Bundled Payments: The Good, The Bad & The Reimbursement

AssetIt is no secret, reimbursement is a huge issue in the healthcare industry.  However, it is an issue that impacts the provider, patient and payor aspects of a procedure.  The Ambulatory M&A Advisor takes a look at bundled payments, a more recent way of billing that ASC providers are pushing to become the norm.

What is a Bundled Payment:

Gabrielle White, executive director of Ambulatory Services and Network Development for Hoag Orthopedic Institute, Administrator for Orthopedic Surgery Center of Orange County explains that a bundled payment is more or less an episodic payment.  This is used in place of paying per encounter for a procedure, and there are many encounters within a surgery, White says.

“There are different professionals, different levels and different types of care that are included.  A bundled payment is all inclusive; we start out on the day of surgery, and some of them finish at time of discharge and some of the bundles finish 90 days after surgery, meaning they have a warranty,” White says.

David Fitzgerald, CEO at Proliance Surgeons, says firmly that a bundled payment is not capitation, pay for performance, population health, etc.  Fitzgerald says it is something that definitely covers a specific episode of care, and there are two different types of it: retrospective and prospective.

“If you are talking about how Medicare is doing their bundles with hospital payments and physicians, those are retrospective bundled payments.  They are based on a look back of services, give it a target price, and reconcile the actual costs versus the target prices,” Fitzgerald says.

“Why it is slow to go forward is due to prospective payments, where they would take the same elements of the retrospective payment, but they would write one check to one individual, and they would be responsible for paying that out to all of the other providers of care.”

ASC Thoughts

Keith Smith, MD, Medical Director, Managing Partner of The Surgery Center of Oklahoma says in the current healthcare market there are two methods of pricing.

“One is the “what can I get away with” method, and the other is “how can I exhibit value to the buyers.”  There are people who focus on trying to generate revenue; then there are those who are trying to render value.  Amongst those who want to generate revenue, they are not big fans of transparent, upfront bundled pricing, because it hampers their goal of just making money,” Smith says.

“To those who want to generate, distribute and show value, they are becoming very highly sought after by consumers in the marketplace.  Whether it is consumers with high deductibles, the uninsured, the self-funded companies in the United States that have rejected insurance and are self funded.  It is more of a long-term approach;  if someone is long-sighted then this is a very attractive positive idea.”

White says physicians within her business and all of the stakeholders are very comfortable working with bundled payments.

“In the ASC, we don’t have the warranty.  We just do from admit to discharge, and our bundle includes the facility fees, implants, the surgeon, anesthesiologist.  All of those things are bundled into a one day episode price.  They are very comfortable with that; we have worked with them and explained they have got to be transparent between facility and professional to be able to come up with the right pricing model.   We started our program in 2008 with procedures that are more predictable in cost and results such as knee arthroscopy, total hip replacement, carpal tunnel, etc.   We have a lot of data for total cost for procedures, and that has made everyone very comfortable offering bundled payment,” White says.

“With hospitals, we have been doing bundled payments since 2010, where we have the 90 day warranty as well.  That one is a different level of comfort  because the providers, meaning the hospital and the physicians, are taking on more of a risk in that bundle.”

White explains that on the surgery center side they have not done warranties yet.  There are only a few things they would want to guarantee and we only want to warranty what  costs we can control.

“I can’t control the cost if a patient goes to the ER after a surgery…we don’t have that kind of a budget to be able to absolve those costs,” she says.

Fitzgerald expresses the thought that not all ASCs are thrilled about bundled payments because the thought of the idea makes these operators nervous.

Fitzgerald says the operators nervous about bundled payments are in that mindset because they don’t want a bundled payment to be the same services they were providing equaling something smaller than the expected cost.

“A bundled payment is not simply a way to add everything up, subtract ten percent, then call it a bundled payment.  That is what ASCs are worried about.  There has to be something in it for each of those players to say ‘I can manage the care better.  I can drive down something.  I have a chance to make this better by managing all of those services together.’  Otherwise it is simply an add of costs together and paid at a lower rate,” Fitzgerald says.

“Bundled payments have the opportunity to drive up volume in cases that may not have had a chance to come to a specific surgery center in the first place.  That is probably the biggest positive for bundled payments and ASCs.  The other is that you are not out there fighting for a payment of that service.  It is already agreed upon.  If you are going to get ‘X’ amount up front, and you already have a bundle, you are not fighting over who got paid what.  You do not have to do all of the other pieces.  There is some value in that in driving down the costs internally to be able to do a bundle.”

Smith says one of the most wonderful parts of this transparent pricing is that it requires the physicians and the facility to sit down and discuss what is fair as the fee.

“It really keeps everyone honest.  The reason that physician-owned facilities are able to do this easier is that if physicians own the facility, they’re not dealing with an outfit they may not necessarily trust,” Smith says.

Payor Thoughts

Smith says that right now payors are the most vocal opponents to bundled pricing.

“We have had bundled prices online for 8 years, and I have never had a payor ask me if I would extend that pricing to them,” Smith says.

White echoes that on the payor side at the surgery center, they do not have any bundles yet.

“Our bundles are with medical travel and cash paying patients.  I have been talking with payors over the last few years.  They have not seemed to be as interested yet in California; but I think that is starting to change a bit more recently, and I will be revisiting with them.  I think there are some groups that do have some bundles in California with payors, we just have not gotten around to renegotiating yet,” White says.

“We have patients come from within our state or from other states through a third party administrative program through employers.  That has worked out positively for the “payors” or self-funded employers because they get better value, and they have price predictability.”

White says price predictability is another nice thing with bundled payments.  On the patient and payor side, there is price predictability.  White says businesses set up rates for certain procedures and openly state what is included in that rate.  People know the price before surgery, instead of getting multiple bills after surgery and not knowing what the cost will be.

Fitzgerald adds that payors struggle with the idea of the bundle because the systems are not built to pay on a bundle.

“Their systems are built to receive a separate bill for each and every type of service.  Now they will be receiving one bill and somebody else is going to be responsible for readjudicating that at a lower level.  Most of their systems are not built to do that. With our payors we have had to suppress the bill for the physician side and increase the bill for the surgery center so we could then turn around and pay that bundle back out to all of the other providers.  We actually have to not send them a bill, and it is a bit tricky to do that,” Fitzgerald says.

The Future of the Bundle

“Like Ghandi said, first they ignore you, they laugh at you, they fight you, then you win.  There are all the naysayers out there saying bundled pricing is impossible.  Some of those same naysayers have their pricing online now.  I think that we are going to see a huge surge of bundled payment because there is a consumerism that is coming alive in healthcare,” Smith says.

According to Smith, patients are paying out of pocket more than ever before, and when people spend their own money, they tend to ask how much something is going to be.  Because there are millions of consumers in the healthcare marketplace, they want a number and they want it bundled.  They do not want three bills trickling in later, they want to know how much it is going to be now, he says.

White agrees that bundled payment has a bright future in the medical field.

“I think there will be an increase in bundled payment because it is being adopted by government, and commercial payors are doing more of this on the hospital side because that is where the higher cost is.  It’s a benefit to everyone.  Whether it is the hospital, patients or the payors, bundled payment helps share risk.  It gives price predictability and transparency,” she says.

If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.

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