A Promising Future for Bundled Payments

You have no doubt been hearing the buzz around bundled payments lately. The Bundled Payments for Care Improvement (BPCI) initiative, launched in 2013 by the Centers for Medicare and Medicaid Services (CMS), is growing rapidly and now includes 48 different clinical conditions and over 1,600 different bundles at organizations across the country. More recently, CMS released a Final Rule on November 16th outlining the first ever mandatory episode-based bundled payment program targeting hip and knee replacements, one of the most common inpatient surgeries for Medicare beneficiaries (more on this later…). United Healthcare also announced recently they would be expanding their innovative oncology bundled payment initiative following favorable results in a pilot across five oncology practices. In this pilot, cancer care costs were reduced by 34%– or approximately $40,000 per chemotherapy patient[i]. Remarkably, United was able to accomplish this even with the skyrocketing costs of chemotherapy drugs (see our last newsletter on increasing cost of cancer drugs)[ii].

Interest in bundled payments as a means of controlling costs and improving quality has steadily increased. With providers and payers experiencing greater success with bundles, we’ll look back at early programs and evaluate lessons for future implementations.

Overview of Bundles (A Reminder)

Under a bundled payment arrangements, providers are reimbursed for a set of services rather than for every individual unit of care (as in the standard fee-for-service model). Providers are reimbursed under payment arrangements that define the breadth of the bundle (i.e., what services are included and over what length of time) and contain specific financial and performance accountability measures. These episodes can be relatively straightforward, such as bundling inpatient hospital services with physician payments, but can also be extended to include readmissions, outpatient care, and/or post-acute services within a single payment. A bundled payment arrangement therefore asks providers to assume financial risk for a wider array of services and costs, while offering financial incentives to share in the upside if that care can be delivered more efficiently and cost-effectively.

Lessons from an Ambiguous Start

Results from early implementations of bundled payments were mixed. One of the first examples of payment bundles was the very successful introduction of the DRG payment system in the early 1980s. Bundling inpatient hospital services into a single payment had a profound effect on care, leading to a dramatic 24% reduction in length of stay (3.4 fewer days) with no change in mortality or readmissions 180 days post discharge[iii]. Expanding bundles beyond DRGs yielded mixed results. The Acute Care Episode (ACE) Demonstration, launched in 2009 by CMS, provided an early glimpse into how bundled payment could affect the quality cost ratio. The ACE project bundles covered all Medicare Part A and Part B services, including physician services, but were limited to specific cardiovascular and orthopedic procedures. Participating hospitals reported a 10 to 12 percent decrease in material costs during the first year and no corresponding price increases in later years. According to a report released by the Healthcare Financial and Management Association, the largest cost savings came from standardization of high cost supplies, such as stents and joint implants[iv]. Dr. Landgarten, MD, CMO and Chief Quality Officer of the Tennessee-based health system Ardent– one of the five participating hospitals in the ACE project– attributed savings in orthopedics to physician engagement around supply costs, remarking that, “[physicians] have a vested interest in the financial and clinical outcome, and it was that leverage that helped achieve supply costs savings.”[v] There is only so much juice, however, in supply costs.

The Integrated Healthcare Association (IHA) bundled payment initiative and the PROMETHEUS Bundled Payment Experiment yielded less promising results, but led to important insights into the importance and complexity of execution. IHA attributed the difficulties it faced in implementation to the lack of information technology infrastructure and capabilities to disburse revenue[vi]. Delays in regulatory approvals of contracts with payers and a lack of consensus around how to define the bundle also hindered implementation[vii]. The PROMETHEUS Bundled Payment Experiment faced a number of similar challenges as well, particularly with regard to payment methodology. Specifically, pilot sites had difficulty executing contracts due to conflicting interests from providers and payers around payment distribution and bonuses. Findings from the PROMETHEUS program were published in Health Affairs and the authors also cited hesitations from providers for fear of sustaining significant financial losses[viii].

A Strong Resurgence                                                 

Much of the recent activity around bundles has been spurred by CMS, which has prioritized bundled payments as a key value-based purchasing strategy to help achieve CMS’ ambitious goal of having 30% of Medicare fee-for-service payments switch to value-based payments by 2016 and 50% by 2018[ix]. Building on the success and lessons of previous programs, CMS has, for the first time, made bundled payments mandatory for hospitals, doctors, and other providers. Beginning in 2016, Medicare’s Comprehensive Care for Joint Replacement (CCJR) program for knee and hip replacements will be mandatory in 65 metropolitan areas[x]. As outlined in the Final Rule, hospitals would be financially accountable for not only the costs of the surgery and subsequent hospital stay but also the payments to the surgeons and related medical costs in the 90 days after discharge.

Commercial payers like United are also following in the footsteps of CMS. Baptist Health South Florida reported savings of approximately two percent after the first year of its special oncology bundle program and is expanding to additional surgical and procedural services[xi]. OrthoCarolina, a collection of orthopedic practices across North Carolina, has also expanded their bundle program to other payers following early success with Blue Cross and Blue Shield of North Carolina (BCBSNC) around total knee replacement surgeries [xii].Most recently, as participants of Medicare’s BPCI program, OrthoCarolina reported that they had observed reductions in readmission rates (down 77%), length of stay (down 18%) and postoperative skilled nursing facility care placement (down 31%). According to Daniel B. Murrey, MD, CEO of OrthoCarolina, the program’s success was largely attributed to case managers who arranged preoperative physical therapy, care planning and management, and patient-specific goal setting. Case managers also called patients regularly during the first year after surgery[xiii].

Going Forward: Ensuring Success of Bundled Payment  

Bundled payment has laid down deep roots and is likely to only grow stronger over the coming years. Economic pressure to contain costs, greater transparency highlighting quality deficiencies, and stronger IT infrastructure to analyze and administer a bundle will support this growth. While these elements are all key, perhaps the greatest hurdle to a successful bundled payment, and thus the greatest opportunity for those that can successfully execute, is meaningfully engaging physicians to reduce unwarranted variation and standardize care around best practices.

Culture change and physician engagement have often been described as the most difficult challenges in healthcare. A number of the previous failures in bundled payment initiatives were attributed to a lack of engagement and alignment of objectives around the new payment model. Successful bundled payment initiative will require many doctors to change the way they think about and provide care. Hospitals and organizations will need to engage doctors by providing training tools, including measurement and feedback, which allow physicians to take the leadership role in modifying the processes of care to achieve improvement and financial success.

At QURE, we have a very unique tool, Clinical Performance and Value (CPV) vignettes, which are designed to engage clinicians in this exact type of care standardization. If success in bundled payment is top of mind for you, we would love to share more about how we can help.



[i]United Health Group, Study: New Cancer Care Payment Model Reduced Health Care Costs, Maintained Outcomes, July 2014,

[ii] Julie Appleby, UnitedHealthcare Expands Effort To Rein In Rising Costs Of Cancer Treatment, October 29, 2015.

[iii] Kahn, Katherine L., David Draper, Emmett B. Keeler, William H. Rogers, Lisa V. Rubenstein, Jacqueline Kosecoff, Marjorie J. Sherwood, Ellen J. Reinisch, Maureen F. Carney, Caren Kamberg, Stanley S. Bentow, Kenneth B. Wells, Harris Montgomery Allen, David Reboussin, Carol P. Roth, Carole Chew and Robert H. Brook. The Effects of the DRG-Based Prospective Payment System on Quality of Care for Hospitalized Medicare Patients: Executive Summary. Santa Monica, CA: RAND Corporation, 1991.

[iv] Healthcare Management Financial Association, Pursuing Bundled Payments Lessons from the ACE Demonstration,  April 2012,

[v] Herman, Bob. Two Major Lessons From CMS’ Bundled Payment ACE Demonstration,

[vi] Caillouette, James and Robinson, James. The “Failure” Of Bundled Payment: The Importance Of Consumer Incentives, August 21, 2014.

[vii] RAND Corporation, Effort to Adopt Bundled Payments Across California Falls Short of Goals, August 4, 2014.

[viii]  Peter S. Hussey, M. Susan Ridgely and Meredith B. Rosenthal, The PROMETHEUS Bundled Payment Experiment: Slow Start Shows Problems In Implementing New Payment Models, November 2011.

[ix] Centers for Medicare and Medicaid Services, Better Care. Smarter Spending. Healthier People: Paying Providers for Value, Not Volume, January 26, 2015.

[x] Centers for Medicare and Medicaid Services,


[xii] BlueCross BlueShield of North Carolina, BCBSNC and OrthoCarolina Team Up to Reduce Cost and Improve Quality of Knee Replacement Surgeries, March 26, 2014.

[xiii] Peggy L. Naas MD, MBA, and Brian McCardel, MD, Finding Value in Value-Based Payment Models: An update on bundled payment models for orthopaedics,