October 1996 Bulletin

Package Pricing

Package pricing is a payment system in which a lump sum or bundled payment is negotiated between the payer and some or all providers for some or all of the services typically associated with a given procedure, including hospital, surgeon, anesthesia, radiology and other provider services. The package price normally covers all pre-, intra-, and postoperative care, and also may include additional services outside of the hospital such as physical and occupational therapy. The payment is generally made to the hospital member of the team, which distributes it to all participating providers under a prearranged agreement.


The package pricing concept has, so far, been applied to high-cost inpatient procedures, such as cardiovascular surgery. Although package pricing has not been common in orthopaedics, this situation is beginning to change. In late 1996, the Health Care Financing Administration (HCFA) plans to initiate a Medicare package pricing demonstration project for hip and knee replacement procedures. This three-year pilot study, if successful, could potentially lead to other package pricing arrangements for many other surgical procedures, both under Medicare and private payer systems. Under this specific project, the hospital will be the recipient of the package payment, and will be in charge of distribution of the payment to the participating providers.

Package pricing arrangements also can be developed between physicians and payers, where the physician is the recipient of the bundled payment. Physicians would then be in control of distributing payment to all providers including the hospital. Such arrangements have been developed by orthopaedic surgeons for arthroscopic procedures, as well as knee ligament and clubfoot surgery.

Payer considerations

Provider considerations

As with all types of managed care contracting, the primary reason for a provider to enter into a package pricing arrangement is to protect or increase patient volume. While the payment for a package of services is fixed, the frequency of demand for those services is not artificially limited. However, there are several caveats of package pricing of which physicians should take special note.

Potential risks

Package pricing contracts carry with them an element of financial risk. When developing a package price offer, the provider team should obtain as much claims and utilization data as possible, directly from the payer or from alternative sources whose reliability may be trusted. Beware of payers who cannot or will not provide accurate data. The provider team should consider managing its risk by seeking "outlier" or stop/loss provisions in a package pricing contract, and should work together to achieve new operating efficiencies.

While package pricing arrangements offer the opportunity for creative collaboration between providers, they must be developed within a regulatory environment which may be hostile to such collaboration. Antitrust considerations are of special concern. The provider team is urged to pay careful attention to the legal and regulatory ramifications of its actions, seeking appropriate counsel in the development of its agreements.

The American Academy of Orthopaedic Surgeons believes that orthopaedic surgeons, and all members of the provider team, should carefully consider the above information before entering into negotiations regarding package pricing contracts. Above all, orthopaedic surgeons must scrupulously avoid agreements which contain the potential for conflicts of interest, and consistently aim to achieve high quality care and outcomes. The primacy of the physician-patient relationship must be maintained and respected at all times.

September 1996

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