Alternative Payment Models Made Simple: Bundled Reimbursements (Part 4 of 6)

In this article, we will cover bundled reimbursements in detail.

This article is Part 4 of our 6-part series simplifying alternative payment models in healthcare.

If you missed the prior articles in this series, or want to jump around to other parts of the series, here are the links:

1. Alternative Payment Models Made Simple – Overview (Part 1 of 6)
2. Alternative Payment Models Made Simple – Pay for Reporting (PFR) (Part 2 of 6)
3. Alternative Payment Models Made Simple – Pay for Performance (PFP) Part 3 of 6)
4. Alternative Payment Models Made Simple – Bundled Reimbursements (Part 4 of 6) (THIS ARTICLE :))
5. Alternative Payment Models Made Simple – Accountable Care Organizations (ACOs) (Part 5 of 6)
6. Alternative Payment Models Made Simple – Patient Centered Medical Homes (PCMH) (Part 6 of 6)

Defining Bundled Reimbursements

Bundled reimbursements, also known as bundled payments, episode-based payments, episode payments, episode-of-care payments, case rates, evidence-based case rates, global bundled payments, global payments, package pricing, or packaged pricing, is defined as the reimbursement of health care providers (such as hospitals and physicians) “on the basis of expected costs for clinically-defined episodes of care.”¹ [1. Wikipedia. Bundled payment. Available at: https://en.wikipedia.org/wiki/Bundled_payment. Accessed March 2016.]

As we discussed in our overview article in this series, bundled reimbursements have the potential to greatly simplify healthcare payment.

A single dollar payment amount is grouped or “bundled” together around a list of many healthcare products and services.

As you have probably concluded, there are two complex pieces to get right with bundled reimbursements:

1. The reimbursement amount
2. The bundle of healthcare products and services included

Determining these features is what we call “defining the bundle.”

Defining the Bundle

Defining the bundle is one of the most difficult and yet most critical pieces of any bundle system.

Imagine the complexity of every little detail that goes into a 7 or 14 day visit to the hospital for any given diagnosis.

All these details need to be at least initially considered when trying to determine a fair price for that given diagnosis.

There are two big components that need to be clarified:

1. Health resource utilization in units
2. Cost per unit of health resource utilization

First, one has to understand exactly what types of products and services are needed for appropriate treatment, and how much of those products and services.

Are specific procedures or surgery needed? How many IVs needed? Are any medications needed? If so, which ones? Which specialists need to assess and follow the patient? Are any days in the critical care unit needed? And more and more…

For every unit of healthcare resource used, now we want to know what each of those units cost. Once we have those figures, we can easily cost out the total for this typical episode of care.

Now consider that this is a single hypothetical patient.

The same episode of care may or may not apply exactly to each patient with this particular condition. For example, the medication may be completely different due to a given patient’s allergy.

It is certain that not every single patient with a given healthcare need will have the exact same type and/or number of healthcare unit consumption.

As such, we need a way to define bundles and their associated payments that accounts for variability in the patient commuinty.

This is where statistical sciences are needed.

Biostatisticians are able to look at many different patients’ diagnoses, characteristics, and treatment courses to determine what is typical for any given episode of care.

Armed with that information, they can set bundle resource use and associated payments more confidently.

Upsides of the Bundled Reimbursements

The bundle simplifies a great deal in the healthcare billing cycle.

For the providers and institutions, they can ignore many of the mundane details of a given hospital visit, simply making sure their bundle charges cover the cost of doing business when they treat patients under their bundle coded charges.

For the payers, the bundle brings a level of predictability.

Predictability is helpful for the payer because it can better calculate what premiums to charge that will adequately cover spending while leaving room for profit margins.

Downsides of Bundled Reimbursements

As someone once profoundly stated – “People will do what you pay them for.”

As such, bundles that receive relatively higher reimbursements naturally attract higher reimbursements.

Let’s take the DRG system, one of the most if not the most widely implemented bundle system employed in the US healthcare economy.

DRG codes do not include elements of quality care. They simply note that a specific bundle of hospital care was delivered for a given patient. When the hospital uses a bed for that DRG, the hospital receives the same amount of payment whether that patient stays in that bed for 7 days or for 14. Naturally, the hospital is motivated to get the patient out relatively sooner so they can free up that bed for another patient who represents another DRG code. As such, the DRG system has motivated hospitals to increase their rate of bed turnover. The more patients churn thorugh their institution means the more DRG codes they get to submit and thus get paid more. That could be a good thing, but it could also lead to pre-mature hospital discharges, hospital readmissions, poorer patient outcomes, and higher overall healthcare costs.

Another major downside of bundled reimbursements is the negative impact they can have on research opportunities. Since bundles are created primarily for reimbursement purposes, they have a single primary function – to assign payment to a provider or institution.

The specific details of resource utilization for each individual patient is lost in the lack of detail indicated by the bundle. This lack of detail often cripples the ability to gather potentially helpful insights that could be mined from health economics and outcomes research sciences to drive improved decision-making.

Wrap-Up: Bundled Reimbursements

We’ve considered the complexity in developing an “accurate” bundle for a given episode of care.

We’ve also seen how bundled reimbursements have advantages and disadvantages. Either way, they do bring the following components to the stakeholders that use them:

1. Simplicity in billing
2. Predictability in payments
3. Financial risk transfer to the provider

In the next article in this series titled “Alternative Payment Models Made Simple,” we’ll tackle another emerging alternative payment model in healthcare today – Accountable Care Organizations (ACOs).

Read the next article in this series, “Alternative Payment Models Made Simple – Accountable Care Organizations (Part 5 of 6)” by clicking HERE.

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