Prospective vs. Retrospective Healthcare Bundled Payment Models

When implementing healthcare bundled payment models, providers and payers have two main strategies to choose from: prospective or retrospective bundles. A prospective healthcare bundled payment model involves creating a budget when the episode of care criteria are reached. The fee is then paid to the provider organization or an intermediary like an accountable care organization to distribute to all relevant clinicians, according to a report from the Health Care Incentives Improvement Institute.

On the other side, a retrospective healthcare bundled payment model requires the fee to be calculated ahead of time and then reconciled against fee-for-service medical claims to determine shared savings after the episode of care ends.

“A fundamental question in contracting for an episode of care with an existing provider organization is whether payments for the bundle are made prospectively or retrospectively,” according to the report. “Episode of care contracting has long been seen as a potentially effective way to transfer manageable financial risk to providers through a single (global) case rate. This ‘technical’ or ‘performance’ risk transfer enables a provider organization to recognize the financial reward for delivering a complete case for less than the negotiated price.”

Payers will need to understand the positives and negatives of these two payment systems before settling on a particular reimbursement plan. In a prospective payment, report authors from the Health Care Incentives Improvement Institute suggest applying a withhold in case a patient is later diagnosed with more severe medical conditions such as cancer.

In a prospective payment model, payers need to make sure to track fee-for-service claims against the bundled fee, which will help evaluate future pricing of healthcare bundled payment models. Payers should either have manual processes to complete this step or implement automated technology.

The report outlines two ways that prospective payments can be accurately priced in a bundle, which involve a flat average payment rate or one that accounts for patient severity using risk adjustment.

A retrospective payment model incorporates a reconciled budget with the health plan acting as a “financial integrator” of the fees paid out instead of putting the responsibility on one provider to be the financial intermediary.

One positive of retrospective bundled payments includes the ability of payers to work with more provider organizations since prospective payment has more regulatory hurdles for providers to overcome. Additionally, since patient behaviors and potential treatment side effects are difficult to predict, reconciling payment through a retrospective approach is more beneficial for providers.

How can insurers work with retrospective and prospective healthcare bundled payment models to achieve the greatest success? One way is to begin with retrospective bundles, which should establish a pathway to prospective healthcare bundled payment models in the future.

In the Health Affairs publication, the Integrated Healthcare Association (IHA)’s Tom Williams and Jill Yegian provided some key takeaways from their work in bundled payment contracts and recommended payers to begin in retrospective bundled payment models before transitioning to prospective bundles.

“Based on our experience, we recommend that those interested in testing bundled payment consider initially testing the bundled payment model using a retrospective payment approach,” the authors wrote. “Retrospective payment is the most common approach currently in use, easing the regulatory and administrative burdens in the early going.”

“It also offers the advantage of developing a reliable financial baseline from which a prospective payment amount can be fairly negotiated. Importantly, this recommendation should not be interpreted as backing away from prospective bundled payment as the ultimate goal; rather, it is a practical, transitional step.”

The IHA bundled payment program initially chose to pursue prospective reimbursement because this type of payment system is well-established in their state and stakeholders felt that retrospective reimbursement would not fully test the risks and benefits of healthcare bundled payment models.

The problems associated with starting off in prospective bundles dealt with regulatory, legal, insurance benefit design and claims payment challenges that the IHA did not anticipate. State regulators had to determine consumer protections in prospective bundles as well as whether providers took on financial risk.

Regulators were also unsure how to apply existing coinsurance and copayments to prospective bundled payment models along with whether to inform consumers about these bundles. Commercial payers also had difficulty in resolving disputes regarding prospective bundled payments.

Due to these many challenges, the report authors suggest payers to begin testing in a retrospective bundled payment model, which should reduce regulatory and administrative burdens. Beginning bundled payment programs through a retrospective approach will also allow payers to build a financial baseline against which a prospective payment can be negotiated more accurately in the future. By beginning in a retrospective bundle, payers can then more effectively transition to prospective bundled payment models later on.

Payers using the retrospective model and then transitioning to a prospective healthcare bundled payment will also allow providers to take on more financial risk in a gradual way.

Health insurance companies looking to create a bundled payment contract are advised to begin in a retrospective bundle before moving into the prospective payment model.

Dig Deeper:

How to Overcome the Challenges of Bundled Payment Models

How Payers Should Prepare for Value-Based Reimbursement