In the era of increasing price transparency in healthcare, one payment model that has been championed is bundled pricing. In general, bundled pricing refers to paying one pre-defined price for an episode of care. This is in contrast to having multiple providers bill separately for their part of the treatment. Similar but separate to this arrangement is that of value-based care (VBC). VBC pays providers based on patient outcomes, typically around achieved quality metrics. Many carriers and TPAs are moving from a traditional fee-for-service model to incorporating VBC reimbursement. However, the purpose of this article is to specifically examine the bundled pricing method.

Bundled pricing largely emerged because of shortcomings in the healthcare industry. The question now is whether these gaps continue to exist and what type of value is being created. Given the continued disruption to the healthcare industry, venture capital is betting money on these types of health startups and the marketing is very aggressive. Existing relationships with consultants and key decision makers are leveraged to introduce this product and actively shared through online communications. In fact, there is a group of consultants who consider themselves antagonists to the industry and tout these types of solutions as a panacea to the healthcare crisis. There is also increasing pressure on consultants from their clients to bring new “silver bullet” solutions to the table. Bundled pricing is one of these being heavily promoted right now. No doubt most brokers, consultants, executives, and HR managers have also been pitched this model at the latest benefits or industry conference. There are multiple companies who specialize in selling this product and I’ll generically refer to them in a group as Bundled Pricing, Inc. (BPI). So with all the noise out there, how do you cut through the hype and discern what’s really going on? My goal is to provide insights gained from years working for a carrier in the health insurance industry and broad experience with clients who incorporated these types of models.

I want to be clear that the purpose of this article is not to defend the status quo. In fact, I believe innovation is wonderful and disruption is much needed for the healthcare industry. There are very deep problems that need to be addressed. Disruption can be good unless it is disruption only for disruption’s sake. Most everyone would agree that the health care system is broken. However, I have interacted with too many clients who while trying to innovate within their own health plans, adopted a program that they later wished they had known more about the details. This in contrast to sometimes relying too heavily on the sales presentation or what the consultant put in front of them. Most of the clients I worked with expressed some type of regret, each one tying back to some component they weren’t aware of before the purchase. The problem though is that once bundled pricing was embedded, it was extremely difficult to pull back out. My goal is to simply provide information so that customers and payers can make more informed decisions in this ever-changing industry. In an effort to innovate, some solutions currently being proposed in the marketplace deserve much more examination. Taking a line from an old movie, let’s take a look at the good, bad, and ugly of bundled pricing.  

The Good

The main reason that bundled pricing came about was because of a lack of price transparency in healthcare. Until recent years, insurance carriers did not have the needed pricing tools for consumers to make informed choices. If a patient has medical services performed, the likelihood of getting detailed pricing information from the provider is often extremely limited. Providers understandably don’t post prices publicly because of contractual concerns and there are also limitations as more complex procedures can’t be relegated to one defined price tag. Bundled pricing provides a known price up front. However, it should be noted that these are generally for “shoppable” procedures. In other words, bundled prices are typically limited to types of procedures such as imaging, labs, and certain outpatient surgeries. It is a well-known fact in the industry that getting an MRI done outpatient at the hospital is going to cost much more than redirecting that same procedure to a free-standing imaging center. Due to how most PPO networks are set up, both the more expensive facility and the lower cost provider are likely still both in-network for the plan. As a result, the focus then becomes much more about how redirection should be done to a lower cost of care. Especially when quality results are similar. Many consumers with traditional coverage would benefit under their current health plan by going to lower cost providers. At the end of the day, it’s about incentivizing the patient to seek those services at the right time at the right place. Carriers have often struggled with offering effective solutions for this redirection. BPI correctly recognized that cost information wasn’t the most significant barrier to redirecting care. Members covered under most employer health plans today have robust pricing comparison tools available. The problem is under-utilization of those tools due to a lack of knowledge and incentives to do so. BPI has incorporated a significant incentive to patients when care is redirected-by paying zero for the service(s). Whether that approach is best will be discussed in more detail. Redirection of care has to start with price comparison data. The insurance carriers have made significant strides to address price transparency. Significant investments have been made in technology to provide consumers covered under those health plans with the data to make more informed decisions. Carriers are now offering transparency and pricing comparison tools to their websites. Bundled pricing and price transparency have been great for moving the conversation forward and in a positive direction.   

Another area where bundled pricing could be positive is that of enhanced employee benefits. If the intent is to purely improve the benefit where patients pay zero for their healthcare in return for redirection of care to lower cost facilities, bundled pricing may be a good fit for clients. There is no question that there is more administrative work involved to collect deductibles and coinsurance from patients. That’s an area that could definitely be improved and a startup may emerge as some point with a solution. With enhanced benefits, there’s no guarantee that there will be a net savings to the plan though. BPI will position bundled pricing as both a cost savings and enhanced benefit, but this is where a closer examination is needed. Regardless, patients will definitely come out on the good end of that arrangement. However, if the purpose of adopting bundled pricing is to save on cost, there are more dynamics that need to be explored to analyze those claims.

The Bad

If an employer is self-funded and carries Stop Loss coverage to mitigate the risk of large claimants, they should know that most Stop Loss carriers will not cover these carve-out bundled pricing procedures under the plan. BPI will respond that this risk is low because these are generally non-complicated procedures and would not push the patient over the Stop Loss attachment point. This observation is generally correct but does leave out the potential risk of complications. With the increasing pressure to expand redirection of services, more and more procedures are being done on an outpatient basis that create an environment for potentially disastrous health outcomes. A recent USA Today article addressed this trend in detail, including alarming quality issues for surgery centers. If a patient were to have complications arising from a carved-out procedure, the claims for complications would generally not be covered under the Stop Loss policy.

There is also an issue with duplicate billing. In theory, BPI claims are outside of the insurance plan and are not supposed to be submitted to the carrier. However, there is no systematic way to verify that these claims will not be paid for twice. If the provider were to mistakenly submit the services as claims both to BPI and the carrier, each vendor will pay the claim as would not be considered a duplicate for either entity. The patient receiving the care is relied on to report this scenario should it occur, or it is left up to the provider to report if they get paid twice. In essence, relying on the honor system. While this doesn’t appear to happen on a broad scale, I encountered repeated scenarios were duplicate claims were filed and only noticed after manual comparison of the data. In part, this situation occurs because there is no data integration between BPI and the carrier.

Related to data, a key component of care coordination requires that a holistic picture of the health record be created for the patient. A lack of data integration creates a scenario where the patient’s claim submitted through BPI is siloed and the information is never integrated into the health plan data. But again, the bundled pricing model encourages more utilization and is not primarily concerned with containing total cost of care. This is an important distinction from savings calculations done off of “sticker” prices. The bundled pricing fee model has high motivation to increase claims volume. There is also little, if any, medical review conducted for medical necessity. There are valid concerns about whether employees should be able to go get unchecked free imaging and surgical procedures en masse. BPI has no incentive to monitor or contain these claims. In fact, the administrative fee is usually set up as a percentage of the “savings.”

The administrative fee model that BPI uses is very problematic. The employer will usually be billed a percentage of the “savings” off of the “typical PPO price.” This measure uses very questionable data benchmarks and assumptions. In essence, the employer pays a percentage of savings calculated solely by BPI without any type of true independent validation or audits. This arrangement is also sometimes referred to as a shared savings model. When I worked in the industry, I tried to steer clients clear of adopting any type of shared savings administrative fee pricing. The house always wins when you adopt a shared savings-type pricing. A flat PEPM administrative fee is best. Discounts or negotiated pricing should be included as part of a vendor’s value proposition, not used as a method for reimbursement. BPI is therefore incentivized to run more claims volume through their service as it will result in more collected fees.

Another area that should be considered by decision makers is that of healthcare equity. From a health plan policy perspective, the question arises on whether it is equitable for certain members on the plan to receive care covered with no out of pockets costs when the plan document outlines other benefits for the remaining members. While patient A is required to fulfill their deductible and/or coinsurance requirements under the health plan, patient B may have zero expenses because they are having a procedure on the targeted approved “list” of bundled procedures. Why not then have no deductible or out of pocket requirements if the intent is to improve the benefits? This goes back to the fundamental question if bundled pricing is being added for the purpose of a “cost savings” component or for benefit enhancement.

The Ugly

The primary problem with bundled pricing is the methodology used to calculate cost savings. This area is key because the main reason employers might adopt bundled pricing is that they are under the impression that significant cost savings will be achieved. When BPI talks to potential clients, the elevator pitch version is that the employer will save on cost (40-50%) and members will get enhanced benefits. Here’s how it usually works: BPI comes in and does a savings analysis exercise for the client that is currently with a carrier or TPA. The report then shows that all the shoppable procedures could have been redirected to lower cost of care providers in the BPI network of providers. This usually assumes that all of the procedures could have been redirected. Rather than compare this same exercise to redirection opportunities already available inside their current PPO network, BPI will pull benchmark data from a third party database that usually isn’t even close to the current carrier’s actual pricing. The client then assumes that the “typical PPO price” is what they would currently be paying. Which is very unlikely. I was personally involved in numerous analyses of the data and saw where BPI claimed savings off of the “typical PPO price” when in actuality the carrier’s pricing was still significantly lower. In addition, the savings analysis will pull in every shoppable procedure to extract savings that could have been achieved with existing carrier had all the proper redirection been done. The interesting thing is that the carrier can likely perform a similar savings analysis to redirect care, also with large savings opportunities. In that case, it is likely that the client is not getting good redirection in their current plan so incentives should definitely be examined.

Potential clients are told that they should be paying much less than the “typical PPO price.” This is where the foundation starts falling apart. I have sat in presentations by several different bundled pricing providers who use some variation of a benchmark price that they can compare their bundled prices to. However, I never met one BPI rep who could adequately explain the methodology behind the benchmark they used. In fact, I was at one presentation where an astute consultant raised their hand and asked the BPI rep how they calculate the baseline numbers. The rep looked like a deer in the headlights and quickly deflected to another question. When pushed on this point, BPI will say that it is a proprietary pricing database from a third party vendor that assembles carrier/vendor data. The irony here is that a solution built on the basis of transparency is remarkably opaque. Yes, the bundled prices themselves are very transparent, just not the benchmark used to calculate the savings. I was personally involved in detailed analyses of pricing comparisons and what was shocking to me is how overstated the “typical PPO price” amounts were when compared to the carrier’s actual allowed charges. The entire premise of significant cost savings rests on using this proprietary third party database that is not adjusted to specific carriers and regional price differences. In fact, this benchmark database typically includes a hodge podge of various types of carriers and vendors, all without adjusting for specific networks, regions, and the current carrier that the client may be currently using.  

The regional price differences dynamic is a very important consideration. Keep in mind that the third party database puts in average prices from many carriers and usually at the national level. It does not adjust for the allowed amounts or networks the client’s carrier may already have with providers in that specific region. These assumptions are important and let’s break this down on a very practical level. I will use a hypothetical example to make it relatable. For example, imagine for a moment that you moved from Denver, CO to Tulsa, OK and you needed to buy a home. Depending on which website you use, the national median price for a home is approximately $218,000. In Denver, the median home value is $415,000 and $120,000 in Tulsa. Big difference. Once you arrive in Tulsa, you hire a local realtor who promises to find you a home at a cost significantly under the typical home price. The realtor has a unique commission structure that will be 20% of the savings off of the typical median home price. After several showings, the realtor finds you a home at a purchase price of $128,000. This is $90,000 less than typical home price in Denver and you are feeling great! That is until you get the commission bill from the realtor who just invoiced you for $18,000. This seems absurd when you realize that the median comparison was not regionally adjusted to reflect actual home prices in Tulsa or that you could have used the home seller’s realtor without paying this “shared savings” fee. When you contest the charge, the realtor says, “But I saved you $90,000 according to what the typical home price is!” While a seemingly outlandish comparison, this scenario describes the exact methodology used to calculate savings in most bundled pricing fee models. Imagine if instead you as a home buyer used to compare homes in the zip codes you were shopping in with actual homes sales data.

The large insurance carriers have sophisticated and massive pricing databases based on actual pricing for all types of providers in the patient’s specific service zip code. This could be compared to the of pricing. The flaw with many third-party pricing databases is that they are using aggregate data that does not accurately compare and contrast data for the specific carrier that the client may be using. So then the main issue is not so much about savings on the procedures, but actually on the redirection to lower cost of care and how to accomplish that effectively.   

Again, the baseline comparison “typical PPO price” is very problematic and is why BPI can comfortably claim that the “typical” charge is 200% higher than their bundled pricing. To make this claim, you literally have to have an opaque hodge-podge of carriers and payers thrown together as the benchmark, plus mix in apples and oranges provider types during analyses. An example of different provider types would be using the typical price for a hospital and comparing to pricing at a free-standing imaging center, then lumping together and claiming the savings when redirected. When in reality the imaging center is likely also in the carrier network. These methodological assumptions used would completely fall apart if used in robust research designs. To address these concerns, BPI will have an independent organization “validate” the methodology and a Good Housekeeping Seal type of validation will be given because according to that “typical price” in the market, BPI will save employers a lot of money. This is because there will appear to be significant savings when using these faulty pricing assumptions. The validation procedures will say change other assumptions including what percentage of procedures get redirected, but not an apples to apples comparison to savings employers could achieve with their existing carrier through proper incentives for redirection. Unfortunately, these dynamics are lost in the fog and employers become the victims of flawed information.

The only true way to measure savings is for a comprehensive claims repricing analysis to be done. This is a good exercise for the benefits consultant to be involved in. The way to accomplish this is to take a claims file from the current carrier, identifying all of the shoppable procedures and have BPI run it against their providers. The question then again is what if these same procedures had been redirected by the existing insurance carrier to lower cost providers?

BPI is sometimes in a dilemma when it comes to insurance carriers. On the one hand, BPI will portray carriers as the villains since they have not redirected care adequately and to them, represent the incumbent shortfalls of the industry. I’ve sat through many bundled pricing presentations and the main reason cited for healthcare trend increases was the administrative component. In theory, a “cash price” reimbursement is made faster to providers instead of having to wait on the slow-moving carrier. In reality, most carriers pay the provider electronically on a prompt basis, providing that the claim was submitted promptly also. On the other hand, BPI will act as a complementary benefit to carriers in order to enter the picture and act as a “bolt-on” to the existing health plans. Usually whichever approach needed to win the sale is the one used. I once had a BPI rep personally tell me that they were not actually competing with carriers on discounts. Rather, they were selling the product as a benefit enhancement for employees.

On the aggregate, bundled pricing vendors have not been able to prove significant savings when those same lower-cost providers are examined in existing carrier networks. Yes, savings can absolutely be demonstrated when services are redirected from higher-cost facilities to low-cost providers. This is where the distinction must be made, but often gets convoluted. How else is BPI able to quickly “launch” into new markets and have providers so ready and willing to accept what appear to be very low “cash” prices? More cities and markets are added with great fanfare. The truth is that these providers are not coming down significantly on their rates. In fact, they are likely still a fair amount higher than the carriers’ negotiated rate. However, it looks like more of a savings when compared to the third party database. Providers are very willing to participate though because they will get more volume through the door and have no patient share to collect. Much less have any type of medical review conducted to see if procedures are actually needed. In an era when reimbursement is moving toward a VBC model, it is attractive for providers to be paid on a “cash” price with no quality outcomes tied to reimbursement. This is a win-win for providers too.

The perception conveyed by BPI to potential customers is that significant cost savings will be achieved by better pricing. In fact, I personally spoke to clients who were emphatically told that the 40-50% savings numbers were in addition to the carrier discounts. The conflation of the two dynamics is naïve at best and disingenuous at worst. If pressed on it, BPI may admit that the quoted savings are actually derived from the redirection itself. The problem is that BPI will allow these two separate perceptions to become conflated. The implied result is then that BPI can do a better job than the carrier on redirection. This may very actually be the case and I will absolutely concede that point. But again, that’s not too difficult to do when the patient has to pay zero. This is where I have a fundamental problem with the bundled pricing sales pitch. BPI can’t have it both ways. Either accurately position the cost savings as a result of better redirection or as a benefit enhancement to employees. However, on the aggregate level, BPI is simply not getting significantly better pricing than large carriers when similar providers are accurately compared side by side in an apples to apples comparison. This would involve not comparing hospital MRI’s to an imaging center. The ironic thing is that most carriers already have various forms of bundled pricing in place including bundled case rates, diagnosis-related groupings (DRGs), and other similar reimbursement methods. When considering simple economies of scale, there is simply no verified data out there to demonstrate that BPI is getting better discounted prices than the larger carriers when compared uniformly. It defies logic and a good data analysis. There is a group of consultants who strongly believe that the large carriers all make a percentage of claims spend as their administrative fee. This is simply not the case. While there are shared savings or percentage of network pricing arrangements out there, much of the carrier self-funded population is billed on a flat PEPM ASO fee. When I worked for a large carrier, I never had self-funded group with this type of arrangement. My clients always had a flat administrative fee. So no, there was no incentive to drive claims cost up. The irony here is that these same consultants will conversely have no qualms recommending to a client to engage in a bundled pricing product that does in fact bill for fees using a shared savings pricing method, driven up with more claims. With the savings calculated on a faulty baseline benchmark that the employer has no control over. In this setup, there is actually a perverse incentive for BPI to ramp up claims. Maybe this is why BPI is not motivated to have medical management programs in place to control costs from unnecessary procedures. In fact, BPI will introduce a fast pass system for patients to get procedures done with literally no review or authorization required. The more procedures, the more revenue. The consultants should be demanding that BPI bill flat fee for consistency purposes.

I didn’t address the pharmacy area up to this point, but filling RX scripts has also become an increasing area of opportunity for BPI. An outside PBM will typically be used to fill low-cost generics at no cost to the member. It is very important for potential clients to understand how they will be billed for these prescription claims. Again, the method of cost savings is not so much about the drugs themselves being significantly less than prescriptions covered under the health plan, the savings comes from replacing other medicines and being redirected to lower-cost generics. It is critical that the client ask BPI to provide detailed information on how the claims are being billed. What can happen in these arrangements is that the outside PBM is actually paid a per-script fee that is much higher than would have been paid for the same RX claims under the health plan. Otherwise, there is no way that the PBM could operate based on a “shared savings” off of the savings in simply moving to low-cost generics. The devil is in the details and that’s why clear understanding is crucial.  

Things to Remember

Let me be very clear in saying that if BPI is able to significantly redirect care to lower cost providers due to lack of similar utilization with existing carrier tools or incentives, then it may be the solution that the employer needs. There are understandable concerns with current market dynamics including price transparency, redirection, High Deductible Health Plans, patient share, etc. These problems will continue to create an environment where these type of niche solutions will arise. What is needed in each of these cases is more information and tools to make better-informed decisions.      

So, if the employer or payer decides to add bundled pricing as a bolt-on value add service, here are some recommendations:  

  1. Insist on flat Administrative fees on a PEPM basis. This removes the propensity to unnecessarily increase claims volume for increased revenues on a shared savings basis.
  2. Require ongoing data validation for cost savings.
  3. If working with a consultant, ask them to disclose their commissions on the bundled pricing product.
  4. Have Performance Guarantees included. Minimums for redirection rates and auditing measures to prevent duplicate billing are needed.  
  5. Closely examine the pharmacy fine print in a bundled pricing arrangement.

Again, the purpose of this article is not to downplay a product offering that has done a really good job of creating much-needed conversations in the healthcare industry. Rather, my goal is to provide information that key decision makers need to consider before rushing headlong into a strategy that deserves more vetting. The problem with things like bundled pricing is that employers can get hyped up and go all in, thinking they’ve substantively addressed cost issues. In reality, often money has just changed cost buckets and no significant savings have occurred. In the complex healthcare industry, there is no one solution that is a panacea. At the end of the day, consultants should be providing value to customers while working toward a goal of lowering the total cost of care. The conversation should be ongoing. Without it, the system will remain broken with everyone footing the bill. No one solution is going to address all healthcare plan concerns. Especially when you consider that most of these programs only operate on the margins. Beware that the next silver bullet doesn’t hit you in the foot, making you go from hero to zero.