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Bundling payments with episodes of care

Last week some friends and I went to dinner at a popular steak restaurant. The waiter appeared with 20 pounds of raw meat stacked on a platter and explained the important distinctions of each cut. The Porterhouse dominated the tray, and the presentation.

As you likely know, the Porterhouse is the Paul Bunyan of steaks, half filet, half strip, connected by a T-bone, and weighing at least two pounds. One of our friends decided to order one, prompting everyone else to ask, “Why would you do that to yourself?!”  He explained, “I’m getting 2-for-1.” That’s pretty ridiculous, as the Porterhouse cost twice as much. It’s also ridiculous because anyone who has ever tried to grill a Porterhouse knows that each side is a different cut, and therefore demands different temperatures and grill times. In essence, it’s too much to really get right.

What does this all have to do with healthcare (beyond the coronary disease and GI issues for my friend)? This is what I think of when so many provider organizations rush to declare themselves Accountable Care Organizations (ACO) or providers of population health. Again, why would you do that to yourself? Why try to take down the whole thing rather than have an achievable portion that is done better and requires no night sweats? There are far easier ways to build the skills and tools to effectively manage a patient’s care. 

Bundled payments and episodes of care are a great starter set to build one’s capabilities and the development of future bundles only adds to your capabilities until they are sufficient for a population. The tools are similar. It’s just a question of scale and risk. 

Towards population health
Episodes of care (EOC) entail any clinical situation where there are relatively predictable starts and equally predictable end points such as procedures, hospitalizations, and acute outpatient care. The success of the providers in affecting clinical outcomes and the total costs accrued during each episode over a specific period of time (three months, for example) will determine whether the provider is rewarded or penalized.

Bundled payments represent a new and increasingly accepted form of reimbursement. It is a solution in which providers are paid a set fee for an episode of care. Bundled payments break down current payment silos and reward providers for improving the coordination, quality and efficiency of care. And it can work now, if it is applied in modest, manageable ways from which lessons can be learned and applied more broadly later.

An EOC should be selected that has enough variation to provide opportunities for cost reduction, but not so much as to pose excessive risk to the organization.

A simulated scenario involving patients who would require hip and/or knee replacement surgery, posited treatment at an orthopedic center organized so that there would be maximum interaction between the patients and necessary healthcare providers. The simulation produced dramatic results. It indicated that patients moved to a SNF after surgery would spend only 12.3 days there, compared to the average stay of 20 days.

The study showed that the average number of readmissions could be cut from 11 percent to 5 percent. The average time in which the patient could return home after surgery would also decline sharply. The profit per case would be significant, the potential total profit likely to reach mid-four figures.

This is not an overly ambitious program. It is a way for each party to monitor each other’s progress against individual care plans. It merely requires collaboration among orthopedists, surgeons, post-operative physicians, specialized recuperative care-workers, and the patient. It would feature a negotiated payment package between the care providers and a third-party payer. If the set price established for the incident of care were $15,000, and the team could reach the endpoint of care by providing services for less than $15,000, they would profit to the extent of the difference. If they exceeded that amount, they would be required to bear the costs of the excess.

In terms of the whole banquet of choices involving population health, this is a bite-size, digestible chunk. But, it should work. And, if we can learn a lesson from the success of a pilot program with bundled payments that optimizes people, processes and tools, we can apply other bundled payments to other episodes of care and ultimately build to a fully operational ACO.

Furthermore, if it had been necessary to invest in a technological solution to facilitate the bundled payment, that application could then be leveraged for more bundled payments and broader populations. These technologies scale and can be applied more broadly.

Accountable care represents a transformative change, but its use should start small. Over a relatively short period of time more ambitious strategies involving ACOs targeting population health will gain time to mature. In the meantime, now is the time for episode-based healthcare. Let’s not bite off more than we can chew or eat more than we can digest.

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