HARDWARE SAVINGS Bundled payments cap the costs of expensive hip and knee implants.

It's easy to see why bundled payments appeal to payers and employers. The popular value-based model that pays providers a flat price for all of the care they'll deliver before, during and 90 days after surgery reduces spending and improves patient outcomes. But are bundled payments a good deal for surgeons and surgical facilities? That depends on how well you negotiate the bundled payment and, as you can see in the table below, how much distance you put between your set fees and your variable costs. Either way, as the push continues to pay for surgery on the basis of quality over quantity, bundled payments have emerged as an increasingly popular model — especially in orthopedics.

Bundled payments are ideally suited for such big-ticket procedures as joint replacements, where the great deal of post-op care presents a significant opportunity for cost-effective rehab. Bundles for joint replacements vary significantly by geographic region, but typically range from $25,000 to $35,000, says Alexe Page, MD, an orthopedic surgeon and health services consultant based in La Jolla, Calif. Consider that an infected joint can cost $150,000 to treat and you see why insurers are interested in offloading the surgical risk to willing facilities, which are then responsible for ensuring the surgery and recovery go as planned.

"It's the facilities that must pay for readmissions, repair operations and new implants if infections occur within the 90-day global period," says Dr. Page. "Treating an infection for $150,000 wipes out every bit of profit, and then some, from an episode of care gone wrong."

What facilities need to do is demonstrate how they can provide the same quality of care at a lower cost, and show insurers that they're willing and able to shoulder some of the risk, says Dr. Page. The responsibility to approach insurers and sell them on the financial benefits of bundled payments lies with individual facilities.

In addition to total joints, bundled payments are also attractive fits for spine and hysterectomy procedures, says Dr. Page. "Use of bundles will continue to accelerate," she says. "There's going to be a huge paradigm shift in payment structure over the next decade."

HOMEWARD BOUND Sending suitable patients home or discharging them to a nearby hotel instead of to an inpatient rehab facility is a good way to drive up profits.

More patients and procedures
Scott Leggett, chief executive officer at Surgery One, a consulting firm based in San Diego, Calif., says he was first attracted to the bundled payment concept by the promise of bringing additional patients into the facilities he helps manage.

"There's a lot more interest in price transparency now that patients are shopping for cost-effective care," says Mr. Leggett. "Facilities have to know the exact cost of surgery to make bundled payments work, so they can put a clear price on the procedures they host.

"All patients care about at the end of the day is how well their surgeries went and how much they paid," he adds. "Making bundled payments work demands that facilities track outcomes for individual cases. That's a game-changer for patients, and they're the ones who will help drive the movement."

Getting bundled payments in place now will set your facility up to attract new surgeons and new specialties in the future, says Mr. Leggett.

Bundles will continue to gain momentum, and the facilities that figure out how to provide the highest quality of care at the lowest cost will be well-positioned to capitalize on the payment structure, says Mark Domyahn, of Pursuance Consulting in Minneapolis-St. Paul, Minn. Perhaps more importantly, they'll be able to negotiate from a position of power when trying to maintain in-network security.

"Private payers are moving toward narrow networks and using their leverage to reduce the number of specialists and facilities they contract with," says Mr. Domyahn. "Bundled payments are a way to differentiate your facility in the marketplace by taking the risk away from payers while providing high-quality care. Why wouldn't payers want those facilities in their networks and funnel more patients their way?"

Greater purchasing power
Bundled payments can give you leverage with vendors when negotiating the purchase price of supplies and implants, says Mr. Domyahn. He says facility leaders can say, We're starting a bundled payment program and every dollar counts. What can you do for me?

Negotiating down the price of implants is usually difficult for independent surgical centers, which don't have the purchasing power of larger hospital systems. Bundled payments help by capping the cost of implants; bundles include a fixed amount for the hardware involved in the procedure. "Facilities that effectively manage case costs will make money with bundled payments," says Mr. Leggett. "Facilities that effectively negotiate the cost of implants included in a bundle will make even more."

It's critical to drill down to specific case cost numbers before negotiating with insurers, so you know how much profit margin to build into a bundle. "That's where surgery center administrators and physician-owners have an advantage," says Dr. Page. "They know exactly how much cases cost and can often manage those expenses more effectively than their hospital counterparts."

Successful negotiation also demands knowing how much insurers are currently paying for procedures and post-op recovery care. For example, insurers that pay facilities $30,000 per joint replacement plus an additional $25,000 for recovery care under the unbundled fee-for-service payment model might be willing to pay facilities $50,000 in a bundle. It's a win-win: The facility is earning more per surgery in exchange for taking on more risk, while the insurer is paying more for each case, but less for an entire episode of care.

You might be able to get creative with how you structure a bundled contract because insurers are attracted to payment stability and predictability. "They might pay more per case, but won't have to worry about wild fluctuations in costs due to post-op complications," says Mr. Domyahn.

You must also determine how to remove non-value-added components of a patient's care to drive savings and increase profits, while still maintaining high-quality outcomes. While there's some concern among insurers that facilities will cut corners to increase profits, Dr. Page says post-op care is one of the biggest cost centers that facilities can focus on to reduce the expense of an episode of care. Sending younger, healthier patients home the day of surgery is one of the biggest ways to save, she says.

Mr. Domyahn agrees and says that's why insurers are attracted to partnering with outpatient facilities. "Instead of automatically sending every joint replacement patient to inpatient rehab, surgery centers send appropriate patients home, where recovery is less expensive," he says.

A physician-owned orthopedic surgery center near Mr. Domyahn discharges patients to a hotel across the street for observation following surgery. "The practice told local payers that their team, from the surgeons to the physical therapists, could care for patients cheaper and better," says Mr. Domyahn. "The cost structure is lower, so the facility is making money, and insurers are paying less than they would if patients had gone to the large local hospital. It's a win-win, and patients are still receiving high-quality care."

Be sure to negotiate exclusions into payment bundles to protect yourself from medical complications unrelated to the surgical care performed, says Dr. Page. For example, make sure hospitalizations for the treatment of medical complications related to diabetes or heart disease aren't included in the 90-day care bundle.

"The better prepared you are to give insurers a comprehensive picture about what you will and will not pay for, and the less you leave up to negotiation, the better off you'll be," she says.

When getting started, work with a single physician champion and focus on a single specialty to get a feel for how the system works, says Mr. Leggett. He says now's the time to launch a program, because "in 10 years, most elective procedures will be reimbursed through bundled payments." OSM