Moving Towards Bundled Payment

Bundled payment, where providers are reimbursed a set fee for an episode of care, would break down current payment silos and reward providers for improving the coordination, quality and efficiency of care.


The fee-for-service system of payment for health care services is widely thought to be one of the major culprits in driving up U.S. health care costs. This system not only encourages volume but rewards poor quality and provides little incentive for care coordination. Bundled payment, where providers are reimbursed a set fee for an episode of care, would break down current payment silos and reward providers for improving the coordination, quality and efficiency of care. While evidence of the impact of bundled payment is limited to date, there is growing interest from both payers and providers in further developing and testing this model.

Under the Patient Protection and Affordable Care Act (ACA), the secretary of the Department of Health and Human Services (HHS) must establish a five-year, voluntary pilot bundling program beginning in 2013. The program is to include 10 conditions representing a mix of chronic, acute, surgical and medical conditions. The bundles would include care provided three days prior to admission through 30 days post discharge (though the secretary could use another timeframe, if appropriate) and whatever range of acute and post-acute services the secretary deems appropriate. The law requires the secretary to test different payment methodologies during the pilot and study how to address challenges, such as low volume or the unique issues faced by rural and critical access hospitals (CAHs). The secretary has the authority to extend the pilot’s duration and scope indefinitely if it is found to reduce costs without reducing quality.

Meanwhile, the Centers for Medicare & Medicare Services’ (CMS) Center for Medicare and Medicaid Innovation (CMMI) unveiled its Bundled Payments for Care Improvement (BPCI) initiative on August 23, 2011. This initiative called for applications from organizations on four broadly defined bundling models.

  • Model 1 includes only inpatient hospitalization services for all Medicare severity diagnosis-related groups (MS-DRGs). Medicare will pay participants traditional fee-for-service payment rates, less a negotiated discount. In return, participants may enter into gainsharing arrangements with physicians.
  • Model 2 includes the inpatient hospitalization, physician and post-discharge services. Medicare will pay participants their “expected” Medicare payments, less a negotiated discount.
  • Model 3 includes only post-discharge services. Payments will be made as in Model 2.
  • Model 4 includes the inpatient hospitalization, physician and related readmission services. Medicare will pay participants a prospectively determined amount.

Numerous organizations applied to participate in the BPCI, and final selections and target negotiations are in progress. CMS elected to delay Model 1 because of too few applicants. In reviewing data and applications, CMS has identified 48 conditions for bundling that together represent about 70 percent of spending on episodes of care.

Other organizations are exploring bundling in the private sector. To be successful, organizations must delve deeply into their data to support decision-making on key parameters of bundling, including determining which services are the best candidates for bundling, how the episode should be defined, how to price the bundle, and mechanisms to mitigate various forms of risk. They also will need a clear sense of which providers would make the best partners and be able to pinpoint where opportunities to reduce costs exist. This issue brief examines several topics that hospitals should explore as they begin to examine their data. Most of the data displayed is from a project conducted by Dobson|DaVanzo & Associates, LLC for the AHA and the Association of American Medical Colleges.1


1. Dobson | DaVanzo analysis of research-identifiable 5 percent SAF for all sites of service, 2007-2009, wage index adjusted by setting and geographic region, and standardized to 2009 dollars. All episodes have been extrapolated to reflect the universe of Medicare beneficiaries. Medicare Episode Payment includes care from all facility-based and ambulatory care settings and excludes beneficiary co-payments. indirect medical education, disproportionate share hospital payment, capital, and other third party have been removed from payments. Home health prospective payment system (PPS) payments do not include payments for Part D drug or durable medical equipment services that are provided under skilled nursing facility, inpatient rehabilitation facility, and long-term care hospital PPS payments. Detailed results of the study can be found in the full report, Medicare Payment Bundling: Insights from Claims Data and Policy Implications, at

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