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Physician/Hospital Alignment: Bundled Payment – Part III: California

Peter Rastello

Continuing our discussion from Part Two of physician/hospital alignment issues in general, and the reemergence of bundled payment initiatives specifically, an important new pilot will soon take place in California.

  The Integrated Healthcare Association ( is launching a new bundled episode of care pilot.  The IHA is a statewide group that promotes quality improvement, accountability, and affordability of healthcare in California and consists of hospitals, hospital systems, managed care organizations, physician groups, vendors/suppliers, and others.  They have been doing some interesting work, including sponsoring the largest non-governmental pay-for-performance program in the U.S., with 8 health plans, 229 medical organizations representing 35,000 physicians providing care for 10.5 million members.

The pilot will include episode payment for total knee replacement and coronary artery bypass graft (CABG) procedures. Implementation will include mutually agreed-upon episode definitions, analysis of health plan claims data, negotiation of a payment model with implementation of this phase of the pilot expected in August 2010.  Later phases of the pilot will expand the number of covered procedures and extend the pilot outside of southern California.


Participation in the pilot is voluntary (all have preexisting contractual relationships) and includes:  Aetna, Blue Shield of California, CIGNA, HealthNet, Cedars-Sinai Medical Center, Hoag Hospital, UCLA Health System, Saddleback Memorial Medical Center, and Tenet-California.  Additionally, several IPAs, and medical groups will participate.


Bart Asner, MD, CEO of Monarch HealthCare and one of the IPA pilot participants, states:


“Over time, pilot participants commit to sharing savings realized via higher-quality, more efficient care.  Ultimately, these savings will flow through to consumers in more affordable health insurance products.”


This pilot was profiled in a Los Angeles Times article entitled “One-Price Approach to Surgery” (LA Times, April 24, 2010) which focused on the “wildly different prices for the same medical procedure, often in the same town.”  They sited as an example, a health insurance executive that had both knees replaced a couple of months apart in separate northern California hospitals, but by the same surgeon.  The bill at the first hospital was $95,000, but the second cost only $55,000.  The article goes on to discuss the potential for bundled payments to increase care coordination and having the potential to slow down the rise of health care costs and drive down premiums.  It also mentions the possible downside of bundling:


  • Works well for defined procedures such as CABG, but is difficult to apply to chronic conditions such as diabetes
  • Does not deter hospitals and physicians from performing unnecessary tests and procedures
  • Will not impact the continual rise of labor costs and prescription drugs; two large cost drivers
  • May give hospitals and physicians greater clout in negotiating prices with insurers


This bundled payment pilot points out the critical “three-legged stool” (hospital/physicians/payer) required for success.  Hospitals must have willing physician partners to work with and the insurance market must be willing to buy this new product at a negotiated price.  Note that since California prohibits the direct employment of physicians, the physician/hospital affiliation model employed under this pilot is the affiliated independent medical group or IPA, which aligns its incentives with the hospital to produce a shared savings.


As one can see, experiments with bundled payments for episodes of care continue to flourish.  CFA will keep you informed on further developments on hospital/physician alignment and bundled pricing, and would welcome your thoughts and comments as we progress.

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