Bundled Payments in Healthcare: Challenges and Opportunities

The Bundled Payments for Care Improvement (BPCI) advanced model was set to expire this year, but CMS recently extended it. CMS made its bundled payments decision based on studies like:  

• “The Impact Of Bundled Payment On Health Care Spending, Utilization, And Quality” by Health Affairs, which found 2% to 5% reductions in total Medicare spending per medical episode when bundled payments were involved.. 
• A study published in the population health publication, The Milbank Health Quarterly that found decreases in internal production costs for organizations using bundled payments.
• A J-PAL study which confirmed that the share of patients discharged to skilled nursing, long-term care, or inpatient rehabilitation facilities dropped by 3% if their cases were handled via bundled payments. 

Three or 5% may not sound like a lot, but when you’re dealing with Medicare’s $839 billion-dollar budget, those few percentage points still mean billions.

Reinforcing CMS’s BPCI decision is the fact that patients don’t seem to be suffering under bundled payment plans. The Health Affairs analysis above found no statistically significant increases in patient mortality, readmissions, or emergency department visits at healthcare organizations using bundled payment programs. 

Still, physician groups and healthcare MSOs have serious grievances with bundled payments. The program poses greater financial risk to them because if the cost of care exceeds the bundled payment, the provider absorbs the loss. Then, bundled payments can require tight coordination among physicians, post-acute care facilities, labs, and other providers. That level of complexity involves not only extensive coordination but accurate data access and sharing that the provider may not have implemented yet. 

Some physicians and provider groups even assert that bundled payments can restrict patient care. Prioritizing patient outcomes, practitioners resent this possibility the most. 

Despite these complaints, bundled payments will stay with us throughout the year and most likely for the foreseeable future. Aggressive cost-cutting is the rule of the day, impacting most areas of federal spending and making CMS even more motivated to move all members to value-based-care (ACOs) by 2030. CMS sees bundled payments as a key feature of value-based care.  

The Leonard Davis Institute, a population health research organization at the University of Pennsylvania, explains,

"The Centers for Medicare and Medicaid Services (CMS) remains committed to episode-based payment models [BPCI] as part of its multidimensional strategy to advance accountable care." 

In addition to the extension of the BCPI advanced program through this year, The Leonard Davis Institute points to CMS’s introduction of the new mandatory TEAM bundled payment model, which expands bundled payments even further. 

Given the inevitable spread of BPCI payment models, physicians, practices, provider groups, and healthcare MSOs must find ways to approach bundled payment challenges while leveraging the opportunities they can present. Here, you’ll discover both. 

What are bundled payments in healthcare?

Bundled payments, also known as episode-based payments, cover all the care a patient receives for a specific condition or procedure over a defined period. Instead of billing separately for each individual service, providers are paid a lump sum intended to cover the entire “episode” or illness, including pre- and post-acute care.

Bundled payments are a voluntary payment model under which a single bundled payment covers services furnished by various health care providers across care settings. Participants can earn additional payment if they reduce costs over the course of the beneficiary’s 90-day episode of care should they meet quality benchmarks.

Bundled payments represent a major shift in healthcare reimbursement, moving away from the traditional fee-for-service model toward value-based care. This model is already a popular method for encouraging value-based care. 

Two types of bundled payments: retrospective and prospective

Payments can be bundled in two ways:  retrospective and prospective. 

A retrospective bundle combines a reconciled budget with the payer as a financial integrator of the fees paid out. The payer shoulders the financial calculus, not the provider. This arrangement is created on an FFS system and is retrospective, since providers first receive their usual FFS payments, which is followed by the receipt of an additional payment after assessment of their total costs and savings. However, these cost assessments often take over a year to complete. 

A prospective bundle, on the other hand, pays a fixed price for a set of services covered in the bundle before rendering any or all of the services. An average cost per episode of care is assessed by historical data and/or regional costs. Payment is delivered to providers when an episode is initiated, rather than waiting for its completion. Adjustments to payments are made taking into account other factors, such as outliers, excluded episodes, and more. 

Challenges in using bundled payments in healthcare  

While using single, predetermined payment for multiple procedures and equipment aims to incentivize efficiency, it can also introduce new challenges for healthcare providers. Tackle these challenges with the right strategies.  

Financial risk and unpredictable costs

Challenge

‍As mentioned above, providers are responsible for any costs that exceed the bundled payment amount. Unexpected complications, such as location-acquired infections or comorbidities, can quickly erode profit margins. Small practices are especially vulnerable, as they often lack the resources or patient volume to absorb these financial shocks.

Approach

‍Providers should use robust risk stratification tools to identify high-cost patients and allocate resources more precisely, focusing care management on those most likely to have poor outcomes. Additionally, negotiating stop-loss provisions or outlier protections in contracts can shield providers from catastrophic costs. Use data analytics to anticipate and manage risk.

Defining and pricing care episodes

Challenge

Accurately defining the extent of services included in a care episode requires providers to distinguish between bundled and non-bundled services—a process that can be contentious and administratively burdensome. Setting appropriate bundle prices is equally complex; if the payment is set too low, providers may be undercompensated, while payments set too high may not yield meaningful savings for payers.

‍Solution

‍Providers should conduct thorough cost analyses, including both direct and indirect costs, and tailor bundles to their patient populations to ensure pricing reflects true resource use. Engaging in transparent negotiations with payers and using historical data to inform episode definitions can help ensure fair compensation and reduce disputes.

Care coordination and data sharing

Challenge

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Bundled payments demand close coordination among ASCs, physicians, care facilities, and other providers, making robust data sharing and integrated care pathways essential. 

Unfortunately, many organizations struggle with fragmented health IT systems and lack the analytics needed to track outcomes, costs, and quality across the care continuum. Smaller providers may feel pressured to align with larger systems to access necessary infrastructure, a step that can reduce their independence.

‍Solution

‍Providers should invest in integrated health IT solutions, such as electronic health records and secure messaging platforms, to facilitate real-time communication and care coordination. Establishing dedicated care coordinators or nurse navigators can further streamline patient transitions and ensure all parties are aligned on care plans.

Administrative and reporting burden

Challenge

Transitioning to bundled payments increases administrative complexity, as providers must manage new reporting requirements, track quality metrics, and reconcile payments and performance with payers. The need for sophisticated cost accounting and analytics tools presents a significant barrier, particularly for organizations accustomed to fee-for-service billing.

Solution

‍Providers can reduce this burden by leveraging automated reporting tools and dashboards that integrate claims and clinical data, making it easier to track metrics and reconcile payments. Outsourcing certain administrative functions or partnering with conveners can also help smaller organizations manage these demands more efficiently.

Risk of underuse and patient selection

Challenge

While fee-for-service models incentivize overuse, bundled payments may create incentives to underuse necessary services to stay within budget. This raises concerns that providers might avoid treating the sickest or most complex patients, fearing their care will exceed the bundled payment and result in financial losses. Maintaining care quality and ensuring that medically necessary services are not withheld remains a critical challenge.

Solution

‍Providers should implement strong quality monitoring systems and ensure that quality metrics are tied to payment, so that care standards are maintained and medically necessary services are not withheld. 

Carving out particularly expensive or highly variable services from bundles, or using blended payment models, can also help address this issue.

Impact on innovation and technology adoption

Challenge

Bundled payments can inadvertently discourage the adoption of new technologies or treatments, especially if these innovations increase costs without immediate, measurable improvements in outcomes. Revising bundles to accommodate advances in care can be technically and politically challenging, potentially slowing innovation.

Solution

Advocate for periodic bundle updates that reflect advances in clinical practice and technology, and work with payers to ensure that innovative treatments with proven value are appropriately reimbursed. Participating in pilot programs or value-based purchasing collaboratives can help demonstrate the value of new interventions.

Dual business model pressures

Challenge

Many providers must operate under both fee-for-service and value-based models at the same time, creating operational and financial complexity. Uncertainty around the pace at which payers will shift to bundled payments further complicates long-term planning for healthcare organizations.

Solution

Providers should align internal processes and care pathways to support both models where possible, and invest in analytics to monitor performance across payment types. Strategic planning and scenario modeling can help organizations prepare for further shifts toward value-based care, reducing uncertainty and supporting long-term sustainability.

Opportunities afforded by bundled payments in healthcare 

Despite these challenges, bundled payments also come with opportunities for providers who can adapt.  

Margin improvement

Under traditional fee-for-service models, revenue increases with the volume of services provided, regardless of efficiency. Bundled payments invert this, offering a fixed payment for an entire episode of care.

Providers who can effectively manage the total cost of care for an episode below this fixed payment win improved margins compared to fee-for-service reimbursements. This shift requires a focus on eliminating waste, reducing unnecessary services, preventing costly complications, and optimizing care pathways. 

For instance, if the bundled payment for a knee replacement is $25,000, a provider team that successfully coordinates care to cost only $22,000 captures the $3,000 difference as margin. This direct reward for efficiency doesn't exist in the same way under fee-for-service. While this cost consciousness requires upfront investment and carries risk, innovating in care delivery will keep providers solvent. 

Enhanced care coordination

Bundled payments inherently necessitate closer collaboration among traditionally siloed providers—hospitals, physicians, post-acute care facilities, and others involved in a patient's journey. 

Because the single payment covers services across different settings, providers share a financial incentive to work together, communicate effectively, and implement evidence-based care pathways. Investing in robust care management programs and data analytics allows providers to identify high-risk patients early, proactively manage transitions (e.g., from ASC to home or skilled nursing), reduce duplication of tests, and prevent avoidable readmissions or complications. 

An example is an ASC collaborating closely with specific skilled nursing facilities (SNFs) to standardize rehabilitation protocols after joint replacement, leading to shorter SNF stays and better patient outcomes, which directly contributes to success under the bundle. This enhanced coordination not only controls costs but also improves the patient experience through smoother transitions and more integrated care.

Cost savings

Studies demonstrate that bundled payments can generate significant cost savings for both payers and providers. These savings are often most pronounced in high-volume, well-defined procedures like lower extremity joint replacements. 

For example, Medicare's mandatory Comprehensive Care for Joint Replacement (CJR) model resulted in savings of approximately $812 per procedure, representing a 3.1% reduction in costs compared to traditional payments, primarily driven by reduced use of post-acute care facilities like SNFs. 

When The Commonwealth Fund reviewed international bundled payment initiatives, it found that 20 out of 32 studies reported modest savings or reduced spending growth. These savings stem from increased efficiency, reduced complications, and the elimination of unnecessary or low-value services fostered by the payment model's incentives. While savings may vary by procedure type and model design, the evidence indicates a clear potential for bundled payments to lower the overall cost of care without compromising quality.

Use MD Clarity to examine the accuracy of bundled payments in healthcare

Bundled payments are reshaping the healthcare revenue cycle, demanding new competencies in risk management, billing, and care coordination. The biggest problems providers face include financial risk, administrative complexity, care episode definition, and the need for reliable IT infrastructure. Addressing these challenges requires investment in technology, collaboration across the care continuum, and careful attention to patient outcomes and access. As bundled payments continue to evolve, providers who proactively adapt will be best positioned to thrive in the new value-based landscape.

MD Clarity’s prime directive is to help practices, physician groups, and healthcare MSOs thrive. Payer contract transparency and control are cornerstones of maximizing revenue. MD Clarity’s contract management platform, RevFind, ingests, digitizes, and parses contracts so providers can understand:

• Which payers are paying contracted, agreed-upon rates, and which are underpaying.
• Amounts underpaid by payer, CPT code, location, and physician, as well as combinations of all four factors. 
• How payer reimbursements compare to each other and Medicare benchmarks.
• The value each payer brings to the organization. 

The RevFind platform is built on contract management best practices so that your staff can execute this important task competently. It takes these critical contract insights to negotiate and win more favorable rates and terms.  

Get a demo to discover how RevFind can reveal which payers are siphoning off your earned revenue, which contracts are most valuable to your organization and more. 

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