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.

New Call for Submissions ­to NEJM Catalyst


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

Learn More »

More From New Marketplace
Effect of Value-Based Payment Programs on Providers That Serve the Poor

Financial Incentives and Vulnerable Populations — Will Alternative Payment Models Help or Hurt?

Understanding APMs’ potential consequences for vulnerable populations is critical if we wish to maximize benefits and reduce harms.

Example 4-Quadrant Analysis and Price Setting for a Single-Procedure Bundle - Lessons Learned from DRG Implementation

Making Bundled Payments Work: Leveraging the CMS DRG Experience

Given its clout and experience, CMS is uniquely positioned to lead the U.S. health system toward high-value care. Bundled pricing based on real costs, leveraging lessons from DRG implementation, would establish the right types of provider incentives.

Kocher03_pullquote risk-based primary care provider

Opportunities for Risk-Taking Primary Care Providers

Embracing two-sided risk while adopting workflow redesign and reviewing benchmarks is leading to improved clinical and financial outcomes.

The Unrealized Potential of EMRs: Interoperability and the Opportunity for Disruption

NEJM Catalyst hosted clinical and business leaders, along with the originator of “disruptive innovation,” to consider the user frustration, high cost, and lack of interoperability of electronic medical records.

Steven Seltzer Andrew Menard Clayton Christensen Edward Prewitt Electronic Medical Records Roundtable Head Shots

The Unrealized Potential of EMRs: Why They Fall Short and the Unexpected Source of a Solution

NEJM Catalyst hosted clinical and business leaders, along with the originator of “disruptive innovation,” to consider the user frustration, high cost, and lack of interoperability of electronic medical records.

Robert Gavin head shot

Amazon and CVS: Short-Lived Unicorns in Health Care, or Healers of the “Tapeworm”?

Will Amazon–Berkshire Hathaway–JP Morgan and CVS-Aetna change the health care game? To one health care employer purchaser, these announcements feel a lot like Groundhog Day.

Fiona Scott Morton head shot

We Can’t Spend All Our Money on Health Care

We have to think about how much we want to spend on health according to how much it’s worth to us at the margin.

Simplified Chain of Production for Primary Care Services Generating Retail Prescriptions. Solid arrows indicate contractual relationships or ownership, and the dashed arrow indicates referral for prescription.

Does CVS–Aetna Spell the End of Business as Usual?

What might one of the largest mergers in history mean for the health care delivery system?

Lack of Incentive Is Top Barrier to Implementing Value-Based Payment

Survey Snapshot: Payer-Provider Alignment Is Difficult Even for Integrated Organizations

NEJM Catalyst Insights Council members say stronger incentives and better use of analytics could improve alignment.

Kaplan04_pullquote Time to Sink Two Canoe Payment Models Argument

Time to Sink the Two-Canoe Argument

Although the transition from fee-for-service to quality-based payment can leave physicians feeling trapped “with a foot in two canoes” while straddling the two payment methods, there are compelling ethical, professional, and business reasons against rationalizing continued support of fee-for-service medicine.


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

Learn More »


The Adverse Impact of the Physician-Hero

In a value-based world, the sickest patients need the benefit of a comprehensive team to…

Financial Incentives and Vulnerable Populations —…

Understanding APMs’ potential consequences for vulnerable populations is critical if we wish to maximize benefits…

Change the Model → Change the…

If we’re going to change the health care payment model, do we need to change…

Insights Council

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

Apply Now