Read our detailed analysis exploring the use of bundled payment as an incremental step toward near-term ACO development. Learn about distinct physician partnerships and strategies needed to succeed under bundled payments versus build an effective ACO and explore how to begin staging the transition to the accountable care landscape.
We recently shared an initial version of this blog post, exploring whether bundled payments represent an incremental step toward developing ACOs, and we received incredible feedback from Project participants in response. Thank you to everyone who took the time to share their questions and comments. Based on the range of reactions, we want to offer a few clarifications and provide an updated analysis below.
First things first: Underlining the value of bundled payments
To be clear, we have not changed our perspective that bundled payments can enable a range of strategic benefits, such as reducing costs per case, improving quality, and strengthening relationships between hospitals and physicians without turning to employment. Further, bundling presents an attractive entrance into the accountable care landscape for many organizations, offering a chance to innovate without fundamentally disrupting the current hospital business model. For our full take on the benefits of bundling, please read "Bundled Payments—Why Bother? (Here’s Why)."
Differentiating between short- and long-term priorities
In the long term, organizations will need to meet the performance standards created by both bundled payments and the shared savings model. Even putting aside payment transformation, the aging of the Baby Boomers will threaten inpatient payer mix and case mix across the next decade. As a result, hospitals and health systems will need to build both efficient inpatient procedural enterprises and effective ambulatory care management enterprises for long-term success. For a detailed explanation, please read our new publication, Running on Medicare Margins, and join our Medicare Breakeven Project.
Despite this long-term convergence, the immediate question is whether pursuing bundled payment is an ideal near-term strategy for all organizations—particularly hospitals and health systems that are actively developing ACOs. Although providers could participate in both the Medicare Shared Savings Program and the Bundled Payments for Care Improvement Initiative, many leaders want to narrow their focus for the coming year. Given limited time and resources, these leaders want to gradually stage their near-term accountable care strategies.
As a result, this blog post focuses on near-term strategy. For hospitals and health systems working to become ACOs in the coming year or two, does bundled payment advance that ambition? More simply put, is bundling the most direct stepping-stone for ACO development?
Is bundling a stepping-stone for future ACOs?
There are many similarities between bundled payments and ACO-compatible payment models—such as shared savings, partial capitation, and full capitation. For example, both bundling and ACO payment models transition providers from pure volume-based payments to value-based payments, shifting risk for cost and quality from payers to providers. Both models require providers to collaborate across the care continuum, bringing together hospitals, physicians, and post-acute care providers in new partnerships. And both payment structures reward providers for improving clinical and operational performance, often by effectively using IT and analytics.
That said, there are some important differences between bundled payments and ACO payment models. While we will save the details for below, at a high level, bundling and ACOs enable providers to pursue two distinct care management ambitions. Bundled payments encourage providers to become successful episodic care managers, while ACOs must become full blown population health managers. These two ambitions are by no means mutually exclusive—we can envision organizations eventually engaging in both bundling and shared savings—but this does not imply a linear evolution from success under bundling to becoming an effective ACO.
To explore whether bundling is an incremental step for organizations with near-term ACO ambitions, we want to compare major attributes of bundled payments and shared savings as well as contrast the key strategies, physician partnerships, and investments needed to thrive under each payment model. For this analysis, we focus on bundling in its most common application—an episodic case rate payment triggered by a hospital admission, typically for an inpatient procedure. As a result, we will put aside the notion of chronic disease bundling, fixed payment for managing a patient’s chronic disease across a period of time.
Bundled payments encourage providers to collaborate on improving the efficiency and quality of individual care episodes, honing in on the unit cost of care. Two key features of the bundled payment create these incentives. First the lump sum payment is shared among participating providers, establishing mutual accountability. Second, the bundled payment is typically smaller than the sum of historic individual payments to generate upfront savings for the payer. As a result, providers can only succeed under bundled payments by reducing input costs and growing volumes to offset the reimbursement cut per case.
Shared savings models encourage providers to collaborate on reducing overall spending and improving quality for populations of patients over periods of time, focusing expansively on the total cost of care. Providers can only succeed under a shared savings model by reducing the payer’s growth in spending on beneficiaries attributed to the ACO, meaning that providers must bill for fewer services over time. In essence, ACOs win by destroying their own demand, at least in targeted areas. While improving internal efficiency may help an ACO manage profitability, the shared savings model creates no new imperative to reduce input costs, as providers’ internal efficiency gains do not ultimately inflect payers’ spending.
Under a bundled payment model, providers face the same growth imperatives that are currently present under the existing fee-for-service payment system. Although bundling reduces the average reimbursement per episode, the number of payments providers receive is still fundamentally linked to the number of discrete care episodes, rewarding volume growth. To support this growth ambition, hospitals will continue to recruit key proceduralists and market their high-end procedural services.
Under a shared savings model, providers are rewarded for slowing the rate of the payer’s spending growth, breaking the link between volumes and financial success. If successful, ACOs will reduce per capita utilization for their attributed patient populations. As a result, ACOs will only be able to grow by increasing the number of attributed beneficiaries. The precise growth strategy will depend on an ACO's attribution model—but it will likely center on expanding the base of participating primary care physicians and growing the size of PCPs’ patient panels.
To successfully manage a bundled payment program, hospital leaders will need to develop an efficient inpatient procedural enterprise capable of reliably delivering high-quality, low-cost episodes of care. Considering the types of care most often bundled, hospitals will primarily focus on collaborating with orthopedic and cardiac surgeons, cardiologists, and the suite of hospital-based physicians such as radiologists, anesthesiologists, and hospitalists. If bundles include readmissions, then PCPs will likely be involved too, but primarily to ensure prompt follow-up post-discharge to mitigate readmission risk.
To successfully build an ACO, hospital leaders will need to construct an effective ambulatory care management enterprise capable of treating patients with chronic diseases in low-cost community settings rather than high-cost inpatient facilities. PCPs, community-based medical specialists, and hospitalists will all be instrumental to success as they form the frontlines of chronic disease management and readmission reduction. While proceduralists can certainly contribute to ACO performance, overall success will largely rest on the shoulders of PCPs and medical specialists—and their ability to effectively keep patients with chronic diseases from needing costly inpatient services.
Infrastructure and personnel investments
When developing a bundled payment program, providers will invest in infrastructure and personnel to both process lump sum payments and improve episodic care coordination. First, hospitals will either invest in or outsource the “banker” competencies needed to manage the bundled payment revenue cycle, which often includes notifying the payer of a bundled case upon admission, billing for and collecting lump sum payments, paying physicians, and supporting gainsharing programs through case-level cost analytics. Second, hospitals will invest in coordination capabilities, such as the ACE Navigators who have been central to success at ACE Demo sites. If post-acute care or readmissions are included in the bundle definition, hospitals will also need to invest in linkages with post-acute care providers to ensure effective information exchange and enable post-discharge performance management.
When developing an ACO, providers will invest in infrastructure and personnel to build a “medical perimeter” around the acute care facility, ensuring that patients with chronic diseases can be effectively treated in low-cost community settings. Key elements of the medical perimeter include medical home infrastructure, disease management programs, EMR systems, disease registries, population health analytics, and tools to engage patients in their care. The medical perimeter will also rely on new personnel, especially the armies of health coaches, mid-level providers, and social workers needed to support comprehensive, team-based care delivery and the data analysts who enable information-powered care.
Key strategies for success
In a bundled payment program, providers ultimately succeed by reducing input costs and improving quality during individual episodes of care. As a result, hospitals will develop gainsharing models to reward physicians for standardizing high-cost implantable device and care protocols. If readmissions are included in the bundle, hospitals will work to streamline patient handoffs across the care continuum and engage patients post-discharge to reduce readmission risk.
In a shared savings model, ACOs ultimately succeed by reducing the payer’s spending on attributed beneficiaries below a pre-determined target and meeting quality standards. As a result, ACOs will focus on areas where effective outpatient management and quality improvement can reduce downstream demand for high-cost services. ACOs will principally work to engage patients with chronic diseases, using the investments in the “medical perimeter” to treat high-risk patients in low-cost settings.
Staging the transition to accountable care
Providers across the country now face an unprecedented opportunity to begin experimenting with a range of new payment models. When evaluating any of these programs, leaders must have clear understanding of why they are voluntarily changing their business models and which payment structures are most appropriate for their organizations. But beyond assessing these initial payment reform options, leaders must develop an overall accountable care strategy, which includes staging the broader transition to accountable payment models. Effective staging will likely necessitate developing both near- and long-term accountable care ambitions.
For organizations with near-term ACO ambitions, bundling does not present the most direct path for building an effective ACO. Fundamentally, bundled payments focus on patients while ACOs focus on populations. To be clear, creating a successful bundling program is unlikely to disadvantage an ACO and would help build the relationships and competencies needed for long-term success. But if the goal is build an ACO the immediate future, hospitals and health systems have more direct ways to use their limited time, energy, and resources. For example, transform primary care practices to medical homes, explore a Clinically Integrated physician network, and develop population-level analytics. These are three direct stepping-stones toward creating an effective ACO.
Not all hospitals and health systems have near-term ACO ambitions, however, and these organizations can more gradually stage their transition into the accountable care landscape. Evolving to prosper under accountable care is fundamentally about initiating a culture shift, bringing together hospitals and physicians to develop a patient-centered and value-based delivery system. As Nick Bassett, head of the bundled payment pilot at Intermountain Healthcare’s Dixie Regional Medical Center, reminded me, “One thing that we’ve found is that there is certainly a culture shift that needs to take place and bundled payment is a slightly less dramatic approach to changing the culture. It’s a way to at least get people talking.” Ultimately, organizations must determine the best way to advance this culture change given both internal ambitions and external market dynamics.
Again, thank you to everyone who shared reactions to the first iteration of this analysis, and we look forward to hearing comments on this update. As always, please feel free to call or email me with any questions or if there is anything we can do to be of service.