Bundled payment a stepping-stone for ACOs? I don't buy it

Rob Lazerow, Health Care Advisory Board


Across recent months, I have noticed a striking change in my conversations with hospital, health system, and medical group leaders as they continue to develop and refine their accountable care strategies. With deadlines approaching for several of CMS’ new payment innovation programs—plus the potential to engage in similar models with commercial insurers and self-funded employers—the prospect of entering the accountable care landscape is becoming real for many organizations.

Providers are currently deciding which, if any, of the voluntary payment programs they will pursue in the coming months. As a result, many of the upcoming Toward Accountable Payment posts will focus on selecting among the range of payment reform programs on the table. For this post, I want to focus on the question of using bundled payment as an incremental step toward becoming an eventual ACO.

Is bundling a stepping-stone for future ACOs?

As I have previously written, hospitals can realize a range of strategic benefits by developing carefully crafted bundled payment programs. And for many leaders who want to begin experimenting with new payment models, bundling presents an attractive entrance into the accountable care landscape, enabling innovation without fundamentally disrupting the current hospital business model. As they think about longer-term accountable care strategy, many of these leaders also assume that bundling offers a helpful foundation for ultimately becoming ACOs.

Unfortunately, I do not buy the argument that bundling provides a stepping-stone for ACO development. I certainly understand the genesis of the argument: line up all of the emerging payment models by degree of financial risk and assume a linear evolution from pay-for-performance to bundled payment to shared savings or capitated models. I even admit there are some areas of overlap across models, such as focus on readmission reduction, but closer comparison reveals that bundled payment and the shared savings model have fundamental differences. There are still plenty of valid reasons to explore bundling—but preparing to become an ACO is not on my list.

Ultimately, bundling and ACO-compatible payment models—such as shared savings, partial capitation, and full capitation—enable providers to pursue two distinct care management ambitions. Bundled payment encourages providers to become successful episodic care managers, while ACOs must become full blown population health managers. These two care management ambitions are by no means mutually exclusive—I can envision organizations eventually engaging in both bundling and shared savings—but I do not see a linear evolution from success under bundling to becoming an effective ACO.

Contrasting bundled payment and shared savings

To debunk the myth that bundling is an incremental step toward creating an ACO, I 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, I want to 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, for now.

Core Incentives

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, generating 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.

Growth ambition

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.

Participating physicians

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 performance management post-discharge.

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 expenditure 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.

Next steps for payment innovators

Providers across the country now face an incredible opportunity to begin experimenting with a range of new payment models. But before applying for any of these programs, leaders must have clear understanding of why they are voluntarily changing their business models—and which payment models are most appropriate for their organizations.

There are a host of reasons to explore either bundling or shared savings, but I hope this post helps highlight that the two payment models are quite different. When comparing the core incentives, growth opportunities, physician partners, investments, and strategies for success, we see that bundled payments and ACOs enable entrance into two different ends of the accountable care landscape: episodic care management versus population health management. Both models are worthy of consideration in their own right—but not as a stepping-stone to the other.

Want a few stepping-stones for future ACO development? Work on transforming primary care practices to medical homes and start building a clinically integrated physician network. Both are meaningful steps toward creating a future ACO—much more so than building a bundled payment program in the interim.

As always, please feel free to call, email, or tweet me with your strategic and technical questions as you refine your accountable care strategy and evaluate any of the upcoming payment innovation programs.