The health care industry is moving toward viewing and paying for all of the care associated with a single condition or procedure — such as knee replacement surgery and rehabilitation — as one product.
We don’t pay for cars piece by piece, picking up tires from one store and spark plugs from another and paying for everything separately. It wouldn’t be efficient or convenient.
Though auto manufacturing and health care delivery are very different, employers, insurers and providers are trying to pay for hip replacements and other medical care more like we pay for a new car.
“You go to Ford and you buy a car, and you expect that the car is going to work,” says Dr. Amol Navathe, a physician and assistant professor of health policy and medicine at Perelman School of Medicine at the University of Pennsylvania. “In health care, we don’t tend to do that.”
Instead, insurers and patients pay surgeons, anesthesiologists, physical therapists, other care providers, hospitals and rehabilitation facilities separately for their work — known as fee-for-service — even though they all contributed to the same final “product,” be it a heart transplant or a joint replacement.
The problem is, that means all of the clinicians and facilities involved in the care often don’t work as a team. “There is little to no incentive for providers to work together,” Navathe says.
In fact, policy experts have generally concluded that paying doctors and hospitals for each service encourages them to perform more procedures and tests, even when unnecessary, and discourages care coordination.
In other words, fee-for-service can drive up costs and doesn’t reward providers for quality.
To fix that issue, the health care industry is moving toward viewing and paying for all of the care associated with a single procedure or condition as one product.
This approach is known as bundled payments or episodes of care. Insurers team up with surgeons or hospitals and agree on a target price for all services that make up a single care episode, which may begin before the day of the surgery and end 60 to 90 days (or more) after the patient leaves the hospital.
Hip and knee replacements have been a popular starting point for adopting this method of payment because they are common and the costs and clinical outcomes tend to vary significantly. The demand for hip replacement surgeries, according to one study, is projected to grow by 673 percent to 3.48 million procedures by 2030. In addition, joint replacements have a “very defined beginning and end,” says Sara Teppema, an actuary with Blue Cross and Blue Shield of Illinois, Montana, New Mexico, Oklahoma and Texas. Patients “get the hip or knee and they’re done.”
We’re asking surgeons to take responsibility for the entire episode.
For a joint replacement, the target price would include the entire cost of surgery — everything from the pre-surgery imaging and the physical joint replacement to anesthesia services and time in the operating room — and would also capture the cost of post-acute care and rehabilitation. The participating providers also have to meet benchmarks for the quality of the care they deliver.
As a result, the model encourages providers to think about costs and quality. If their total episode costs meet or go below the target price, they’re rewarded with a share of the savings. If they spend too much, however, they’re on the hook for the extra costs.
“We’re asking surgeons to take responsibility for the entire episode,” Teppema says.
If a surgeon has assumed financial risk for the entire episode, she may think twice before choosing to perform a surgery in a high-cost hospital as opposed to a lower-cost outpatient surgery center if the patient could do well in either setting. Or the surgeon may encourage patients to think about cost as well as quality when choosing a post-acute care and rehabilitation setting.
Surgeons also have an incentive to keep patients from developing complications that could lead to a hospitalization and drive up the cost of care.
“Up until now, providers haven’t had to think about cost and value,” Navathe says. “For commercial payers looking to drive down cost and improve quality to deliver value to employer customers, it makes sense.”
Medicare and private insurers alike are adopting versions of this.
For instance, Medicare is running a large, mandatory demonstration program using bundled payments for hip and knee replacements in hospitals. In this Comprehensive Care for Joint Replacement model, Medicare continues to pay providers in the fee-for-service model but sets a target price for the entire episode. After a year, Medicare determines if the hospital will receive a bonus payment for staying under target or pay a penalty for going over.
Another Medicare pilot, the Bundled Payments for Care Improvement initiative, allows participants to choose from 48 clinical episodes, including common ones like heart failure and diabetes, to include under the alternative payment model.
Private insurance companies are pursuing their own forms of this approach. Some contract with high-performing hospitals or surgery centers and set a target price with them for defined episodes of care. Others choose to contract with surgeons directly, so those physicians have an incentive to drive coordination and cost reduction.
“From the clinical perspective, there’s no doubt that having a coordinated plan of care is something good for patients,” Navathe says.
Only a few studies so far have documented the savings the industry hopes to see from the approach because it’s relatively new. But the early results are promising.
A study Navathe co-authored, published in JAMA Internal Medicine in January, showed the average cost of a hip and knee replacement fell nearly 21 percent at a hospital network participating in Medicare’s BPCI program.
Most of the savings came from reduced implant costs and less spending on post-acute care. The quality of care improved or was unchanged.
This creates what Navathe calls a “win-win-win” — employers, insurers and consumers save money, providers get to share in the savings and patients receive higher-quality care.
There are opportunities to expand the model beyond joint-replacement surgery. Some commercial insurers have already created maternity care bundles and are eying other procedures and conditions.
Medicare was a driving force for the adoption bundled payments under President Barack Obama. The Trump administration says it supports the approach but wants to move more slowly.
In August the federal Centers for Medicare and Medicaid Services signaled the agency would cancel plans for a mandatory demonstration program using bundled payments for heart attacks, bypass surgery and hip and femur fractures. It also halted the planned expansion of the joint-replacement program to more hospitals.
CMS Administrator Seema Verma said the changes “give CMS maximum flexibility to test other episode-based models.”
Private payers don’t seem deterred by the changes in Washington and Medicare’s programs have already generated a significant amount of interest among commercial insurers.
“We see it as an opportunity for us regardless of what’s happening there,” Teppema says.