Why Bundled Payments for Inpatient Care?

January 2015

After nearly 30 years of clinical practice in academic surgery, I was tired of the conflict over payment for surgical services. Declining payments by insurers at the same time that costs of providing care steadily increased. I felt threatened from all sides. Distrust with insurers and distrust with hospital leadership had me feeling like I was entrapped in a matrix with no escape. Besides all of the conflict over payment, no one seemed to care whether appropriate and effective care was providing the best outcomes for my patients. I decided to pursue a new direction in my career. I decided to pursue the design of “Bundled” payment as a way to realign physician and hospital incentives away from the maddening fee-for-service feeding frenzy, and toward better outcomes for patients at lower costs.

The concept of the “Bundle” is for a single payment to cover the entire episode of care from the time that a patient is admitted to the hospital, through the entire hospitalization, and finishes after a defined period of time following discharge. The single payment covers all hospital costs, all professional costs, and all costs incurred during the post-discharge period of time. The design of the payment is really quite simple.

First, the cost of a routine episode of care is determined. A routine case is one where the patient is discharged alive and within the appropriate limits of hospital duration. A routine case is one where the patient is not readmitted during the post-discharge window of coverage. These total routine costs are risk-adjusted because all clinicians understand that patients with severe or multiple co-morbidities will require more costs to have an uneventful outcome.

Second, the excess costs of Adverse Outcomes of the episode are determined. An Adverse Outcome is when there is an inpatient or post-discharge death, a length of stay outlier reflecting severe complications of care, or a readmission during the post-discharge coverage window. The probability of an Adverse Outcome occurring can be computed from data derived from a reference group (perhaps 80% of the total) of hospitals and the risk-adjusted costs for each adverse event can be computed. The cost of the episode is the routine cost plus (the probability of an Adverse Outcome) x (the excess cost of the Adverse Outcome). Thus, a warranty is created in much the same fashion as would be done with buying a personal computer or an automobile. The predicted cost based upon a large sample of previous patients will accurately define the risk adjustment and the cost of the entire episode. The total predicted cost allows the physician-hospital team to then negotiate a price with payers that is truly informed. Effective care that reduces complications of care and readmissions improves margins for the providers. Efficiency in the elimination of marginally beneficial or frankly useless services in providing routine care improves margins. But importantly, providers cannot cut vital services for effective care because increased complications of care will financially penalize the provider partnership.

There are obviously many other details to the Bundled Payment story that have not been told and will be covered in future distributions of the Newsletter. Please note the references for additional published and peer-reviewed information about our concept of the Bundled payment model and what it can do for your patients and for you.

Donald Fry

Donald E. Fry, M.D. is Executive Vice President for Clinical Outcomes Management at MPA Healthcare Solutions, Adjunct Professor of Surgery at Northwestern University, and Professor Emeritus of Surgery at the University of New Mexico School of Medicine. At MPA Healthcare Solutions, Dr. Fry provides clinical leadership in analyzing and evaluating clinical performance, guiding quality improvement, and creating incentives for coordinated, cost-effective care.

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