Bundled payment programs are creating an impetus for healthcare providers to redesign care, which is a critical step for providers to generate the cost and quality improvements required for success under value-based care.

Bundled payment for health care is the wave of the future. It is likely to be widely embraced in the coming years, as providers look to improve quality and reduce costs in response to pressure from employers, payers, and consumers. Among respondents to a recent survey on bundled care, more than 31 percent of hospitals report they are already participating in bundles, and 52 percent more expressed interest in doing so.a

The Centers for Medicare & Medicaid Services (CMS) also has signaled its support for bundled care as part of its efforts to promote the industry’s larger trend toward value-based care and shifting of risk to providers. After two decades of experimentation, CMS began mandating bundles for joint replacement procedures at 800 hospitals starting on April 1, 2016, and the agency issued a proposal for a program mandating bundles for cardiac care on July 25.

Many payers and providers that are implementing bundled care have achieved positive results. All of the five major payers that have pursued bundles aggressively report better outcomes and lower costs.b In some cases, results have been impressive. For instance, UnitedHealthcare reduced the cost of cancer treatment by one-third when it introduced its first cancer care bundle.c And Geisinger Health System, a pioneer in bundles, saw a 10 percent decline in readmissions as well as reduced hospital charges and a shorter average length of stay after introducing a bundle for coronary artery bypass graft surgery.d

Moreover, among hospitals responding to the aforementioned survey on bundled care, 69 percent said bundled payment has enhanced quality and 63 percent said bundles are helping to contain costs by simplifying administration. Meanwhile, among employer respondents, 50 percent said bundles are reducing overall healthcare costs and 49 percent said bundles are contributing to improved health outcomes.

The Need for Scale

Despite the clear direction that CMS has set and the potential of bundled care to reduce costs, improve outcomes, and enhance the patient experience, many providers are holding off in developing bundles or have only pursued modest pilots. Although pilots are a good start, we believe the only way to realize the full benefits of bundles is to deploy them at scale.

Small pilots are expensive propositions that typically involve manual data processes and other costly work-arounds. Scale is needed to justify the investments required to deliver bundled care efficiently and cost-effectively, which is critical to successful adoption. Employer and health plan respondents in the bundle survey say they would be willing to move ahead in making the systems and operational changes required for bundled care only if they could be assured of realizing overall cost savings of at least 6 to 10 percent. Discrete pilots that focus on only one or two conditions cannot generate such savings. Scale is needed to deliver the cost savings that will attract a critical mass of customers and enable health systems to gain market share—a key potential advantage of bundles.

By applying a strategic, systematic approach, using the following steps, a provider can increase its odds of success in building a sustainable full-scale bundles program.

Organizationally Commit to Care Redesign

The first step in building a bundles program at scale is to make an organizational commitment to redesigning care processes. Health system leaders must embrace the philosophy that reorganizing care around discrete medical conditions or episodes will yield significant value in the form of lower cost, improved quality, and a better patient experience, whether in a bundles paradigm or not.

Adopting a bundles strategy is easier for organizations that have already committed to care redesign. This point is exemplified by MD Anderson Cancer Center in Houston, which has been able to transition smoothly and rapidly to a bundled care model as a direct result of its long-time commitment to redesigning care processes.

The Cleveland Clinic is another example of an organization that has built a successful bundles program on the basis of its prior efforts with care redesign. In 2007, the Clinic, whose structure had centered around traditional medical specialties, reorganized into a group of institutes defined from the patient’s perspective around disease and organ systems. Each institute defined which diseases and conditions it would address, developed outcome metrics, and identified who should be included on care teams based on the required skill sets. The organization credits this care redesign effort with enabling it to become a pioneer in exploring bundles, launching programs with Walmart, Boeing, Lowes, and others.

Sidebar: Top 10 Key Bundled Payment Success Factors

To demonstrate their commitment to redesigning care, health systems should establish a core team to garner support for the effort throughout the organization. The team efforts at care redesign also should be as extensive as possible. A good starting point is to redesign care processes that account for 50 percent of revenue, and to bundle 40 to 60 percent of this subset, in terms of revenue. Thus, the bundles program would account for 20 to 30 percent of the health system’s total revenue. Anything less would likely fall short of the scale required to ensure sustainability and unlock the full value of the bundled care model.

Determine Which Types of Bundles to Offer

Health systems have three options for the types of bundles to pursue: CMS only, commercial only, or both.

Pursuing CMS bundles enables organizations to gain immediate experience with delivering care under the predefined customer and product requirements of CMS programs. This option can generate cost savings, but it limits the ability to gain market share. It may be the best choice if payers and employers in the area have not shown a strong interest in bundles, or if leadership is not fully committed to the concept.

Offering commercial bundles gives organizations the opportunity to increase market share while reducing costs. But it requires them to fulfill customer and product requirements that may not be as clearly defined as they are for CMS bundles.

The third option—pursuing both types of bundles—is the best option for health systems that want to reap the full benefits of bundles, particularly where CMS has been making bundles mandatory. It is a good choice in markets where there is strong interest from payers and employers, and for health systems whose leaders are fully committed to the bundled care model.

Identify Target Customers

For health systems that are developing commercial bundles, the next step is to evaluate potential customers (health plans, employers, and consumers) and assess the relative merits of each type before deciding which to target. Targeting health plans enables health systems to build volume more rapidly but requires them to share some of the benefits of bundles with the health plans. Targeting consumers also has limitations, because customers cannot independently purchase care bundles for services above their deductible levels.

Going directly to employers eliminates the middleman but makes it more difficult to generate volume, so health systems must develop a large number of bundles to make this approach economically viable. An emerging model that could help to address the volume challenge involves working with an intermediary, or channel partner. An example is Carrum Health, a company that connects groups of employers with health systems that want to offer bundled care but lack access to a sufficient number of employers to make bundles profitable. This model has the potential to succeed on a large scale, although the extent to which this potential will be realized is yet to be seen.

Assess Market and Customer Needs

To generate maximum value for a bundles program, a health system must identify the medical conditions that drive the most cost and disruption for employers, health plans, and patients. In most cases, however, health systems have focused on creating bundles for conditions that are easiest to systematize and that are performed in highest volumes, such as joint replacements, the predominant bundle providers are pursuing today.e

The problem is that limiting bundling to just one or two such conditions makes only a small dent in overall costs. For instance, joint replacements—often the only bundle offered—account for only about 5 percent of inpatient spending. By contrast, pregnancy and its complications constitute almost 20 percent of total inpatient spending by commercial plans yet represent only a handful of bundles, mainly in small pilots.f Other conditions, such as diabetes, asthma, and cancers, also account for a significant proportion of spending but are seldom bundled.g

The findings of the bundles survey suggest that employers desire a greater variety of bundle choices for cost-driving medical conditions than many hospitals are interested in delivering. By offering more bundles and targeting expensive conditions that drive up costs, health systems can win the business of large buyers and gain market share.

Market needs also can point to compelling bundle opportunities. For example, health systems in markets with older populations might focus on procedures and diseases associated with aging, such as joint replacements and diabetes, whereas those in markets with younger demographics could offer bundles for maternity care, asthma, and sports medicine.

Finally, choosing bundles that best align with institutional strengths, both clinical and nonclinical, will help to ensure success. For instance, a health system with a strong cardiac program might develop bundles for heart conditions, while a provider with robust IT capabilities and an appropriate clinical staff structure could focus on bundles that require substantial integration of care.

Design the Bundles

The bundle design should include a definition of services covered, and for how long (e.g., related readmissions might be covered for 90 days after discharge for an acute bundle, or for a full year for a chronic condition bundle). The design team also should decide on wraparound services, including pricing, how the bundle will be administered, and the breadth of the network that will deliver services.

The decision of what services to include requires careful consideration. A good starting point is to consider the bundled payments definitions offered by the PROMETHEUS model, developed by the Health Care Incentives Improvement Institute.h To be effective, a bundle should include enough services to achieve meaningful cost savings but not so many that it covers a significant amount of unrelated costs (e.g., costs related to car accidents). The team should identify the points in an episode of care that have the biggest impact on cost and quality, and focus on standardizing care around these points.

Health systems that collaborate openly with their partners, whether payers or employers, as they begin the design process are more likely to achieve positive outcomes. For instance, MD Anderson views its partnership with UnitedHealthcare in developing a head and neck cancer bundle as critical to its success. “Both partners must be in it as a discovery process,” says Ron Walters, MD, associate vice president of medical operations and informatics at MD Anderson. “They must be able to voice opinions, have open discussion, and come to solutions jointly.” MD Anderson’s successful partnership with UnitedHealthcare has prompted other payers to approach the health system about collaborating.

It also is critical to engage physicians to drive the bundle design process. Bundles provide a financial incentive for physicians, but inclusion in the design process and access to data are other incentives for participation and commitment that we have found are just as critical.

Although the specifics of each bundle will vary, the success of any bundle solution will depend on the extent it addresses the following four key customer needs.

Cost reduction. Health systems must demonstrate that their bundles will reduce costs for customers—both health plans and plan members. Employers will expect to see an impact on premium levels at least equivalent to what they have achieved from shifting cost to employees by increasing copays and deductibles.

To drive volume and help to ensure the sustainability of bundles programs, health systems should explore ways of sharing cost savings with payers and plan members, such as warranties, discounts, and shared savings programs, considering the risks and rewards of each approach. For instance, a warranty that caps costs but does not necessarily reduce costs will elicit less volume from a health plan than an up-front discount or a shared savings model.

Quality. The quality of bundles must be equivalent to or greater than available alternatives. Higher quality often drives down costs (for example, more proactive management of patients after discharge can reduce hospital readmission rates and related costs), so quality improvements are inherently part of any successful bundles offering.

Simplicity. Bundles must be easy to administer if they are to be widely adopted. If a bundle increases an employer’s workload excessively, the administrative burden could outweigh any potential cost savings. Maximizing automation of the administrative aspects of the bundle will help to prevent margins from being eroded by manual processes.

Comparison of Employers’ and Hospitals Levels of Interest in Different Types of Bundles
Comparison of Employers' and Hospitals' Levels of Interest in Different Types of Bundles

Superior customer experience. Bundles provide a unique opportunity for health systems to differentiate their offerings from those of the competitors by delivering a superior customer experience. Achieving such differentiation starts with determining which features of a bundle would be most important to targets. For instance, customers might value convenience, access to transportation, and a single point of contact throughout treatment, responsiveness of staff.

Once bundles have been developed, they must be priced competitively, taking into consideration customers’ current contracts or cost positions. It is true that bundles ideally provide superior outcomes and the promise of reduced costs, but in the face of emerging competition, providers must be willing to share some of their savings by passing them on to plans, employers, and or consumers in the form of lower costs. Risk tiers, meaning different bundle prices (and potentially different included activities) based on patient profile, can mitigate risk to providers.

Competitive pricing can be deployed as a strategy for expanding into new markets. Scripps Health in San Diego adopted this approach, contracting with Carrum Health to sell its bundles to employers beyond the health system’s primary service area. Scripps has priced its bundles aggressively to attract new customers, with the expectation that the additional volume generated will more than compensate for the discounts offered to employers. “We view this partnership as a low-risk experiment that will enable us to learn how to succeed with bundles, as we believe this is a model we will likely have to adopt more broadly in the future,” says Marc Reynolds, vice president of managed care contracting for Scripps.

Use Rapid Prototyping to Accelerate Rollout

Developing an effective bundles program requires a commitment to the bundles concept and a willingness to test alternative designs, recognizing that success likely will require multiple experiments. Health systems therefore should consider pursuing rapid prototyping, which involves experimenting with a variety of bundle designs and refining them quickly in response to market feedback. Prototyping allows a health system to experiment using a minimum of resources before accelerating the rollout of bundles on a large scale. It bears emphasizing that rapid prototyping is far easier for health systems that are already engaged in redesigning care or have completed the process.

The Path Forward

Health systems have long acknowledged the need to improve care delivery, but so far, relatively few have perceived a clear and compelling economic rationale for redesigning care processes. With CMS driving the move toward bundled payments and away from the fee-for-service model, health systems now have an opportunity to reap the economic benefits of care redesign. The redesign of care delivery—the true innovation of bundles—will generate cost and quality improvements long before the payment model changes.

Building a scalable, sustainable bundles program is a substantial undertaking, but the benefits will begin to accrue more rapidly than many providers realize—especially the cost benefits stemming from care redesign. For instance, recent redesign efforts for one health system’s spine surgery program yielded a 16 percent savings before any change in the payment model was made. The savings were achieved largely by reducing the variability of orthopedic implants and improving pain management to reduce length of stay.

Now is the time for health systems to make a strong commitment to redesigning care. Those that develop competitive bundles and deploy them at scale can leapfrog competitors who are hesitant to move beyond the pilot stage.

Anne Wong, MBA, is a director, strategy, PwC Strategy&, Chicago.

Gary Ahlquist, MBA, is a principal, PwC Strategy&, Chicago.

Carolyn Black, MBA, is a manager, PwC Strategy&, New York.


a. Alquist, G., Wong, A., and Black, C., “Go Big or Go Home: Accelerating the Rollout of Bundled Healthcare,”Strategy&, March 10, 2016.

b. Bailit, M., and Houy, M., “Key Payer and Provider Operational Steps to Successfully Implement Bundled Payments,” HCI3 Issue Brief, May 28, 2014.

c. Conway, L. “What Can We Learn From United’s Medical Oncology Episode-Based Payment Pilot?,” Advisory Board, July 17, 2014.

d. Delbanco, S., “The Payment Reform Landscape: Bundled Payment,” Health Affairs Blogs, July 2, 2014.

e. Although CMS’s Bundled Payments for Care Improvement initiative encouraged participation in 48 medical conditions or episodes, half of participating providers focused on just one or two conditions, and 72 percent enrolled in three or fewer. See Thomas C. Tsai, T.C., Joynt, K.E., Wild, R.C., Orav, J., and Jha, A.K., “Medicare’s Bundled Payment Initiative: Most Hospitals Are Focused on a Few High-Volume Conditions,” Health Affairs, March 2015.

f. Based on Truven commercial database.

g. Agency for Healthcare Research and Quality, Medical Expenditure Panel Survey , FY13.

h. See “PROMETHEUS Payment: What Is PROMETHEUS Payment?” Health Care Incentives Improvement Institute, 2015.

Publication Date: Saturday, October 01, 2016