Who Should Own Bundled Payment Episodes?

DATE: 11/03/2017

With the announcement of the next generation of Medicare bundled payment programs (“BPCI Advanced”) expected at any time, many different organizations are offering opinions about how this program will be structured and which types of providers should participate in which type of episodes.

A frequent topic in this conversation is the “ownership” of the episodes; i.e., which provider should be financially responsible for the surpluses and deficits in these episodes. In the existing Medicare Bundled Payment for Care Improvement (BPCI) and Comprehensive Care for Joint Replacement (CJR) bundled payment programs, the “participant” receives 100% of the surplus and is responsible for 100% of the deficits, so the ability to create “savings” can have significant financial implications to the participant.  Both hospital and physician groups have vied for the opportunity to “own” the episode. Physician ownership was allowed in the initial BPCI program, but in the CJR program and the recently-cancelled Episode Payment Model (EPM) program, only hospitals can participate.

Recently, some pundits have opined that physicians should own BPCI Advanced episodes, citing their influence on patient care and ability to make positive changes in care protocols. This is certainly true, but most physicians know that providing better patient care doesn’t always lead to greater financial rewards, and bundled payment programs exemplify that situation.

While physician ownership of major joint replacement episodes may generally be successful for reasons described below, the financial results of other types of episodes are far more variable, with the means of creating success largely outside of the control of physicians. In addition, the opportunities for success are much more limited in certain episode types, and the high amount of cost variation combined with low episode volume can create significant financial risk for the episode owner. While some large physician groups may have the capital to withstand ongoing financial losses or highly variable financial outcomes, most community physicians don’t want to risk amounts many times higher than their normal compensation due to potential losses they can’t control.

How financial results are determined in bundled payment

In Medicare bundled payment episodes, financial results are determined by the relationship between the Medicare provider payments (i.e., episode cost) and the target amount. The episode “cost” is the sum of all Medicare payments to all providers who provide services to the patient within the period of the episode, which is usually the initial hospital stay and 90 days after the discharge. Targets are generally determined in one of two ways―either from the historical episode cost of the participant during a baseline period, or from the average episode cost of other hospitals in the same geographic area. Since BPCI Advanced is expected to be a voluntary program, the use of historical baseline targets is expected. Most hospitals whose cost exceeded the regional averages would not participate in a program in which targets were computed as such.  This means financial success is dependent on the participant’s ability to reduce Medicare costs below their own historical levels.

An additional factor in target-setting is the “CMS discount,” which is a percentage by which the target is decreased to allow CMS to incur immediate savings from each episode. In BPCI these percentages are 2% or 3% based on episode length (90 or 30 days, respectively), or 1.5% to 3% based on the participant’s quality scores in the CJR program.  Since these percentages are applied to the average historical episode cost, participants must decrease their episode cost more than the discount amount before any savings accrue.

How winners and losers are created in bundled payment

Knowing the index acute Diagnosis Related Group (DRG) payments are a fixed cost to Medicare, savings are generally created in two ways: by reducing readmissions or by reducing post-acute institutional services, such as skilled nursing facility (SNF) and inpatient rehabilitation facility (IRF) care. The extent to which these opportunities exist varies by the clinical category of the episode. For example, readmissions in major joint replacement episodes are generally low (less than 10% of episodes having readmissions) and may be largely unavoidable. The primary opportunity lies in reducing unnecessary SNF and IRF services.

In contrast, the primary opportunity for cost reduction in chronic disease episodes such as congestive heart failure (CHF) or chronic obstructive pulmonary disease (COPD), is in readmissions, since about half of these episodes include at least one readmission. While post-acute institutional care can generally be managed by creating and implementing care management protocols, reducing readmissions is a highly physician-intensive process with fewer guaranteed pathways for success.  Another component to understanding opportunities, or lack thereof, to create savings is the proportion of episode cost derived from the index admission, as discussed below.

Assessing opportunity in bundled payment episodes

The differences in these opportunities can be visualized in the graphs below. Each column represents an individual patient episode, the height of the column is the cost of the episode, and the colors indicate the components of that cost. Because inpatient acute care is paid on a DRG basis, the blue components of these bars that indicate the cost of the “index admission” are generally the same height, with differences being attributable to different DRGs. The purple color above the cost of the index admission generally represents physician services, which rarely present an opportunity for savings. Therefore, the predominant savings opportunities occur in the yellow, green, and red areas representing home health, SNF, and readmissions, respectively.

The graph below indicates the episode composition for major joint replacement episodes. It shows that about half of patients received SNF services, and relatively few have readmissions. Consequently, the primary savings opportunity is in reducing the number of patients sent to SNF after joint surgery and working with the SNFs to create a shorter length of stay.

In the CHF graph below, the predominance of red in these episodes shows that readmissions are a major cost driver for CHF patients, with SNF services also adding a significant amount of cost for the higher-cost patients. This comparison demonstrates that different strategies and care management processes are necessary to achieve cost savings with CHF episodes than with major joint replacement episodes.

The final graph below depicts the composition for coronary artery bypass graft (CABG) episodes. Notable in this graph is the predominance of the index admission and physician cost (blue and purple, respectively), compared to the relatively small amount of post-acute cost. In these episodes, there are relatively few opportunities to achieve meaningful cost savings compared to the previous episodes discussed.  CMS applies a discount to the average episode cost when developing targets, so creating savings that exceed the discount is extremely difficult because of the relatively small proportion of post-acute cost in these types of episodes.

Understanding these differences in cost composition is critical for providers in evaluating their potential risks and opportunities associated with “owning” these types of bundled payment episodes.

Opportunity variation among episode types

Another critical factor in physician ownership of the episodes is the extreme amount of variability in cost among episodes and over time. The graph below shows the average quarterly cost for individual CHF episodes for a number of academic medical centers participating in the BPCI program. Each group of graphs represents one hospital participant, with the blue, orange, green, and yellow bars indicating the average episode cost savings for that participant for each of four quarters in the year. The first hospital achieved savings of $4,000 per episode in the first quarter, but by the third quarter it lost about $2,000 per episode.  Experiencing a volume of 150 to 200 episodes per quarter created losses of $300,000 to $400,000 in each of those quarters. The majority of the remaining hospitals had similar experiences, with only one experiencing consistent surpluses across all four quarters.

This extreme amount of risk variation is difficult even for a large medical center, but would be even more significant for an independent cardiology practice at risk for this type of an episode.


Our objective in this paper is not to suggest that physicians should never participate as risk-bearers in bundled payment episodes; in fact, many orthopedists (independent and hospital-owned) have had significant financial success in the major joint replacement episodes. Those successes have originated from the characteristics of that episode type.  Historically, there is significant post-acute care utilization and changes in post-acute treatment patterns can be applied broadly across a large number of episodes.  At the same time, problematic readmissions are few.  This combination creates a large opportunity for cost reduction.

Cardiologists, hospitalists, and other medical specialists aspiring to duplicate this performance have a significantly different landscape, as shown above. The greatest opportunity with CHF episodes is readmission reduction, which is extremely resource-consumptive, while in CABG episodes there is little post-acute care, creating a narrow opportunity for success. These difficulties are present in many other episode types; in fact, major joint replacement episodes may be the only low hanging fruit for physicians in the entire bundled payment program.

A better opportunity for many physicians is to contract with the participating hospital as part of the gainsharing program, in which the hospital can share a specified amount of savings or loss with certain physicians. While the upside of these arrangements may not be as lucrative as ownership of the episode, there is little if any downside risk for physicians in gainsharing arrangements. The BPCI and CJR programs allow physicians to be paid as much as 150% of their Medicare payment throughout each episode, which exceeds the payment rates of many commercial payers. Physicians interested in participating in the financial results of Medicare bundled payment programs may find that participating in a gainsharing agreement with the hospital makes more financial sense than becoming a participant on their own.


This article was developed in collaboration with Singletrack Analytics.  For more information, contact DataGen and follow us on LinkedIn for more learning on healthcare payment reform.

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