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Bundled payment models may provide great opportunities because they are in the middle ground of reimbursement models between fee-for-service and capitation.

Navigating health reform

Health Reform: Bundled Payments Are Key to Lower Health Care Costs

  • Matthew Borchardt
  • 3/2/2015

The health care industry is in the midst of unparalleled change due to the unsustainable growth in costs. To slow rising costs, many new reimbursement models have been introduced in an attempt to transform the way we pay for health care. These models also have the potential to change the way care is delivered.

The Department of Health and Human Services (HHS) has just set its timeline for the transition to a fully value-based reimbursement system. Innovative models can be found all over the country. Bundled payments seem to be in the middle ground of reimbursement models between fee-for-service and capitation.

In essence, a bundled payment model is a single payment to all the providers involved in a defined episode of care. These models are designed to lower costs by aligning the incentives to coordinate care so the various providers share financial and performance accountability for the entire episode. Medicare currently has four bundled payment models that range from acute care hospital stays to the continuum of care from acute care hospitals to post-acute providers.

Our experience suggests that the critical elements for success under a bundled payment arrangement include:

  • Reducing readmissions
  • Reducing skilled nursing facility (SNF) length of stay (LOS)
  • Managing care coordination
  • Channeling

Reducing readmissions

Success under bundled payment models requires providers to reduce the use of services in order to lower the total cost of care. Under the current fee-for-service methodology, hospitals are still reimbursed for most readmissions, so the creation of a bundled payment would allow hospitals to take on risk and share in the savings if they are able to reduce readmissions from historical levels. As care delivery is redesigned, providers who develop models that successfully reduce readmissions will be highly valued by patients, payers, and other potential partners.

Reducing skilled nursing length of stay

Working with bundled payment arrangements also requires understanding the flow of patients through the system, as well as which areas of the continuum provide the greatest opportunities for improved utilization management or outcomes. In cases we have worked on, the post-acute area often represents more than 50 percent of the total cost of care, so it is an area full of potential.

Reducing skilled nursing facility length of stay (SNF LOS) offers significant financial benefits. To decrease SNF LOS, post-acute organizations will need an enhanced understanding of their internal processes and performance. They will have to decrease the LOS while maintaining their quality metrics and not increasing readmissions.

Since SNFs are typically paid a rate per day, access to cost accounting or decision support systems will be critical to fully understanding the financial implications of reducing LOS in an SNF. These tools will provide SNF operators with the information necessary to manage day-to-day operations effectively, while maintaining and improving quality. This transformation is no easy task, but SNFs that are able to achieve success in LOS reduction will have a strategic advantage in the future.

Managing care coordination

To lower the overall costs of an episode of care, it will be important to coordinate care throughout the continuum. Typically, “other costs” are incurred when unneeded “care stops” occur outside the typical patient flow. These stops can be removed to streamline the process and ultimately reduce the entire episode cost.

While reducing readmissions and SNF LOS represents the most significant opportunities, pushing success to the highest level will require understanding and eliminating waste in miscellaneous episodic costs. Providers that hope to excel in a bundled payment environment will develop the understanding of costs throughout the continuum and develop strategies to eliminate waste and redundancy.


Successful participation in a bundled payment arrangement will depend on the value a provider can demonstrate. Value will be defined differently by different elements of the health care system.

  • Payers define value based on the provider, the quality results, and their overall costs.
  • Clients or residents base value on a combination of convenience and the quality of service.
  • Health systems define value based on the ability to coordinate services, costs, and quality.

Although currently it seems as if the relationships that have been created over time have been directing the patient volume for bundled payments, in the future, value will be what counts most.

What this means

The future of health care is moving from volume to value. While we don’t know for certain what is in store, we do know that becoming a value-based provider is critical. Those who can lower costs while delivering greater quality will set the standard for success.

In terms of bundled payments, it will be important to be able to analyze your costs and quality metrics and understand how your organization compares to peers and competitors. Over the long run, organizations capable of providing the most value at the overall lowest cost will position themselves as preferred channels for patients.

Combining the ability to deliver care in this fashion with a payment model that rewards successful participants for this type of performance has the potential to produce transformational win-win economics for providers, payors, and patients.