4 Steps to Achieving Managed Care Bundled Payment Arrangements

Author: OSL Editor


Only 3% of hospitals have managed care or direct-to-employer bundled plans in place, according to the Third Annual Joint Replacement Benchmark report conducted by OrthoServiceLine in 2016. While government bundled payments have been trialed for nearly a decade, insurance companies and corporations are only recently entering this arena (with a few exceptions).  According to Bill Munley, Hospital Administrator, Shriners Hospitals for Children, hospitals have only reached the tip of the iceberg when it comes to the opportunities available through managed care bundled payments.

At the 2018 Musculoskeletal Stethoscope And Calculator ConceptLeadership Summit, Munley discussed what healthcare providers can do to attract insurance and private employers for bundled payments, how to negotiate these contract elements, the true cost calculations, and the billing and collection challenges within traditional hospital settings. Based on his experience serving as Vice President of Orthopedics at Bon Secours St. Francis Health System, he came up with the following four key steps to implementing managed care bundled payment arrangements.

Step One: Create a Solid Value Proposition

The value equation is defined as quality and outcomes, divided by cost, as related to patient experience. But what does the word “cost” mean to you in this equation? Most providers assume the goal is to get your costs of service down, Munley explains. While you do want to decrease your costs and increase your efficiencies, the word “cost” in this case refers to what it’s costing the insurance company, or costing the patient out-of-pocket, to do your joint replacement. “This is the cost they’re looking at when they come up with a value equation for you,” says Munley.

He recommends putting a formalized program in place, with measurable dashboards and metrics that appeal to the insurance companies. From here, you can look to take your program to the next level and get designated as a Center of Excellence by as many outside sources as possible. Of course, before you jump into any bundled payment efforts, you’ll want to ensure that you have in fact achieved low cost—not only your own cost but also competitive insurance rates—in addition to high quality and high satisfaction. Then be sure to track your outcomes – not just acute-care outcomes, but post-operative outcomes as well.

Step Two: Define the Episode

Episode definition can be completed in many ways. For example, it could be done with a test pilot, where you get together with an insurance company to exchange data. Or it could be a no risk shared savings. It can also be an acute-care bundle, a formal 30-day bundle, or a 90-day episode. No matter which approach you take, the key is to clearly define the beginning and the end of that episode.

Step Three: Data Analysis

You want to be sure to include all costs associated with your program – and this goes beyond the traditional hospital costs. Most hospitals have cost accounting, which is a big help with this. Start by calculating your biggest cost, which is the hospital costs – including pre- and post-op. Next, add in costs for your surgeon and anesthesia, then move on to radiology, pathology, hospitalists and consults (ie. physiatrist). From here, consider the costs accumulated once patients are discharged, including SNF/IRC, homecare, outpatient therapy, readmissions, any other outpatient services, navigator costs, and finally, the business office costs. “Most people don’t think about the business office costs because our systems are not set up to handle this kind of bundle,” says Munley. “But there is a cost associated with people being devoted to this from the business office.”

Many hospitals initially approach this process with enthusiasm, looking to comb over every detail and ensure every piece is perfectly in place. But as a result, they don’t make any real progress. This is called “analysis paralysis” and it is a huge setback. To avoid this, Munley recommends focusing on your three biggest costs – hospital, anesthesia and surgeon – and move forward from there.

Step Four: Negotiation and Steerage

Now that you have the insurance providers in the room, it’s time to negotiate. Unlike the case with CMS, the negotiation boundaries are fairly wide open when it comes to bundled payment arrangements. Like ordering from a menu, you can pick and choose what you’re looking for and they’ll work with you, says Munley. This process begins with partnering with payors to obtain true episodic cost utilization and data. These companies will work with you and give you some of that true cost. When everything is added up, Munley cautions, be prepared to give a 5-10% discount on current rates to that insurance company.

During the negotiation and steerage phase, you can build in outlier clauses. For example, if an implant goes over a certain amount, you get money back. Or if charges exceed a certain percentage over the amount of reimbursement, you get a percentage of the difference back.

You also want to balance your discount price with steerage. While CMS bundles didn’t allow hospitals to steer Medicare patients, this is not the case with managed care. It’s equally important to give patients some ownership of the cost. Look for ways to involve the consumer so they can share responsibility throughout the episode of care. This could be through financial incentives or penalties imposed by their employer and/or TPA if the patient comes to you versus a competitor.

Of course, you have to consider fair market value for the employed versus the non-employed groups you’re contracting with. You also want to consider keeping physicians whole – it’s your choice whether you put the different providers at risk (Munley’s team at St. Francis chose not to). Then you can consider implementing gainsharing, but be sure to look at your metrics around this and make your decisions accordingly.

The Results

When Munley led his former team at St. Francis in implementing managed care bundled payment arrangements, they were initially approached by a commercial payor (Blue Cross) with a bundled opportunity. Next, they were approached by a surgical tourism company called BridgeHealth, then Optum, and finally United Healthcare. St. Francis initially just started out with bundled payments for knee replacements through Blue Cross, before the program trickled down to include different joints, and eventually spine and other service lines.

In terms of the financial performance and ROI, most of this is incremental business and still very profitable, explains Munley. “An analysis of Bridge Health patients with a mixture of inpatient and outpatient orthopedics and general surgery revealed that our average contribution margin per case was pretty good,” Munley says. “An analysis of joint and spine from United Healthcare and Optum had a much bigger contribution margin per case.” All bundled payment arrangements over the last three years produced an incremental contribution margin of over $2 million. This year the team at St. Francis expects that number to rise to $2.5-$3 million.


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