actuary projects that by 2019, payments to physicians in the APM will constitute 60% of Medicare  physician spending, with continued projected increases thereafter.
  • State Medicaid programs and the commercial payer industry, including self-insured employers, also seem engaged in, and committed to, VBD payment reform strategies consisting of provider-based risk-sharing constructs.

Bundled payment models tie reimbursement to predictable costs of an episode of care, resulting in gains to providers if costs are lower than predicted, and losses if they are higher. The CMMI Bundled Payment for Care Improvement Initiative and the Oncology Care Model exemplify the inclusion of cumulative phases of care into episode bundles. Similarly, commercial payers and large employers have shown recent interest in bundled services.

Reducing high variability within specified episodes of care requires applying standardized clinical algorithms leading to more predictable resource utilization and cost. Entrepreneurial providers willing to deliver quality care in a more efficient, consumer-friendly manner by managing defined risk and performance effectively will be viewed favorably in the new marketplace.

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