Contact Us

Innovating for Bundled Payments

October 14, 2015 // Erik Nelson

Bundled payments are here to stay. Healthcare is the only industry where prices are unknown until after services are delivered. Can you imagine buying a ticket to London where the airline says that the final price will depend on the weather, how full the flight is, and how long they sit on the tarmac?

The healthcare industry points to variation as one of the barriers to standardized pricing. But pressure to reduce costs, coupled with across-the-board advances in clinical care, data analytics, and health technology, is going to put an end to this practice.

To underscore this new reality, CMS is for the first time, mandating bundled payments for hip and knee replacements. This requirement will put hospitals at financial risk for these episodes of care from the point of admission through 90 days post-acute care starting in January 2016.

Innovation Is Essential 

To compete in a bundled payment environment, hospitals will have to innovate on an unprecedented level. Traditional quality improvement teams will no longer cut it. Hospital systems must experiment with new models of care. They will need to incorporate disruptive innovations that will have a meaningful impact on quality and cost.

Case Study: Perfect Fit Health

Consider the potential impact of an emerging solution developed by Perfect Fit Health.* This solution aims to disrupt the traditional approach to supporting post-acute care physical therapy.

Currently, patients recovering from total knee replacements (TKR)—one of the mandatory bundled payment episodes proposed by CMS—can expect 2-3 physical therapy sessions per week. This totals 24-36 sessions over the course of their 12-week recovery period. But payers commonly only authorize about half of these visits. This requires patients to:

  • Seek authorization for additional visits,
  • Pay for their care out of pocket, or
  • Continue without the guidance of a professional physical therapist for the remainder of their recovery.

The problems with this traditional approach are many:

  • Compliance with outpatient physical therapy (PT) is abysmal, even when insurance covers it. Some studies suggest that only 30% of patients attend all of their authorized physical therapy sessions per episode of care.
  • The total cost of physical therapy is significant. PT costs for a TKR, for example, range from $1,750 for standard coverage (assuming $125 per visit for 14 visits) to $4,500 for full coverage (36 visits), accounting for 5.6-14.5% of the total cost of an average TKR. (Per a Blue Cross/Blue Shield study, the average cost of a TKR is $31,124.)
  • The potential out-of-pocket costs for PT copays, coinsurance, and fees can serve as an even greater disincentive for patients to comply.
  • The current facility-based approach is inflexible and does not consider emerging patient requirements for greater convenience. Patients expect to be able to receive care on-demand, wherever and whenever they need it.

Applying a Disruptive Innovation to Bundled Payments 

Perfect Fit Health is in the process of testing a hybrid model of PT. A patient may see a professional physical therapist in person once a month and then receive virtual support in between visits. Plans are personalized, protocols are evidence-based, and in-person care occurs at a site of the patient’s choosing.

Perfect Fit Health believes it can achieve quality outcomes with this hybrid PT model for $300 per month. If it’s successful, a complete 3-month TKR physical therapy plan will cost $900, compared to today’s average of $1,750-$4,500. If this model proves itself out and saves $1,000 per TKR episode, this innovation represents more than $300 million in savings for just one procedure. Apply these savings to multiple episodes of care and you certainly have a disruptive innovation.

Healthcare Providers, Take Note

Perfect Fit Health is just one example. There are hundreds of other emerging mHealth innovations that are attempting to have the same impact across the entire healthcare spectrum. It is critical for provider organizations to understand what innovations are emerging and how they will to respond.

*Disclaimer: I am an active advisor to Perfect Fit Health. I chose to use this example because of my familiarity with them.