Episode 15: Bundled Payments Bring Benefits

Simplifying the payment process for healthcare can be like turning a large ship, but bundled payments have been a large step forward. Dr. James Ballard, an orthopedic surgeon in Portland, walks through the benefits of bundled payments for patients, payers, and providers. When doctors look at the world, they can bemoan all the difficulties of the healthcare system, or they can look at them and find opportunity in the challenge.

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Full Transcript

Announcer: It’s time to think differently about healthcare. But how do we keep up? The days of yesterday’s medicine are long gone, and we’re left trying to figure out where to go from here. With all the talk about politics and technology, it can be easy to forget that healthcare is still all about humans. And many of those humans have unbelievable stories to tell.

Here, we leave the policy debates to the other guys and focus instead on the people and ideas that are changing the way we address our health. It’s time to navigate the new landscape of healthcare together, and here are some amazing stories along the way. Ready for a breath of fresh air? It’s time for your “Paradigm shift.”

Michael: Welcome to the “Paradigm Shift of Healthcare” and thank you for listening. I’m Michael Roberts, with my co-host Scott Zeitzer. On today’s episode, we’re talking to Dr. James Ballard, a leading orthopedic surgeon in the Portland area. Hi, Dr. Ballard, and welcome to the show.

Dr. Ballard: Hey, thanks. Great to be here. Thanks for having me.

Scott: Yeah, Dr. Ballard, I know that you and I have worked together for quite some time. I’m gonna…I think it might be at least 10 years, it might be close to 20 years.

Dr. Ballard: Yeah, I think we’re getting even beyond 10 for sure.

Scott: Yeah. Wow. Okay. I’m just showing my age when I can’t tell anymore, that’s for sure. The topic from a big picture for everybody joining us, is about bundled payments and ambulatory surgical centers. And I kind of wanted to ask you first, like, how did you get started with your ambulatory surgical center?

Dr. Ballard: That’s actually a super interesting question. I think every surgery center has a great backstory. And our backstory, of course, is enough to probably fill a couple of podcast episodes. But essentially, I’m what’s called an adult reconstruction surgeon, so I do hip and knee replacement surgery.

And traditionally in healthcare, I didn’t have a place in an ambulatory surgery center because those were originally built, of course, for, what we call low-acuity surgery procedures, like, you know, knee scopes, and carpal tunnel releases, and small hand procedures, and things like that.

So when I came into practice in 2003, total joint surgeons didn’t even work in surgery centers. And so, to be honest, it wasn’t even on my radar when I started my practice. But then pretty soon we started noticing that we were getting, really, a lot better at hip and knee replacement, and getting people out of the hospital faster.

And traditionally, you know, if you go back a long time, this is a two-week stay in the hospital. Then we started noticing that we got this down to two days, and then we got it down to one day. And then we started thinking, and not just me, but other surgeons in the country started thinking, “Why are we even doing this in the hospital?” And when you start to ask that question, that’s a huge paradigm shift. That’s taking something that’s been traditionally done one way and turning it on its head.

And that’s really the moment when we started thinking, “Okay, we should probably start doing hip and knee replacement in a surgery center.” So that was kind of the genesis of the idea.

Scott: Yes, it’s interesting about ambulatory surgical centers in general, when you talk about something like a total joint replacement, a total knee replacement, it does involve a lot of education for the patient as well as the caregiver.

Dr. Ballard: Absolutely. When we transitioned and we brought patients to the ambulatory surgery setting, we knew before we did it that it would have to be a setup with a deep educational component. There had to be a lot of prep work ahead of time. You couldn’t just draw people into the surgery center and operate them. But it’s funny because we knew that. We started doing that in hospital.

So before we did it in the ASC, we realized in the hospital setting that people did better when they had a lot of pre-op education, when they had post-op education, when they had appropriate follow-up. So we just took what we had learned in the hospital and put it into an ASC environment.

So it isn’t like we did something we weren’t doing before. We just took it and tailored it to the outpatient arena. But it has extra importance for a couple of reasons, the biggest one is it demystifies the idea that you’re gonna actually have this done and be home having dinner at your house that night. And so the education does that.

And then, of course, it prepares people so they can be set up for success when they do go home.

Scott: It’s really excellent. And as the person… I did not get a total joint replacement. I had a hernia operation done in an ambulatory surgical center. And as the patient, it is really nice to be able to just go in, go out the same day and be at home. It’s never fun to have surgery, that would be a stretch, but it’s much nicer to recuperate in your own house.

Dr. Ballard: No kidding. And, you know, when we were starting to think about…when the idea first came out, I rejected the idea at first because as I started thinking about…this is years ago. The only thing that I could come up with for motivation to do it, this is years ago, was that it was gonna allow me to work in an environment that I own, and it would be a way to supplement my income.

And I rejected the idea because I wasn’t gonna do something that was just for me. It would make my life better, you know, from a logistics standpoint, etc. But it’s only when I started to open my eyes and realize that, like, what you just said, how much better I could make the patient experience.

And then you start to getting into how I can make this cheaper for the people that pay the bill, which is the insurance company generally and patients to a smaller degree. Then I started noticing, “Okay, this is an idea that’s gonna affect everybody.” You know, there’s really three pillars to the surgical experience, right?

There’s the provider, which is me. There’s the payer, which is the insurance company, and then there’s the patient. So when I started to see the synergy that an outpatient surgery would have in the total joint context that all three portions, you know, all three people that were in this together, or all three groups, were gonna benefit, particularly the patient, that’s when I knew the idea was good.

Scott: Interesting thing that you bring up is one of the pillars being the insurance company. And that’s a good segue for the conversation about bundled payments and how they fit in with the ambulatory surgical center. So let’s take a step back for a second. Why don’t you explain to everybody what a bundled payment is?

Dr. Ballard: You know, when you think traditionally about the healthcare, that anybody who’s listening, the way their healthcare works, unless they’re in a Kaiser-type situation, it’s what we call fee-for-service. So, Scott, if you have your hip replaced, and we do it at a hospital, and Blue Cross is your insurance company, Blue Cross is gonna get bills from a bunch of people.

They’re gonna get a bill from the surgeon. They’re gonna get a separate bill from the anesthesiologist, a bill from the hospital, a bill from the physical therapist. If there’s a brace or something involved, they get a bill from a durable medical, good company. If there’s home health involved, they get a bill from the home health people.

And then what happens is they have control sort of over the cost. But the cost becomes hard to control because there’s so many players and so many different bills involved. So when you take in a hospital setting, the fee that the hospital charges Blue Cross is called a site fee.

So that’s the money that Blue Cross gives the hospital to pay for your hip replacement implant, which costs $4,000 to $5,000. It’s to pay for all the, you know, medications that are used, to pay for the nurses that take care of you, all the overheads the hospital has. When you have your hip replaced, the major cost component is the site fee.

Now, it’s interesting because when people think about, you know, “I’m getting my hip replaced,” they picture that the majority of the money goes to their surgeon. Because that’s kind of the picture people have. When in reality, only about 6% to 8% of the total spend on your hip replacement goes to the surgeon. The clear bulk of it goes, in the case we’re talking about, [inaudible 00:07:18] goes to the hospital.

And hospitals have thrived on joint replacement surgery because it’s very profitable, which means that the insurance company gives the hospital quite a bit of money. And they clear when the surgery is done by good surgeons that are dropping length of stay to 1.2 or 1.3 days, and people are having fewer complications. The hospitals clear a substantial profit from that.

So it’s been great for them. And so that’s how we’ve been driving forward. Now, the problem, the macroeconomic problem we have in the United States right now is that the number of people that are gonna be needing hip and knee replacement is going up exponentially. And if you look at the curve for demand, it’s incredible. And anybody who pays attention to the news understands that the money is going down.

So the demand for one of medicines most expensive and common procedures is going up, and the money available is going down. So that problem has to be fixed somewhere. And frankly, right now, nobody is fixing it. So everybody’s looking at everybody else and nobody… So we’re maintaining this equilibrium, not even an equilibrium, the status quo that’s gonna be, it’s ultimately a train on a track going to a dead-end destination.

So ASCs are an excellent environment because they’re obviously a much smaller scale than a hospital. They have a much smaller footprint, and they’re much more nimble. So a surgery center can go to an insurance company and provide the same surgery for 30% or 35% less than the hospital.

So there’s two parts to your question that I’m drifting into. The first one is how does an ASC help that macroeconomic equation? Well, it helps the equation because it’s a lot cheaper, first of all. And it’s an environment that’s completely dictated and run by a surgeon, which hospitals are not. And so there’s an efficiency and a quality piece that comes in that as well.

Bundled payments, so fee-for-service again, is your poor insurance company gets bills from a ton of people. A bundled payment arrangement is where you have a company that’s called a convener, and the name doesn’t really matter, but it’s a company that is in charge of this quote unquote “bundled payment.”

So the bundled payment company has an agreement with Blue Cross, “Hey, Blue Cross, every time we do a total hip for you, we’re gonna give you an all-in price of x number of dollars. Meaning, Blue Cross, you’re gonna give us a check for x number of dollars, and then we will guarantee you that everything involved in this procedure will be covered in that one payment.”

So Blue Cross and the bundled payments scenario cuts one check only for the entire thing and it goes to this convener company, okay? So, and automatically, that amount of money is dramatically less than if you added up all the component pieces under a traditional fee-for-service arrangement.

So the convener takes that money, and then has an agreement with the surgeon, and the anesthesiologist, and the surgery center, and the physical therapist, and gives the money out to those different entities. And in the end, it’s done for a substantial discount to the hospital. But it’s done in a way that simplifies things dramatically for the insurance company, right, because now they’re just cutting one check.

And it leaves the onus on the convener to run an efficient operation. And as soon as you start putting surgeons in charge of making things efficient, that makes things ultimately efficient because that’s where we thrive.

Scott: Yeah, you know, it’s interesting, Dr. Ballard, I say this with love, anybody who works with orthopedic surgeons will find out that they are highly anal retentive, OCD [inaudible 00:10:43]. I mean this with love and care because anybody who’s actually observed a surgery or has been part of the team and a surgeon, it’s, like, it’s an absolute requirement.

You know, there’s a scalpel in your hand and you’re responsible for the patient. And everything is going to be set up the way that you want it to be set up to take good care of the patient. And it’s just the way…thank goodness for it. So I always make that joke, but in reality it’s like without that ability to really get very focused and efficient, you wouldn’t be a good surgeon. You wouldn’t be around.

Dr. Ballard: And what’s interesting is… So I don’t disagree with that, right. I mean, because we surgeons kind of have that mentality. We’re focused. We’re efficient. We’re driven to excellence, I mean, all those things you mentioned that play into that. What’s interesting, though, is the way we’re doing things right now in healthcare…

So when I’m in a traditional paradigm, I’m gonna do your hip replacement, we’re gonna go to a hospital. When I walk into the hospital, I’m walking into an environment that I have absolutely no control over, I have no financial stake in, I am not part of their process, really. Now, we’ve learned over time to force ourselves into their process a little bit, but hospitals are prohibited from getting me involved with them as an organization financially at all.

Scott: That’s correct.

Dr. Ballard: So as soon as you start putting surgeons in charge of an institution, like a surgery center, where they have a financial stake, they need to make it efficient. But they need to make it efficient at the same time they produce high quality, then you hit the magic sauce. Because now the motivation level for the surgeon to really drive that episode and really hone down in the OCD-type way you’re talking about, the efficiency, but, really, ultimately focus on quality. You bring efficiency and quality together, that’s the magic sauce.

Scott: Yeah, I agree with you. And, you know, in fairness to hospitals, their systems are set up to take care of everything from, say, OB-GYN care, all the way across to ortho, and cardio, and neuro.

Dr. Ballard: Exactly. Heart attack and stroke.

Scott: …the procedure’s hard.

Dr. Ballard: Yes. So we don’t focus on… You know, our focus is much, much more narrow, like you said. So we focus on just a more narrow range of surgical procedures. And, yeah, the hospitals, well, they, obviously they have a place, right? When you get sick you wanna go to the hospital.

But when you’re starting to talk about these high acuity, high volume, meaning a high demand for this procedure, very expensive procedure, hospitals have just not done, like, anything, really, to bring the cost down.

And the cost has to come down. There’s no way this whole thing is gonna survive unless the cost comes down.

Scott: You know, and it’s interesting because as far as patients are concerned, right now, they’re like, “Whatever, man, I like the idea of an ambulatory surgical center. I don’t really care about bundled payments.” But from a long-term scope perspective, like you said, that train has gotta go somewhere, right?

Dr. Ballard: It’s curious you say that. You know, you’re right. And it’s curious you say that because the way it’s set up right now, even, we’re doing hundreds of joint replacements in our surgery center. We’re saving every commercial payer in Oregon 30% per episode. But we’re so early into this that that savings is absorbed by the company and is not passed on to the patient, generally speaking.

So, right now, patients aren’t financially benefiting from the change of venue. But when I talk to insurance executives, which I’ve done a lot of that lately, and you start talking about bundled payments, they know that what they need to do is encourage their patients to go into this atmosphere where it’s gonna cost…they’re gonna get high quality but at a lower cost.

And so, what we will go towards, and it’s slowly happening, is the insurance companies will begin to structure a benefit plan so that when a patient makes a decision to go into one of their high-quality surgery centers, because not every surgery center is geared for this.

When you go to one of, you know, Blue Cross’s high-quality surgery centers, they’re gonna help you as the patient financially benefit from that with potentially no copay, or a lower copay, or a lower out-of-pocket maximum, stuff like that. Those insurance plan redesigns take time, and again, you’re talking major paradigm shift. So it’s just taking some time.

Scott: And it really is. To the point, I remember talking about this just offhand, we were just having a conversation, that in some ways it was actually, like, when you talked about getting this set up with the insurance companies, they were trying to figure out how to just get it done, right?

Dr. Ballard: Oh, yeah. So, you know, when you talk about what we do now with most companies, which is a fee-for-service arrangement, that was a problem in itself, because we had to convince them that, “Hey, we know you traditionally think this should go to the hospital, but it can go to the ambulatory environment.”

And now every commercial payer in Portland’s on board with that. So they’re all covering that because they know it works. When you talk about a bundled payment arrangement, and again, I’ve had conversations with every major commercial insurance carrier in Oregon, they want to do it. But the paradigm shift is so deep that their systems, their software programs, their whole thought process is geared toward suffering through this multiple-billing fiasco that we’ve traditionally done.

They’ve kind of just acquiesced to the fact that this is just the way our life is. And when this better idea comes around, they have to change a lot to make it happen. They have to shift their own mindset. They have to start changing software. They have to start being careful how they build, etc. So it’s like turning a ship, you know. And some of them are turning faster than others.

Scott: Yeah, it’s really surprising. When did you and your partners decide to start moving forward with the bundled payments? Because it seems like it’s, for sure, a lot of risk that you’re taking on. And then trying to tell insurance companies, “Hey, look, you’re saving money and we’re taking the risk.” When did you guys make that decision and decide to do it?

Dr. Ballard: So one more thing to tag on to answer that question.

Scott: Go ahead.

Dr. Ballard: One thing that we’ve done that’s unique with our bundle, we’ve done with this company, we have the bundle executed with, it’s called a 90-day risk bundle, which means that we tell the insurance company, “You pay us x amount of dollars. You pay the convener the money, and then we will guarantee this surgery against complications for 90 days, which means if anything happens related to surgery that’s a complication, we will cover it. You won’t pay for it.”

This is to the insurance company. So now they get a high-quality product, and they’re guaranteed the complication, that we’ll cover it. Because right now, if I do your Blue Cross surgery, and you have a complication, like you have an infection, or you get a blood clot, or you have something happen, Blue Cross pays for that on top of everything else you’ve already paid for.

As you just mentioned, we’re assuming significant risk. And we’re taking a 90-day risk on ourselves, which, as you can imagine, if you’re an insurance company, you know, guaranteeing a surgery is almost never heard of in the United States. So when you talk about how we got into it, so it’s impossible to talk about this without mentioning this company by name. It’s a company called Region Surgical out of Chicago.

When we were building our surgery center… To go back to your statement on orthopedic surgeons, you know this, Scott, better than anybody, trying to get orthopedic surgeons in one room to agree on something is like herding cats.

Scott: It is so hard. Yes.

Dr. Ballard: So we had so much to do, there’s no way we could do it alone. And so we hired Region Surgical out of Chicago to help build the surgery center and come up with the logistics. I mean, all the incredible amount of work that goes into it.

They have a brilliant CEO and some brilliant C-level people that when they saw what we were doing here, when we formed our surgery center, it was competitors from the city. We all came together, competition to create this environment. So our ASC is made up of people that are competitors, which is unusual.

When they saw that and we started all kind of talking about the bundled payment idea, it all coalesced around a lot of brainpower from Region, and then a lot of passion from us. And so it was the decision that… Because as surgeons by ourselves, there’s no way we can make that happen, a bundled payment. It takes MBA-level experience. It takes law degrees and other stuff that we don’t have.

So we just put our passion with Region’s horsepower, and together that’s kind of how we did it, and we just knew it would work. And we were excited because, I mean, this is an exciting time to be in healthcare. It’s curious, because…and I’m giving you a really long answer to your question, but…

Scott: No, but it’s a good one. And I think people will enjoy it.

Dr. Ballard: You know, when doctors look at the world, the healthcare world, you can do a couple of things. You can put your head down and cry, and bemoan the fact that healthcare is hard, paperwork, and it’s demanding, and reimbursements going down, etc. You can do that. Or you can put your head down and pretend it isn’t happening, which is a terrible strategy. Or you can look at the difficulty and find opportunity in the challenge.

And this is where opportunity is in the challenge. We surgeons can get together and provide a solution to the market that nobody else has done. Insurance companies haven’t done it, certainly hospitals haven’t done it. But we have a macroeconomic problem that we now have the power to provide a fix to that macroeconomic problem.

A 30%, roughly, discount in the cost of the procedure, and guarantee it to with a bundle, etc. in a way that allows us to remain financially viable. And again, benefits all three people in this equation.

Scott: Yes, to me, just fascinating. I’ve got one son, my son, my one son, he is actually in med school. And, you know, we had a conversation about that. I said, “Healthcare is changing. And you’ve gotta have a passion for it and an excitement about it because it’s gonna continue to change.”

And his response was actually interesting. His response was, “I just wanna take care of patients and figure out ways to take better care of them. And so as it changes, I can’t wait to figure out how to do that.” And I was, like, “Great, man, we just need more of that.”

Dr. Ballard: I totally agree.

Scott: I get back to this. And I do think long-term, you’re right, that the insurance companies are gonna start seeing that they’re saving money. It’s prudent for them to reach out to their customers and say, “Hey, you’re gonna save money by utilizing this particular road for a total replacement.”

And I think that’s when that wind will come out. How long that will take for them to go figure that out, that’s a whole different thing, because they’ve got lots of pressure points as well. And the other takeaway I want everybody listening in who’s not in the medical area, doctors’ offices are essentially small businesses, nothing more.

You, Doc, are taking care of everybody, doing surgery on people, and you’ve got this small step. But you don’t have MBAs, you don’t have lawyers. The need for somebody, in this case like Region, to come in and, you know, put this all together is gonna be critical. And that’s been something that we’ve been talking about when we talk to other people. Like, it’s no longer just the doctor saying, “This is what we’re gonna do.” It’s…

Dr. Ballard: Oh, no kidding.

Scott: …about people getting together. It’s a real team thing.

Dr. Ballard: Oh, that’s how I met you. I mean, I, years ago, was baffled by the idea of the… I wasn’t baffled by the internet, but I didn’t know where to start to educate patients through a website etc. Now, I was fortunate to be introduced to your company, and that’s the only way that I’ve been able to go forward with a really great presence on the internet, and educating patients, and facilitating all that.

And that’s where doctors have to recognize, like I do, like, I’m really good at surgery but I’m not great on the internet, you are. I’m great at surgery, but I’m not great at negotiating, you know, the details of a bundled payment contract, but the guys at Region are. So it’s where you surround yourself with talented people that know what they know and you let them do what they do.

Scott: Yeah, that’s the only, the interesting balance, because you go back to the beginning of your conversation about part of the success for the ambulatory surgical center is, “Hey, I get to control what’s happening when the patient walks in the door.” And where the appropriate balance comes into play is, like, “Look, this is what I do well, take care of the patient, do the surgery, etc. And this is what I don’t need to focus on right now.”

In my case, like, I help you with the online marketing, and you’ve got other people helping you figuring out the bundled payments. And I’m sure you’ve got somebody helping you with how to negotiate lease payments for whatever. It just takes a team. It’s a team approach.

Dr. Ballard: Right. I wanna step back to something that we talked about earlier in the conversation. And I think people that aren’t in medicine would be fascinated by this. So when you bring a bunch of surgeons together, like in our surgery center, the only reason that this whole thing can happen, bundled payments, risk assumption, etc., is that we’ve taken all of the variability out of medicine.

And what people might be shocked to hear is that when they… Like, let’s go back to your total hip hypothetical. If I take you to a hospital in Portland and do your hip replacement, and there’s six surgeons that do hip replacement at that hospital, there’s gonna be six different ways that the hospital manages you, depending who the doctor is.

Like, you know, how soon do you get up and walk? What kind of medicine do you get? What approach do they use in the operating room? You know, what tools do they use? What do they tell you when you go home? There are six different stories because there are six different surgeons.

And so, when you think of something like flying an airplane, when I’m flying to Houston next week, which I’m gonna do, I’m pretty confident that what happens in that cockpit is standardized. Like, they don’t get into the plane and, like, wing it. You know what I mean? And try to figure out as there, like, “Oh, what are we gonna do today?” They have a set checklist.

Each pilot, no matter who they are, when they get in that plane, does everything the same way. They ask for their coffee different from the stewardess. But every single thing, the checklist, when they take off, who they talk to, what words they use, are identical. So when we formed OSI, our surgery center in Portland, we knew that even though we’re all different, and we’re all competition, we knew we had to coalesce around one standard care pathway for patients. And a non-healthcare person might hear that and go, “Well, but don’t all of you guys do that?”

And as you know, Scott, healthcare is anything but that. There is tremendous variability, particularly when it comes to stuff like caring for total joint patients. So what we pulled off was we brought all these competitors together, and we literally sat at a table and started at the very first point of touching a total joint patient all the way to the end, and put all of our stuff on the table and came to one pathway.

So we were able to do that, and that standardization approach to care, which is unfortunately not super common, is what really has to happen. And it’s a key element of what we did.

Scott: I couldn’t agree more. Everybody that we talk to, when we’re trying to be…when we hear about these success stories, whether it’s, we’ve got one orthopedic surgeon who takes care of more people in the South Bronx than the entire city of Cleveland in a year. And we have another surgeon who’s very hyper-focused on how he communicates with his patients.

We have you talking about how you’ve made the ambulatory surgical center/bundled payment option actually work. And all three of you have one thing in common and that is systems, a very systematic approach to how they get that done. And I think that’s gonna be a critical component, because if you’re not a medical person, it is the art of medicine, everybody. There’s a reason they call it that.

But there are certain things about the art of medicine that are…where protocols and systems can be extremely effective to help you practice the art of medicine.

Dr. Ballard: And what’s interesting is that under the guise of the art of medicine, a lot of doctors use that as cover for, “I really don’t want to come to common agreement with other doctors on what I do. Like, I have my own pet ID, and I’m smarter than everybody else in the room.”

So the clear majority of what I do as a surgeon, I mean, almost all of it, with the exception of maybe some inter-operative decisions, you know, about angles and kind of things. But when you talk about care of a patient, almost all of that, if not all of it, is standardizable, if that’s the right word, and should be standardized.

It should be, like, the pilot for Delta they get in that cockpit. You know what I mean?

Scott: Absolutely.

Dr. Ballard: The airline one doesn’t go, “Oh, no, Pilot Ballard is here. We gotta do this all different. And because when Pilot Johnson was here, it’s a totally different way.” Do you know what I mean?

Scott: Yeah, I do.

Dr. Ballard: They all know it’s the same no matter who’s flying the plane.

Scott: Well, we’re gonna have to end it here. We’re at that 30-minute mark. And listen, Doc, I sincerely appreciate the passion and enjoy the conversation. Thank you so much for your time.

Dr. Ballard: Oh, that was great. Anytime, always love talking to you.

Announcer: Thanks again for tuning in to the “Paradigm Shift of Healthcare.” This program is brought to you by P3 Inbound, marketing for ortho, spine, and neural practices. Subscribe on iTunes, Google Play, or anywhere you listen to podcasts.