Bundled payments are a value-based care model where your practice receives a single, fixed payment for all services related to a specific treatment or procedure—an “episode of care.” This single payment replaces the multiple bills you would traditionally send for each individual service.
Think of it like a fixed-price contract from a general contractor. The contractor gives one price to build a new kitchen, covering the plumber, electrician, materials, and labor. If they complete the job efficiently under budget, they increase their profit. If costs run over, the loss comes out of their pocket. In a bundled payment, you and your care partners take on this same cost management risk.
Why This Matters to Healthcare Providers
This model shifts the financial risk for an entire episode of care to you. Success under bundled payments proves to potential buyers that your practice is efficient, can coordinate care effectively, and knows how to manage costs—all qualities that increase your valuation. Government and commercial payors are increasingly using these models, like the CMS “TEAM” model for surgery, making this a key skill for future success.
Example in Healthcare M&A
Scenario: An orthopedic practice is evaluating whether to join a commercial insurer’s bundled payment program for total knee replacements. The episode of care covers all services from the day of surgery through 90 days of post-operative care.
Application: The practice partners with a local hospital and a preferred physical therapy group. They agree on a plan to standardize the knee implants they use and implement a collaborative post-op protocol to reduce recovery time and prevent readmissions. Instead of three separate entities billing the insurer, the orthopedic practice receives one single payment for the entire episode and is responsible for paying its partners.
Outcome: By managing the process efficiently, the total cost of the episode is 15% below the bundled payment amount. The practice shares this surplus with its hospital and therapy partners. When the practice later explores a sale, buyers see this program as a major strength. It demonstrates predictable revenue and an ability to manage risk, leading to a higher valuation multiple than a practice operating solely on a fee-for-service basis.
Related Terms
- Value-Based Care – The overall healthcare model that prioritizes patient outcomes over the volume of services. Bundled payments are a primary example of this model in action.
- Accountable Care Organizations (ACOs) – Another value-based model, but ACOs manage the total cost and quality for a patient population over time, not just a single care episode.
- Stark Law – A federal law governing physician referrals. Your bundled payment arrangements with partners must be structured carefully to meet its requirements, though many government models include specific legal safe harbors.
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Frequently Asked Questions
What are bundled payments in healthcare?
Bundled payments are a value-based care model where healthcare providers receive a single, fixed payment for all services related to a specific treatment or procedure—referred to as an “episode of care.” This payment replaces the traditional multiple bills for each individual service.
How do bundled payments impact financial risk for healthcare providers?
Bundled payments shift the financial risk for an entire episode of care to the healthcare provider. Providers must manage costs effectively to stay within the fixed payment. If they complete the care episode under budget, they can increase their profit; if costs run over, the loss comes out of their pocket.
Why are bundled payments important for healthcare providers’ valuation?
Success under bundled payments demonstrates a practice’s efficiency, ability to coordinate care, and cost management skills. These factors increase the practice’s valuation and appeal to potential buyers, as they ensure predictable revenue and risk management.
Can you provide an example of bundled payments in a healthcare M&A context?
An orthopedic practice participating in a bundled payment program for total knee replacements receives one payment covering surgery and 90 days of post-op care. By partnering with a hospital and physical therapy group, standardizing implants, and collaborating on post-op protocols, the practice managed costs efficiently, reducing total expenses by 15% below the bundled payment. This success increased the practice’s valuation in a sale scenario.
What related terms should healthcare providers understand along with bundled payments?
Related terms include:
- Value-Based Care: A healthcare model prioritizing patient outcomes over service volume, with bundled payments as a primary example.
- Accountable Care Organizations (ACOs): Value-based models managing cost and quality for patient populations over time.
- Stark Law: Federal law governing physician referrals; bundled payment arrangements must comply with this, with some models having legal safe harbors.