Retrospective vs. Prospective Payment

Picture yourself in the following scenario:

Your car is not working. Doesn’t start. You take it to the mechanic and they tell you they will fix it and send you a bill…at some point in the future. Probably in a month or two, maybe longer. Not just one bill either, there will be at least two bills: one for parts and another for labor. Perhaps a third bill, depending on what they have to do to fix your ailing car. Also, when you get your bills, you’ll have to call the car insurance company if you have questions instead of calling the mechanic directly.

Sound familiar? Maybe not for your car, but this is the world patients enter when they receive care. (Granted the comparison only goes so far, humans are not cars).

hen a patient visits the hospital, the above scenario is the standard. A patient shows up to the hospital, receives services and occasionally pays some portion of the costs up front, and then receives waves of bills for weeks or months after being discharged. Payment is complicated, and if you turn on the news or have received health care yourself, you’ve probably wondered if anything could be done to make it more straightforward…well, there are efforts underway to make it easier, but the short answer is: it’s hard.

Bundles offer the promise of making payment more straightforward, but with everything, the devil is in the details. At a high-level there are two primary funding mechanisms for bundles: (1) retrospective (like all other hospital payments) and (2) prospective payments. There are pros and cons to both approaches, though the majority of bundles fall into the former category (retrospective) for reasons described below.

Retrospective Payments

Retrospective payments are the norm for bundles, largely because retrospective payment is standard in the health care industry.

One caveat:

As mentioned before, most of the financing to health care systems/doctors comes AFTER care has been delivered. Within bundled payment programs and depending on the cost of care for an episode there may be:

(a) an incentive paid to the healthcare system/provider, or

(b) money owed to the insurer from the health care system if the cost of patient care exceeded the set price for the bundle AND whether there were agreed-upon stipulations for exceeding that threshold*This is often referred to as outlier costs, or in some cases risk corridors..

Aside from potential additional gains or losses, the funds for retrospective payments are paid in the same manner of non-bundled care.

Prospective Payments

Prospective bundles pay a fixed price for services that are covered in the bundle*Coverage can include any or the following: pre-operative care, hospital inpatient stay only, post-acute care, and increasingly warrantees on outcomes. Click for an example. BEFORE all of the services are rendered. For example, a patient is deemed to be a qualified candidate for an agreed upon bundle–say a knee replacement–then a fixed payment would be made to the contracted health care system. This amount would cover the total cost of care associated with that treatment and the system would be responsible for any costs over the fixed amount. If the costs of care are below the fixed amount, then the system keeps the savings.

To Retro or Pro, that is the question

While the prospective payment option sounds appealing and simple to administer, the financial mechanisms required for these types of payments defy the current systems of payment.

Most financial systems are simply not designed to accept a set amount for patients that could have many different diagnosis and treatment codes associated with their particular path. Further, prospective payment models often include clauses that call for a “reconciliation” process*The majority of bundles have "reconciliation periods" (click here to read prior article). These are timeframes where the total costs for patient care are assessed over several months while the care is still being paid for via the patient, insurance (private or government), employer, or a combination of the three. if the costs for a patient surpass a certain threshold (described above).

Prospective payments are completely dependent on the demographics and risk profiles of prior cases – meaning actual patient complexities and comorbidities are not captured when determining the negotiated bundled rate. In short, patients vary MUCH more than cars (or anything else we purchase), which is why the health care payment system is dissimilar from most every other service or commodity we buy.

From a financial standpoint retrospective payments for bundles are easier to understand, administer, and execute, which is why they comprise the majority of bundled payment financing arrangements. Prospective payments may become more common as claims processing and coding systems become more nuanced, and as risk scoring for patient populations become more predictive. Until then, both commercial and CMS bundled payments will rely on retrospective payments.