Administering healthcare bundles: An overlooked key to success in the new health economy
Healthcare providers are embracing the bundled payments model as a way to improve care and reduce costs. But they won't reap the full benefits of this new approach unless they master the administrative aspects of bundles.
Administering healthcare bundles An overlooked key to success in the new health economy
Chicago Gary Ahlquist Senior Partner +1-312-578-4708 gary.ahlquist @strategyand.pwc.com
New York Kelly Tsaur Principal +1-617-251-3929 kelly.tsaur @strategyand.pwc.com
San Francisco Deepak Goyal Partner +1-415-653-3499 deepak.goyal @strategyand.pwc.com
About the authors
Deepak Goyal is a partner with Strategy& based in San Francisco. He leads the firm’s technology practice for the health provider sector, focusing on IT strategy, value-based care delivery, IT effectiveness, and digital and consumer-oriented healthcare transformation. Kelly Tsaur is a principal with Strategy& based in New York. He advises payor and provider clients on strategic technology and core operations issues, with a focus on platform/IT strategy and economics. Vinay Bhat is a senior associate with Strategy& based in San Francisco. He advises payor and provider clients with a focus on payor–provider collaboration enablement, IT strategy, IT cost optimization, and enterprise architecture. Jonathan Kaplan is an associate with Strategy& based in New York. He works with payor and provider clients on value-based care strategy, payor–provider collaboration enablement, and Medicare/Medicaid effectiveness.
Strategy& senior associate Sindhu Kutty also contributed to this report.
As the bundled payment model for medical care gains traction, health systems implementing it will spend a lot of time figuring out how to create standardized courses of treatment, and how to make the economics work for all stakeholders. Prospective bundles combine all aspects of care — procedures, follow-up consultations, rehab — into a single price, which is known in advance. Studies suggest that bundles have the potential to vastly improve consumers’ healthcare experience and sharply reduce the care-delivery and administrative waste that’s endemic in the system. To succeed with bundles, health systems will also need to master the administrative aspects — including how to identify bundle-eligible insurance plan members, how to set the price for members of different risk, and how to calculate and disburse payments to providers in a transparent and fair way. Health systems’ challenge in administering bundles looms especially large because they must currently do so without a lot of help from payors. Although it is hard to imagine payors absenting themselves indefinitely from a development that is so important, many insurers — not wanting to overcommit — are taking a wait-and-see approach. This has put the onus for early bundles administration on the health systems themselves. If they want to establish market-leading positions, health systems are going to have to add capabilities, make organizational changes, and forge partnerships that will allow them to focus and gain experience in this fast-growing area of healthcare.
The era of bundles has arrived
In the evolution of the U.S. healthcare system, bundled payments are getting a lot of attention. More than a quarter of all U.S. hospital systems have begun to offer bundles, believing that the approach of combining all the services associated with a given health condition into a single bill will make the hospitals more competitive — in terms of both cost and patient satisfaction. According to Strategy&’s 2014 healthcare bundles survey, the adoption of bundles is even higher — more than 30 percent — at the larger healthcare systems and the urban hospitals that are typically the early adopters of hospital trends. (In 2014, Strategy& surveyed more than 500 executives at hospitals, employers, and payors about their perspectives on bundled payments.) Most healthcare bundles currently offered are designed to cover specific procedures or acute episodes (e.g., hip replacement surgery) with the bundle covering only specified portions of the treatment, and the price of the bundle determined retroactively. Emerging opportunities — in which bundles have a chance to increase the impact on patient experience and provider costs — involve bundles that extend beyond procedures to cover chronic health conditions (in situations where that makes economic sense), that include more of the care continuum (such as prevention), and/or whose price is set in advance. These so-called prospective bundles — we refer to them as Bundles 2.0 (see Exhibit 1, next page) —represent about 8 percent of all the healthcare bundles offered today, and they are clearly gaining momentum in the industry. As hospital executives start planning these more sophisticated bundles, they will undoubtedly focus on care quality standardization (e.g., the best and most efficient ways of treating a cardiac patient, or someone with type 1 diabetes) and on the contracting issues associated with bundles. These are enormously challenging areas, where Strategy& has developed tremendous insight through fieldwork and as a result of the annual bundles surveys. This report focuses on the administrative side of bundles — from account installation and risk classification to the disbursement of fees — which has not garnered enough attention. This needs to change. A well-thought-out administrative approach
Exhibit 1 Evolution of bundled care offerings
Range of current offerings
Bundles 1.0 Bundles 2.0 Next generation
The ﬁrst wave of bundled care pilots
• Covers procedure-based and acute episodes (e.g., knee replacement, stroke) • Includes core services such as diagnosis, inpatient, and outpatient • Lacks design sophistication
– CMS bundle deﬁnition – Retrospective payment – No warranties – No risk adjustment
An expanding set of customized models
• Includes key chronic conditions (e.g., diabetes, congestive heart failure) • Extends across care continuum, with expansion into primary care and home care services • Shows greater design maturity
– Customized bundle deﬁnition – Prospective payment – Pricing guarantees – Risk adjustment
A robust line of marketready care products
• Represents a scalable portfolio of modularized care products tailored to the organization • Expands beyond traditional care settings into emerging prevention and patient engagement models • Exhibits the maturity of a true product portfolio (e.g., channel strategy, market segmentation)
is essential if the value proposition of bundles is to be transparent to insurance plan members, and if providers are to participate. Indeed, without robust administration, the benefits of bundles will prove elusive — or may not be realized at all. In any discussion of bundles administration, it is important to start by acknowledging one piece that’s missing: namely, an ecosystem of payors ready to collaborate on the implementation of prospective bundles. Because of the critical role that payors play in healthcare reimbursements, it is certainly ideal if the infrastructure for administering bundles can be jointly designed by providers and payors. However, misaligned incentives and the sheer difficulty of supporting the reimbursement paradigm shift have prevented this collaboration from happening. Self-insured employers looking to offer bundles have generally worked directly with providers — another indication that payors are not taking leadership roles in this area. To be sure, in the long run, it is hard to imagine bundles reaching their full potential without payor participation. However, given that it may take a while to get true payor engagement, providers that want to move ahead with prospective bundles will need to handle much of the initial design and implementation themselves. The good news is that health systems are not starting from scratch in putting together an infrastructure for administering bundles. Their intake and revenue cycle management departments already handle many activities that are essential to healthcare bundles. However, there are other functions essential to bundles administration that traditionally exist on the payor side or that are not part of the ecosystem today. Figuring out how to fill the gaps that exist is not a build-by-the-numbers exercise. It becomes an even more complex puzzle as providers aim to improve the patient experience, minimize disruption to their current processes, foster trust among all stakeholders, and build an infrastructure that can scale up as needed.
Breaking down the challenge
The best way to address the challenge of building an administrative infrastructure for bundles is to break it into three discrete parts. Providers need to (1) know which capabilities they need to deliver a successful solution; (2) decide how they are going to deliver capabilities they currently don’t have; and (3) figure out how they are going to organize themselves to manage and continuously improve operations. Articulating each of these parts as a question may be useful in making the challenge manageable. All of these areas have unique design challenges, specifically high-level issues that justify a disproportionate amount of time and attention, or that force a provider’s hand to make trade-offs in how it must proceed in one or more areas related to bundles. For example, a key capability design challenge is how to make the member identification process foolproof, so that people eligible for bundles aren’t mistakenly treated outside the bundles track and those not eligible for bundles aren’t treated within the bundles track. From a sourcing perspective, a key design challenge could be whether to manage the calculation and disbursement function through an independent third party, balancing the perception of fairness with the loss of control and transparency. A key organizational design challenge could be whether to create a “center of excellence” dedicated solely to bundles administration. Such a team also may be seen as essential in an area of hospital administration where so much is still new. Question 1: Which capabilities do we need to deliver a successful solution? Bundles administration largely requires a familiar set of capabilities across the life cycle of care, which fall into eight broad categories (see Exhibit 2, next page). Scheduling, registration, billing, payment posting, and payment variance resolution are all capability areas where health systems already have expertise; they can leverage and expand these capabilities to support care bundles. However, health systems’
A key design challenge is how to make the member identification process foolproof.
Exhibit 2 Bundles administration required capabilities
Effort required to implement
Provider life cycle
Ongoing business operations
Prior to care delivery
Clinical screening and risk adjustment Scheduling Registration
High Medium Medium
After care delivery
Billing Payment posting Payment variance resolution Calculation and disbursement
High Low Low High
experience is limited or nonexistent in two other functions of bundles administration. The first is calculation and disbursement — figuring out how much various providers are due and distributing the payments. The second is the installation of plan sponsor accounts — the process of entering new insurance plan members into a hospital network’s information systems. In the absence of payor involvement, health systems must fill these capabilities gaps, by either developing the capabilities internally or “renting” them from other sources. The calculation and disbursement capability is new to health systems that are accustomed to simply collecting insurance payments for their own services. Health systems administering care bundles get a lump sum payment covering all aspects of the bundle, and must determine and distribute to providers the amounts each is contractually entitled to receive. The process requires complex calculations and a detailed understanding of contractual arrangements with various providers. Some who provide care as part of the bundle, such as anesthesiologists or physical therapists, may get a payment only for completing the procedure. However, “controlling doctors,” who are in charge of procedures (e.g., orthopedists for knee replacement surgeries, and obstetricians for maternity care), may get both fees for their services and separate payments for following care protocols. Controlling doctors also may be entitled to periodic “gain-sharing” payments for limiting utilization or controlling costs over quarterly or yearly periods. Account installation involves accurately identifying insurance plan members who are eligible for bundled treatment. The fact that the member is receiving bundled care also needs to be clear during downstream processes (e.g., when the member is buying prescription drugs at a pharmacy or being treated by a physical therapist) to ensure the right care delivery and reimbursement. If a mistake is made at any point, it is likely to result in a frustrating patient experience, a deviation from the standardized care protocol, and/or a timeconsuming payment correction process that will diminish the bundle’s cost savings. The risk of misidentifying patients who are eligible for bundles is even higher with employers that have self-insured health plans. Even on these employees’ cards, there is likely to be a payor’s name and logo, since a payor is usually administering the employer-paid plan. This creates the potential for a lot of confusion, because many current bundles deals are being struck directly between employers and health systems. A staff member registering a new patient, a medical specialist called in to consult on a procedure, a pharmacist, or a physical therapist would all see the payor’s name on an insurance card and not realize that
the member is being treated as part of a bundled offering. Multiple mistakes would follow, including billing- and care-related issues. This potential confusion warrants the use of a unique bundle identifier in all provider systems. It also makes the case for establishing a dedicated center of excellence to manage the bundles workflow, as opposed to extending a few existing functions to take on the extra work. Getting the classification right at this early stage is critical, and will trigger a different care pathway and a different administrative process. In addition to developing these scarce capabilities, hospitals must figure out how to handle one brand-new capability — clinical screening and risk adjustment. Clinical screening and risk adjustment uses predetermined criteria — including clinical patient data — to decide what price to guarantee a given patient. It’s hard to overstate the importance of this capability in a model predicated on setting the price of healthcare treatment in advance. After all, one of the value propositions of bundles, from a consumer perspective, is that it removes the financial uncertainty of buying healthcare. The consumer knows beforehand, just as she knows when she rents a car or buys a head of broccoli, what the cost will be. Of course, from an ecosystem perspective, this can work only if the guaranteed price accurately incorporates the ultimate risk-adjusted cost of treating the patient. To offer a simplified example, it is usually not going to cost the same for an OB to provide a maternity care bundle to a 42-year-old first-time mother with a history of hypertension as it is to take on a patient who is 25 years old and in excellent health. Different risk factors apply, leading to higher bundle payments for certain people than for others, and clinical screening and risk adjustment is the critical capability in making this feasible. Question 2: How do we deliver these capabilities? This question comes down to building a capability in-house versus outsourcing. In most cases where the effort to develop the capability doesn’t seem excessive (what we called “low” or “medium” effort in Exhibit 2), providers’ default position may be to enhance a capability they already have and make it suitable for bundles administration. In a similar way, a capability that requires a lot of effort to develop might be one to outsource. In fact, the build-versus-outsource decision is more complicated than it appears; in each case you need to consider the following criteria: • Business strategy — how you plan to differentiate yourself from your competitors and how quickly you must develop the solution components
Hospitals must figure out how to decide what price to guarantee a given patient.
• Maturity levels of your current internal capabilities — essentially, how big your gaps are • Availability of targeted vendor solutions — bundles administration is a new space and there may not be any vendors that can do exactly what you need • Cost — both the initial investment and ongoing operational costs once the function is in place should be considered, in alignment with your expansion strategy • Desired operating model — a function of your organizational advantages and constraints One big challenge is the immaturity of the vendor landscape. Prospective bundles are not an area where vendors have figured out the right service models, much less developed sophisticated service offerings. In our scan of vendors that offer healthcare administrative solutions, we did not find any that have a complete package for bundles administration. Some vendors have technology that they are retrofitting for this emerging area, but the technology tends to be relatively nascent and narrow (covering only portions of the required capabilities). The clearest sign of vendors’ limitations is their lack of mature capabilities in the areas of billing and calculation and disbursement, two areas of bundles administration that require a drastic departure from current provider processes. Whether they outsource some capabilities or not, providers will have to make significant investments, especially in the areas of pre-care delivery administration and post-care administration. In areas such as scheduling and registration, the investments will likely be in processes, labor, and quality control; in other areas that involve outside vendors, such as calculation and disbursement, it will be necessary to invest in integration and automation. Many providers may prefer to keep their up-front investments small in order to prove the concept, accepting a higher variable cost during a startup period in which they are focused on learning. This is especially true for those functions that may shift back to payors as the market evolves. Question 3: How do we organize ourselves to successfully manage and continuously improve operations? Providers face two main organizational challenges as they develop an infrastructure for bundles administration. The first is continuing to support their traditional administrative functions while they build a
new one to service bundles. The second challenge is scaling up the administrative infrastructure supporting bundles as that part of the business grows. The health systems we have worked with on bundles administration have opted for the simplest way of adding the necessary services — handing responsibility for these new services to existing managers or third-party administrators. For instance, hospital staffers who are already handling pre-care delivery functions, such as eligibility and pre-authorization checks, have been asked to do the equivalent work for prospective bundles. Likewise, the departments that already handle financial reconciliation at hospitals have in many cases begun to handle bundles-related disbursements as well. This extension-based approach is fine as a way of putting a toe in the water. However, we think that health systems should consider going further, and creating small centers of excellence to ensure the end-toend coordination of bundles. We also think there’s an advantage in deputizing a small team responsible for becoming so deeply versed in the intricacies of bundles that they have the answer to basically every question, no matter which stakeholder is asking it — an insurance plan member, a contracted physician’s office, or a payor. The center of excellence ensures a focal point where feedback is consolidated and strategically addressed, and issues get resolved effectively. As volumes increase, health systems will need to invest more in automation. It may also be advisable to separate out the pre-care and disbursement functions in a similar dedicated center of excellence model that does not rely on the hospital’s existing departments. The novelty of the function will require feedback loops, so that whatever’s not working in a prospective bundle — something about the care protocol itself, or something related to administration — can quickly be identified and fixed. With a change this big, success on the organizational side won’t come down to redrawing lines and boxes. The biggest success factor is people’s engagement. It is critical that all internal stakeholders understand the organization’s objectives for bundled care and their own role in making the new approach successful. This also goes for independent physicians and their staff; enlisting the support of these external stakeholders is key. Indeed, the development of a successful bundles business will be a transformational shift for most health systems. As with anything transformational, the culture has to enable it instead of getting in the way. This can be done by restructuring employee incentive models, and by placing an emphasis on fast failure and continuous
We think that health systems should go further, creating small centers of excellence to ensure the end-to-end coordination of bundles.
improvement. Using culture to enable change is a challenge for many organizations, but it is one that health systems will have to master if they are to achieve the cost savings, improved outcomes, and increased organizational impact that are the rewards of prospective care bundles.
Just how much of a payoff will bundles produce? The answer is not yet clear. However, in the Strategy& survey, 72 percent of health systems that are already pursuing bundles acknowledged that those initiatives have helped them enhance service quality through care standardization. Sixty-three percent said that the care bundles they implemented have been instrumental in creating better alignment with physicians. Fifty-seven percent said that bundles have helped them reduce medical costs, and more than half of the respondents reported reductions in administrative costs due to simplified billing processes. Much experimentation and learning remains to be done in the area of prospective bundles. This is, after all, a fundamentally new approach to medical care. But the concept has too many benefits not to become a larger percentage of hospitals’ offerings in the future. The administrative aspect we’ve discussed here — with all the changes it will necessitate in the areas of capabilities, third-party partnerships, and internal organization — just cannot be overlooked. It is a critical part of the foundation that will help bundles succeed.
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