4 Considerations for Hospitals Before Entering Into A Bundled Pricing Contract

As healthcare reimbursement moves away from a fee-for-service environment, many hospitals are considering entering into bundled contracts with insurers, physicians and/or other providers. Bundled contracts take many forms but generally pay an entity a fixed or capitated amount in return for a set of services surrounding an episode of care. In this structure, healthcare providers accept financial risk, and as a result, should enter into bundled contracts cautiously.

The future of bundled payments
While bundled payments have historically been utilized for surgery and other procedures with a defined beginning and end, future contracts are expected to include pre- and post-operative costs for up to 30-days post surgery as well as bundled payments for chronic medical conditions, such as congestive heart failure, pulmonary disease and other conditions that don’t have a defined 'end,' says Kevin Lieb, senior director with TRG Health Care Solutions. As a result, quality and cost management of these patients will be much more complex, and innovative care strategies will need to be developed, he says.

In response, hospitals should review the following four types of considerations before entering into a bundled pricing contract.

Financial considerations
Because providers take on risk in a bundled contract, financial considerations are probably the most important set of considerations hospitals needs to examine before entering into such a contract. As part of examining the financial impact of a bundled contract, hospitals should:

• Understand the direct and indirect costs for the entire bundled pricing episode. "Many hospitals enter into contracts without a true understanding of their variable and fixed costs," says Mr. Lieb.
• Identify frequency of outliers and associated costs for these cases. "A single train wreck of a case could ruin margins for an entire year," says Mr. Lieb.
• Develop risk mitigation strategies and terms for outliers. James Reilly, managing partner at TRG Health Care Solutions says that hospitals can mitigate outlier risks by including a provision in the contract to exclude certain outliers from the bundled payment or develop a reinsurance or risk pool for these cases. Contracts that include exclusionary provisions might define an "outlier" as a patient that exceeds a pre-determined total length of stay, a certain total of charges or who has a set number or type of co-morbidities, says Mr. Reilly.
• Identify what costs can be lowered with the help of your physicians. After getting a complete picture of current costs, hospitals should begin to estimate how much these costs might be lowered by physicians. This includes cost savings from standardizing equipment or implants as well as cost savings from providing more coordinated care. Once physicians are engaged, hospitals must commit to transparently sharing its costs with physicians as a way to drive their behavior, says Mr. Lieb.
• Quantify market share potential. Finally, hospitals should determine how many more admissions they should expect from entering into a bundled contract and how that is expected to translate into revenue increases. "The level of discount offered may be dictated by the amount of business the deal is expected to attract," says Mr. Reilly.

Medical staff considerations
Because physicians are essentially the key drivers of the cost of care, hospitals must engage them in any bundled payment initiatives. Hospitals with a medical staff that is resistant to bundled pricing must view this as a major challenge to success and will need to enact steps to bring them on board. Hospitals should:

• Communicate with medical staff regarding risks and rewards of bundled pricing. Rewards should include incentive programs that reward physicians for improving efficiency and better coordinating care, says Mr. Lieb. "Medical staff need to be supportive before negotiating with payors," he says.
• Educate physicians on what is included in a "bundled fee." Physicians need to understand that under this payment structure, consults by other physicians do not receive additional reimbursement, for example.
• Negotiate a fixed fee with core physicians. Hospitals should work with core physicians to determine a fee for the physician fee portion of the bundled payment, which should align with historical reimbursements for physician services during the bundled pricing episode, say Mr. Reilly. The fixed fee would cover the base reimbursement for services in the episode, but physicians could receive additional incentive payments for meeting certain efficiency and quality benchmarks.

Operational considerations
Before a hospital can enter into a bundled payment contract, it must ensure it has the operational structure and processes to track patients covered by the contract as well as accept and distribute payments. Hospitals should:

• Develop a process to identify patients covered under bundled contracts. Hospitals should develop processes "flag" these patients when presenting to the ED or when a procedures is scheduled to ensure appropriate billing by hospital and physicians.
• Consider patient navigators or case managers to assist with efficient patient flow and communication with physician offices.
• Develop a system to receive bundled payments and accurate and timely disbursement of professional fees. Mr. Lieb suggests considering a third party or PHO to disperse funds.

Quality
Lastly, hospitals must take steps to ensure quality while working to provide more efficient care. They should:

• Create a culture to openly discuss opportunities to improve care coordination, clinical outcomes and lower costs. "A clinically integrated model is needed to make [bundled pricing] work," says Mr. Lieb. Beyond just being integrated, the hospital must also foster a culture of team-work, coordination and quality improvement.
• Create a forum to track and share outcomes with your physicians. Finally, a hospital must have a system in place to tracks quality and outcome data on pre-determined measures and shares that data with physicians. Once shared, physicians and the hospital should identify areas to work together to improve outcomes, and the hospital should provide incentives under the bundled payment structure to reward physicians for meeting measurable goals.

Learn more about TRG Health Care Solutions.