Bundled Payments

The Problem

Fee-for-service healthcare reimbursement is alleged to provide financial incentives for healthcare providers to deliver redundant and/or unnecessary patient services.  New forms of reimbursement, collectively referred to as value based purchasing, seek to change these inherent financial incentives by prospectively limiting the amount of reimbursement to providers.  These policies shift financial risk from third party payors to healthcare providers and are intended to simultaneously improve patient outcomes and cost-effectiveness.

Healthcare providers have not developed actuarial methodologies to assess and mitigate the new financial risks imposed by value based purchasing.  Providers’ reluctance to accept risk without these management capabilities deters the ability to assess the purported merits of value based purchasing.

One form of value based purchasing is bundled payment reimbursement.  Bundled payments combine all services for a defined episode of care into a single amount of payment.  Providers may place bids for bundled payment services to gain market share.  Providers are financially at risk for the patient care provided under these contractual awards. 


Develop and validate analytic methodologies to assist health care providers to assess and mitigate financial risk inherent in bundled payment.

  • Decompose the financial variance among episodes of care for a given case type into component elements.
  • Support providers’ review and re-engineering of the care delivery process to reduce the variation in elements of care while improving quality and cost management in the care episode.
  • Provide quantitative methodologies to establish bid prices for care episodes in bundled payment contracting.


Use point estimate to estimate the mean and variance of the cost of a care episode.  Total knee arthroplasty (TKA) will be the initial care episode analyzed.  Episode costs will be decomposed into three components: 30 days before hospitalization, the index hospital admission, and 90 days post-acute care.  The contribution of each of the three components to the total episode variance will be determined.  Within each component, identify the chargeable items that contribute to total variance.

Replicate this analytic approach on hip arthroplasty episodes to determine the feasibility of this approach on episodes other than TKA.

Provide analyses of financial risk and options to mitigate risk to healthcare providers to support their determination of care delivery profiles, associated financial risk, and contracting terms to establish episode bids.

Potential Impact

Help to reduce healthcare cost while improving quality of care.

Purdue University, 610 Purdue Mall, West Lafayette, IN 47907, (765) 494-4600

© 2015 Purdue University | An equal access/equal opportunity university | Copyright Complaints | Maintained by Regenstrief Center for Healthcare Engineering

Trouble with this page? Disability-related accessibility issue? Please contact Regenstrief Center for Healthcare Engineering at dpweb@purdue.edu.