New Marketplace

What Are Bundled Payments?

Article · February 28, 2018

Bundled payments represent one form of alternative payment models (APMs) that are designed to move toward value-based care by incentivizing providers to advance coordination and efficiency of care while also improving quality and outcomes at lower costs. With bundled payments, the total allowable acute and/or post-acute expenditures (target price) for an episode of care are predetermined. Participant providers share in any losses or savings that result from the difference between this target price and actual costs.

Bundled payments, also known as episode payment models (EPMs), require participant providers to assume risk, as they must cover costs that go above the target price for an episode of care including those that arise from complications and hospital readmissions. On the upside, providers share in the savings if they keep costs below the target price while maintaining quality standards. Bundled payments are showing significant promise in improving care quality while at the same time bringing costs down.

 Episode of Care Definition

An episode of care involves the entire care continuum for a single condition or medical event, such as joint replacement or labor and delivery, during a fixed period. It includes all acute and post-acute care delivered by hospitals, physicians, skilled nursing facilities, and other providers participating in a care pathway. Other episodes of care commonly involved in bundled payments are:

  • Myocardial Infarction
  • UTI
  • Pacemaker
  • Congestive Heart Failure
  • Stroke
  • Sepsis

As these examples illustrate, some episodes of care represent a higher risk than others. Additionally, patients also represent different levels of risk based on age, behavioral factors, and comorbidities. For these reasons, bundles can be adjusted to reward providers who assume more risk.

Bundled Payment Models: Retrospective and Prospective Payment Systems

There are two basic types of bundled payment models: retrospective payment systems and prospective payment systems. In a retrospective payment system, payers retain a fee-for-service (FFS) arrangement and continue to compensate providers directly. But they also track total costs against the predetermined target price. If costs exceed the target price, then the payer reduces payments accordingly. If costs are lower than the target price, then providers share in the consequent savings.

In a prospective model, payers make a single lump-sum payment to a convener who then distributes payment to the various providers involved in the episode of care. As with the retrospective model, providers share in any losses or gains based on the predetermined target price.

CMS Bundled Payments for Care Improvement (BPCI)

First introduced at the Texas Heart Institute in 1984, bundled payments rose to prominence with the passage of the Patient Protection and Affordable Care Act (PPACA). This legislation led to the formation of the CMS Innovation Center which created the Bundled Payments for Care Improvement (BPCI) Initiative. Four bundled payment models were developed and piloted through this program between 2013-2017:

Four payment models under CMS’s BPCI Initiative

Four payment models under CMS’s BPCI Initiative Click To Enlarge.

Medicare Bundled Payments 2018: CMS BPCI Advanced

At the end of November last year, the Trump administration canceled hip fracture and cardiac care bundles that were mandatory under the Obama administration. To reduce the burden on rural hospitals, they also significantly decreased the number of geographic locations from 67 to 34 where participation in the Comprehensive Care for Joint Replacement (CJR) payment bundle was required.

These policies left healthcare leaders wondering about the future of bundled payments. But in January 2018, CMS confirmed its commitment to bundles when it announced BPCI Advanced. This new CMS bundled payment model includes twenty-nine inpatient and three outpatient episodes of care. Participation in the program is voluntary and involves a single retrospective bundled payment for a 90-day clinical episode duration. BPCI Advanced qualifies as an Advanced APM under MACRA’s Quality Payment Program to further entice physicians to participate with the additional Advanced APM monetary incentives.

Bundled Payment Success Strategies

One area where bundled payment models are showing great promise is in joint replacement procedures. Several providers demonstrated cost savings, particularly in post-acute care costs, under CMS’s CJR payment bundle. According to a JAMA study published in February 2017, CJR saved U.S. taxpayers $5577 or 20.8% per joint replacement care episode for 3942 patients.

Providers who have piloted bundled payment programs are having success in other areas as well. Here we outline nine strategies that have been gleaned from the experiences of early participants:

  1. Physician Leadership
    Leverage the clinical expertise and experience of physicians throughout the entire care journey. Surgeons, hospitalists, and other specialists should stay proactive in decisions about patient recovery even after they have left the hospital.
  2. Care Navigator or Coordinator
    Assign navigators to patients to assist them with post-discharge care in areas such as medication and care instructions. While many organizations fill this role with nurses, others are tapping non-licensed personnel to liaise with the care team and to help with non-clinical post-discharge activities such as filling prescriptions and getting to follow-up appointments. This additional support is proving cost and care effectively.
  3. Consensus Building
    Develop consistent care pathways by gaining consensus from all involved providers regarding metrics, guidelines, and protocols as well as a system of governance that monitors and ensures compliance. Establishing on-going partnerships between acute and post-acute providers builds trust and reduces clinical and financial variations.
  4. Early Mobility
    Get patients moving as early as possible after an acute care event. Mobility has long been shown to speed up recovery. It also reduces the length of stay at skilled nursing and inpatient physical therapy facilities and sometimes prevents the need altogether.
  5. Mine Existing Data
    Use historical data to understand variation in patient care journeys and their subsequent outcomes to identify opportunities. What worked well? Where can inefficiencies be eliminated? Also, use predictive analytics to understand higher-risk patients who have comorbidities, sometimes referred to as “bundle breakers.”
  6. Classify Episodes of Care Based on Risk
    Group episodes of care according to risk when negotiating target prices. For example, elective hip replacement patients represent lower risk than those with hip fractures, so bundles should be priced accordingly.
  7. Technical Infrastructure
    Develop internal data systems as well as appropriate provider collaboration and information sharing tools. Or consider hiring third-party administrators such as tech companies or outside bundle conveners to do it for you. Having access to data across care teams and throughout the span of time for an episode of care offers unprecedented learning opportunities.
  8. Reduce the Use of Skilled Nursing and Inpatient Physical Therapy Facilities
    When appropriate, send patients home by engaging the family in care. For patients with higher care needs, develop a strategy that prioritizes patient mobility and strives to reduce time spent in care facilities. 
  9. Prepare Patients for Success
    Encourage patients to quit smoking, attend to their comorbidities such as diabetes, and address their social needs. Proactively educate patients and their families about what to expect and how to care for themselves post-discharge.

Bundled Payments: A Permanent Fixture in Health Care

With the promise of the early BPCI bundles, the government’s recently renewed commitment to these APMs, and the collective knowledge gained from early pilots, more and more health care leaders are exploring bundled payments’ potential for reward. In fact, according to McKesson and ORC International, payers are forecasting bundled payments to account for 17% of payments by 2021. What’s more, large ­employers who, along with their workers, are being crushed by high insurance costs, are directly negotiating bundle pricing. These are telling indicators that bundled payments will remain a key APM in value-based care strategies.

Call for submissions:

Now inviting expert articles, longform articles, and case studies for peer review


A weekly email newsletter featuring the latest actionable ideas and practical innovations from NEJM Catalyst.

Learn More »

More From New Marketplace
Value-Based Pricing Would Lower Drug Costs and Boost Quality

New Marketplace Buzz Survey: Who’s to Blame for Drug Pricing, and How to Fix It

This survey of NEJM Catalyst Insights Council members shows strong opinions about the impact of high prices, who’s to blame, and how to fix the problem.

A Look at the Four Pillars of Primary Care

Pay for Relationship: A Novel Solution to the Primary Care Crisis

What society should and can pay for is care that enables relationships between patients and providers.

Examples of Stages of AI Technology Development and Diffusion

How Artificial Intelligence Is Changing Health Care Delivery

The development of intelligent machines holds great promise for making health care delivery more accurate, efficient, and accessible, but challenges remain for incorporating AI technology into clinical and administrative settings.

Recommendations to Resolve Information Asymmetry at the Strategic Level

Information Asymmetry: The Untapped Value of the Patient

The knowledge and preferences that patients could — and should — share with clinicians would restore balance to point-of-care interactions, leading to better outcomes and enhanced value.

Key Components for Health Care Systems to Address Patient Affordability

The Next Frontier in Reducing Costs of Care: Patient Affordability

To create meaningful point-of-care guidance so that patients can make informed medical and financial decisions, health system leaders and policymakers can develop interventions to address four major components of a proposed patient affordability scale.

Direct-to-Consumer Telemedicine Is the Biggest Coming Threat to Traditional Health Care Organizations

Survey Snapshot: Mega-Mergers and Telemedicine Accelerate Convenient Care Growth

NEJM Catalyst Insights Council members detail how providers are looking to direct-to-consumer telemedicine and partnerships to meet the differing needs of their patient populations.

Opelka01_pullquote - ACS IPU team-based surgical care bundles playbook

Developing a Playbook for IPU-based Surgical Care and New Payment Models

The complexity associated with most surgery lends itself to the integrated practice unit structure, with its focus on the care team and value-based payment.

Convenient Care Has Been Good Overall for the Health Care Industry

New Marketplace Survey: Convenient Care — Opportunity, Threat, or Both?

A survey of the NEJM Catalyst Insights Council shows conflicting views about both the value of convenient care and what respondents’ organizations should do.

Payer-Provider Partnerships Produce Better Quality Outcomes 3 - community health plan - physician partnership

New Research Shows How Payer-Provider Partnerships Can Accelerate Adoption of Evidence-Based Care

Five best practices that are replicable and scalable are facilitating improved clinical and financial outcomes today.

30-Day Mortality Rates at Non-Teaching and Major Teaching Hospitals 2013-2014 - value-based care at academic medical centers

What Value-Based Payment Means for Academic Medical Centers

Academic medical centers must become as dedicated to advancing operational and clinical efficiency as they have been to advancing the science of medicine.


A weekly email newsletter featuring the latest actionable ideas and practical innovations from NEJM Catalyst.

Learn More »


Value Based Care

222 Articles

New Marketplace Buzz Survey: Who’s to…

This survey of NEJM Catalyst Insights Council members shows strong opinions about the impact of…

From the Commonwealth to Obamacare: Reflections…

The former Executive Director of the Commonwealth Health Insurance Connector — a model for the…

Medicare and Medicaid

131 Articles

From the Commonwealth to Obamacare: Reflections…

The former Executive Director of the Commonwealth Health Insurance Connector — a model for the…

Insights Council

Have a voice. Join other health care leaders effecting change, shaping tomorrow.

Apply Now