Value-Based Care News

How to Create a Useful Contract for Bundled Payment System

A team from the Harvard Business School worked with orthopedic surgeons and Harvard Pilgrim Health Care, a medical insurance company, to develop a stronger bundled payment model.

By Vera Gruessner

- In 2013, the Centers for Medicare & Medicaid Services (CMS) Innovation Center announced that 450 medical providers will take part in a Bundled Payments for Care Improvement initiative. However, more recent results show that healthcare providers aiming to adopt new reimbursement models like the bundled payment system often encounter obstacles while others remain dedicated to the more traditional fee-for-service reimbursement model.

Bundled Payment Models

One of the key issues crops up when negotiating contracts for the bundled payment system. The contracts often use very short time frames, which make them similar in that way to a fee-for-service program, according to the Harvard Business Review.

Often, contracts for the bundled payment system are negotiated in a zero-sum cost-shifting method between payers and hospital administrators. This doesn’t add to real value when physicians are not included in these contract negotiations. Physicians are left scrambling to better address patient health outcomes analysis and cost reduction.

Developing a bundled payment contract

To provide a more effective system for contract negotiations and strengthening the bundled payment system, a team from the Harvard Business School worked with orthopedic surgeons and Harvard Pilgrim Health Care, a medical insurance company, to develop a stronger bundled payment model that can truly bring more value toward the consumer.

The aim of the project was to ensure all stakeholders including doctors, insurers, hospitals, and the patients themselves benefit from the bundled payment contract. The research team from the Harvard Business School was looking to develop a reimbursement plan in which the providers maintained their financial margins, insurers had lower fees to cover, and patients had better outcomes.

The surgeons were interested in participating in this bundled payment system because they were incentivized through a reward program to provide better patient health outcomes at reduced costs. The insurer took part in the program because it recognized how traditional payment models would not be applicable in curbing rising healthcare costs. Due to these benefits, other providers and insurers are taking notice. Commercial bundled payment models are slowly cropping up around the country.

When creating the contract, the first item of business was to define what medical condition would be bundled. Damage to rotator-cuff tendons and repair was the main medical need. This type of treatment was well-defined and had a specific cycle of care as well as a variation in patient outcomes, which made it ideal for the bundled payment system.

Next, the team of insurers and providers needed to select an agreed-upon patient population as well as specific outcomes such as a range of rotator-cuff strength, quality of life, and surgical complications. Improving patient engagement and setting the prices of the bundled payment system was also a major part of the contract negotiations.

“Everyone recognized that the engagement of both patients and external professionals involved in the RCR cycle of care was critical for the project’s success. Toward that end, the Boston Shoulder Institute agreed to identify downstream physical therapists and to train, certify, and compensate them,” the Harvard Business Review reported.

“The physicians also planned to conduct extensive patient pre-op education on narcotics, discharge, and physical therapy as well as provide 24-hour turnaround for all telephone calls, same-day office visits for urgent care, and a phone call from the physician’s office on the first day after surgery.”

Risk-contracting and virtual bundling

Bundled payments can vary among several potential reimbursement models. One typical model is when an entity like an accountable care organization or a patient-centered medical home receives the entire bundled payment and then distributes the funds among individual doctors and providers, according to the American Medical Association.

Another type of bundled payment model is called “virtual” bundling in which payers reimburse each individual provider and participating doctor independently while ensuring each payment is based on negotiated rules according to the contract so that the total payments for services does not eclipse the total agreed-upon bundled payment amount.

Additionally, it is important for insurers and providers to understand the overall benefits of the bundled payment model, which consists of risk-contracting. The risk-contracting method entails that participating physicians and providers receive the full bundled payment and any difference even if the costs of their services were less than the contracted amount. This gives hospitals and doctors a greater incentive to lower their healthcare spending.

Doctors participating in bundled payment arrangements will need to understand the model’s quality benchmarks and risk adjustment factors when implementing this type of reimbursement.

There are a variety of issues that providers and payers will need to discuss when creating a bundled payment contract such as whether paying a single entity or virtual bundling, the definitions of an episode of care, and the duration and calculations of the bundled payment.

Physician partnerships

Doctors may also benefit from partnering with larger institutions, according to the Bundled Payment Guide for Physicians, a brief published by The Physicians Foundation, Smith Anderson, and the North Carolina Medical Society.

“Success in bundled payment systems depends upon having sufficient infrastructure and administrative expertise to manage the bundled payment arrangement,” the brief stated. “In some cases, physicians may benefit from partnering with an institution or larger physician organization that has the requisite administrative expertise, as physicians may find it challenging to create that expertise from scratch. When looking for a partner, however, a physician should ensure that the partner and the physician have common goals and that the partner has recognized physician leadership and administrative expertise.”