Insights from Forum Sponsor Kaufman, Hall & Associates, Inc.


By agreeing to provide specific services at a set price and a predetermined level of care, bundled payment arrangements allow organizations to build competencies for the new healthcare era.


Bundled payment arrangements are becoming increasingly prevalent as payers and employers seek to stem high healthcare costs and hospitals and health systems move toward a value-based business model.

Such arrangements typically involve a payer or employer agreeing with a healthcare provider on a fixed price for a specific service, including any hospital, physician, and ancillary services. The agreed-on price often also incorporates pre-hospitalization and post-hospitalization expenses. In addition to a guaranteed price, these arrangements require a defined level of service and quality, as measured by quality metrics related to outcomes, clinical performance, patient satisfaction, and other measures.

Bundled payment arrangements can be established at a local, regional, or super-regional level and are typically focused on high-cost elective procedures, such as major joint replacements, spinal procedures, and bariatric surgery.

Employers and Providers Seek Benefits of Bundled Payments

In an effort to reduce healthcare expenditures, the Centers for Medicare and Medicaid Services has conducted pilot programs offering bundled payment opportunities through Medicare. In addition, a growing number of employers are pursuing contracts directly with providers in an effort to control rapidly rising health benefit expenditures. WalMart, for example, has bundled payment arrangements with six leading U.S. hospitals and health systems to treat employees who need heart, spine, or transplant surgery.

The Cleveland Clinic also offers bundled payment arrangements for large employers for cardiac and spine procedures, back pain care, and orthopedic services. Other employers who have established these types of agreements include General Electric, Lowe’s, Pepsi, and Kroger. In some cases, larger health systems are subcontracting with smaller local providers for bundled payment services.

When done appropriately, bundled payment arrangements offer benefits to all parties. For employers and payers, the arrangements provide a guaranteed level of care quality and greater predictability of healthcare costs, as well as lower prices for traditionally high-cost services. Patients, who increasingly are bearing a greater share of their healthcare costs, also benefit from the provision of high-quality care at lower out-of-pocket cost.

For hospitals, health systems, physicians, and other healthcare providers, these arrangements provide the opportunity to build core competencies needed for value-based care, including the ability to manage patients and cost with a moderate level of financial risk. Providers can improve their ability to consistently perform at a certain level of quality and service, and to routinely track, measure, and analyze care cost and quality. If they are successful, organizations can attract more patients and build their programs.

When and How to Pursue Bundled Payment Arrangements

In determining whether to enter into a bundled payment arrangement, an organization must evaluate the following factors:

  • Its ability to excel on quality and cost
  • Its strengths and weaknesses in areas such as market position, surgical performance, physician alignment, and accessibility to patients
  • Its ability to collaborate across functional areas to create a consistent product
  • The willingness of employers and payers in the region to participate in the arrangement
  • The willingness of employed and independent physicians, including primary care, surgeons, and hospital-based providers, to participate under the terms of the contract
  • Whether it is equipped to handle projected patient volume increases

For arrangements in which patients may be traveling in from some distance for care, healthcare leaders also should factor in the organization’s proximity to major airports, and hotels and other lodging options.

Organizations that decide to pursue bundled payment arrangements must evaluate their existing capabilities and competencies, and build them where needed. These may include implementing clinical protocols, clinical intake processes, pre- and post-discharge coordination, and data and analytical competencies.

The biggest risk for organizations in implementing a bundled payment strategy is ensuring their ability to provide designated services at a consistent cost and quality level, while still achieving a sustainable margin. Understanding the allocation and variation of costs at a detailed level related to these procedures is critical.

A multidisciplinary team with representatives from finance, care delivery, clinical operations, data analysis, and quality performance should lead development of the organization’s “go-to-market strategy.” This process will include identifying the potential payers and employers who may be available as partners on a direct contracting basis through a bundled payment program. The team also will need to project anticipated revenue and program costs.

The possibilities for individual organizations related to bundled payment arrangements vary based on several factors, including geography, proximity to major employers, and the ability to execute. While such contracts offer significant opportunity to expand a hospital’s or health system’s patient base, only those entities with a well thought-out program and market strategy will successfully capture meaningful portions of that opportunity.


Todd Fitz is a senior vice president, Strategy Practice, Kaufman, Hall & Associates, Skokie, Ill., and a member of HFMA’s First Illinois Chapter.

Dan Clarin is an assistant vice president, Strategy Practice, Kaufman, Hall & Associates.

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Publication Date: Thursday, June 12, 2014