Actuarial Notes

Evaluating bundled payment contracting

By Lynn Dong, Kate Fitch, Bruce Pyenson and Kathryn Rains-McNally · Milliman · 2011 · GH301-100-25

Study guide: Exam GH-301

A Milliman Healthcare Reform Briefing Paper of December 2011 that illustrates a bundled payment model for hip- and knee-replacement surgeries using commercial claim data. It details reimbursement and resource allocation among the pre-operative period, the admission and the post-discharge period, and notes that an actuarial analysis of historical claim data is the foundation for evaluating the risks and rewards of bundled payment contracting.

On the syllabus

  • Exam GH-301 — Provider Contracting and Reimbursement, outcomes 1b and 1c; the whole paper.

Overview of Bundled Payments

  • Under a bundled payment the payor makes a single payment for all services related to a treatment or condition, possibly spanning multiple providers in multiple settings; in practice the services in the bundle are defined by a payor-provider contract.
  • Bundled payments appear in contracts when they bring advantages to both providers and payors, for example to attract more business, including self-pay patients, medical tourism and payor contracts, and to engage physicians.

Recent Developments with Bundled Payments

  • Bundled Payments for Care Improvement Initiative: four bundled payment options that vary in services included, time frames covered and whether payments are prospective or retrospective.
  • Medicare ACE demonstration: from 2009, bundled payments for acute care episodes for select orthopedic and cardiovascular inpatient procedures, awarded by competitive bid.

A Simple Bundled Payment Model: Hip or Knee Replacement

  • Figure 1: Bundled Payment Model
    • An example splits a $30,000 bundled payment among providers delivering services in the preoperative, operative and post-discharge periods.
  • Bundled payments change the risk: providers bear the risk for costs greater than the fixed fee, including outliers and readmissions.

Illustration

  • A claim data analysis of hip- and knee-replacement surgery uses the 2008 Thomson Reuters MarketScan database, summarizing claims by 30 days preoperative, operative inpatient stay and 60 days post-discharge.
  • Figures 2 to 8 show allowed dollars and resources (relative value units) by treatment phase, by region, between physician and facility during the inpatient stay, and average allowed costs per case.

Considerations in Contracting for Bundled Payments

  • Defining the episode
  • Evaluating catastrophic risk
  • Financial stability for low case loads
  • Determining provider allocation of funds
  • Distinguishing case severity
  • Quality outcome requirements
  • Administrative complexity
  • Risk-sharing alternatives
  • Potential for increased utilization

Conclusion

  • Bundled payment arrangements have the potential to reduce claim costs for payors and create market and financial advantages for providers, but they change the nature of risk.

Appendix A Research Methodology

Appendix B Categorization of States into U.S. Census Regions

Appendix C Description of Thomson Reuters MarketScan Databases

Sources