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Clinical Variation: The Hidden Gem in Bundles

Sheldon Hamburger
Principal/Consultant, The Aristone Group, Raleigh-Durham, NC

The Centers for Medicare and Medicaid Services’ (CMS) ongoing push into mandatory bundles is finally making the healthcare industry stand up and take notice. Because of the government’s focus on reducing post-acute spend in these programs, hospitals follow suit and believe that their opportunity resides in the post-discharge venue. As we’ll see, there is a much larger financial opportunity available for those willing to seek it out.

A hospital performing some “reasonable number” (let ’s say about 1,000) hip and knee replacements per year could be seeing a post-acute world that looks something like Figure 1 below. These percentages are approximate and more along the lines of “order of magnitude.”

Note: After seeing many analyses of CMS data for both Bundled Payments for Care Improvement (BPCI) and Comprehensive Care for Joint Replacement (CJR), the below percentages seem to hold true with only minor variations on a facility-by-facility basis. For example, Diagnosis-Related Group (DRG) might be 46 percent, Skilled Nursing Facility (SNF) might be 28 percent, and so on.

Let’s consider some approximate numbers using these percentages:

CMS’ Goal

CMS’ nirvana in these bundle programs would be elimination of SNF bringing their total SNF spend to $0. More realistically, cutting SNF in half is probably the target. This would result in a $3.75 million annual savings to CMS in our example above. The hospital’s share of this savings could be up to 20 percent in the newest mandatory models. This would generate about $750,000 per year for the hospital.

The strategy to effect SNF reduction revolves around sharing some of this savings with the physicians. Known as “gainsharing,” such arrangements are generally not allowed in the healthcare world, but bundle programs have waivers to permit this. These gainsharing arrangements create economic incentives for surgeons to promote reduction in SNF utilization.

What’s in it for the Hospital? More Than Most People Realize!

In every instance I’ve seen, hospitals follow the CMS lead and pursue postacute savings as their lead source of revenue in bundled payment programs. While not “chump change,” the potential post-acute revenue to hospitals under these programs ($750,000 in our example above) is actually dwarfed by a unique opportunity CMS has provided.

In addition to sharing savings in the area of post-acute care, CMS also allows hospitals to generate savings under something it refers to as “internal cost savings” (ICS). These are savings the hospital achieves for care improvement under the bundle program by performance optimization within their own four walls as opposed to post-acute care.

Often, hospitals look at the ICS opportunity to mean, in orthopedic cases, for example, reductions in implant spending by standardizing vendors. This type of improvement may generate some savings, but the amounts are relatively small. Moreover, hospitals find it very difficult to get surgeons to standardize on these devices.

What’s So Special About ICS?

The great thing about ICS is that there are no limits on how much a hospital can save and the hospital gets to keep 100 percent of that savings. Of course, you don’t need to be part of any “program” to work on internal operational improvements. But as we’ll see, CMS provides a special incentive to drive theoretical savings to reality.

A Note About Clinical Variation

For many years, hospitals have been struggling with the challenges of clinical variation, and rightfully so. Wide variations on a risk-adjusted, per case variation for any medical or surgical condition indicate inefficiencies that can only be addressed through direct physician engagement with credible data, as Don Berwick, MD, the quality expert, noted.1

I often hear hospitals explain that they have ongoing initiatives in this area including the establishment of standardized order sets and the use of fancy data analytics tools. But when I drill down, reality is that these initiatives are hardly effective, if at all.

Studies show that, adjusted for patient acuity, a given surgeon’s cases can vary up to about $30,000 per case.2 For a hospital with 1,000 annual cases, this equates to a staggering $30,000,000 per year! Of course, it’s not realistic to expect the elimination of all clinical variation. But even a reduction of just eight percent would yield $2.5 million to the hospital—three times the post-acute opportunity that is commonly the target of bundle programs (See Figure 2).

While this challenge of reduction in clinical variation is well known, hospitals have been unable to make inroads in improving the situation because the necessary changes fundamentally revolve around changing surgeons’ practice patterns, which has always proven to be difficult, but not impossible, using reliable data. This makes sense. Changing human behavior is always difficult, but doctors will make rational decisions based on their own data, if it’s objective, transparent and credible.

But, CMS bundle programs allow “gainsharing” with surgeons who cooperate in such behavior change. This gainsharing has always been the missing ingredient in a truly effective strategy to address clinical variation.

The Hidden Gem Emerges

This is the hidden gem in CMS bundle programs. Just look at the numbers. The hospital example cited above is chasing about $750,000 per year in post-acute savings. To achieve this, they will invest in care coordination software technology and additional staffing for care navigators and/or case managers. Those “investments” are ongoing; that is, they are new, annual expenses substantially reducing the $750,000 opportunity.

But the same hospital could choose to pursue $2.5 million per year in clinical variation savings. To achieve this, they will make initial investments in technology and training to effect the needed surgeon behavior change. Once that change has been implemented, the ongoing costs should be nothing more than minimal technology. Even if these implementation and operational costs are double those of the post-acute opportunity, the net savings to the hospital simply dwarf anything in post-acute (See Figure 3).

Now look at the accumulated savings (these are hard dollars, not “efficiency improvement”), to the hospital over three years (See Figure 4).

And remember—there is no limit to the amount of savings the hospital can generate. And it keeps 100 percent of that savings.

What Are You Waiting For?

Given this unique opportunity that is only afforded in bundled programs, it is difficult to understand why hospitals simply don’t ignore the post-acute area and instead focus on clinical variation as the key part of ICS.

Additional benefits come from these efforts. For example, new workflows and processes that result in the improvements in orthopedics will create a natural halo effect that crosses over to other services lines. This is additional free money—100 percent to the bottom line.

Obviously, there is much work and effort required to achieve the results here. But given the economic opportunity, this should be the primary focus of every bundle program under CMS.

1 Berwick, D. (1989). Continuous improvement as an ideal in healthcare. New England Journal of Medicine, 320, 53-56

2 Source: Various hospital studies by Verras, the American Hospital Association’s endorsed solution for clinical variation, repeatedly show variations of $20-$30K per case.

Sheldon Hamburger is an alternative payment model advisor for hospitals and healthcare firms nationally. With a focus on program implementation, he brings extensive knowledge and experience gained from more than 25 years of healthcare financial consulting, technology design and development, and sales and marketing strategy for Fortune 1000 clients. He is a frequently sought-after speaker and writer on regulatory and technology trends affecting hospital operations, provider reimbursement issues, BPCI/CJR, programs and regulations, medical expense strategies and payer-provider dynamics. Residing in Raleigh, NC, he is an active member of HIMSS, HFMA and ACHE. He earned his bachelor’s degree in Computer Engineering from the University of Michigan. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. or (248) 613-7166.

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