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Anesthesia Industry eAlerts

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January 19, 2015


Bundled payments, which cover episodes of care, are taking hold in the health services marketplace.  Private payers, large healthcare organizations and many states as well as the federal government have developed and are now participating in bundled payment contracts.  Anesthesiologists need a methodology for determining the payment amount that they will accept for providing their medical services throughout a 30- or 90-day surgical episode.  A very important article explaining a basic methodology appeared in the May 2011 ASA Newsletter; it should be in the library of every anesthesia practice.


On many lists of the top five, or ten, or twenty trends to watch this year are bundled payment programs.  Bundled payments are taking hold more and more firmly.  Although traditional fee-for-service is still the dominant method of payment for anesthesia services, we should all be familiarizing ourselves with emerging payment methodologies including bundled or “episode of care” systems along with accountable care organizations and shared savings programs.

In the bundled model, payment covers a comprehensive episode of care and compensates all participating providers for all patient services related to a single illness or condition.  The largest bundled payment program is Medicare’s Bundled Payments for Care Improvement (BPCI) initiative, which was announced in August 2011 and launched in January 2013.  Currently, BCPI tests four models for bundling payment for acute and/or post-acute care by episode of care.  The four models offer participating healthcare organizations options for the clinical conditions to be tested, the length and composition of an episode and the level of financial risk.  The initiative is projected to serve 130,000 Medicare beneficiaries. As of July 2014, 243 healthcare organizations had signed up for bundled payment contracts.  Another 6,500 providers are analyzing Medicare spending data to determine whether to enter into these risk- and reward-sharing arrangements. 

The states are also exploring bundled payments.  Arkansas, Colorado and Tennessee are among those that have launched statewide initiatives.  In the private sector, large health care systems and employers have been engaged in this form of value-based contracting for some time.  The Cleveland Clinic and Lowe’s, the national home-improvement chain that has more than 250,000 employees across the U.S., entered into a direct contract for cardiac care in 2010 and the Cleveland Clinic has similar agreements in place with Boeing and Wal-Mart.  (Becker S.  Healthcare strategy 2015 – Back to the basics:  12 key thoughts. Beckers Hospital Review, January 6, 2015.)  Late last year, United Healthcare and the University of Texas MD Anderson Cancer Center in Houston agreed to a three-year deal in which the insurer will pay MD Anderson a fixed rate for the care of up to 150 patients with certain types of head and neck cancer.  Other private insurers including Aetna and Blue Cross and Blue Shield plans also have created bundled-payment arrangements with hospitals.  (Herman B.  United Healthcare, MD Anderson deal may spur more bundled payments in cancer.  Modern Healthcare, December 15, 2014.)  We can expect the number of these arrangements to continue growing.  In an issue brief released by the Health Care Incentives Improvement Institute (HCI3) in May, 2014, Key Payer and Provider Operational Steps to Successfully Implement Bundled Payments, the five payers that reported results from their analyses (a sixth did not report any results) observed a positive impact on both cost and on quality.

The majority of bundled payments have focused on orthopedic or cardiovascular procedures, which have less cost variation than do condition-based episodes of care.  Indeed, Stead and Merrick used the examples of knee and hip replacement procedures to illustrate the calculation of all-inclusive anesthesia case rates in their seminal article Episode-Based (Bundled) Payments for Anesthesiology published in the May 2011 issue of the ASA Newsletter.  This article walks readers through the data that must be collected in order to have an accurate understanding of the practice’s actual average costs and actual average revenues by payer for the procedures on which they are asked to propose an anesthesia case rate.  The information required includes a year’s worth of data for the following items, at a minimum:  patient demographics, payer information (primary and secondary payers, contractual allowances, co-payment amounts), all services provided during a typical surgical episode, billable units, anesthesia time, cost of resources required to provide care and other overhead expenses.  

The cost of providing the service can be calculated by adding the median compensation of the anesthesiologist with his or her practice and professional liability costs and dividing by the hours of care provided over the relevant time period.  There are other methods of determining costs, just as there are various methods to determine revenues.  “One method uses current collections and sets a case rate based on a weighted average.  A group would need to know the minimum CF it must have in order to cover its costs, as well as the number of anesthetics it provides for these cases for a given time span and the average anesthesia time.  Some groups may propose a case rate based upon the commercial conversion factor,” as Stead and Merrick state.  They then lay out an example that includes ancillary medical services, e.g., pain management, invasive monitoring lines and post-discharge visits, and that leads ultimately to a table showing a volume-weighted average total payment of $1,235 for all the care provided for joint replacement procedures during a 90-day period:

The article noted above is a very useful starting point for an anesthesia practice that seeks to construct its own bundled payment profile.  It is also helpful for groups to be aware of the bundled payment profiles that the health systems and payers with which they contract have developed.  In particular, readers should be conversant with the “evidence-informed case rate” (ECR®) definitions released by HCI3 in August 2014.  The more than 80 ECR definitions, which are open source and are available for public use without any charge, are intended to be used for a variety of purposes including bundled and accountable care organization payment programs, reference-pricing initiatives and provider cost and quality analyses.  Among the procedures for which ECR definitions have been developed are CABG, cataract surgery, colonoscopy, cholecystectomy, hip/knee replacement/ revision, C-section and vaginal delivery.  Condition-based ECRs include low back pain and osteoarthritis.  The components of each ECR are:

Understanding how the ECRs are developed and how they work “allows providers to adjust and position themselves ahead of the curve by improving the quality of care by examining actionable analytical reports on ECRs, which measure quality based on [potentially avoidable complications] and typical costs associated with that ECR,” according to HCI3.  We believe that ECRs will play an increasingly important role in anesthesia and pain medicine practices’ finances, and we will cover them in depth at the appropriate time.

With best wishes,

Tony Mira
President & CEO