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How Bundled Payments Pay Off in Joint-replacement

 |  By jcantlupe@healthleadersmedia.com  
   July 09, 2012

This article appears in the June 2012 issue of HealthLeaders magazine.

Before they met with vendors of joint surgery devices several years ago, top officials of the 1,674-licensed-bed Baptist Health System in San Antonio, Texas, didn't realize that millions of dollars were at stake that day.

The meeting included hospital officials, a team of orthopedic surgeons, and vendors. As Michael C. Zucker, FACHE, senior vice president and chief development officer of Baptist Health, recalls, hospital leadership had been talking with vendors for weeks seeking to lower costs for joint-replacement devices. But it wasn't working. 

So they changed tactics, convincing a group of orthopedic surgeons to be involved in the process and attend the meeting. "We were aligned about the costs," says Zucker.

United with physicians, the hospital was able to establish price guidelines and vendors accepted terms of the negotiations. The hospital walked away from the meeting with seven-figure savings in price concessions over one year. "Surgeons representing multiple orthopedic groups were in the room with us, and we held the line on spending with the vendors," says Zucker. "We had a major reduction of $2 million as a result of meetings with vendors and representatives from orthopedics and cardiology," he says, referring to the hospital savings in one year under the program.

That session reflects the possibilities of bundling payments, bringing together physicians and hospitals in orthopedic programs with shared savings designed to improve quality and reduce costs, especially for joint-replacement surgery.

 "The reason we had the surgeons with us with the vendors was the result of having connected them to us with the bundled program," says Wendy H. Solberg, FACHE, CPHQ, vice president of quality and patient safety at Baptist Health System. "The physicians now have some skin in the game for the hospital's cost of care. Prior to that, physicians only had to worry about their professional fee.

"With bundled payment, we got a lump sum from Medicare for both the hospital costs and physician costs," she says. "We made the physicians whole for their professional fee, but they received an incentive to help us with cost per case via their gainsharing methodology; that would not have been possible without a bundled payment arrangement."

Healthcare systems are getting involved in government-run demonstration projects that feature bundled payments, with some forecasting that good results portend important changes ahead for hospital and physician alignment, Zucker says. In the wake of healthcare reform and the move toward accountable care organizations, bundled payments are becoming an integral part of the healthcare landscape, he says.

Joint replacement is seen as an important niche for such programs.

As far as healthcare leaders are concerned, several major issues are at the heart of the need for improved financing schemes specifically for orthopedic programs, such as bundled payments, to counter increased costs in joint-replacement procedures. One is the expected continual demand for new cases, and another is the increased cost of medical devices. Overall, for orthopedics and other service lines, a major impetus toward financial reform is reflected in the move toward value-based payments determined by outcomes and penalties associated with readmissions.

About 500,000 knee-replacement surgeries and more than 175,000 hip replacements are performed each year. Hip replacements are expected to increase 174% in the next 20 years, and knee-replacement surgeries are expected to increase 673%, according to a 2007 study by the American Academy of Orthopaedic Surgeons.

"We are absolutely seeing an increase in volume of patients who have advanced arthritic changes that require surgery," says James Caillouette, MD, an orthopedic surgeon and chief of staff at the 70-staffed-bed Hoag Orthopedic Institute, which is part of the 498-staffed-bed Hoag Memorial Hospital Presbyterian in Newport Beach, Calif. "We are very busy seeing not only baby boomers, but younger patients, as well. We are seeing patients who are high-functioning, but their lives are increasingly compromised by hip or knee issues."

As demand for joint-replacement surgery grows, hospitals are grappling with a large variation in pricing of devices, says Francois de Brantes, MS, MBA, executive director of the Health Care Incentives Improvement Institute, a nonprofit organization in Newtown, Conn., that studies payment models associated with quality care.

Bundling payments is seen as a valid method to reduce costs, and the Centers for Medicare & Medicaid Services is testing various models, de Brantes says. "A fair amount of bundled contracts are being written across the country. Most of them that are pilots are in the process of being converted to a more permanent status," he says.

Surgery complications are among the key reasons for variability in total knee-replacement costs, de Brantes says. Strategies such as bundling payment to an episode of care could help reduce that cost variation, he adds.

Bundling services has a "built-in mechanism to encourage the reduction of those complications," de Brantes says. For instance, if a provider negotiates a bundled payment for knee replacement that's equal to the average cost of the surgery, which is about $27,500, the provider would earn a $2,000 margin on each bundle if complications are eliminated.

Baptist Health System is one of five healthcare systems in the country participating in Medicare's Acute Care Episode demonstration project related to bundled payment pricing for cardiac and orthopedic procedures.

"Bundling is already part of the everyday lexicon," Zucker says. "Everybody is realizing that aligning the incentives with physicians is important. We don't have a lot of ability to change without involvement of physicians, as they can influence cost decisions."

Success key No. 1:  Negotiating with vendors
The vendor meeting that helped Baptist Health successfully save $2 million was a part of an initiative to reduce the number of vendors, says Zucker.

He says that health systems must incorporate procedures to reduce expenses for medical devices, which in some cases represent nearly half the cost of joint-replacement care. One red flag is the great variation in pricing from one hospital to another. Zucker says he's evaluated prices from certain vendors for hip-joint devices and contacted officials from other hospitals who tell him they were paying half the cost of the estimates he was given.

Through a relationship with the physicians, Zucker says the hospital was able to make inroads on pricing by eliminating some vendors from a preferred list. Baptist's ACE and physician health organization governing board has defined parameters for cost, quality, and other benchmarks, including protocols and metrics, he adds.

The committee structure, using the governing board protocols, has enabled the physicians to work with the hospital on vendor contracts. The ACE program also created a way for the hospital and independent physicians to be more aligned, Zucker says.

Without such a program, "very little incentive exists for physicians to collaborate with hospitals," he says. "The bundling and gainsharing components of ACE have enabled us to achieve these results. Hospitals realize much of the decisions about utilizing devices are based on physicians' preference.

"We recommended to the physicians that we would have to reduce the number of vendors in order to achieve significant pricing concessions," Zucker says. The hospital and the physicians then decided to limit the number of vendors and made clear there were certain prices that were off limits. "We told them the amount we were willing to pay in; it was up to the vendors to accept the price."

The 1,275-licensed-bed Oakwood Healthcare Inc. system based in Dearborn, Mich., also uses a committee structure involving physicians to reduce vendor costs, says Sandra Sneed, administrator of clinical services for Oakwood's Center for Orthopedics and Neurosciences. "We collaborate with our physicians and let them know that, in most cases, we try to maintain a physician preference and product price cap," says Sneed. "If that vendor wants to do business with our hospital, they have to meet the price cap."

Because of confidentiality clauses, Sneed declined to disclose specific amounts, but said, through physician alignment "we were able to achieve significant price discounts on orthopedic implants," and "we know we were able to save a significant amount when these contracts were up."


Success key No. 2: Physician alignment
Initially, when he met with physicians at Baptist Health to go over proposed bundled payment programs, "physicians were lukewarm at best," Zucker recalls.

Physicians weren't thrilled about being involved in bundling projects—especially since they would not receive payment through Medicare; the hospitals would. Suddenly, "we were the bank," Zucker says. He portrays the independent physicians as being filled with anxiety, and with an attitude. "They were not excited about this. It was more like, ‘How can you do this to us?'" he explains. Within a year, when hospital physicians received more than $1 million in gainshare distribution under the bundled payment plan, they were certainly more enthusiastic.

Under the CMS ACE demonstration project, physicians received up to 125% of Medicare reimbursements, based on quality and overall cost improvements involving the treatment of 4,000 patients.

While the hospital has agreed to discount its fee, physicians still are paid 100% of the Medicare allowable rate and do not have to worry about collecting the 20% patient copayments; the hospital handles that. If quality and cost saving goals are achieved, gainsharing distribution is made to physicians who qualify on a monthly basis. 

As more and more physicians received checks under the gainsharing plan, "all of a sudden it became intriguing," Zucker recalls. "It was an ‘Aha!' moment, and within months we had momentum. Physicians were interested in participating to achieve quality and cost savings to share in the success.

"It's challenging to move the bar very far. It's possible when physicians are aligned properly," he says. "We believed that creating this alignment also could help change the game in terms of quality; we could create much more value."

Success key No. 3: Order sets
Standardized order sets are used in healthcare systems to improve quality, such as reducing transcription or medical errors as well as improving financial performance. It could involve physician workload regarding discharges, severity of illness, or risk of mortality. The protocols can improve compliance with recommended processes of care.

The use of standardized order sets has increased dramatically, from 31% to 97% in one year, according to Zucker. By improving its structure of order sets and removing variables within physician practices, the Baptist Health System worked within a bundled payment model that led to hospital savings in orthopedic and cardiology devices and other costs of at least $8 million from June 2009 to December 2011, Zucker adds.

The hospital system has improved physician engagement, with many doctors focusing on outcomes and data, Zucker says.

In examining the order sets, they looked at various process measures, such as "what lab tests this patient needs, what drugs were needed," says Solberg.

"The standardization of our practices ensures that we all know where we are going and are focused on managing a patient," Solberg says.

Baptist Health physicians were instrumental in putting the standardized order sets together, says Zucker.

"The standardized order sets, essentially evidence-based protocols, were developed by local physicians involved in the ACE program to define the ‘best way' to treat a particular admission," Zucker says. One of the order sets involved total hip-joint replacements, he adds. "The physicians quickly transitioned to the protocol because they saw the benefits to the patients, the hospital, and themselves. The clinical protocols are another way to further ensure that everyone is heading in the same direction."

By physicians developing the clinical protocols with the hospital, "They took greater ownership of them," Zucker says.

Zucker and Solberg say that before the procedures were established, physicians were often left in the dark about the overall price of items used for implants or other orthopedic procedures because they simply concentrated on their own techniques and were not aware of products used by other physicians.

"Oftentimes, the physicians had no idea how much something cost," Zucker says. "But this transparency of our costs and data is in effect ‘putting it all out there.'"

To overcome challenges to implement a bundling program, Zucker says healthcare systems should:
- Identify opportunities for early wins to demonstrate effectiveness of partnership
- Define the vision from the outset; establish a series of short-term, achievable objectives
- Empower the physicians to own program leadership, governance, and decision-making
- Use quality improvement as the main change agent with physicians

Success key No. 4: Data registry
The Connecticut Joint Replacement Institute uses its joint-replacement registry—with data on thousands of patients—to evaluate clinical protocols for improved outcomes for its total hip and knee patients. "That data from the registry was crucial while implementing our bundled payment program," says Steven Schutzer, MD, medical director.

The Connecticut Joint Replacement Institute at the 617-bed Saint Francis Hospital and Medical Center in Hartford, Conn., is an integrated program focused on implementing standardized best practices for hip- and knee-replacement surgery.

"The registry provides our rocket fuel; all of our outcomes data is derived from the registry, and this enables us to track our cost and clinical outcomes," Schutzer says.

The registry is important because it facilitates continuous process improvement projects, he says. The bundled payment program is known as the Step Ahead Plan and includes a package of goods and services for a single price, with an optional warranty. It is a collaborative effort among the Connecticut Joint Replacement Surgeons LLC, the Woodland Anesthesiology Associates, and the Saint Francis Hospital and Medical Center, Schutzer says. The program's warranty will be provided to some patients covering postoperative surgical-site complications.

"Without registry data, creating bundled payments or other risk-sharing, value-based healthcare products would not be possible," he says. "Under our bundled payment arrangement, the revenues are allocated to the three providers of the bundle based on the providers' cost for delivering services."

Schutzer says the institute, which opened in 2007, uses the data to monitor and review best practices and clinical protocols. The Step Ahead Plan is governed by a joint governing committee involving representatives from all three parties.

"Clean, credible data is a very powerful and persuasive tool," he says, because it is one the stakeholders—both physicians and administrators—"have difficulty refuting."


This article appears in the June 2012 issue of HealthLeaders magazine.

Reprint HLR0612-8

Joe Cantlupe is a senior editor with HealthLeaders Media Online.
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