Our healthcare system today is broken in large part because of how we pay for it. Our fee-for-service legacy gives providers an incentive to deliver as many exams, tests, and treatments and fill as many beds as possible. But as we know, piling on services does not equate to high-quality care. The new payment and risk-adjustment models that are emerging as a result of healthcare reform are needed to improve both the economic and the clinical value of the services that healthcare providers deliver. Nonetheless, providers must attend to a range of issues to be fully prepared for the changes that are well underway across the healthcare system.

In exploring the new payment models, policymakers have focused on holding providers more accountable for the cost and quality of outlier charges—costs that exceed the allowable amount for a specific diagnosis or treatment. Through such risk shifting, providers that achieve excellent outcomes and deliver value to their patients are rewarded, while those that fail to do so are penalized.

Although both private and public payers are implementing significant changes, the U.S. government has taken the lead in payment reform through the various pilot programs and demonstration projects set forth in the Affordable Care Act (ACA). These programs include accountable care organizations (ACOs), value-based purchasing, and bundled payments, which establish a standard fee for all the services typically involved in a defined episode of care, rather than making individual payments for each type of service rendered in each case. In particular, the Bundled Payments for Care Improvement (BPCI) initiative administered by the Centers for Medicare & Medicaid Services (CMS), which includes four different models of bundled payment arrangements, has received serious attention as a way to improve quality at lower costs.a

Population health management, such as in an ACO, is another risk-based payment reform strategy that, to varying degrees, emphasizes provider performance at an aggregate level for a defined group of patients. Regardless of whether an organization is working on bundled payments for a narrow slice of care or broader population health management across the care continuum of chronic disease, it must define and manage fundamental elements and capabilities to lower patient risk and complication rates, reduce unnecessary care and readmission rates, and improve patient outcomes.

Common Core Elements and Capabilities

To begin, a provider organization must take two basic steps: First, it must clearly define the populations for which it is assuming risk, with the size and shape of the defined population depending on the initiative’s objectives. Second, it must clearly define the services that it will deliver to the target population, including where they will be delivered and who will be involved.

Bundled payments are frequently developed for surgical procedures and other well-delineated episodes of care, such as coronary artery bypass grafting or total joint replacement. Determining the patient population covered by the bundle depends on how the episode of care is defined, its start and end points, what services are included, and where those services will be provided. For example, bundles for surgical procedures increasingly include postacute care and transitional services such as rehab and home health. Including postacute care in a bundled price often requires organizations to form external partnerships, so risk must be appropriately managed and shared among the partnering entities.

A patient population is defined more broadly for population health management programs than for bundled payments because such programs tend to be concerned with delivering care—including preventive care—for large and diverse groups of patients rather than for groups of patients who share the same specifically defined episode of care. Nonetheless, that broader definition also depends on the scope and objectives of the program. A population can be defined by many characteristics, including geography, demographics, and even medical conditions. Organizations that want to pursue population health management first should clearly identify what kind of population they plan to manage and then determine the at-risk services that they will cover for that group.

One approach is to identify a high-priority population (based on health burden or cost, for example) that can immediately benefit from improved care coordination. This population might comprise patients who have chronic conditions such as congestive heart failure or diabetes along with other comorbidities, such as obesity. The challenge then is to define the range of services that these patients will receive under the risk-based contract.

To this end, the provider organization should conduct a careful inventory of the services it provides and a critical assessment of all services that the population will require, as well as services that may be unnecessary. The aim should be to develop a comprehensive care continuum map that highlights not only the services the organization can deliver, but also service areas for which the organization may need to seek external partners that can deliver elements of care. For example, organizations that have traditionally focused only on acute care will need to manage risk for preventive care, disease management, postacute care, and end-of-life care.

Managing Variations in Cost and Quality

Whether a provider organization is pursuing population health management or episode-of-care bundled payment, its success in assuming risk will depend on its ability to manage variations in cost and quality. Although differences in physician decision-making contribute significantly to variations in cost, healthcare organizations have long been reluctant to intervene to address those differences. The increasing demand for predictable outcomes and costs, however, spotlights the need to balance traditional physician autonomy with evidence-based medicine and predictive care. Developing evidence-based predictive care paths and protocols can help administrators engage clinicians in conversations about the impact of their clinical decisions on both cost and quality.

Whether an organization is focused on the episode of care for a bundled payment or the care continuum in a population health management program, physicians should be involved in developing care paths and protocols that diagram high-level decision points affecting care. The challenge is to develop a care path that is both specific and structured, but not overly complex and prescriptive. Striking this balance will require clinicians who deliver the care to engage in a process to adopt and align with these new protocols.

For this process to be successful, and have the full support of the clinicians, the organization should assemble a core team of clinicians representing all of the organization’s healthcare services to participate on the care protocol development teams charged with identifying the evidence that supports current standards of care. The care protocol development teams may draw from professional medical societies, systematic reviews of the literature, and other peer-reviewed research. This review may reveal areas where the organization’s care practices surpass established standards of care, providing an opportunity to demonstrate true differentiation to patients and payers. Likewise, it may identify areas where care does not fully meet the established standards, providing an opportunity for rethinking internal processes and improving care quality.

Defining the Cost and Quality of Care

Organizations that choose to assume risk will need to demonstrate the extent to which they provide both economic and clinical value to the populations they serve. To do so, they must understand both the costs of treating the defined population and the appropriate metrics for tracking the quality of treatment. After identifying cost and quality metrics and establishing internal baselines, organizations should continuously monitor their internal progress as well as how their performance compares with external benchmarks. Many organizations will find that capturing these critical metrics requires developing new capabilities in data gathering and analytics.

By critically assessing its clinical and financial data, an organization can identify additional process and capability gaps and then develop actionable plans to fill those gaps, thereby improving care delivery and reducing variation in cost and quality. For example, linking financial and clinical data may disclose that differences in clinical practice between physician groups create wide variations in costs and/or outcomes. These data also can provide the basis for developing a clear value story that the organization can articulate to resonate with key stakeholders. Patients, for example, will want to know that a provider can demonstrate outcomes that are better than those its competition can deliver, and payers will want to see evidence of consistent outcomes and predictable costs.

Putting a single, predictable price tag on medical procedures allows a hospital to position these services as “branded products” and to compete on cost and quality. The common element is the necessity to leverage both cost and quality data to craft an evidence-based economic and clinical value story that the organization can share with payers and employers—about care that is delivered for a set price at an established quality standard.

Rethinking Care Delivery

The true benefit of at-risk strategies such as bundled payments and population health management is derived from reengineering care delivery, not just combining separately paid line items into a single tab. Linking payments to care quality can serve as a significant incentive for multiple providers (physicians, hospitals, and postacute settings) to coordinate the care they deliver across a patient population. This model also offers healthcare providers a degree of flexibility in determining what types of specific services to deliver in order to maintain performance standards. Under traditional fee-for-service systems, payers often impose administrative approval processes (e.g., prior authorization) on providers to influence the total cost of care (i.e., controlling cost through limiting access). In contrast, bundled payments and population health management give providers the incentive to avoid unnecessary services, enabling payers to dispense with such oversight strategies.

Care redesign requires significant attention and can easily be overwhelmed by the variety of other administrative details necessary to implement payment bundling. It is with this challenge in mind that in its BPCI initiative, CMS has put equal emphasis on the care redesign and administrative aspects of payment bundling. This work, however, can be successful only with solid clinical leadership backed by committed management, as evidenced in a bundled payment demonstration involving Hoag Orthopedic Institute (HOI) in Irvine, Calif.b

For HOI, a specialty hospital for inpatient and outpatient surgical care in Southern California, participation in the bundled payment model sparked an examination of practice patterns and the movement of surgeons away from fee for service to a model that required care coordination. As HOI started accepting bundled payments for total joint replacements, practice variations among surgeons and hospital staff became glaringly evident. HOI realized that unless it redesigned its care delivery, bundled payment could become a significant financial liability. Infection prevention and performance improvement committees evaluated physician performance on quality and outcomes and generated comparative data, all of which pointed to the need to reduce practice variation through care redesign.

HOI’s experience underscores an important lesson: All too often, organizations implementing risk-based payment do not pay careful attention to improving and coordinating care processes, which is a critical ingredient for success. Focusing solely on operational and administrative changes, such as claims adjudication and contracting, misses a core element of the model: coordination of care across all providers involved in an episode of care.

At-Risk in Action

Nearly 250 healthcare organizations have taken on risk with Medicare in bundled-payment programs covering 48 health conditions, and almost 7,000 more are in a trial phase, using Medicare data to assess their readiness for going at-risk. Meanwhile, a number of states have been experimenting with bundles within their Medicaid programs.c Experiments with population health management appear in all shapes and sizes, with payer-provider partnerships using different risk-sharing approaches to manage the health of target populations. Several large, self-insured employers are taking on risk for the health of their employees. Walmart, for example, has established agreements to send employees who need heart, spine, and transplant surgery to one of six highly regarded healthcare organizations.d Walmart employees will have no out-of-pocket costs, including for travel, lodging, and food for the patient and a caregiver.

In the current healthcare environment, the drive to provide better care at lower costs is stronger than ever.

Provider organizations that invest in developing the capabilities and infrastructure required to take on risk will position themselves for continued success.

Jill E. Sackman, DVM, PhD, is a senior consultant at Numerof & Associates, Inc., St. Louis.

Christen M. Buseman, PhD, MPH, is a research analyst at Numerof & Associates, Inc., St. Louis.


a. For detailed information about the BPCI initiative, see the Center for Medicare & Medicaid Innovation, “Bundled Payments for Care Improvement (BPCI) Initiative: General Information,” innovation.cms.gov/initiatives/bundled-payments.

b. Stansbury, J., and White, G., “Care Redesign: An Essential Feature of Bundled Payment,” Issue Brief No. 11, Integrated Healthcare Association, September 2013.

c. Evans, M., “Interest Surges in Medicare Bundled-Payment Initiative,” Modern Healthcare, July 31, 2014.

d. Hospitals include Cleveland Clinic, Cleveland; Geisinger Medical Center, Danville, Pa.; Mayo Clinic sites, Rochester, Minn., Scottsdale/Phoenix, Ariz., and Jacksonville, Fla.; Mercy Hospital Springfield, Springfield, Mo.; Scott & White Memorial Hospital, Temple, Texas; and Virginia Mason Medical Center, Seattle.

Publication Date: Sunday, March 01, 2015