Volume pricing by procedure changes the industry

Bundled pricing lets practice share in risks and rewards

More practices are pursuing a concept some say is the next big trend in managed care reimbursement for physician practices and hospitals — bundled pricing for specific surgical procedures. Increased business and higher incentive compensation are the potential payoffs for physician practices. To get those benefits, however, practices must be able to work with hospitals and suppliers to negotiate a fixed rate to charge managed care organizations for all care related to a given procedure.

"It gives you a competitive edge to have a predicted rate to charge managed care organizations, as well as predictability in what you recoup," says Amy Showalter, RN, MBA, orthopedics market manager for the Richmond, VA, division of Columbia (formerly known as Columbia/ HCA). Showalter is spearheading an alliance among three Richmond providers — Columbia Henrico Doctors Hospital, West End Orthopaedic Clinic, and prosthesis vendor DePuy — that could lead to a bundled pricing arrangement for a total joint arthroplasty (a total hip and knee replacement typically performed on arthritis patients). The group hopes to begin negotiating with payers in the next few months, and to begin performing the procedure under the bundled pricing setup within six months.

Bundled pricing (sometimes called global pricing) offers a twist on the traditional managed care concept of discounted pricing based on increased patient volume. Your practice should charge the MCO less for providing care to its members, the traditional thinking goes, because the MCO will give you sufficient patient volume that pays off in the long run. The difference in bundled pricing is that providers, especially surgeons, are in the driver’s seat, says consultant Joe Olivo of Virginia Beach, VA-based PMC. Most traditional incentive compensation arrangements from MCOs award nothing or very little to specialists if utilization improves, Olivo says. Bundled pricing pays a flat fee that the caregivers split, regardless of how much the care costs.

Specifically, the concept works like this:

• A provider identifies a high-volume, high-cost procedure that has strong potential to be performed efficiently without sacrificing quality of care. The most common examples in use today are total joint replacements and coronary artery bypass procedures. (A Medicare demonstration project is under way for both of these procedures). Showalter of Columbia says carpal tunnel syndrome and spinal surgeries are other possibilities.

• A physician group aligns with other health care providers involved in the procedure. Typically, this is a hospital and a vendor.

• The team works together to develop a critical pathway for the procedure, developing "best practice" methods that follow patient care from the moment the decision is made to perform the surgery through pre-admission checkups and tests, the surgical procedure, and any follow-up care such as rehab visits.

• Each member of the group scrutinizes its own internal processes involved in the procedure to make sure costs are as efficient as possible and quality is strong.

• Once the care group members are satisfied they have the most efficient critical pathway, they set a fixed price for the procedure and negotiate the price with payers. This is one area where the group has to be careful, according to Robert Westergan, MD, medical director of Jewett Orthopaedic Clinic, a 21-physician practice in Winter Park, FL, that is exploring entering the bundled payment arena for joint replacements. It’s essential to factor in padding for patients who develop complications based on past benchmarking data, he says. For example, following joint replacement surgery, the joints of some patients can dislocate and extra follow-up care is needed. Because the group receives a flat rate for all care related to the procedure, they have to eat the extra expense involved if extra office visits or a follow-up operation are needed.

• The group determines a formula for dividing any financial incentives between care group members. Negotiating this percentage often is one of the trickiest steps of the process, Olivo says. "In the few cases I’ve seen, the hospital receives 60% of the incentive and the physician group and ancillary providers split the remaining 40%, but it can vary on a case-by-case basis," he says. "Right now physician practices don’t get anything in terms of incentives, with the exception of a withhold, so 40% is definitely an improvement."

Examining ‘every aspect of experience’

West End Orthopaedic Clinic, the practice considering participating in the Richmond venture, is concerned primarily with quality of care and the opportunity to work more as a team with other caregivers, says Richard James, MD, a surgeon at the clinic. "What we’re trying to do is look at what we’re doing — every aspect of a [total joint replacement] patient’s experience. Obviously, we’re trying to cut costs, but while maintaining a level of quality that will keep us on the forefront of the market."

If West End Orthopaedic Clinic decides to participate in the venture, it could be a model for other procedures, such as spinal or arthroscopic surgeries, James adds.

During the past few months of discussions with Columbia and others, James says he’s been impressed by the potential that bundled pricing arrangements offer for greater physician involvement in every element of the care process.

"We’re bringing people together who never get together," he says. " Last week when we had our meeting, it was amazing how many people are involved [with the same patients] who never see each other. It’s amazing — now A can talk to C without having to go through B. "

The group found there were several things that the operating team could do more efficiently, but that required cooperation from other people in order to happen. For example, they found that when operating room personnel send for drugs, they never know the problems the pharmacy has in getting them back to the operating room on time. They also learned that the surgical team could cut costs by ordering half-packs of cement used in the total joint replacement procedure.

Although physicians have talked about global pricing for years, few have actually put it into practice (see related story on one practice’s experience, above). To date, the procedures used in global pricing are select cardiac and orthopedic procedures focused on the Medicare population, Olivo says. "I expect that’s what you’ll continue to see for the next 12 to 18 months, although I understand they [HCFA] are looking at other procedures," he says. Olivo says global pricing will become more prevalent for high-cost, high-volume surgeries with a significant hospital utilization component.

The Richmond group selected the total joint replacement procedure for two reasons, Showalter said. It typically represents a high-volume surgery for the hospital, and it’s a good fit with a HCFA demonstration project that will apply bundled pricing arrangements to selected providers in the Chicago and San Francisco areas later this year.

Jewett Orthopaedic Clinic is considering implementing bundled pricing during the next year for total joint replacements. The concept has tremendous potential for physician practices to participate further in the risks and rewards of managing patient care more efficiently, Westergan says. The clinic currently is pursuing discussions with potential partners.

"The benefit to us is that we capture more market share in something we already do a lot of by negotiating exclusive arrangements for that subpopulation of patients," he explains. "Exclusivity is not an opportunity you can get very often. Exclusivity includes [assuming] risk, and that’s something we are eager to be a part of. In our market, there’s no significant financial incentive for the physician to accept the risk for decreased LOS. For this type of arrangement, the incentive is shared between the physician and the hospital."

Heavy physician involvement in the process is a key reason why bundled pricing can work, Westergan and Olivo say. By developing critical pathways, physicians ensure utilization doesn’t increase at the expense of quality of care. The best candidates for bundled pricing arrangements are physicians who perform the procedure frequently and who have good outcomes data.

Few of the groups interviewed by Physician’s Managed Care Report involve primary care physicians in the arrangement. "The primary physician involved in the arrangement now is the surgeon, and the PCP is given a fee-for-service reimbursement for the care they’re going to provide," Olivo says. " Clearly, they’re involved in the care but are not involved as a player on a day-to-day basis. The big costs are really with the hospital and surgeon, so that’s who is involved in these projects now." He adds that HCFA’s bundled pricing demonstration projects for heart and orthopedic programs don’t integrate primary care physicians.