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A Strategy for SuccessfulImplementation of Bundled Paymentsin Orthopaedic Surgery

Kevin J. Bozic, MD, MBA

Lorrayne Ward, MBA, MPP

Investigation performed at theUniversity of California, SanFrancisco, San Francisco, California

COPYRIGHT © 2014 BY THEJOURNAL OF BONE AND JOINTSURGERY, INCORPORATED

» Bundled payments are an innovative method to align payer andprovider incentives in a way that maximizes patient-centric valuecreation. Public and private payers, as well as self-insured employers,are aggressively pursuing bundled payments as a way to improve carecoordination and patient outcomes and to reduce costs, particularly inhigh-volume, high-cost areas such as total joint arthroplasty.

» Successful implementation of a bundled payment system requiresclinical and administrative leaders who are committed to developingnew systems of delivering care and willing to hold themselvesaccountable for both the costs and clinical outcomes associated withthe care they deliver.

» The transition from a fee-for-service payment system to bundledpayment is fraught with potential pitfalls that must be identified earlyand closely managed.

» By following the steps outlined here, institutions consideringbundled payment for total joint arthroplasty can more quickly andeffectively move toward implementation.

Itis widely recognized that thecurrent fee-for-service reimburse-ment system in health care providesan incentive to focus on the volume

of health-care service provision over qualityor value1,2. Various payers and self-insuredemployers have experimented with analternate paymentmethodology—bundledpayments—in which a single lump-sumpayment ismade to all health-care providers(including facilities, physicians, and non-physician providers) for the entirety of apatient’s episode of care3. This approach isintended to encourage coordination ofservices and communication across pro-viders and to reduce costs by aligning

financial performance with high-qualityoutcomes. The Patient Protection andAffordable Care Act called for a large-scalepilot of bundled payment for Medicarepatients, to be managed by the Center forMedicare & Medicaid Innovation(CMMI). In 2012, more than 400 hospi-tals from around the country were selectedfromhundreds of applicants for the CMMIBundled Payments for Care Improvement(BPCI) program, for services spanningforty-eight Medicare diagnosis-relatedgroups (DRGs).

Total joint arthroplasty is an idealclinical procedure for use in a trial of bun-dled payment, as it is a high-volume

Disclosure: One or more of the authors received payments or services, either directly or indirectly (i.e.,

via his or her institution), from a third party in support of an aspect of this work. In addition, one

or more of the authors, or his or her institution, has had a financial relationship, in the thirty-six

months prior to submission of this work, with an entity in the biomedical arena that could be

perceived to influence or have the potential to influence what is written in this work. No author has had

any other relationships, or has engaged in any other activities, that could be perceived to influence or

have the potential to influence what is written in this work. The complete Disclosures of Potential

Conflicts of Interest submitted by authors are always provided with the online version of the article.

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JBJS REVIEWS 2014;2(10) :e2 · http:/ /dx.doi .org/10.2106/JBJS.RVW.N.00004 1

procedure with substantial variation inboth costs and patient outcomes4,5; yetthe clinical presentation and treatmentof patients is relatively predictable andwell understood.

Developing the organizational in-frastructure to successfully implementbundled payments requires rethinkingof current clinical and administrativepractices. In this article, we outline astepwise approach to enable a health-care organization to successfully imple-ment bundled payment; this approach isbased on our experience to date inimplementing an inpatient bundledpayment for total joint arthroplasty withthe CMMI BPCI Initiative.

Steps for Success1. Identify the Clinical Condition(s)The first step inmoving toward bundledpayment implementation is to deter-mine the clinical condition or condi-tions to which bundled payment willapply. The following key factors shouldbe considered:

VolumeThe condition or procedure should havesufficient volume to justify the effortnecessary to implement bundled pay-ment and to maximize the impact ofclinical redesign and cost reduction. Apotential rule of thumb is to select con-ditions or procedures that present at theaverage rate of one per business day(approximately 200 to 250 cases peryear), although the volume thresholdmay differ according to the size and in-stitutional priorities of the health-careorganization. We suggest this thresholdbecause low-volume conditions andprocedures often present difficultieswith regard to standardizing processesand implementing systems of care.

Variable Cost and QualitySubstantial room for improvement onboth financial and quality dimensionsshould exist5. For patients who under-went total joint arthroplasty at our in-stitution, there was a cost difference ofmore than 20% between the lowest andthe highest-cost surgeons as well asknown variability in key patient

outcomes such as surgical site infection,readmission, and reoperation.

Relatively Homogeneous PatientPopulationThe implementation of standardizedclinical care pathways and the minimi-zationof outlier risk are achieved throughthe selection of conditions with a rela-tively high degree of homogeneity acrosspatients. For this reason, we chose pri-mary total joint arthroplasty, since keyfactors such as patient age, preoperativefunctional status, and indication for sur-gery are more narrowly circumscribedthan they are in other clinical conditions.Patients undergoing revision arthroplastywere excluded, given the greater vari-ability in their clinical presentation,treatment, costs, and outcomes.

Robust Measurement ToolsSystems to track baseline and ongoingcost, quality, and operational metricsare fundamental to the successfulimplementation of bundled payments.Joint replacement registries and othercondition-specific measurement toolscan play an important role not only inthe tracking of clinical outcomes but alsoin the evaluation of the operational andclinical impact of bundled payments.

Given these criteria, the mostcommonly selected clinical conditionsand procedures for bundled payment aretotal joint replacement, congestive heartfailure, chronic obstructive pulmonarydisease, and coronary artery bypass sur-gery6. This paper draws from our expe-riences with developing a plan forbundled payments for primary totaljoint arthroplasty procedures.

2. Identify Clinical andAdministrative ChampionsOne of the primary goals of bundledpayment is to give providers the incentiveto coordinate multidisciplinary care andto improve communication across pro-viders7. However, the existing clinicaland administrative organizational struc-tures of most hospitals do not facilitatethis type of cooperation. As such, clearstrategic direction and continuing

involvement from the highest levels ofhospital leadership (e.g., chief executiveofficer, chief operating officer) are neededin order to successfully implement bun-dled payment. Departments are usuallyheld accountable to department-specificoutcomes, such as patient volume orrevenue, which in a bundled paymentscenario could shift dramatically as care isredesigned across the continuum andmetrics are tracked at the episode or pa-tient level. Tomake bundled payments asuccess, clinical and administrativeleadersmust bewilling to operate outsideof existing paradigms. They must havesufficient authority—either formal (e.g.,via position or title) or informal (e.g., viapeer reputation or acclaim)—to conveneproviders and staff from across the orga-nization, and theymust have the vision toguide a different way of thinking aboutpatient care. Many provider organiza-tions have well-respected clinical andadministrative leaderswho are outspokenand skeptical about the staying power ofpayment reform initiatives such as bun-dled payments. Substantial investmentsof time and authority are required to get abundled payment program off theground, and without strong, committedclinical and administrative champions,the effort will not be successful. In ourexperience, the commitment of two se-nior physician leaders and the early en-gagement of top hospital administratorswere fundamental to getting the projectoff the ground. A constant focus onmoving the project forward and theability to break down institutional bar-riers are required, since the success ofbundled payment implementationgreatlyhinges onhammering out the newdetails for every aspect of patient care andfinancial reimbursement within this newmethodology. Bundled payment imple-mentation forces institutions to collabo-rate across existing departmentaldivisions, in order to develop the newprocesses and work flows to optimizepatient outcomes and reduce costs.

3. Define the EpisodeThe episode is the specific set of activitiesthat occur during a defined time period

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for which the institution will acceptbundled payment5. The starting-pointdefinition of the episode is the clinicalcondition or procedure, but there are awide variety of factors to consider, in-cluding the following:

Starting Point or TriggerMany episodes are initiated by the acuteinpatient stay, but other events can beconsidered; for example, the first out-patient visit to a specialty clinic, theinitial diagnosis of a chronic disease, andthe transfer to a post-acute care facility.The trigger needs to be a clearly identi-fiable, standard event that initiates thetreatment course for each patient in aparticular episode. Initially, we exploredstarting the episode at the time of thereferral from the primary care physicianto the orthopaedic surgeon, as that is thefirst indication of a potential need forsurgery and the first opportunity to co-ordinate care across the continuum.However, given that a large proportionof our patients come from a wide rangeof outlying geographical areas with di-verse primary-care networks, the steer-ing committee decided to limit the scopeto the inpatient encounter only. Thiswas seen as a limitation on the full po-tential of bundled payments, and it was achoice that was made to limit the riskassociated with assuming a bundledpayment to the portion of the episodethat was directly under our control. Athorough understanding of existingprocesses and their variability is neces-sary before determining the trigger forbundled payment. The trigger should beinstitution and condition specific.

Duration of the EpisodeThe majority of episodes are defined inrelation to a fixed number of days afterthe initial discharge from the acute in-patient stay (e.g., inpatient stay plusninety days after discharge)5. Extendingthe episode length increases the risk ex-posure to providers, but it may alsoprovide physicians with the incentive toinitiate longer-term management andcoordination of the patient’s conditionat an earlier stage to mitigate these risks.

A historical analysis of our total episodecosts shows that nearly a third of the totalcosts are incurred in the first thirty daysafter discharge. As the total episodelength increases, a greater share of costs isexpended on post-acute services, with asmuch as 50% of the total cost of theepisode traced to this segment of care atninety days after discharge.

Inclusion and Exclusion Criteria• Services: As with episode length,

the broader the inclusion criteria, thegreater the risk exposure, as well as thegreater the potential upside and impacton clinical outcomes, such as surgical siteinfection rates and functional outcomes.Of the options available to us under theCMMI criteria, we selected the nar-rowest model in terms of scope. Thismodel covers the inpatient stay and anyreadmissions within thirty days. Post-acute care services are not included inthis bundle, although several of the otherCMMI BPCI models (Appendix 1) in-clude such care. One of the most im-portant considerations in making thisdecision is whether or not your health-care organization has formal or informalrelationships with post-acute care facil-ities, such as acute rehabilitation facili-ties and skilled nursing facilities. Theserelationships can range from establishedpartnerships (including joint ventures orbeing part of the same ownership entity)to having identified point people at eachhigh-volumepost-acute facility towhichyou refer patients. Without these com-munication and collaboration channels,a wide-scoped bundled payment pro-gram cannot be successful.• Inclusion and exclusion criteria: It is

important to define which patients andepisodes of care will be included andexcluded from the bundle. Many bun-dles exclude certain patient or proceduretypes that substantially increase the fi-nancial and clinical risks, such aspatientswith multiple medical comorbidities orcomplex, atypical procedures. Such pa-tients and procedures are often associ-ated with a high degree of variability inboth cost and outcomes, often due tofactors that are outside the control of the

provider. Bundled payments take intoaccount the factors that are within thepurview and control of providers as wellas the factors that are deemed to beoutside the control of providers (e.g.,nonmodifiable patient comorbidities);this combination of provider account-ability and risk adjustment serves to re-duce costs while adding value to thepatient experience. Exclusions couldalsobebased on the payer type, age of thepatient, transfer status, or other admin-istrative factors. For the CMMI BPCIinitiative, there were no clinical up-frontexclusion criteria, only administrativeones linked to various Medicare cover-age types. At our institution, we decidednot to include revision total joint ar-throplasty in the bundled paymentprogram, as the clinical experience of oursurgeons indicated that the treatmentcourse and outcomes associated withrevision total joint arthroplasty weremore variable than those associated withprimary total joint arthroplasty, thusaddingmore risk and greater uncertaintyto the risk that wewould assume under abundled payment plan.• Readmissions:Most—but not all—

bundles include related readmissions inorder to give providers the incentive tomake use of multidisciplinary strategiesto reduce readmissions. Defining what a“related” readmission is can be a verycontentious process, with payers andhealth-care purchasers on one end tak-ing a very broad view (basically anysubsequent admission, within the de-fined period, that is not trauma relatedor that is not a new cancer diagnosis) andprovider organizations employing amuch narrower definition (e.g., onlyincluding readmissions that representwell-established hospital-acquired con-ditions or that are directly tied to thesurgical episode.) CMMI counts nearlyall subsequent inpatient encounterswithin thirty days as a “related” read-mission, with the exception of traumaand new cancer diagnosis-related ad-missions. The process of determiningthe scope of related readmissions alsohelps to align incentives across payersand providers.

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4.DefinePerformanceMetrics and theGainsharing ModelThe ability to track performance on anongoing basis is crucial to the successfulimplementation of bundled payment8.Performance should be defined onclinical, operational, and financial di-mensions. Target metrics need to bedetermined in advance, with regularreporting to all relevant stakeholdersbuilt into the bundled payment. Thelevel at which metrics should be col-lected and reported is a key decision andstrongly influences accountabilitymechanisms, as people and organiza-tions tend to gravitate toward visible,auditable metrics that they view as beingmost under their purview to influence.For example, metrics that are collectedand reported at the individual physicianlevel may drive a behavior that is differ-ent from that driven by metrics mea-sured at the departmental or procedurelevel. We are planning to track perfor-mance at the departmental and indi-vidual physician levels, with the bundledpayment and nonbundled paymentpopulations being delineated. We arealso aiming for monthly reporting ofmost metrics, to enable feedback andcourse correction in as close to real timeas possible (Appendix 2).

Participation in a registry effortsuch as theCalifornia JointReplacementRegistry (CJRR) or the Function andOutcomes Research for ComparativeEffectiveness in Total Joint Replace-ment (FORCE-TJR) Registry can helpfacilitate collection and comparison ofphysician-specific performance mea-sures, including both process and out-comemeasures9.While trackingmetricsat the institution level is vital, the impactof bundled payment on the wider pop-ulation can be extrapolated by compar-ing hospital-specific outcomes underbundled payment with larger data setscollected by joint replacement registriesand similar condition-specific dataaggregators. Through organizationssuch as the CJRR, hospitals participat-ing in bundled payments can track theirshort-term and long-term outcomes andconduct analyses of clinical and

operational effectiveness both beforeand after implementation of a bundledpayment system. Performance can bebenchmarked against state and nationalaverages as well.

These metrics undergird the gain-sharing model. An aspect of many bun-dled payment programs, gainsharingenables the sharing of any cost savingsachieved with the providers and staffinvolved in the episode of care. This isintended to incentivize providers tochange their behavior and focus on op-timizing outcomes and reducing costs.However, it is important to set qualityand safety thresholds that must beachieved before any transfer of fundstakes place. Such a system creates asafeguard against any stinting of carethat may occur if only cost savings aretaken into account in the gainsharingmethodology10. In addition, the defini-tion of cost savings must be agreed uponin advance—some actions may only beshifting costs upstream or downstream,without reducing costs across the entireepisodeof care.Theremay alsobe start-upandongoing expenses that arenecessary torun a bundled payment program, andthese shouldbe fundedbyanycost savingsachieved.

Similar to performance metrics,the level at which gains are shared mustbe determined prior to the start of abundled payment program. Some in-stitutions choose to share gains broadly,such as at a department or nursing-unitlevel. Others opt for individual providerand staff-level incentives. This decisionhinges on a thorough understanding ofthe episode of care and the type of be-havior change that is desired.The level ofaccountability that the organizationwants to drive should determine thetarget of the incentives. The success ofcertain episodes of caremay depend on afew discrete decision-makers whose di-rect contribution toquality and financialoutcomes can be measured. For exam-ple, if implant variability is identified tobe the primary barrier to making bun-dled payments financially viable, ahandful of surgeons hold the decision-making authority of whether or not to

standardize. Other institutions requiresmall changes across a wide group ofstakeholders,without clear lines of directaccountability. Process changes thatimprove communication and reduceduplication of services within multipledepartments and across the continuumof care are an example of this. In order tobe effective, gainsharing models shouldreflect the care process and the key leversfor change. Furthermore, institutionsneed to be realistic about the amount oflikely financial gains, particularly in theinitial years of bundled payment imple-mentation. Devising a complicatedgainsharing methodology for a smallpool of cost savings—or possibly none atall—may be overkill in the early stages ofimplementation.

5. Map Episode of Care and CostsOnce the episode is clearly defined, it isnecessary tomap it in its entirety. This isa fundamental step to ensure that allstakeholders have a shared understand-ing of the episode and of the tasks per-formed by others. The map should beconstructed from the patient’s perspec-tive, with use of patient-shadowingtechniques and staff interviews, andshould reflect the so-called “typical” orstandard patient flow across the full ep-isode of care11. Using a patient-centeredmethodology clearly highlights areasof transition and handoff, which aprovider-centered focus can often miss.Each staff type should be identified, andkey decision points that drive variationsin care should be clearly indicated. Ifpossible, each step in the map shouldhave a corresponding time estimate.These maps should draw upon directobservation to the fullest extent possible.After the initial drafts are developed,they should be validated via multidisci-plinary sessions composed of all of thefront-line staff involved in that phase ofcare. To develop our initial maps, weemployed volunteers to follow patientsthrough the full episode of care andobserve several cycles of work at eachstage. Then we vetted the processsteps and time estimates with a crosssection of staff from each stage of the



episode—outpatient visit, surgery, andinpatient stay. This process resulted ina representative map of the “typical”patient episode that was accepted by allmembers of thecare team,with importantvariations highlighted. For example, thismethodology highlighted that somesurgeons were using peripheral nerveinfusion catheters for all patients, whileothers were only doing blocks for totalknee arthroplasty patients, a differencethat has implications both in terms ofoutcomes and costs.

To speed up the process, it is pos-sible to develop amapbased on the inputof the multidisciplinary staff, startingfirst with a high-level outline of theprocess and then refining themap on thebasis of input from front-line staff.However, we recommend starting with

direct observation if possible, preferablyby staff members who do not work inthat area on a daily basis, as they will bemore attuned to process inefficiencies.

Process Mapping (Fig. 1)Process mapping uses standard symbolsto indicate the flow of a patient throughthe episode and the resource intensity ofthe various staff and providers who areinteracting with the patient12. For ex-ample, Figure 1 shows the first set oftasks with regard to a patient beingtransferred from the post-anesthesia careunit (PACU) on the day of surgery tothe inpatient orthopaedic nursing unit.The colors indicate the type of staff, thebottom right-hand box indicates thenumber of minutes it took to completethe task, and the top right-hand box

indicates the type and number of re-sources that were involved in that task.In this way, it is easy to see at a glance thetypes of resources involved in any givenphase of care, the standard sequence oftasks, and the resource intensity of eachstep.

In addition, the map can serve asthe basis for cost estimation based onresource intensity for each stage of theepisode. This is accomplished throughtime-driven activity-based costing(TDABC), which is a methodology toaccount for actual resource utilizationacross the episode of care in a detailedway13. First, direct costs associated withsupplies andother tangible items that areconsumed in the direct provision of careare attributed to the episode. Second,personnel costs are attributed to the

Fig. 1Process map for inpatient stay on postoperative Day 0. CPO = continuous pulse oximetry.



episode by using the internal cost data ofthe health-care institution to determinean hourly rate that takes into accountboth the direct and indirect cost for thetypes of staff that are directly involved inpatient care. This rate, applied to thetime estimates in the map by resourcetype, yields the total episode cost bysegment of care. TDABC analysis canbring to light the true cost of variabilityand serves as a methodology to enableinformed cost-benefit decisions withregard to improvement interventions. Itis also a fundamental underpinning ofensuring a focus on value for the patient,as outcomes per cost unit can be accu-rately determined and assessed. OurTDABC analysis highlighted that themajor areas of cost difference acrosssurgeons and procedures was in im-plants, drugs, and supplies, as opposedto inpatient or outpatient care. It willalso serve as a way to track the cost sav-ings achieved through our care redesignefforts. Other methodologies can beused, based on data from existing ac-counting systems, but theyoften lack thelink back to clinical processes at a de-tailed level. For instance, most hospitalaccounting systems charge the same flatfee for an inpatient room on an ortho-paedic floor. However, the resource in-tensity in terms of nursing,rehabilitation, and other providers’ time(costs that are usually built in to theroom charge) are dramatically differentfor a patient who is undergoing a revi-sion arthroplasty versus a patient who isundergoing primary arthroplasty.TDABC can be used to quantify theactual cost of consumed resources, goingbeyond allocations.

6. Identify Opportunities forImprovement—Evidence-BasedAnalysis Versus Consensus-BasedOpportunity SourcingAfter a shared understanding of the fullepisode is achieved through mapping,the most impactful areas for care rede-sign and cost reduction can be collec-tively identified. Some factors toconsider include the stakeholder will-ingness to change and the magnitude of

improvements that can be achieved—both clinically and financially.

One starting point to identify areasfor improvement is through a review ofexisting literature and other sources ofbest practices. Gaps between currentinstitutional practice (as outlined in thecare maps) and the documented evi-dence can be highlighted.

A complementary approach wouldbe to determine focus areas for im-provement through stakeholder con-sensus. Typically, there are severalwidely recognized “pressure points” thatcause work flow inefficiencies or gaps inquality patient care. Addressing theseareas can often secure goodwill amongstakeholders and may serve as an enginefor driving further improvement. Usinga combination of evidence-based analy-sis and consensus-based opportunitysourcing will likely yield the mostimpactful areas for improvement.

7. Redesign Care to Improve Qualityand Reduce CostThe identification of focus areas willoften lead to an outpouring of im-provement ideas from stakeholders. Amethodology to manage and prioritizethese efforts is necessary. The approachmust be multidisciplinary, since it ishighly likely that the areas identified willrequire input from and change by anumber of disciplines.

An approach with demonstratedsuccess is the Lean continuous im-provement methodology14. The Leanmethodology, a management systemand set of principles that originated withtheToyotaMotorCompany, empowersfrontline staff to rapidly trial and im-plement changes to increase quality andreduce costs and can be a powerful wayto source and sustain change. A funda-mental principle of the Lean methodol-ogy as applied to health care is to viewprocesses from the patient’s perspective.This principle strongly complementsthe goals of bundled payment to en-courage seamless, multidisciplinary careacross the patient episode, instead of inthe typical departmental or organiza-tional siloes15. The Lean continuous

improvementmethodologyprovides thetools and framework to map activitiesand identify wastes from the viewpointof the patient, which has the additionalbenefit of aligning a diverse group ofstakeholders around a common per-spective15. Through repeated cycles ofLean continuous improvementwork, anintegrated, evidence-based, patient-centered care pathway that can reducevariation and improve patient outcomescan be developed. Multiple hospitalsacross the country have exhibited dra-matic improvements in outcome andreduction in costs of care through thedeployment of the Lean method-ology16-18. Orthopaedics served asone of the first areas for implementa-tion of the Lean methodology at ourhospital. To date, we have conductedfive, week-long improvement eventsfocused on the perioperative episode forpatients who have had total joint ar-throplasty. This has resulted in reduc-tions in patient lead time (the totalamount of time it takes to get from thestart of a process to the end of a process)during the inpatient stay, earlier identi-fication of high-risk patients, more effi-cient turnover of operating rooms, andsmoother handoffs from the PACU tothe orthopaedic nursing unit. In addi-tion to the operational improvements,this work has led to a culture changethrough which front-line staff and pro-viders better understand the full con-tinuum of care through which theirpatients move. They also better under-stand the ways in which staff memberscan work together to optimize the entireepisode, not just the portion for whichthey are directly responsible.

8. Price and Market the Episodeof CareOnce a reliable care pathway has beenstably implemented and performancedata are available, organizations can de-termine a fixed price for the episode ofcare. The price should take into accountthe actual cost of care delivery, and anexpected standard deviation (as basedon analysis of the data) should be builtin to the price. If there are identifiable



up-front factors that drive differences inthe care pathway—and therefore thecost (e.g., the number of comorbidconditions or the bodymass index of thepatient)—prices should reflect thevarying resource intensity.

After determining a price at whichthe organization’s operating costs areadequately covered for the vast majorityof patients, the hospital can market itsfixed price to commercial payers, largeself-insured employers, accountable careorganizations, and other health-carepurchasers. In particular for high-volume, high-cost procedures withsubstantial existing market-price vari-ability, such as total joint arthroplasty orcardiothoracic surgery, a guaranteedprice and reliable outcomes are a majorselling point that can drive additionalvolume to the institution19.

However, a risk that accompaniesany price or quality guarantee is thepotential downside risk associated withoutlier cases. Having a separate processfor identifying and paying for definedoutliers (which the CMMI pilot does) isan important design element for imple-menting bundled payment. A thoroughanalysis of historical data can help toground the discussion of the expectedvolume and cost of outliers. For theCMMI pilot, the prices are set on thebasis of hospital-specific historical re-imbursement data. This enables us totrack cost savings and clinical outcomesagainst ourselves, instead of againstmarket or peer benchmarks.

9. Evaluate Results and IterateClinical and financial performancemustbe tracked on an ongoing basis, basedon agreed-upon metrics and reportingmechanisms. A multidisciplinary steer-ing committee should be accountablefor this regular review and should havethe authority to make operational ad-justments as needed. The steeringcommittee needs to include clinicalchampions from all involved services,unit nursing leadership, and represen-tatives from finance and quality, at aminimum. It is to be expected that in theinitial phases, close monitoring and

readjustment will be necessary, as theorganization learns how to best managepatients in a more holistic manner. Forexample, cost savings or operationalchanges in one area may have unin-tended downstream implications. Theproviders (both hospital and physician)must remain flexible andnimble inorderto respond to these developments.Through ongoing iteration and contin-uous process and quality improvement,the goals of bundled payment can beachieved.

Implementation ChallengesWhile bundled payments are an excitingdevelopment in the pursuit of highervalue care, there are a number of very realimplementation challenges that institu-tions will face as they attempt to roll outthis new payment methodology. It isimportant to recognize these potentialstumbling blocks up front and to worktoward minimizing their impact as theimplementation of bundled payment isbroadened.• Competing incentives in a hybrid

payment environment: For the vast ma-jority of institutions and clinical areas,there is a long way to go before the ma-jority of payments are administered in abundled manner. Yet, waiting until theentire payment system has made theshift toward episode-based paymentswill leave an institution far behind thecurve4. That means that in today’s en-vironment, certain actions that makesense in a bundled payment, such asoffering higher-touch services to reducereadmissions, will directly reduce reve-nue as collected under a fee-for-servicesystem. For example, hiring clinical carecoordinators to manage patients acrossthe care continuum can decrease read-missions and emergency departmentvisits, but under the current fee-for-service system this would directly reducerevenue from the additional admissionsand visits, as well as incur cost. Thistension can also play out at a depart-mental level, where providers may becompensated on the basis of work rela-tive value units or other volume-basedmeasures instead of on the basis of the

quality outcomes achieved or expendi-tures averted. A detailed analysis—bothfinancial and clinical—of these trade-offs is necessary, and institutions mustmake an informeddecision as towhetheror not to participate. Mechanisms tocompensate short-term “losers,” as wellas longer-term initiatives to redesignincentive structures, will be necessary toencourage broad-based participation inthe care redesign required by bundledpayment. We have started to identifyand address these tensions, but we ex-pect to operate in a hybrid paymentenvironment for some time.• Stress on the existing administrative

and data-collection infrastructure: Carv-ing out a subset of patients within aclinical condition or department to bereimbursed in a bundled manner cancause a substantial amount of manualwork for administrative staff. Currentfinancial and data systems are built tosupport fee-for-service care and willlikely require manual manipulation toappropriately track bundled payments.For example, in our program, an ad-ministrative assistant has to separatelyflag the patient in the electronic healthrecord, and the claims are analyzed oneby one on the back end to ensure propercoding, submission, andpayment. Fromthe first step of correctly identifyingthese patients to ensuring that all par-ticipating providers are paid out of asingle bundled payment, a number ofadministrative work flows need to beadapted to enable bundled payment.Managing this dual administrativestructure is difficult and creates the riskof patients and payments slippingthrough the cracks or metrics being in-correctly tracked and reported. A morehigh-touch management approach forbundled payment patients may be nec-essary in the early stages of imple-mentation, until data systems catch up.We are using the CMMI BPCI programas a trial for developing organization-wide tools for bundled payment so that,as more payers and conditions are re-imbursed in this way, we can processthese patients and payments moreefficiently.



ConclusionsBundled payments can be an effectivemechanism to align payer and providerincentives to work in a more patient-centered way. However, implementingbundled payments requires committedclinical and administrative leadership todevelop new systems of delivering andoptimizing care. The transition from afee-for-service payment system to bun-dled payment is fraught with potentialpitfalls that must be identified early andclosely managed. By following the stepsoutlined in this review, organizationsconsidering bundled payment canmovetoward implementation more quicklyand efficiently.

Source of FundingThisworkwas supportedby a grant fromthe California HealthCare Foundationand a grant from the University ofCalifornia Center for Healthcare Qualityand Innovation.

NOTE:The authors thank Stephanie Teleki,PhD, and Vanessa Chan, MPH, fortheir help in preparing this manuscript.

Kevin J. Bozic, MD, MBA1,Lorrayne Ward, MBA, MPP2

1Department of Orthopaedic Surgery,University of California, San Francisco,500 Parnassus Avenue, MU 320-W,San Francisco, CA 94143

2Performance Excellence Department,UCSF Medical Center,

350 Parnassus Avenue, Suite 501,San Francisco, CA 94117

E-mail address for K.J. Bozic:[email protected] address for L. Ward:[email protected]

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Appendix 1: Overview of Center for Medicare and Medicaid Innovation Bundled Payments for CareImprovement Initiative

The Center for Medicare and Medicaid Innovation (CMMI) was established in 2010 with the passage of the Affordable Care Act. Its missionis to test “innovative payment and service delivery models to reduce program expenditures…while preserving or enhancing the quality of carefor those individuals who receive Medicare, Medicaid, or Children’s Health Insurance Program (CHIP) benefits.”5 In 2011, the CMMIannounced the launch of the Bundled Payments for Care Improvement (BPCI) Initiative, which called upon hospitals, post-acute carefacilities, physician grouppractices, andhealth systems to apply for a pilot program to test bundledpayments for different types of care episodes.The goal of the initiative is to demonstratewhether bundled paymentswill achieve the goals of “higher quality,more coordinated care at a lowercost to Medicare6.”

Four different payment models were proposed, with varying inclusion criteria and durations. The CMMI’s intent is to trial variousmodels and assess their relative effectiveness in achieving the program goals:

Model 1: Retrospective Acute Care Hospital Stay Only—this model covers only the inpatient stay, with physicians continuing to bepaid separately by Medicare. However, in a departure from current procedure, the hospital and the physicians will be allowed to share anyfinancial gains arising from care redesign or other efforts.

Model 2: Retrospective Acute Care Hospital Stay plus Post-Acute Care—this model begins with the inpatient stay and extends to allpost-acute care provided thirty, sixty, or ninety days after discharge.

Model 3:Retrospective Post-AcuteCareOnly—thismodel is triggered by the inpatient stay, but the bundled payment only covers post-acute care provided thirty, sixty, or ninety days after discharge.

Model 4: Acute Care Hospital Stay Only—this model provides a single lump sum payment to the admitting hospital, from which thephysicians and all other practitioners will be paid. Participating institutions are financially responsible for related readmissions to any hospitalwithin thirty days after discharge.



Appendix 2: Draft of Bundled Payment Performance Dashboard*

All Total Joint Arthroplasty Patients Bundled Payment PopulationTimePeriodSurgeon 1 Surgeon 2 Surgeon 3 Surgeon 1 Surgeon 2 Surgeon 3

Clinical performance and quality

SCIP Inf 9 Compliance (urinarycatheter removed on POD 1 or 2)

Monthly

Total number of falls Monthly

Blood utilization rate (THA) Monthly

Blood utilization rate (TKA) Monthly

PACU length of stay Monthly

Unplanned ICU/step-down unitadmission rate

Monthly

Surgical site infection rate (THA) Monthly

Surgical site infection rate (TKA) Monthly

Reoperation rate Monthly

Medication reconciliation afterdischarge—metric TBD by CMS

Quarterly

Case mix index Quarterly

Number of post-discharge phone callsrequiring secondary triage and/or escalation

Monthly

CMS Physician Quality ReportingSystem participation rate

Annually

Percentage of patients with B-Carecompletion within 24 hr of discharge day

Monthly

30-day readmission rate Quarterly

Patient-reported outcome measures Quarterly

Mortality rate Quarterly

Functional mobility Quarterly

Financial performance

Average cost per case (primary THA) Monthly

Average cost per case (primary TKA) Monthly

Average cost per case (bilateral) Monthly

Implant cost per case (primary THA) Monthly

Implant cost per case (primary TKA) Monthly

Implant cost per case (bilateral) Monthly

Non-core professional fees per case (primary THA) Monthly

Non-core professional fees per case (primary TKA) Monthly

Non-core professional fees per case (bilateral) Monthly

Total contribution margin Monthly

Total cost savings (change vs. previous year) Monthly

Operational performance

Lead time between OI appointment and surgery Monthly

OR turns (cases per day) Monthly

OR turnover time Monthly

Average LOS (days) (primary THA) Monthly

Average LOS (days) (primary TKA) Monthly

Average LOS (days) (bilateral) Monthly

Percentage of first cases starting before 7:35 AM Monthly

Average case length (primary THA) Monthly

Average case length (primary TKA) Monthly

Average case length (bilateral) Monthly

Case volume (primary THA) Monthly

Case volume (primary TKA) Monthly

Case volume (bilateral) Monthly

Percentage of patients dischargedbefore noon (orthopaedics unit)

Monthly

Average daily discharge time (orthopaedics unit) Monthly

Patient experience

Rate hospital top box percentage Quarterly

Pain well controlled top box percentage Quarterly

*B-care = bundled care, CMS = Centers for Medicare &Medicaid Services, ICU = intensive care unit, LOS = length of stay, OI = orthopaedic institute, OR = operating room, PACU = post-anesthesia careunit, POD = postoperative day, SCIP Inf 9 = Surgical Care Improvement Project Infection Indicator 9, TBD = to be decided, THA = total hip arthroplasty, and TKA = total knee arthroplasty.



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