The Case for Cost Per Unit of Care: Bundled Payments

Jan 29, 2020

Courtney Stevenson has over a decade of experience in the healthcare industry and has worked extensively with both insurance providers and physicians. Prior to joining DataDx, she managed a provider relations team at a nationwide insurance company and coordinated member services for a large health plan provider in Oregon. Courtney earned her Bachelor of Science in Health management and Policy from Oregon State University, as well as a Certificate in Healthcare Administration and Management from Oregon Health & Science University. She is an active member of the Healthcare Financial Management Association.

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As the shift towards value-focused care and reimbursement continues private practices may find it difficult to keep up with the many changes. Determining the cost of care or “cost per unit of care” is proving essential for revenue cycle management and managing risk for private practices who have the most to lose. Unlike larger health systems or hospitals that can provide their own resources and financial support while weathering these changes, private practices often find themselves struggling to meet changing payor requirements. Providers and healthcare systems are now assuming more downside risk which has also made it challenging to remain financially viable in today’s marketplace.

What Is The Cost Per Unit Of Care, Why Does It Matter ?

Understanding the true “cost per unit of care,” what it costs to deliver services across the continuum of care, can be vitally important information to use as leverage when negotiating and reducing costs. It can also be helpful in making decisions that will impact practice revenue, such as which payment models will benefit your practice most. Often after seeing a reduction in reimbursement from payers, practices may find themselves at the crossroads between continuing with a payor contract or going out of network. This may not always be the best approach especially with the rise of high-deductible plans in the marketplace.

Due to high deductible plans, patient’s awareness around cost has increased and consumers are more selective with their care. “The growth of high-deductible health plans (HDHPs) and increasing patient responsibility have created a new reality around the cost of healthcare. Examples of hospitals charging $25 for an aspirin and $100 for newborn baby diapers fuel media attention and highlight the lack of true-cost data, as well as ineffective reimbursement models.”1 Practices that choose to go out of network run the risk of losing patients who are now taking a more proactive role in their healthcare as it affects their pocketbook more than ever before.

Meanwhile, the healthcare industry in general is suffering from steady declines in revenue. The changing marketplace has seen a decrease in reimbursement from payers, a shift from fee-for-service to value-based reimbursements, along with an increase in high deductible plans and increased costs for employers who offer those plans. Reducing costs has become a focal point and championed cause by political candidates, healthcare systems, and patients alike. Lowering healthcare costs are the driving force towards value-focused care and reimbursement. In addition to the impact knowing the cost per unit of care has on revenue for your practice, it has become crucial to navigating the new value-based payment models and is the first step towards cost-conscious care and the reduction of costs.

Bundled Payments And Their Impact On The Future

In response to this shift in the marketplace payors are developing new reimbursement models to incentivize providers and facilities to deliver coordinated, quality care, at lower costs. Bundled Payments is one such alternative payment model (APM). In 2013, CMS established the Bundled Payment for Care Improvement (BPCI) “to promote better care coordination among providers and facilities. The program currently reimburses participants for 48 different types of episodes of care, but this is expected to increase under MACRA.” 2 The bundled payment model bases reimbursement on an episode of care, which involves the entire care continuum for a single condition or medical event during a fixed period. Rather than reimbursing everyone involved separately, one single payment is made to the providers and facility involved using a set price based on historical costs, which is then shared among the participant providers. The impetus behind this payment model is to affect advanced coordination and accountability, maintain or improve quality of care provided, and to lower costs.

More Risk, More Headache ?

With the launch of APMs, risk has become a significant factor, both in terms of revenue and predicting patient care. Unlike traditional fee-for-service, healthcare systems, facilities, and providers now assume a greater amount of downside risk under the bundled payment model. If the cost of care delivered exceeds the predetermined reimbursement, the providers and facility bear the financial responsibility for the overages. Conversely, if the costs for an episode of care are less than the target price the facility and providers share in the savings and get to keep the difference. Depending upon the episode of care some patients may present a greater risk than others based on their medical history and comorbidities. Being able to track and understand the cost per unit of care is essential to being able to accurately gauge risk, plan and allocate resources successfully, and consequently maximize reimbursement with bundled payments.

Bundled payments have enjoyed success with the Comprehensive Care for Joint Replacement (CJR) model as demonstrated by “Medicare’s voluntary bundled-payment program for hip and knee replacements reduc[ing] spending by 1.6% from 2013 to 2016.” However, implementation for other medical or surgical conditions where there are more factors that are outside of the provider’s care, such as medication adherence and potentially sicker patient populations, has yet to be widely applied.

Overall participation in the bundled payment market expanded significantly in 2019 and the growth is expected to continue in 2020.4 Participation is not just limited to Medicare, in a recent study “commercial payers reported that 20% of their total business is currently aligned with a bundled payment.”5 Highly motivated hospitals and health systems participation continues to increase on a voluntary basis. As CMS continues to release new APM models, the latest being the Radiation Oncology (RO) Model3 that took effect January 1st, mandatory participation is required for select Core Based Statistical Areas (CBSAs). Participants in CMS bundled payment programs may also qualify for value-based incentive payments under MACRA’s Quality Payment Program by meeting certain quality metrics. As these payment models experience success with CMS, participation will increasingly shift from voluntary to mandatory.

How To Succeed With Value Based Care And APMs

Succeeding within the framework of APMs and the ever-evolving landscape of value-based care may seem daunting, but there are several different tactics and tools practices can use to be successful. First and foremost, data is key. Historically there has been a lack of data surrounding the true cost of care for patients and specific conditions, let alone an episode of care. Determining the true cost of care can prove challenging given the variations in patient risk and social determinants. That’s not to say it’s impossible, but it does require robust and reliable data that can be transformed into actionable information. Coordination across different databases and standardization also play a role in obtaining data that can be applied to drive decision making and operational improvements.

Utilization of data to determine costs of care empowers practices to make better informed strategic decisions which increases their likelihood of remaining financially viable. Having a clear understanding of cost of care will facilitate better decision making when considering terming contracts and out of network participation. Demonstrable data regarding the costs per unit of care is a powerful tool when negotiating payor contracts or deciding if an APM is right for your practice. If you serve a high-risk patient population bundled payments may not be an effective payment model as you’ll go above costs too often. Data is also critical for benchmarking, tracking progress, and identifying cost variations.

While practices are limited in the amount of change they can affect at the hospital level, optimizing operational procedures within their practice are necessary for the high level of collaboration required to adapt to value-based care. Below are key areas practices can focus on:

  • Infrastructure: Develop proper infrastructure to support processes. Many practices will have a Navigator; someone whose focus is to facilitate care and coordination between different providers and facilities.
  • Patient education: Setting appropriate expectations with the patient and their family/caregivers is important for the episode of care.
  • Coordination, collaboration, networking: Effective communication and collaboration with a network of trusted providers involved in a patient’s care episode helps to reduce cost.
  • Standard practices and protocols: It’s important that all facets of patient care have standard practices in place.
  • Identifying bottlenecks: Understanding where constraints and demands on resources are and how to avoid unnecessary risk during transitions in care.
  • Identifying risk factors and comorbidities in patients: How to plan effectively for follow up management, predicting patient needs, allocating resources most effectively.

DataDx software is tackling the conundrum of determining the cost per unit of care by incorporating practice EMR and accounting systems into a real-time dashboard that can identify and understand payor mix and reimbursement, which can help renegotiation efforts and selecting which APM your practice will inevitably participate in. While there are still improvements to be made before implementation for more surgical and medical conditions, it remains clear that reducing healthcare costs and the shift towards value-based care and reimbursement models are here for the foreseeable future.

As a practice, it is important to prepare for adoption in order to be as successful as possible. The onus for achieving success within this framework will lie with the providers, practices, and healthcare systems. Having meaningful real-time data and benchmarking for your practice will lay the foundation for the transition to value-based care. Knowing and understanding the “cost per unit of care” is a pivotal first step towards ensuring your practice evolves with the changing healthcare climate and remains financially viable.


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